The transatlantic slave trade was essentially a triangular route from Europe to Africa, to the Americas and back to Europe. On the first leg, merchants exported goods to Africa in return for enslaved Africans, gold, ivory and spices. The ships then travelled across the Atlantic to the American colonies where the Africans were sold for sugar, tobacco, cotton and other produce. The Africans were sold as slaves to work on plantations and as domestics. The goods were then transported to Europe. There was also two-way trade between Europe and Africa, Europe and the Americas and between Africa and the Americas. Global territorial expansion prior to the transatlantic slave trade also provided many benefits. Britain’s domination of the transatlantic slave trade was made possible through ideal (Central) geographic placement as well as a dominant naval force.
The transatlantic Slave trade brought massive profits to the United Kingdom. These large profits allowed the growth of Britain’s already rich middle class which was now willing and able to invest in business and technology. These investments allowed important facets of the United Kingdom’s economy to flourish. These investments expanded agricultural and textile technology, seeded the new Steam Engine, strengthened Britain’s colonial empire and enriched the Bank. Investments also picked up steam through the government promoted; Joint-Stock companies. This allowed capital to be diversely distributed as well as the risk. As a result of Britain’s sturdy financial and economic conditions, they were the leading figure in the Industrial Revolution. Britain’s national banking system provided it with capital from investments and a surplus of finances for which to use in commerce on the international scale. New inventions of the time included John Kay’s "flying shuttle" weaving device and George Stephenson’s "Rocket" railway train, along with innovations such as Abraham Darby’s thought to use coal instead of charcoal in order to create fuel. Henry Bessemer's renovation of steel production was also crucial. Each of these improvements assisted the production and transportation of products and materials used for trade and in industrial factories.
The transition from an agricultural based economy to a machine based economy was a milestone for Britain. By employing innovations such as the water wheel, and later the steam engine, the United Kingdom was able to drastically increase their output and productiveness. This was especially evident in the United Kingdom textile industry.
Other new developments included a seed drill, which enabled farmers to plant seeds in straight rows as well as the introduction of mechanical reapers and threshers. These devices as well as the three-field rotation and heavy plough greatly increased farm production in Britain, promoting the growth and trade of the country. The improved cultivation of healthier fruits, vegetables, and other foods grown on British farms using the new inventions bettered the health and growth of the population. This resulted in an influx of workers to help run industrial factories. Some of Britain’s primary advantages were geographical and completely natural. Great Britain was rich in natural resources such as water and coal. These could provide an abundance of energy supply for trains, factories, steam ships, and other devices, which increased transportation, and also the movement of workers. Transportation saw exponential growth during this period as well. Updated infrastructure like canals, improved road systems and railways increased the overall efficiency of Britain’s shipping industry. Transportation also effectively moved new ideas and schools of thought, allowing innovation and change to spread like wildfire. Britain’s American colonies played an important role in providing the country with such vital raw materials.
The enclosure movement restricted the ownership of public farmlands specifically to the wealthy landowners. As a result of this movement, an influx of unemployed farm workers was created, adding to Britain’s strong labor force in cities. An increase in the number of workers in industry meant that factories could run more efficiently and produce more goods than ever before, helping to manufacture a much greater amount of new machinery. It was this expanded variety of mechanical tools that would fuel the continuation of the Industrial Revolution.
What is the price -specie- flow mechanism and what did it illustrate?
The price–specie flow mechanism is a logical argument made by opposing the idea that a nation should strive for a positive, or net exports. The argument considers the effects of international transactions in a, a system in which gold is the official means of international payments and each nation’s currency is in the form of gold itself or of paper currency fully convertible into gold. Hume’s Price-Specie theory assumed that when a country has a trade deficit it’s caused by net outflow of gold. Wealth within these nations were then assumed to gradually decline among its population as a result of this. Because of such a negative shift in the wealth of these nations domestic demand would naturally decline. Prices of home goods, or autonomous consumption needs would drop and bring wages with it. As a balancing mechanism imports naturally go down as exports simultaneously go up. This is assumed to improve the trade balance until the deficit is eliminated.
The price-specie flow mechanism states that under a, countries with positive are effectively importing gold in exchange for their while those with negative trade balances are exporting gold in exchange for. The countries that experience higher exports than imports see a net inflow of gold. The key argument of the Price-Specie flow mechanism is the increase in gold in countries with positive trade balances causes, which makes rise and in turn makes imports more. This causes that country to lower prices in order to be competitive with other nations and potentially prosper. Conversely, the Domestic demand in these nations drops for gold in countries with negative trade balances and results in , which makes prices fall and exports more competitive internationally. This causes the balance of trade to shift in both countries. The Price-Specie flow mechanism acknowledges that the economic force of inflation and deflation allows international trade balance to find it’s market equilibrium.
