History of Economic Systems and Income Inequality Notes

Introduction

  • This course will cover firms and consumers in a market-based ‘mixed economy,’ where goods and services are provided by both private firms and the government.
  • Topics include market forces, supply and demand (as signals), incentives, and profits.
  • Central planning, the basis of communist economics, will be briefly discussed as an alternative system.
  • The reading is divided into three sections:
    • Section A: Transition from pre-capitalist systems.
    • Section B: Income inequality.
    • Section C: Influential economists Adam Smith and Karl Marx.

The Western World A Thousand Years Ago

Southern Africa

  • Landscape: No modern structures; people lived in small huts, often near water sources.
  • Ethnic Groups:
    • San: Hunter-gatherers, gathering wild fruits and hunting game.
    • Khoikhoi: Pastoralists, herding cattle and goats, also gathering wild fruits and tubers.
  • Social Structures:
    • Close-knit communities with strong social bonds and shared responsibilities.
    • Largely egalitarian, with collective decision-making.
    • Elders guided younger generations.
  • Spirituality: Beliefs centered around the natural world; rituals, storytelling, and music were integral.
  • Writing: Not developed by these communities, limiting the size of communities.
  • Archaeological Evidence: Used by historians to understand life in this period due to the lack of written records.
  • Bantu Migration: Beginning to reach Southern Africa, leading to competition for resources and further migration. Introduced agriculture, ironworking, and new social structures.

Medieval Europe

  • Lifestyle: Most people lived on farms and in small villages, rarely traveling far.
  • Economic Roles: Strictly defined by societal norms; barter was the primary means of exchange.
  • Money: Existed but was not often used; taxes were mostly paid in kind.
  • Travel: Challenging and often perilous; roads were mostly dirt paths.
  • Religion: Shaped people’s lives; the Church provided spiritual guidance, education, and social services.
  • Standards of Living: Simple lives with little cushion against economic shocks like famines, wars, and disease.
  • Life Expectancy: Average was between 30 and 40 years due to high infant mortality rates; survival into adulthood could lead to living to 50, 60, or older.
  • Hygiene: Rudimentary; bathing was infrequent, and sanitation practices were basic and often non-existent, contributing to the spread of diseases.
  • Science: Superstition and tradition guided decisions; modern empirical science did not exist.
  • Social Stratification: Stark divide between the aristocracy and the peasantry.
    • Aristocrats: Lived in fortified castles or large manors.
    • Peasants: Worked hard; houses were small, often single-room, with animals providing heat. Poorly ventilated and lacked amenities.
  • Manorial System: Lord of the manor distributed land in exchange for crops and labor. Peasants could be free or ‘villein.’
  • Social Mobility: Limited; status was largely determined by birth, though movement was possible through war, marriage, or joining the clergy.

Traditional Economic Systems

  • Characteristics: Rigid and slow-moving compared to today’s societies.
  • Technical Advances: Crop rotation, cultivation of beans, stirrups on saddles, and the four-wheel wagon.
  • Impact: Increased efficiency on farms, releasing labor for construction projects like cathedrals.
  • Acceptance of Change: Slow adoption of technical advances due to traditional knowledge and religious beliefs.
  • Economic Progress: No concept of improving material standard of living over time.
  • Material Standard of Living: Very low compared to modern standards; basic technology and little surplus. Seasonal famines were commonplace.
  • Movies: Series like Outlander and Vikings often present a romanticized version of the economic conditions of those times.
  • Improvement: The improvement of economic conditions in the past two centuries was extremely slow initially, but it has gathered speed over time.

The Industrial Revolution

  • Importance: Transformed society, leading to urbanization and changing the social fabric.
  • Continuous Process: Can be viewed as a continuous process that has been changing society for nearly 250 years.
  • Steam Power: Revolutionized England by providing a new source of energy, used initially for pumping water from mines, then for locomotives and weaving looms.
  • Urbanization: Altered the social structure, pulling the population from rural areas to urban centers.
  • Enclosure Acts: Privatized and consolidated common land, forcing many smallholders and rural laborers to find work in factories.
  • Social Classes: Led to the emergence of a distinct working class and a growing middle class (Bourgeoisie).
  • Shift in Power: Capitalism eroded the economic power of the land-owning aristocracy as control of capital became more important than control of land.
  • Harsh Labor Practices: Wages were very low, working hours were incredibly long (12-16 hours a day, six days a week), and regulations were minimal.
  • Health and Safety: Limited standards in industrial workplaces; poor ventilation and dangerous machinery led to frequent accidents.
  • Child Labor: Common, with children as young as five or six working in factories and mines.
  • Poor Living Conditions: Coal fires and factory waste led to poor air and water quality, causing outbreaks of diseases.
  • Income Inequality: A profound economic divide emerged between wealthy industrialists and the working class.
  • Luddite Riots: Early threat to the jobs of skilled artisans led to attempts to destroy factories and machines.
  • Malthus’s Theory: Argued that rising wages would lead to higher population growth, resulting in famine; keeping wages low would curb population growth.
  • Reforms: Calls for reform grew, leading to changes in labor laws and social policies, such as the Mines Act of 1842 and the Ten Hours Act of 1847.
  • Combination Acts: Repealed in 1824, paving the way for the growth of trade unions.
  • Improved Living Standards: Rising wages, greater productivity and a growing range of goods meant that the material living standards of the working class in England were substantially better at the end of the 19th century than they had been 100 years earlier.
  • Global Spread: Facilitated by advances in transport and imperialism.
  • Economic Growth: Overall, stimulated economic growth and improved the material welfare of most of the world’s population.

