Industrial Age Economic Theories

From Adam Smith to Karl Marx

Origins

The economic history of the modern world can be broken down into two periods

The Commercial Age from 1500 to 1750

The Industrial Age from 1750 to present

capitalism

The Commercial Age was characterized by the advent of the philosophy of capitalism

Capitalism: an economic system of large financial institutions—banks, stock exchanges, investment companies, that first developed in early modern Europe

mercantilism

The primitive economic system it created was called Mercantilism

Mercantilism: European government policies of the 16th-18th centuries designed to promote overseas trade between a country and its colonies and accumulate precious metals by requiring colonies to trade only with their mother country

mercantilism

Mercantilists looked to the state to protect their businesses and allowed it to regulate commercial activity

European governments enacted numerous trade laws strictly regulating trade

The laws maintained high import tariffs to keep out foreign competition

mercantilism

Encouraged exports to ensure balance of trade surpluses could be used to acquire gold and silver

Goods traded between colonies and foreign countries went through the mother country (taxed both ways!)

Shipping trade kept in the hands of the mother country’s merchant marine

Weakness of mercantilism

Negative balance of trade between colonies and mother country

Stockpiled money led to inflation. Discouraged production and savings

Black market trade increased in light of heavy economic regulation

Example: The Navigation Acts in Britain and her colonies

Adam smith

Adam Smith disagreed with mercantilist practices. Espoused his views in his book The Wealth of Nations

The wealth of nations

Smith believed that an economy had to be given free reign to regulate itself to be successful

He called this Laissez-faire

Individual self interest would be the “invisible hand” guiding trade

Trade was limited only by the availability of raw materials

The wealth of nations

Labor theory of value: Finished goods produced by an economy are intrinsically valuable because of the labor and resources put into them

These intrinsically valuable goods became the reason for trade

Stockpiled goods only valuable as a means of acquiring other goods

The corporation

Legal foundations for modern corporations laid in Britain and France in 1850s and 1860s

Financed through purchase of stocks

Investors got dividends if business profited

Limited liability of investors if business failed

Monopolies, trusts,and cartels

Some big businesses in the late 19th century sought to eliminate competition

Wanted monopoly in their markets

Eventually governments intervened to prevent monopoly power

Reactions to industrial capitalism

Trade unionsWorked for change through large scale organization

Considered Illegal through much of the 19th century

Seen as wanting to restrict trade

Strikes combated by police and troopsGradually accepted as gains reduced probability of worker revolt

The socialist challenge

Socialists worked to alleviate some of the problems of industrialization

Disparities of wealth deplored

Condemned exploitation of women and children in the workforce

Sought to expand enlightenment ideas of equality to the economic sphere

Forms of socialism

Evolutionary socialism: hope for workers lay in change through representative government. Moderate

Utopian socialism: sought idealistically organized, separatist communities of workers

Marxist Communism: advocated class struggle and revolution. Radical

evolutionary socialism

Looked to government to legislate changes in working conditions

Successful to a degree

Expanded suffrage to all men

Reformed working conditions

Medical insurance, unemployment compensation and pensions helped

Utopian socialists

Led by Charles Fourier and Robert Owen beginning around 1830

Tried to establish equitable society

Everyone worked in accordance to ability and inclination

Utopian socialists

Model community at New Lanark formed by Owen

Lowered working hours, paid fair wages, provided fair prices in company store, and educated children

These communities faced considerable moral criticism. Efforts continued but eventually failed

Marxism

Karl Marx and Friedrich Engels most prominent 19th century socialists

marxism

Marx saw utopians as unrealistic

Social problems were the inevitable result of the capitalist system

He stressed class divisions

Workers had only their labor to sell

Employers took advantage of workers

The communist manifesto

Developed in the social and political turmoil of 1848

Stressed class struggle as the driving force in human history

Marx believed the working class would ultimately win

Socialist revolution the only alternative to continued exploitation

“The proletarians have nothing to lose but their chains. They have a world to win. Workingmen of all countries, unite!”

- Manifesto of the Communist Party, 1848

Socialism and then communism

Workers would seize control of the means of production from the bourgeoisie, crush opposition classes, and nationalize the economy

Once capitalism collapses, a transitional socialist dictatorship of the proletariat would develop a fair and just society

Socialism and then communism

Bourgeoisie: the class of well-off town dwellers whose wealth came from manufacturing, finance, commerce, etc.

Proletariat: the working class who typically have only their labor to sell

Once opposition ended, the dictatorship of the proletariat would eventually fade away leading to true Communism

In true Communism there is only one class and no state

Socialism and then communism

Under true Communism:

Economic exploitation, crime, and social injustice would naturally end

All private property would cease to exist

Thus, there would be no more need for police, courts, armies, or governments

Socialism and then communism

Marx didn’t foresee 20th developments in capitalism like labor concessions and the welfare state

Human nature not considered

Marx believed the dictatorship of the proletariat would be benevolent. This was not the case in most Marxist governments

Critique of Marx