The increasing wealth of nations with positive trade balances will result in domestic inflation. The positive sums of these nations begin to build as the wealth of competing nations fall. The competing nation’s lowering wealth results in the lowering value of their currency thus making their prices highly competitive. As the once dominant countries experience inflation the international demand for imports begins to focus on the countries experiencing deflation. These are the market forces that drive the international trade balance to find it’s equilibrium. This mechanism refuted many of the ideals that pertained to mercantilism. The Price-Specie flow mechanism illustrates the invisible hand over international trade balance. This changed economic thought and in turn, nations began to shift their focus away from mercantilist ideals. Instead focusing on their trade balances in order to prosper.
Adam Smith, in his Wealth of Nations, illustrated the self regulating mechanism of markets. Explain.
The invisible hand is one that is moved by the rational decision-making process of every consumer and producer alike. The theory of the Invisible Hand states that if every consumer is allowed to rationally decide what to buy and each producer is allowed to choose freely what to sell and how to produce it, the market will settle the product distribution and the prices that are beneficial to all the individual members of a community. Efficient methods of production are adopted to maximize profits. Low prices are charged to maximize revenue through gain in market share by undercutting competitors. Investors invest in those industries most urgently needed to maximize returns, and withdraw capital from those less efficient in creating value. All these effects take place dynamically and automatically and move to find the most efficient and beneficial equilibrium. The invisible hand ideology refutes any ideas of government intervention under the assumption that the invisible hand is the primary market driver.
The existence of emerging markets with less stable infrastructure than most developed countries also plays into the invisible hand. These impoverished countries naturally have much lower price levels and lower wages. The invisible hand brings investors with rational self-interest from wealthier nations to seek profitable returns by lending to these countries and installing infrastructure within their borders. The cheap prices in emerging markets may also attract the entrepreneur seeking a place to start a business. These businesses that are being installed abroad may be bringing profits home but profit the emerging markets as well. This is a result of small local businesses gaining activity through providing capital goods for the American Business.
The self-interested shift of demand towards the lowest prices benefits all of society by creating higher savings, more investment and more consumption to promote small business. As wealth is seen to improve the quality of life and your happiness, this assists the invisible hand as well. The pursuit of happiness results in the pursuit of wealth. This common notion of money accumulation being the answer has resulted in specialization through the individual’s interests and bringing the highest quality of goods at the lowest possible prices.
The Price-Specie flow previously mentioned is an example of the invisible hand. High inflation causes international demand for imports to shift towards countries experiencing deflation or lower prices. This is a result of the rational self-interested decisions of consumers and producers finding its harmonious equilibrium. The equilibriums that are met through self-interest result in the most beneficial circumstances for society. By choosing the support of domestic to that of foreign industry, man intends only his own interest; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it.
By pursuing his own interest he frequently promotes that of the society more effectively than when he truly intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it. (WON) The pursuit of self-interest by every individual person is argued by the invisible hand theory to result in aggregate conditions that are favorable to the aggregate population.
The positive impacts that the self-interested decision has on society are indirect. These self-interested decisions directly affect this person’s life quality but indirectly change its impact on society as a whole. Self-interested decisions impact society in the same way, which describes why this hand is invisible. The beneficial changes the individual makes on society are unseen but the aggregate self-interest in society entirely shifts market circumstances. The beneficial changes made by the invisible hand or “society’s rational self-interest” on society, are visible to the naked eye.
Why did Smith see Mercantilism as impoverishing a nation?
Adam smith’s insights on the structure in of the mercantilist trade system changed the opinions of many former mercantilists. In March 1776, Smith published An Inquiry Into the Nature and Causes of the Wealth of Nations. This massive work of nearly a thousand pages was based on his research and personal observations. Smith attacked government intervention in the economy and provided a blueprint for free markets and free trade. These two principles were poised to become the hallmarks of modern capitalism.
At the time of Smith’s observations and disputes, mercantilism was the key economic ideology that was currently implemented. This system emphasized the utilization of high import duties, subsidies to favored companies and government granted monopolies. These policy tools during the time were dominantly believed to maximize the wealth of nations, Smith saw these tools as “impoverishing a nation”. Smith attacked the government’s tendencies to favor companies and limit their subsidies towards their operations. This closed out opportunities for small business within these colonies. High import duties hurt all business but left the state unscathed and only less worried about a negative trade balance. Government granted monopolies, needless to say shamelessly sucked up the vast majority of profits to be made. These policies which mercantilism implemented minimized competition and allowed them to keep high prices, hurting the people within their own borders.
Mercantilism was an economic race between states, each state was represented by a select few and nobody else was allowed to participate. The race aimed to achieve the highest accumulation of precious metals through importations. Also unknown at the time was that the importations of precious metals were actually hindering their opportunity for accumulating “real wealth”. Real wealth was claimed by Smith to define the annual produce of the land and labor of a society. The precious metal importations were actually causing inflation and raising domestic prices thus lowering the value of their currency. This also impoverished the people under mercantilist rule because all of their wealth was represented with this currency. David Hume founded the price-specie flow mechanism during the time period, which the Wealth of Nations was written. This mechanism supported Smith and shared a solution to the issue of inflation, which correlated, strongly with Smith’s beliefs of an invisible hand. The system implied that net importations of gold would lead to inflation, making these countries less competitive and shifting gold imports towards countries experiencing lower prices due to deflation. This was the first of many scenarios most efficiently solved through natural market forces.
