ECON1020 Economics and Business Strategy - Week 1, Unit 1: The Capitalist Revolution
Introduction
This unit explores the rapid and sustained growth in average living standards since 1700.
Inequality
Global Income Disparity: Significant differences in average income exist between countries, much larger than 1,000 years ago.
Singapore vs. Liberia:
In Singapore, the richest 10% average $67,436, while the poorest 10% average $3,652.
In Liberia, the richest 10% average $994, while the poorest 10% average $17.
Historical Growth Patterns: Sustained economic growth began at different times in different places.
Countries like the UK, Japan, and Italy, which experienced early economic take-off, are now rich.
Countries with recent or no economic take-off remain in the flatlands.
Measuring Income and Living Standards:
Gross Domestic Product (GDP): A measure of the total income and output of an economy in a given period, usually expressed in per-capita terms.
Formula:
Disposable Income: Total income minus taxes plus government transfers.
Formula:
GDP is correlated with wellbeing measures like life expectancy and infant mortality rate.
"Hockey Stick" Growth
Definition: "Hockey stick" curves represent the sustained rapid growth in GDP per capita experienced by countries worldwide.
Timing of Growth Take-Off:
Britain: approximately 1650.
Japan: approximately 1870.
China and India: second half of the 20th century.
Some economies saw improvements after gaining independence from colonial rule.
The Technological Revolution
Definition: Technology is a process that uses inputs to produce an output.
Impact: Technological changes have allowed significant increases in living standards by reducing work-time needed to produce goods.
Timeline: Remarkable scientific and technological advances occurred around the 18th century in Britain.
Scarcity of Time: Driven by the scarcity of time (24 hours per day for work and leisure).
Easing the Trade-Off: Technological changes help ease the trade-off between work and leisure.
Industrial Revolution:
A wave of technological advances starting in Britain in the 18th century.
Transformed an agrarian and craft-based economy into a commercial and industrial economy.
Example: Productivity of labour in producing light is half a million times greater than it was among our ancestors around their campfire.
A Connected World: Technological progress has greatly improved the speed of information travel.
Environmental Consequences
Impacts:
Global: climate change.
Local: pollution in cities and deforestation.
Causes: Expansion of the economy and the way the economy is organized.
Potential Solution: The permanent technological revolution may enable using fewer resources to produce more output.
Capitalism
Institutions: Laws and social customs governing the production and distribution of goods and services.
Definition: An economic system where the main institutions are private property, markets, and firms.
Key Concepts:
Private Property: Ownership rights over possessions, including capital goods (non-labour inputs used in production).
Markets: A way for people to exchange products and services for their mutual benefit, involving reciprocated, voluntary transfers with competition.
Firms: Business organizations that use inputs to produce outputs and set prices to cover production costs.
Capitalist Revolution Impact: Capitalism led to growth in living standards due to:
Impact on Technology: Firms competing in markets had strong incentives to adopt and develop new technologies.
Specialisation: The growth of firms and expansion of markets allowed unprecedented specialisation in tasks and production.
The Gains from Specialisation
Increased Productivity: Specialisation increases productivity of labor through:
Learning by doing.
Taking advantage of natural differences in skill and talent.
Economies of scale.
Reliance on Markets: People can only specialize if they have a way to acquire other needed goods, which occurs via markets in a capitalist society.
Comparative Advantage
Example Scenario:
Greta: 1250 apples or 50 tonnes of wheat.
Carlos: 1000 apples or 20 tonnes of wheat.
Allocation:
Greta has absolute advantage in both.
Greta has a comparative advantage in wheat.
Carlos has a comparative advantage in apples = he is least disadvantaged in production of apples.
Benefits of Specialisation: All producers can benefit by specialising and trading goods, even if one producer could produce at a lower cost.
Role of Markets: Markets increase labor productivity by allowing specialisation.
Capitalism and "Hockey Stick" Growth
Original Question: Rapid sustained growth in average living standards since 1700. How did this happen?
Natural Experiment: The division of Germany after World War II into capitalist West Germany and centrally planned East Germany.
Question: Did capitalism cause the "hockey stick" growth?
Divergence in Growth:
Not all capitalist economies are equally successful.
The right incentives must be present to promote growth.
Economic conditions: Firms, private property, or markets may fail.
Political conditions: Capitalist institutions are regulated by the government, which also provides essential goods/services (infrastructure, education).
Political Systems
Coexistence: Capitalism coexists with various political systems.
Political System Definition: Determines how governments are selected and how they make and implement decisions.
Democracy: In most countries today, capitalism coexists with democracy, which includes individual rights (e.g., freedom of speech) and fair elections.
Non-Democratic Systems: Capitalism has also coexisted with non-democratic systems.
Summary
Important Trends:
Increased income inequality across regions over time.
"Hockey stick" growth in GDP.
Technological progress.
Adoption of Capitalism:
Capitalism = Private property + Markets + Firms.
Failure of these institutions can explain divergence in economic growth