The Market as a Principle of Exchange

E. L. Shusky - Culture and Agriculture

Eric Wolf – Europe and the People Without History

Adam Smith

• Adam Smith published the Wealth of Nations in 1776

• Foundation for understanding of capitalism

• Defines Market, laws of Supply and Demand

• Thought that each person was pursuing their own best interest

• This meant maximizing profits

http://www.undiscoveredscotland.co.uk/usbiography/stu/images/adamsmith-portrait.jpg

Economics in Simple Societies

• Adam Smith’s view does not apply to simpler societies– Huge cultural differences

• Before large impersonal societies, individuals did not seek to maximize ownership of material goods– Did not seek to profit from

distribution of goods• Kin and close friends had rights

and obligations that precluded trading to advantage

http://snoedel.punt.nl/upload/09/native20village.jpg

The Market

• Market exists solely for profit

• Kinship, friendship, loyalty, personal relations not valued – only goods and services

• Market is recent– not “natural” – not “simple”– could arise only after the

appearance of impersonalized societies.

http://www.product-reviews.net/wp-content/userimages/2007/08/nasdaq.JPG

Price

• Price: determined at the intersection of supply and demand.

• This “equilibrium” can fluctuate• Need variety of sellers willing to

compete with each other • Also need a variety of buyers

willing to compete with each other– Produces hostility– Not suitable for tribal or

community solidarity

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Free Market

• Free Market economy arose in Europe in 1450-1650

• Occurred when trade expanded – without corresponding

spread of a political entity.

• No central authority like Roman or Chinese empires

Why NW Europe Became Dominant

• Agricultural diversification– wool and dairy

• Serf system died• rent-based tenant system

• Cottage industries: textiles• Large cities: skilled labor

– factories arose

• Freedoms: individualism • Protestant revolution

– free thinking

• Manufacturing and shipbuilding:– goods sold abroad

• Industrial revolution started here

http://www.flatrock.org.nz/topics/history/assets/krup_industrial_revolution.jpg

Wallerstein’s Core

• Wallerstein’s “Core” refers to N.W. Europe

• Productivity required free/skilled labor.

– Serfdom at an end.

– Nobility lost power to those who produced

• Cheap goods meant expanded markets.

– Grains from Eastern Europe

– Gold, sugar, lumber, cotton from Latin America

http://www.flatrock.org.nz/topics/history/assets/living_in_cities_1850.jpg

Periphereral Areas• Wallerstein’s “Peripheral” areas =

Eastern Europe, New World

• Workers wages were low

– Based on Serfdom or Slavery

– Production went for export

• Low production = famine

• Low specialization

• Low motivation of workers:– No freedoms, opportunities,

ownership.

– Example: Russia until 1990sUntil 1861 the Tsar owned 1/3 of Russian people as serfs

http://www.gmu.edu/departments/economics/bcaplan/museum/serf.jpg

Core Controlled Markets

• Core evolved power because of its control of markets and finance

• Markets and finance were not competitive, but were monopolies

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Political Hierarchies

• By the 18th century

– trade increased

– search for markets motivated solely by profit

– Increased power of political hierarchies

• European nations raced to control raw materials

– to feed national factories with guaranteed markets

– Resulted in colonialism

European Colonialism in Africahttp://www.martinfrost.ws/htmlfiles/april2007/britemp8.jpg

Industrial Revolution

• The Industrial revolution led to more wealth in Europe– sense of superiority– Periphery became poorer

• New wealth of Europe can be seen as derived from the labor and raw materials of – Africa– Asia– and Latin America

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Wealth

• Tributary – surplus production taken by elite as wealth

• Mercantile – trade of surplus production to make a profit– Markets created by web of trade– Means of production stays same

• Capital – profits invested in technology to improve means of production– Larger surplus, larger profits– Means of production owned by capitalist– Labor sold to capitalist in exchange for

wageshttp://www.paiz.gov.pl/_img/_pictures/6029.jpg

Labor

• Labor is an attribute of human beings – Used to produce goods

and services to sustain life

• For humans to produce, must have– Tools

– Resources

– Land

                                     

                                    