Smith’s arguments criticized the business ethics and morals of mercantilism but it was his criticisms on the economy’s actual performance that got everyone’s attention. Smith questioned the efficiency of this system and was right to do so. The morals of mercantilism were questionable to the uneducated eye but the flaws, which Smith exploited to the public, started a revolution. He argued that all the functions that mercantilism invested in the state could be more efficiently performed by the individual entrepreneur. This was essentially suggesting investing all functions, which were currently invested in the state, in the individual entrepreneur. Smith’s idea behind this was that the invisible hand would find the most efficient outcome for all. For instance, in contrast to allowing government dictated prices he suggested allowing the “invisible hand” or supply and demand to find the most efficient output and price for all. These balances, which Smith claimed to naturally occur, indeed found the most efficient medium between the buyer and the seller.
Smith’s most compelling argument towards mercantilism in my opinion is easily summed up. The goal for net importations of precious metals hindered economic growth and the Real Wealth nations thus impoverishing it’s people. These net importations not to mention monopolies and government in exchange for the goods export us favored businesses, not small businesses. The creation of free markets was believed by smith to reverse these effects through the invisible hand, which worked its forces in all markets. Free markets were the solution to the impoverishment of the people by increasing the “real wealth” by actual improving domestic production. It allowed specialization to be created and for the genuinely well run businesses asking of fair prices to be picked up by the invisible hand and carried towards economic prosperity.
What explains the rise of slavery in the Western Hemisphere?
When the Portuguese first sailed down the Atlantic coast of Africa in the 1430's, they were motivated by simply one commodity. Surprisingly, considering the present atmosphere, it was not slaves but gold. Ever since Mansa Musa, the king of Mali, made his pilgrimage to Mecca in 1325, with 500 slaves and 100 camels of which were all transporting gold, the region had become enriched with such wealth. Although one major problem presented itself; trade from sub-Saharan Africa was controlled by the Islamic Empire, which stretched along Africa's northern coast. Muslim trade routes across the Sahara, which had existed for centuries, involved salt, kola, textiles, fish, grain, and slaves.
As the Portuguese extended their influence around the coast, Mauritania, Senegambia and Guinea created trading posts. Rather than becoming direct competitors to the Muslim merchants, the expanding market opportunities in Europe and the Mediterranean resulted in increased trade across the Sahara. In addition, the Portuguese merchants gained access to the interior via the Senegal and Gambia rivers, which bisected long-standing trans-Saharan routes. This allowed the Portuguese influenced, Senegambia and Guinea trade to expand into new markets and vastly increase the goods of which they can trade and trade for. This is a result of the exposure to new regions because the varying regions of the interior presented new demands as they have different needs due to geographical inefficiency. The Portuguese brought in copper ware, cloth, tools, wine and horses. Trade goods were soon to include arms and ammunition. In exchange, the Portuguese received gold transported from mines of the Akan deposits, pepper and ivory.
There was a very small market for African slaves as domestic workers in Europe, and as workers on the sugar plantations of the Mediterranean. However, the Portuguese found they could make considerable amounts of gold transporting slaves from one trading post to another, along the Atlantic coast of Africa. Muslim merchants had an uncontrollable appetite for slaves, which were used as porters on the trans-Saharan routes with frequent casualties along the way and for sale in the Islamic Empire. The Portuguese found Muslim merchants entrenched along the African coast as far as the Bight of Benin. The Portuguese at the start of the 1470’s, as the Bight of Benin was known, reached the Slave Coast. It was not until they reached the Kongo coast in the 1480's that they outdistanced Muslim trading territory. The first of the major European trading 'forts', Elmina, was founded on the Gold Coast in 1482. Elmina was modeled on the Castelo de Sao Jorge, the first of the Portuguese Royal residence in Lisbon. Elmina, which of course, means the mine, became a major trading center for slaves purchased along the Slave Rivers of Benin.
Sugar became more lucrative in the world market than salt, which had been a staple for centuries. The success of the sugar industry led to the formation of the plantation system. By the beginning of the colonial era there were forty such forts operating along the coast. Rather than being icons of colonial domination, the forts acted as trading posts which they rarely saw military action. The end of the fifteenth century was marked (for Europe) by Vasco da Gama's successful voyage to India and the establishment of sugar plantations on Madeira, Canary, and Cape Verde Islands. Rather than trading slaves back to Muslim merchants, there was an emerging market for agricultural workers on the plantations. By 1500 the Portuguese had transported approximately 81,000 slaves to these various markets. Portugal’s success through the sugar industry brought worldwide interest in the sugar industry and plantations.
