Reaction and Reform: New Economic Theories

World History - Libertyville HS

Industrialization’s Effects

• Gap between rich and poor grew

• Dominant economic theory = mercantilism– Worked for pre-

industrial societies– Actually hurt

development of industrialization

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?

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

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

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

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

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

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!

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

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

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

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

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

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

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

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”

The Evolution of Economic TheoryMercantilism

(zero sum game; imp. of colonies)

Laissez Faire(Hands off!; open

markets; best product wins)

Capitalism(profit motive;

competing good; winners &

losers)

Socialism(social justice; gov’t owns key

industries)

Communism(Dictatorship of the proletariat;

“workers’ paradise”)