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Capitalism

• In Capitalism, tie between labor and means of production is severed

• Holders of wealth acquire means of production

• People must sell their labor to operate means of production

• Produces a division of classes

– Owners

– Workers

Karl Marxhttp://165.176.125.169/schools/projects/photoproject/history/lowell/womenworker3.JPG

http://www.facade.com/celebrity/photo/Karl_Marx.jpg

Capitalism

• Means of production controlled

• Distribution controlled

• Labor must now buy goods produced– People without means of

production must become labor to live

– But full employment not necessary for successful capitalism

Unemployed, 1930

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Capitalism is Autocatalytic

• Goal: to maximize surplus– Keep wages low– Raise output of workers– Increase Technology

• Huge pressures to– Out-produce competition– Undersell competition

• Must constantly be reinvesting in technology

• Autocatalytic• Therefore means of production

transformed : progress

http://teamster.usc.edu/~fixture/Robotics/Automation_files/image008.jpg

Western Wealth

• Is Western wealth the result of ingenuity – or due to exploitation of the

periphery?

• Can developing world catch up?– Modernization

• Or is first world dominance too entrenched?– Dependency Theory

http://www.fresno.k12.ca.us/divdept/sscience/history/devilfish.jpg

Modernization Theory

• Modernization theory: – poor nations copy what rich

nations have done

• Modernization requires– Industrial base

• first light, then heavy

– Capital • from World Bank, USAID

– Skilled work force

– Hope placed on technology• but may displace people

http://blog.lib.umn.edu/hauck026/architecture/sweatshop.jpg

Modernization Economic growth in S. Korea 1950-1995

Per capita GDP 1950-1995

Modernization in China

• China’s economy growing at 9% yr– 50% of GDP from Industry

– By 2050 GDP will be second behind USA

• GDP per capita rising– will rise 10x by 2050

• Population– Will peak at 1.4 billion in 2030

– Will be overtaken by India in 2030

• Education– 8x number science and engineering graduates

of USA

http://images.quickblogcast.com/94244-86968/modernization_china1.jpg

Modernization in India

• India’s economy growing at 8% yr– 20% of GDP from Industry

– By 2050 will be third behind USA, China

• GDP per capita rising– Will rise 7x by 2050

• India’s population – 1.5 billion by 2050

– will overtake China in 2035

• India now adding 1 million cars/yr– By 2050 will have 600 million cars

– Most of any country in world

Tata Nano built in India

Cost: $3,000

http://www.redlineblog.com/autos/wp-content/uploads/2008/01/tata-nano-profile.jpg

ModernizationGlobal Economies by 2050

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Global Middle Class

Difficulties with Modernization

• Difficulties with Modernization:– Population growth

– Capital accumulation from where?

– Ability to control markets absent

• Market control is more important than any product innovations.– Actively pursued by U.S. and

multinational corporations

G7: U.S., U.K, Canada, Germany, France, Italy, Japan

http://www.treasury.gov.au/documents/1185/images/chart1.gif

Multinational Corporations

• Cross national lines

• Integrate:– Producing

– Processing

– Transporting

– Storing

– Merchandising

• Thus control prices

• Cheap labor found in poor countriesNike factory, Vietnam

http://i.a.cnn.net/cnn/2005/TRAVEL/08/12/vietnam.economy/story.nike.vietnam.jpg

Why do Poor get Poorer?

• Some underdeveloped countries getting poorer

• New Imperialism– Multinational corporations

control profits.

• Profits from production go to core countries

• Profits are not used for investment in production

Source: The End of Poverty, Sachs

Multinational Corporate Wealth

•

1998

Dependency Theory

• Peasants tied economically to capital city– which is tied to core countries

• Regions within poor nations– do not trade, compete or

cooperate with each other – – only with the capitol city – where goods leave for other

countries

• Goods coming in to poor countries come from the West – via the capitol city.

http://www.mapsworldwide.com/mwwlive/itm_img/9706212302sam.jpg

Dependency Theory

• Elite within the capitol city – controls economics and politics of a

country.

• Elite always conservative – to retain power.

• But elite do not control overseas markets– These are controlled by core capital

• Underdeveloped nations – can never generate sufficient economic

growth – to compete equally with the developed

world • that controls their markets.

Ferdinand Marcos, former Philippine President

http://www.wellesley.edu/Activities/homepage/filipina/philippines/history/gmarcos.jpg

African Middle Class is Small

http://www.teacheconomicfreedom.org/.a/6a0133f1f74f92970b01538e85dcf0970b-500wi