As surrounding territories in the western hemisphere developed and advanced as societies, agricultural, textile and many other industries began to emerge and grow stronger and thus more demanding of capital goods. The demand for labor inevitably expanding at an exponential rate and the economic advantages of slaves in contrast to paid labor was becoming a large attraction. The sugar plantation, agriculture and other industries began to spread and it was becoming obvious that the slave trade’s profitability was a derivative of the growth of those industries. As the slave trade caught more and more global attention the transatlantic slave trade was established. The rise of slavery begun with Portuguese merchants of who essentially operated a monopoly, the profitability became apparent as the transatlantic slave trade was established through other country’s interest. This marked the prominence of slavery in the western hemisphere, which would serve as profitable assets or commodities.
Why did David Ricardo see the "corn laws" as destructive to industrial development?
The were designed to in the against competition from less expensive foreign between 1815 and 1846. These laws disagreed with Free-Trade ideals while in fact it strongly prohibited them. The Corn Laws were parallel with the theories of mercantilism and protectionism. David Ricardo was a strong proponent of free trade and used logic-based theories to highlight the negative impacts of these laws. Ricardo’s approach to economics differed markedly from that of Adam Smith. Ricardo was a pure theoretician, an engineer of a simple, highly abstract model from which he drew policy conclusions. His most important assumption was that economic growth must decline and end due to the scarcity of land and its falling marginal productivity. In this, we see the origin of John Stuart Mill’s later contention that economic stagnation would flow from the working out of the capitalist productive process. It also is very suggestive of later arguments by John Maynard Keynes of the continuing potential macro stagnation that, according to Keynes and many of his followers, flows from a chronic insufficiency of aggregate demand in any relatively closed-market economy.
One of Ricardo’s strongest and most logical theories is one of which directly contradicts the closed-market ideals which pertain to the Corn Laws. Ricardo’s theory of Comparative Advantage, Included in his publication; Principles of Political Economy and Taxation, Ricardo explains it with an example of Portuguese wine and British cloth. Portugal has an advantage in climate to make wine at a cheaper cost, and England has an advantage of making cloth, also because of climate. For each country to trade instead of making both goods costs would decrease and consumption of the two goods would increase. Comparative advantage deals with free trade between two countries. If country X has an advantage in making good A, and country Y has an advantage in making good B, then the two countries should make the respective goods and trade with each other. Anything else would be merely inefficient in economic terms. Trade and specialization benefit everybody as land, labor, and capital are invested in the most profitable industries within specific countries.
Ricardo believed that the, in particular, constituted a burden to the agricultural economy. He believed that these trade barriers kept food prices artificially high and encouraged a bloated rent rate. This bloated rent rate resulted in large profits directed at the landowning class, which wasn’t Ricardo’s favorite. Landlords held monopolies on grain, which provided an unfair advantage in capital, which in contrast, was not taken advantage of. Landlords are mere parasites in the Ricardian system. For Ricardo, the supply curve for land is perfectly inelastic and the social opportunity cost of land is zero. Landlords receive an income, rent, merely for holding a factor of production without serving any socially useful function. The classical economists were particularly critical of the spending habits of landlords. Instead of saving and accumulating capital by increasing the supply of capital goods in the economy, the landlords engaged in consumption spending. The landowning class was seen as lazy, selfish, unproductive bloodsuckers. The blood they sucked was capital from the circulation of Britain’s economic system. The classical economists considered the activities of the landowning class to be detrimental to the growth and development of the emerging industrial society.
What were the three parts to the Industrial Revolution? How did each of these affect trade and the growth of the European economy?
The industrial revolution marked a time of exponential growth beginning in Great Britain and eventually spreading across the globe. This growth brought about great changes in technology and methods of production. During this time period, Great Britain saw their economic staple shift from agriculture to textile and machine-based manufacturing. A variety of crucial things were brought up through this time of change including the textile industry, iron founding, steam power etc. Population density and urbanization was prevalent during this time as many people came for work or simply to live in this flourishing society that sparkled amongst it’s counterparts. The industrial revolution, aside from the three important factors mentioned was also obviously driven by capital and the growth of capitalism. The emergence of capitalism brought about ambitious investors whose large capital contributions allowed the most profitable new industries and the most innovative technologies to surge immediately upon inception.
The textile industry, prior to advancements undergone throughout the industrial revolution could not exactly be classified as an “industry”. Before the 1760’s, textile was a cottage industry using mainly flax and wool. Cottage industry implied that the production took place in households that would buy the materials necessary from wholesale sellers. As cotton importations began to grow, domestic demands for textiles followed. The increasing demand simply could not be supported with the current textile production structure. The simple wheel was added to the spinning process using the more refine Saxony wheel that drove a differential spindle and flyer with heck, in a continuous process. The simple wheel was soon put to shame by John Kay’s Flying Shuttle, which doubled productivity of this process. The flying shuttle increased the width of cotton cloth and speed of production of a single weaver at a loom. Resistance by workers to the perceived threat to jobs delayed the widespread introduction of this technology, even though the higher rate of production generated an increased demand for cotton. These technological advancements along with many others marked the transformation from a cottage industry to a real profitable factory based industry. The textile industry brought profits to the European economy, as everybody needed clothes to wear. Also the newly efficient methods of textile productions allowed for modest pricing and in turn, even higher demand. The industry was one of the first to take the spotlight from agriculture and as it expanded it brought benefits through trade.
