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Cronology and Characteristics • It started at 1300 and was fully formed by 1500 • It is considered the most successful and productive system • Characteristics: – Free market – Goods and services – Private enterprises
What is capital? • Money—financial capital • Goods—physical or manufactured capital: buildings and equipment • People—human capital: culture and community • Nature—natural capital: natural resources and ecosystem services
Characteristics • Individualism: competition stressed contrasted to communal living • Private property: not just land • Profit motive: supply and demand regulate prices • Hire Labour • Loan money with interest • Sanctity of contract
Supply and Demand • Supply: – A product or service can either be abundant or scarce. – These terms are relative and society would generally be better off with an abundance of things. • Demand: – How much of a product people want or need.
Prices • Prices vary based on the supply and demand of a product. – High Demand + Low Supply = High Price – Low demand + High supply = Low Price • Prices are a way to ration products and also to inform suppliers which products to make, so that they can maximize their profits. • This profit motive guides them to produce the products that we not and not waste resources on products that we don’t want.
Free Trade • A voluntary free trade benefits both traders. If the trade was not beneficial to all involved parties, then they would simply keep what they already had. • Any restriction on free trade hurts someone and destroys wealth. • Any voluntary trade creates wealth, in that the new owner of the product places a higher value on that product than the old owner did. • Countries do not have to be the best at producing anything to benefit from a comparative advantage.
First Industrial Revolution • People are scarce and nature is abundant— increase labour productivity • Result: Productivity increases x 100
Next Industrial Revolution • People are abundant and nature is scarce • The only possibility for increase is the resource to productivity
Capitalism influences • • • Reaction to the Great Depression The Marshall Plan in Europe The threat of communism The influence of John Maynard Keynes Independence for colonial countries – experience of fighting in WWII – intellectuals and resistance • Rise of US as a world power – Post-1945: US controlled 60% of global industrial capacity – Colonialism - territory – Post-1945 - trade – Truman - ‘we believe in the Imperialism of Commodities’ – ‘American Dream’
Richness vs Poorness • Mercantilism vs Free Trade • Capitalism vs Socialism • Private vs Public • Hard workers vs Laziness • Creation of wealth vs Disribution of wealth
Wealth of Nations • Mercantilism states that a country that exports more than it imports will get richer. A country that imports more than it exports will get poorer. • Tariffs & Quotas are based on this false belief. • Mercantilism is false, but is still widely believed today. Simply listen to Lou Dobbs on CNN (he is a mercantilist). • Trade will always balance itself over time. Who would sell to someone who isn’t paying his bills ?
Capitalism vs Socialism • • • Private ownership vs Public ownership Creation of wealth vs Distribution of wealth Forced transfer of wealth always destroys wealth Countries that follow Capitalism get richer Countries that follow Socialism get poorer (or not as rich as they would have been)
Capitalism vs Socialism • Capitalism – – Private Property Free Trade Low Taxes Light Regulation • Socialism – – Public Ownership Restricted Trade High Taxes Heavy Regulation
Some Consequences • Demographic – People move from less developed countries to the most developed – Migrations from poor countries – Waves of illegal immigration difficult to regulate
Some Consequences • Social: need to develop the following sectors: – Social Security – Medicare (HSA) – Schools – Post office – Hospitals