Reaction and Reform: New Economic Theories

1. Reaction and Reform: New Economic Theories World History - Libertyville HS

2. Industrialization’s Effects • Gap between rich and poor grew • Dominant economic theory = mercantilism • Worked for pre-industrial societies • Actually hurt development of industrialization

3. Effects of Industrialization • Big question: What was the appropriate role of government, in society and the economy? • Should government stay completely out of the economy? • Should government help poor people? • Should government completely control the economy?

4. Laissez Faire policy: Government, Stay Out!!! • Literally means “hands off”, in French • Based in French enlightenment criticism of mercantilism • Criticized high tariffs on foreign goods • Supported free trade (flow of commerce between countries w/ no gov’t interference) • Idea was that the best products would “win”, bringing wealth to that nation

5. Laissez Faire: Adam Smith (1723-1790) • Scottish economics professor • Wrote Wealth of Nations (1776) • Defended free markets • Economic freedom = economic progress • No gov’t interference in markets! • Influenced development of capitalism

6. Capitalism Policy: Land, Labor and Capital, OH MY!!! • Belief that factors of production should be privately owned • FOP = land, labor, capital • Private money should be invested in business ventures to make profit for investors

7. Capitalism • Believed in natural laws of Smith’s Wealth of Nations • People work for their own benefit • Competition forces people to make better goods • Law of Supply & Demand: enough goods will be produced at the lowest possible price, to meet demand in a market economy

8. Capitalism • David Ricardo’s Principles of Political Economy and Taxation (1817) • Believed in permanent underclass (some poor always exist) • “The Iron Law of Wages” • Employers pay workers more money when there are fewer workers around (why?) • Workers make more money, can afford better food, more kids • More kids eventually increases # of workers • More workers = lower wages, worse living conditions, fewer kids

9. Capitalism • Capitalist belief in a permanent underclass was basis for its opposition to government assistance for poor people • Interference upset balance of market economy • Minimum wage, working conditions, etc would reduce profits of business, resulting in hiring fewer people b/c of owner’s increased costs • In class example!

10. Socialism: You’ve Got Your Government in My Economy!!! Belief that government was the only force strong enough to fight against unfairness created by capitalism, markets

11. Socialism: Reformers • Reformers • Jeremy Bentham (1748-1832) advocated theory of Utilitarianism • People should judge ideas, institutions, and actions based on their utility (usefulness) • Government should promote greatest good for greatest number of people • Individual should be free to pursue own advantage w/o state interference

12. Socialism: Reformers • John Stuart Mill (1806-1873) • Challenged “pure” capitalism • Argued that ordinary workers should have share of profits of company • Demanded that gov’t should equalize people’s wealth by taxing the rich and giving it to poor • Other reformers focused on evil effects of industrialization

13. Theory of Socialism • Belief in social justice • Gov’t was a force for good, in society • Gov’t should control key industries to end poverty & encourage equality • Key industries in 1800s were factories, mines & RRs • Public ownership would keep workers from being at mercy of employers

14. Communism (Radical Socialism): Workers of the World, Unite!!! • Karl Marx (1818-1883) and Friedrich Engels (1820-1895) • Believed that economic forces alone dominated history, society • Wrote The Communist Manifesto in 1848

15. The Communist Manifesto • Human society was divided into social classes, each in conflict with other • Haves = “bourgeoisie” = factory owners, employers • Have nots = proletariat = factory workers • Industrial revolution had made wealthy rich and the proletariat poorer • Predicted uprising of the proletariat: workers would overthrow the owners and establish workers’ paradise

16. Marx’s Dictatorship of the Proletariat • Belief that capitalism would destroy itself • Process • Big business would drive artisans out of business • Eventually, only a few manufacturers would control all wealth • Proletariat would revolt, take over factories and mills from the owners (“Dictatorship of the Proletariat”) • Proletariat would run industry, producing only what society needed • Workers would share all profits equally (economic equality) • Gov’t would be controlled by proletariat until state withered away and a “classless society” emerged

17. Marx’s Classless Society • “Classless society” = communism • Factors of production (land, labor, capital) would be owned by the people • Private property would not exist • All goods & services would be shared equally by all people • Marxist slogan: “From each according to his ability, to each according to his need”

18. The Evolution of Economic Theory