The Steam-Engine could arguably be seen as one of the most important innovations of it’s time. James Watt, in collaboration with Matthew Boulton finally succeeded to perfect their steam engine in 1778 through radical improvements in engine efficiency of about seventy-five percent. Prior to the steam engine, the majority of industries still relied on wind and waterpower as well as horse and manpower for driving small machines. Industries were previously confined to certain locales; steam meant that factories could be built anywhere, not just along fast-flowing rivers. This change allowed factories and firms to be located anywhere in the mainland and essentially created much more land for productive services. This change also allowed firms to locate themselves within areas of high population density, abundant natural resources and high volume commerce that increases efficiency of trade immensely. By the early 1800s, high-pressure steam engines had become enough to move beyond the factory, prompting the first steam-powered locomotive to hit the rails in Britain in 1804. For the first time in history, overland by something other than the muscle of man or animal. Soon, steam would power boats, farms, and road vehicles. The difference in performance of the two was the significance of the creation of steam-powered transportation. This naturally made trade more efficient through automation thus lowering shipment and transportation costs and requiring minimal labor force. Steam powered transportation also allowed information regarding new ideas and solutions to spread from innovators to producers faster than ever before. The newfound availability and liquidity of information allowed industries to constantly improve their production processes. With capitalism implemented, information also brought new business ideas cross-country and strengthened domestic competition and with boats; overseas competition would later become more prevalent.
One of the most crucial driving factors of the industrial revolution was the manufacturing of iron and steel. Firstly, this manufacturing process would not be made possible without Great Britain's immense supply of coal and iron ore. But the process was inefficient and was visibly diminishing the lumber supply in Britain. For many centuries, the British had converted their iron ores to iron and steel by heating the raw material with charcoal, made from trees. The discovery and implementation of coal was a milestone in the Iron industry. Coal was heated in the absence of air, this process converts coal to coke which proved to be far superior in the conversion or smelting of iron ore to iron. The iron ores required an intense airflow which Watt’s steam-engine was able to provide.
These improvements in iron manufacturing made it significantly more efficient in every aspect possible. As a result of these improvements, the production of iron greatly increased. Eventually, enough iron was being produced to manufacture machine frames, water pipes, rails etc. These changes fed European economic growth because of the emergence of an entirely new and autonomous industry, which would soon see large profits and stimulate the economy. On the topic of stimulating the economy, Iron allowed for infrastructure developments like rails. The privilege of cheap and efficient transport lowered the carriage cost of goods. This meant that goods were cheaper in the shops and this increased the demand. The increase in demand led to the expansion of factories, which required more energy. The prime energy source at the time was coal. As the Industrial Revolution began to speed up, the need for coal grew because it created power for the factory engines, steam powered ships and steam locomotives. The demand for iron increased as well. Iron was needed to make the railway tracks, steam locomotives and the giant Watt steam engines that pumped the mines and provided energy to run factory machinery. At a later stage, iron was needed to construct the steamships. Watt’s steam engine and the increased efficiency of Iron ore conversion allowed each other to flourish hand in hand, without one another such success would be difficult to achieve.
Why did Karl Marx think that capitalism would self-destruct?
Karl Marx was a revolutionary German economist and philosopher; Marx was also the founder of the communist movement. Marx watched change take place in industrial economies throughout the eighteen hundreds. Industrialized cities were expanding in front of his eyes and much of the working class was in poverty. Marx’s beliefs were built upon the idea that these industrial changes don’t take place without changes in class and in turn, class struggles. He saw these changes in class to be longstanding and to have formed in ancient and medieval society through the relationship between the wealthy who had oppressed the slaves. As new technologies emerged and a market forces became more naturally occurring and self-correcting, the middle classes gained wealth through trade and began to challenge the authorities of the old rulers. In Marx’s opinion this didn’t end the struggle of classes but created a new one between the proletariat and the bourgeoisie or the working class and the landowning class respectively.
One of Marx’s main criticisms of capitalism is the exploitation of the proletariat, which is constantly occurring through the bourgeoisie class. Marx called this the “Dictatorship of the bourgeoisie. The wealth that was created by the manual labor of the proletarians primarily benefited the bourgeoisie. The bourgeoisie, who owned the means of production, could raise the price of the goods that are produced. The amount of money paid to the proletariat that created this product remains unaffected by the price charged for the product. This difference in prices charges and wages paid were the “surplus value” or “profits” that were made strictly by the bourgeoisie class and were seen as a major contradiction of capitalism. In Marx’s theory, the idea that a proletariat's wage is unaffected by the price of the good which he produces is a perfect example of exploitation. The exploitation of the working class is the foundation of capitalism. The wealth disparity that is seen in modern day society is a perfect example of the bourgeoisie class and the proletariat class. This wealth disparity is assumed to expand further and further as the proletariat class expands at a much more rapid pace than the bourgeoisie class.