Hockey-Stick Growth

  • Definition: Rapid growth in standards of living after thousands of years of economic stagnation.
  • GDP per capita: Used to indicate average levels of production, income, and consumption.
  • Real GDP: Corrected for price changes, allowing comparison of quantities of goods and services produced over time.
  • International Dollar: A common currency used to compare standards of living between countries, accounting for cost of living differences.
  • Figure 1: Shows real GDP per capita for six countries over 1000 years, illustrating low standards of living before the Industrial Revolution.
  • Income Inequality: Individual countries experienced it, but this is not reflected in GDP per capita.
  • Britain: Experienced increasing average income levels at the end of the 18th century, the most advanced economy in the world by 1900.
  • Economic Take-Off: Occurred later in other European countries, the United States, and Japan.
  • China: Rapid industrialization after economic liberalization in the late 1970s, lifting millions out of poverty.
  • India: Economic take-off also happened in the late 20th century.
  • Africa: Colonial exploitation, lack of infrastructure, and limited access to technology prevented industrialization.
  • Slavery: Left a massive scar on many countries, disrupting social order and causing human misery.
  • Colonisation: Resulted in the exploitation of natural resources, trampling of the local population and arbitrary borders, leading to instability in many countries.
  • Nigeria: Typical of many African countries, experiencing little economic growth during the colonial period and poor post-independence economic performance.
  • Take-Home Message: Industrialisation improves material standards of living but comes with significant costs.

Income Inequality

Between-Country Inequality

  • Before Industrial Revolution: Per capita real incomes were similar across countries.
  • After Industrial Revolution: Some countries experienced GDP per capita growth, while others stagnated, leading to income differences.
  • World Bank Classification: Countries are categorized into low-income, lower-middle-income, upper-middle-income, and high-income.
  • High-Income Countries: Have advanced economies with high levels of industrialization, infrastructure, and access to education and healthcare.
  • Low-Income Countries: Face significant challenges, with many people lacking access to clean water, healthcare, and education. Economic growth is slowed by political instability and corruption.
  • Middle-Income Countries: Developing or emerging economies that have increased their average income level.
  • 2024 Nobel Prize: Awarded to economists Daron Acemoglu, Simon Johnson, and James Robinson for their work on economic development.
  • Figure 2: Illustrates the distribution of countries according to their World Bank classification.
  • Sub-Saharan Africa: Most low-income countries are located here.

Within-Country Income Inequality

  • Definition: Refers to the evenness or unevenness of income distribution within a nation.
  • High Inequality: Reduces social cohesion, erodes trust, and leads to social fragmentation.
  • Poverty and Crime: Communities plagued by poverty often experience higher crime rates.
  • Limited Opportunities: Inequality constrains access to education, healthcare, and employment for poorer households.
  • Incentives: People want to be rewarded for effort, investment, and innovation.
  • Gini Coefficient: Most commonly used measure of income inequality, ranging from 0 (perfect equality) to 1 (extreme inequality).
  • South Africa: Has a Gini coefficient of roughly 0.63, indicating a profoundly uneven distribution of income.
  • Figure 3: World map showing country estimates of the Gini coefficient in 2014.
  • Lowest Inequality: Mostly in developed high-income economies.
  • Highest Inequality: Middle-income countries in Southern Africa and South America.
  • Kuznets Curve: As an economy develops, income inequality first increases and then decreases.
  • United States: Has a much less equal distribution of income than European countries due to fewer regulations, lower minimum wage, less progressive tax systems, and different cultural attitudes toward wealth.
  • Russia: Higher than expected income inequality due to the transition to a market economy, lack of social safety nets, and regional disparities.
  • Brazil: Substantially reduced its income inequality through social programs, improvements in education, and increased labour market participation.
  • South Africa: Key factors contributing to income inequality include the unequal distribution of wealth, the legacy of apartheid, current high levels of unemployment, and labour legislation.
  • Social Grants: Have improved the quality of life for millions of people, but income inequality remained high.
  • Black Economic Empowerment (BEE): Aims to promote economic transformation, but its impact on income inequality has been mixed.
  • Economic Challenges: Unemployment, poverty, and inequality are among the biggest.

Two Important Economists

Adam Smith (1723-1790)

  • The Wealth of Nations (1776): Describes new developments and criticizes contemporary thinking at the start of the Industrial Revolution.
  • Mercantilism: Smith argued against the idea that wealth was the quantity of gold, stating that it was the quantity of goods and services produced.
  • Opposition to Monopolies: Advocated for free markets without government intervention.
  • Invisible Hand: Argued that individuals acting in their own best interests benefit the public welfare.
  • Limited Government: Advocated for laissez-faire economics, with government roles limited to defense, justice, and public works.
  • Division of Labour: Emphasized the importance of specialization and division of labour as the basis of economic growth.
  • Inequality: Recognized the potential for inequality and argued for the moral responsibility of the wealthy to contribute to society.

Karl Marx (1818-1883)

  • Das Kapital (1867): Describes human history as the history of class struggle.
  • Class Struggle: Different social classes emerge and are in perennial conflict with one another.
  • Historical Materialism: Suggested a predictability in the development of the class struggle.
  • Exploitation: Acknowledged that economic growth had the potential to improve people’s standards of living, but was associated with unacceptable levels of exploitation.
  • Proletarian Revolution: Predicted that inequalities would lead to a revolution where the workers would take over the means of production and introduce a classless society.
  • Communist Manifesto (1848): Written with Friedrich Engels, describing the history of class struggles and criticizing the bourgeoisie.
  • Marx’s Predictions: Many proved incorrect, as the capitalist system was able to transform itself.
  • Legacy: Left an indelible mark on world history, with Marxist ideals influencing socialist experiences in countries like Russia and China.