History and Theories of Capitalism

I.     Preconditions for historical development capitalist economic system

A.   Laws, religions, culture - protect ownership, allow accumulation of wealth.

B.   Sufficient labor productivity - allows formation of an investable surplus.

C.   Individual freedom, safe travel - allows exchange goods, change jobs.

D.   Monetary and accounting systems - encourage trade.


II.   Precapitalist Developments

A.   Egypt and Mesopotamia - State ownership.  Limited freedom.

B.   Greece and Rome - Increased freedom, but slavery still dominant. Retail trade primarily in luxuries for the upper class.  Surplus was used for public projects.

C.   The Middle Ages - The countryside was segmented into self-sufficient feudal estates.  Systems of mutual obligations arose between lords and servants and between the craftsmen in the cities. 


III.  The Development of Capitalism

A.   Merchant Capitalism- 13th C. in Italy. Also, enclosure movement created wage dependent class.

B.   Renaissance - 15th C. - Revitalization of literature and art; groundwork for Industrial Revolution.

C.   Protestant Reformation - 16th C. - Weakened old power structure, created individualistic theology, led to Calvinist ideas about work, saving, and accumulation of wealth.

D.   Putting out system - 16-17th C. - capitalist production in homes for a piece wage.

E.   Industrial Revolution - 17-18th C. - Supported by inventions such as coke smelting, thread spinning, steam engine. Factory system.  Rapid capital formation and growth, becoming self sustaining.  

F.    Mercantilists - Argued the nation's stock of gold determined its wealth and power. Favored strong national governments and intervention.  Imports heavily taxed and exports subsidized. Revenues from sale of patents of monopoly, including international trade.  


IV.  Classical Economics

A.   Adam Smith - Provision of consumer goods is the ultimate purpose of production.  A system based on self interest would best fulfill social ends.  A competitive system would protect the consumer and would establish itself with little government aid.  The government would have three important functions: to provide national defense, administer justice, and to build public works.

B.   Jean-Baptiste Say - Demand for commodities does not depend on the supply of money, but on the production of other commodities.  "Supply creates its own demand."  Government should encourage production and free market.  Foundation of supply side economics.

C.   Thomas Malthus - Doubted reliability of market system to generate sufficient demand. Argued that population growth would outstrip food production. Probable fate of mankind was war, famine, and plague.  Social welfare programs only make the problem worse.

D.   David Ricardo - Accepted Say's Law.  Main problem of capitalism was income distribution.  Population growth would drive up food prices.  Real wages at the subsistence level, but money wages increase, causing profits to fall.  Investment would slow and economic growth would stop.  England could prevent this with a policy of free international trade.  Developed the concept of comparative advantage.

E.   John Stuart Mill - Believed that social justice was the most serious problem of capitalism.  For taxation of large inheritances, redistribution of income, public provision of education and health.


 V.  Revolution and Intervention

A.   Karl Marx - According to historical materialism, society adopts system appropriate for its level of development.  Capitalism regarded a necessary evil for eventual adoption of socialism.  Problem of capitalism was desire for accumulation of wealth.  Exploitation of labor and investment in machinery would lead to over-production, business depressions, declining profits, social unrest, revolution.


B.   J. M. Keynes - Advocated reforms of capitalism during the Great Depression.  Rejected Say's Law and felt that the government should bolster insufficient demand.  Public control of aggregate demand could be assumed slowly without disturbing society.  Allocation of resources and distribution of goods should be handled by the private sector.


 VI. Austrians

A.   Joseph Schumpeter - Critic of Keynes. Creative destruction is strength and ultimate weakness of capitalism

B.   Friedrich Hayek - Danger of macromanagement, informational efficiency of capitalism


 VII.  New Twists on Old Ideas

A.   Postwar Keynesianism

B.   Monetarism

C.   Supply-Side Classicism

D.   New- and Post-Keynesians

E.   Radicals

 VIII.     Global Capitalism

A.   Dimensions - Trade, Investment, Finance, Information

B.   Stages (Thomas Friedman)

1.0 (1492-1800) About “countries and muscles,” driven by technology.

2.0 (1800-2000) Driven by continuing technological growth and  multinational corporations.

3.0 (2000-present) Driven by technologies favoring the individual


C.   Triple Convergence (Friedman)

1.    Technologies (web-based collaboration)

2.    Business practices (less top-down)

3.    Open borders (end of Cold War)

D.   Globalism Good? Classicism says yes on trade, unsure on factors.

E.   Framework - New role of World Bank, IMF. From GATT to WTO
Kupchan - Unlike previous major turns in world history, the current turn has created few institutions and has developed little consensus about the shape of he new world order. Legitimacy of governments based not on democracy, but on "responsible governance" -- "a state would be in good international standing if it is dedicated to improving the lives of its citizens and enables them to pursue their aspirations in a manner broadly consistent with their preferences."

F.   Globalism vs Regionalism - Economists generally prefer globalism (broad multilateral agreements) over bilateralism and regionalism to gain the benefits of trade creation without inefficient and harmful trade diversion.
-- However, since the falure of the Doha Round, this has been difficult, because (1) a larger and more diverse set of actors in the global market since the end of the Cold War and rise of China, and (2) the rise of populist movements in many countries, stemming from rising inequality and rising immigrant/refugee populations.and the inflexibility of the WTO is leading to a new regionalism.
-- Irony: The backlash against globalism is occuring at a time when we have a broadly coordinated expansion of the global economy. Here's a summary from the IMF World Economic Outlook Update for January 2018: "The cyclical upswing underway since mid-2016 has continued to strengthen. Some 120 economies, accounting for three quarters of world GDP, have seen a pickup in growth in year-on-year terms in 2017, the broadest synchronized global growth upsurge since 2010. Among advanced economies, growth in the third quarter of 2017 was higher than projected in the fall, notably in Germany, Japan, Korea, and the United States. Key emerging market and developing economies, including Brazil, China, and South Africa, also posted third-quarter growth stronger than the fall forecasts."

IMF Outlook January 2018