Marx believed these gradual but certain changes in class are going to lead the capitalist system to self-destruction. More and more of the population were exploited by the bourgeoisie class, and reduces to proletarians or “working status”. The immense rise in the population of the proletariat class in conjunction to the civilly unacceptable overexploitation of the proletariat class is Marx’s deciding factor in the inevitability of capitalist self-destruction. The proletariat class is seen to grow powerful not in wealth, but in numbers which is believed to be all that is necessary to start a revolution. Marx believed the struggle of the growing proletariat class would eventually lead them to overthrow the capitalist system successfully. This would naturally usher in the rise of the socialist system or communism. The system would give educational privileges to all classes equally and turn all means of production into state property.
From a modern capitalist perspective, the benefits of education would sufficiently give rise to the proletariat class if they were given such granted access, which they would in a communist system. Unfortunately, the reason educational access would give rise to the proletariat class along with the reason the majority of students go to school in the first place is nonexistent in a communist structure. This reason is the implementation of knowledge towards accumulation of wealth; this isn’t possible with communist ideals. This arguably takes from the motivations of the entrepreneur and levels the playing field for everybody under the system. A distinction of classes will disappear with the communist structure, as classes no longer exist. Marx predicts that “the dictatorship of the proletariat” will take place in the form of socialism as a precursor to the eventual complete takeover of the communist system.
Why were the classical economists not that concerned about recessions?
The key belief within the classical economic school of though is the self-regulating manner of markets. Classical economists believe that the market, in its self-correcting manner will always naturally find its equilibrium GDP that is the product of full engagement of the economy. When demand sees a weakening, the shift in supply is believed to return the equilibrium to its natural GDP where all of the economy’s resources are fully employed. Wages are believed to be determined by labor markets and not by demand. Classic economics also functions under the assumption that prices, wages, and interest-rates are flexible, this is to say that they can rise or fall to compensate and counteract market fluctuations or failures. This assumption is better known as Say’s Law. In better terms, this assumes that when an economy produces a certain level of real GDP, it also generates the income needed to purchase that level of real GDP. In other words, the economy is always capable of demanding all of the output that its workers and firms choose to produce. Hence, the economy is always capable of achieving the natural level of real GDP.
These three flexible economic factors are a crucial player in the classical belief that markets are fully self-regulating. An example of these adjustments could be exploited in the classical theory of interest-rate adjustment in the money market. As the interest-rate rises the economy tends to save more, which in turn reduces business expenditures as a result of the rising cost of borrowing money (IR). This would now put the economy below natural level of GDP. Classical economists believe that in such a situation, the interest-rate will fall causing investors to demand more of the available savings. The interest-rates are believed to naturally lower until equilibrium is met between the supply of funds from aggregate savings and the demand for funds from investors. The flexibility of the interest rate keeps the money market, or the market for loanable funds, in equilibrium all the time and thus prevents real GDP from falling below its natural level. Similar forces are believed to occur within the labor market fluctuations. When the supply of labor exceeds the aggregate demand for labor from firms, wages for paid workers will fall to ensure that the labor force is fully employed. The classical theory believed that much of the unemployment that came about during recessions was “voluntary employment”. This regarded to skilled workers who refuse to work for the current wages. These market-regulating mechanisms are praised by the classical economist and are driven by the rational, self-interested decisions of the aggregate population driving all markets to their utmost efficiencies.
What were the causes of the Great Depression? Why or how did we manage to avoid it during the 2007-10 period?
When the economy is driven by day-to-day decisions made by human beings we find an inevitability of bubbles, crashes, or recessions. The Great Depression was a perfect example of how sensitive markets can be. In 1907, panic selling sent the NYSE (New-York Stock Exchange) spiraling downward in a massive market sell-off. At the time JP Morgan was responsible for the current day duties of the Federal Reserve, as it was not yet established. JP Morgan moved reserve funds to banks lacking capital in the hopes to help them make a swift recovery. Following this minor glitch in economic history was the implementation of the Federal Reserve. This was to be created by the government in order to play the role of a “bank of banks”, lending capital where it’s most needed and providing economic stimulus through capital injections or any form of positive market manipulation. In 1929, America had a slight Deja-Vu as the stock-market crashed and remained in the pitfalls of a recession for almost twice as long as it ever has or ever would up to current day 2012. The reasons for the severity of such a recession relative to all others are a highly controversial debate. It’s widely believed that a few synchronized factors worked in conjunction to bring about such a devastating time in American Economic history.
Having established the Federal Reserve between the stock market crashes of 1907 and 1929, there may have been a bit much on their plates in terms of costs. Upon the stock market crash in 1929, the Federal Reserve took the opposite course of which would be considered mainstream in today’s economy. This was done by cutting of nearly a third of the money supply, successfully shutting down any hope for a recovery. Banks suffered liquidity problems and went under almost immediately. This now brings us back to the idea of our economy’s decisions being made by human beings decisions. The Federal Reserve could be seen as successful with these methods as no recession of nearly such a caliber has occurred (Knock on wood). The human decisions made by the Federal Reserve were the need to set the tone for why the Federal Reserve is here. Not to bailout banks and provide stimulus for careless banks. Ironically, by increasing the and keeping interest rates low during the roaring twenties, the Fed instigated the rapid that preceded the collapse. Their decision was firmly believed to set the tone for banks to be fiscally responsible in the coming years.
The ushering in of President Hoover in the Oval Office brought about a different approach to the economic situation. Following his predecessor, Roosevelt whom he believed had done to much to fix the recession, Hoover came in with a “do nothing attitude”. Hoover aimed to ensure that domestic wages would not fall. In order to ensure such a thing, one would need to create artificially high prices, which couldn’t be possible with the public’s current financial situation. This led to the introduction of a new piece of legislature which aimed to do just so. This legislation suggested the implementation of protectionist, or mercantilist foreign trade policies. The Smoot-Hawley act was put in place to cut off cheap imports in order to protect our agriculture. The law quickly evolved from agriculture into a multi-industry tariff. Other countries responded in creating their own tariffs, which cut off international trade and resulted in a worsening of economic conditions through exposure to American prices.
The financial crisis of 2009 was considered to be one of America’s worst recessions since that of the Great Depression. What’s done differently between the two eras is commonly misconceived by those who try to compare them as today’s intellectual property is far superior. One of the most important factors that allowed us to avoid a depression in 2009 was the same factor that allowed us to veer around it in every recession since 1929. Four years after the wake of the depression in 1933, the Glass-Steagall was created which brought about the FDIC. The Federal Deposit Insurance Corporation operates as an independent agency, which provides insurance on bank deposits, made by regular people. Knowing that the population’s financial welfare holds the key to economic prosperity as well as demand, the FDIC was created to protect this welfare. Their deposit insurance policies improved even further following the 2009 recession as deposit insurance was now offered on up to $250,000.
In the trough of the 2009 recession, President Obama enacted a $787 billion stimulus package. The main purpose of the economic stimulus package was to instill the confidence needed to restore economic growth by hopefully encouraging slightly increased or stable demand. Monetary policy had done all it could, and it was clear was needed. The stimulus plan also aimed to restore trust in the finance industry by further limiting bonuses for senior executives for companies that received funds. The TARP program was born under President George W. Bush and signed into law on Oct. 3, 2008, a month before voters even went to the ballot box and more than two months before Barack Obama’s inauguration. The Troubled Asset Relief Program was a stimulus for banks created to grow them during a time when they should be shrinking (ie:recession).
The invisible hand theory that Adam Smith advocates implies that markets function in self-regulating manners through human decision-making and rationality. Rationality is also considered to be the same thing as sanity, when a person is irrational they are therefore insane. During market failures like the Financial Crisis and the Great Depression, goes into panic mode and becomes irrational. This could result in spending habits that are overly conservative and too focused on one end of the spectrum. Private markets for goods, services, labor, and securities do mostly self-correct, but panic feeds on itself and disarms these stabilizing tendencies. In this situation, only government can protect the economy as a whole, because most individuals and companies are involved in self-defeating behavior of self-protection. Government's failure to perform this role in the early 1930s transformed recession into depression. Depression has proven to be avoidable by recognizing situations when the self-regulating mechanisms of the invisible hand through rationality no longer apply.
What explains the Post WW 2 growth of the world economy?
The end of the Second World War marked a time of unexpected but healthy economic prosperity. During this time period, Americans were speculative about one of their most helpful industries out of the great depression, coming to an end as a result of the war’s end. This was fear in a halt of military spending which had been stimulating the economy. The need to produce war supplies prior to World war two resulted in the emergence of a military-industrial complex. This was a term coined by President Eisenhower for the military industry, which supplied the Second World War. Consumer sentiment in America rose following World War Two as the survival of the military-industrial complex defied expectations. The expansion of the Iron Curtain pulled Europe and America into a cold war with the Soviet Union. In response, the government initiated investments in sophisticated military technologies such as the hydrogen bomb.
Europe’s state of shambles following the world war left them extremely vulnerable to soviet communist takeover. The prevention of such a takeover was viewed by the government as crucial to America’s foreign trade and a plethora of other potential cooperative negotiations. This inevitable fact gave rise to the Marshall plan, which emerged in 1948 intended to last four years. The Marshall Plan was essentially an aid program to rebuild and strengthen the European structure to ensure their continued prosperity in tandem with America. The stimulus was distributed evenly amongst European countries weighted by their per-capita income. The European recovery which was fueled by the Marshal Plan improves the global economy but America stood to be the primary beneficiary as markets for U.S. goods greatly improved which helped give rise to the post war economic boom.
International monetary arrangements were formed during this time as well. Somehow the bloodbath of countries on a global scale gave rise to global unification for economic means. These arrangements brought about the establishment of the International monetary Fund and the World Bank in 1944 (IMF). These structures provided a framework for economic cooperation that would lead to a more stable and prosperous global economy. These policies simultaneously ensured an open, capitalist economy. Two years following such a global economic advancement marked the implementation of the Employment Act of 1946, which aimed to promote “maximum employment, Production and purchasing power. (AE)” These government policies increases consumer sentiment on the economy and resulted in increased spending which would further spur the post world war boom.
Domestically the United States continued big government spending to promote economic growth. The combination of government spending and tax cuts created a period of growth with almost full employment. The end of the World War would result in a massive influx of troops, a repossession of an enormous potential labor force. The U.S. government implemented policies, which would ensure the sweetness of their return. The G.I bill, or the Servicemen's Readjustment Act would put into place in 1944. Benefits included low-cost mortgages, loans to start a business or farm, cash payments of tuition and living expenses to attend college, high school or vocational education, as well as one year of unemployment compensation. This brought U.S. troops into the American labor force with flying colors. Having a bundle of financial incentives to learn, invest and build a company greatly enhance the labor force and the production it entailed. The American workforce changed significantly. During the 1950s, the number of workers providing services grew until it equaled and then surpassed the number who produced goods. And by 1956, a majority of U.S. workers held white-collar rather than blue-collar jobs. At the same time, labor unions won long-term employment contracts and other benefits for their members. The increased production was epitomized with the surge of auto sales and production. The widespread ownership of cars causes a trend of migration from population-dense regions, to less populated regions. This migration gave rise to “Sun Belt Cities” in the south and expanded business across the country. All these factors worked together throughout an expected rough period to transform it into one of the most prosperous time periods in American economic history.
Using what you have learned in this class, how would you answer Yali's question today?
In 1972, Jared Diamond was asked by a native New Guinean, “why did white races develop technologies, wealth and power so much more quickly than other races of the world?” Diamond suggests that the answer also happens to be the name of the book the question is posed in, Guns, Germs, and Steel. Diamond believes the development of technologies like guns and steel in addition to the immunity to fatal disease helped propel white Europeans to the top of the totem pole of advancement. European advantages constructed as a result of a naturally more complex thought process, which could have led to the rise of guns, germs and steel. In contrast, these advantages also lied beneath their feet. These natural advantages may have been underappreciated during such early times due to the lack of knowledge that other regions lacked such natural edges. But while they may have been underappreciated they were not underutilized.
Access to water could have been easily taken for granted but the acknowledgment of their importance by white settlers was a smart play. Even in the year 2012 we see our incredible technologies being employed on a mission for space exploration. Much of their focuses aim to find the potential for life on another planet. When water is seen as the primary indicator that life on another planet could exist, it’s obviously important for ours. The importance of water is simply a derivative of the greater importance of geography. Different geography meant different climates; as a result primary climates would see prosperous agriculture. Having prosperous agriculture while many poorly located nations were still trying to get it started was a huge benefit. This is because their advanced agriculture would decrease the allocation of land, labor, and capital towards other interests while most nations continued to put all of their eggs into the agriculture basket. The advancement in agriculture would lead to a surplus and thus resulting in a growing population with more supporting capacity. The growing population simply meant more brains involved in the equation. The collaboration of such a relatively enormous population gave rise to new schools of thought. These brought about ideas of colonization, expansion, production or more simply just the idea of advancement.
Access to water, aside from its health and agricultural benefits would later on provide an unimaginable privilege upon the advent of trade. Goods, which prospered in such central, white dominated regions, prospered because of their resources. These abundant resources in tandem with a large population allowed them to produce or simply collect goods easier than other regions. By easier, these countries gave up less than other countries in producing goods due to efficient methods of production. This was a comparative advantage and served Europeans greatly upon the advent of trade, as many countries would demand imports. Though, this would be a bit later in history than Yali was truly concerned about. The initial advancement of agriculture had to be the first step towards guns, germs, and steel. Being the economic staples of every nation at the time, the first to advance would be the closest to innovation.
Information during such a primitive era was as illiquid as possibly imaginable. The planets, which may have water sources today, and potential to prosper are not within our realm of knowledge even today. Oversea regions had a similar perspective on the emerging European nations as we have on these planets today. Such capitalization of God-given advantages was able to occur and develop in these nations while isolated regions were unbeknownst to such advanced schools of thought. Lack of exposure to new schools of thought left isolated regions merely incompetent in societal progression. Some regions like New Guinea, regardless of copious water, was slow to advance because of the information which was unrefined but still adhered to. Is this advantage a result of the white race being genetically inclined towards thinking? This question would typically be refuted with the fact that their geographical location served them their advancing privileges. This is what I believe was the deciding factor in Yali’s question. But it could be argued that the early white colonization of the two most advantageous geographical regions was a result of incontestable logic and problem solving skills, it’s all in the eyes of the reader.
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