Econ 113 (1)

Week 2: Capitalism and its Impact on Labor Productivity and Income

Overview of Capitalism

• Improvement of Living Standards: Capitalism is credited with significantly enhancing living standards.

• Key Figures: Adam Smith, known as the father of economics, highlighted the mechanisms of capitalism in his works.

Adam Smith (1723-1790)

• Background: A philosopher and economist whose notable works include The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations.

• Contributions:

  • Advocated that individual self-interest promotes public good within a free market system.

  • Emphasized that while markets promote prosperity, government intervention is necessary for defense, justice, education, and infrastructure.

Mechanisms of Capitalism

• Technology:

  • Firms play a crucial role as they drive technological advancements and productivity.

  • Competition among firms fosters innovation and efficiency.

• Specialization:

  • Encourages division of labor, allowing individuals to focus on specific tasks and increase overall productivity.

  • The rise of firms and market expansion motivates specialization.

Week 2: Gains from Specialization and Comparative Advantage

Gains from Specialization

• Increased Productivity: Specialization enhances knowledge and ability through:

  • Learning by Doing: Repeated exposure leads to improved skills.

  • Differences in Abilities: Individuals may excel in different tasks.

  • Economies of Scale: Larger production quantities become more efficient.

• Distribution Concerns: Specialization creates questions about how goods are allocated.

Comparative Advantage

• Example of Comparative Advantage:

  • Greta and Carlos:

    • Greta has an absolute advantage in all goods but specifically a comparative advantage in producing wheat.

    • Opportunity costs are calculated to determine advantage:

      • Greta for wheat: 1 ton = 25 apples

      • Carlos for wheat: 1 ton = 50 apples

  • Result: Greta should produce wheat, Carlos should produce apples based on opportunity costs, maximizing total production.

Gains from Trade

• The specialization helps increase total output, showcasing the benefits of trade.

Week 3: Capitalism and Economic Development

Market Dynamics

• Impact of Tariffs: A consensus among economists suggests tariffs hinder specialization and slow economic growth.

• Population Growth: More prolonged life expectancy and larger families correlate with capitalism.

• Correlation vs. Causation: Economic growth is complex; thus, establishing causation between capitalism and increased living standards is challenging.

Varieties of Capitalism

• Conditions for Raising Living Standards:

  • Secure private property

  • Competitive market environments

  • Management detached from governmental influences.

Technological Revolution and the Industrial Revolution

Escape from the Malthusian Trap

• Malthusian Theory: Thomas Malthus suggested perpetual stagnation due to resource limitations and population pressures.

• Technological Advances: The Industrial Revolution showcased significant productivity rises due to technological innovations, allowing populations to be sustained beyond previous limits.

Factors Leading to the Industrial Revolution in Britain

• Causal Theories:

  • Joel Mokyr emphasizes the influence of the Scientific Revolution.

  • Other scholars highlight Britain's political systems, frugality, and access to coal.

• Scholarship Disagreement: There's no consensus on the definitive cause of the Industrial Revolution.

Economic Models

• Purpose: Economic models help understand essential factors behind economic outcomes and how changes affect equilibrium.

• Utility: Models are vital in portraying the broader economic picture based on people's interactions.

Technological Choice and Innovation

• Dominance of Technologies: Technologies are chosen based on efficiency, cost inputs, and labor relations.

• Creative Destruction: Described by Joseph Schumpeter, this process indicates that innovative technologies eventually replace older ones, affecting employment dynamics.

• Industrial Revolution Characteristics: Transition from labor-intensive to capital-intensive methods was manifested in production technologies.

Understanding Productivity and Labor Dynamics

Labor Productivity Trends

• US Work Hours and Earnings:

  • Growth patterns indicated hourly earnings escalated, while work hours reduced substantially over the 20th century.

• Global Comparisons: Different countries demonstrated variances in productivity allocation towards leisure versus work.

Malthusian Trap and Productivity Functions

• Key Model Assumptions: Explains how productivity is influenced by labor population and technological development.

• Productivity Declines: Highlighted by the diminishing returns of labor when exceeding optimal land use.

The Permanent Technological Revolution

• Technological Developments: Continual innovations push economic boundaries, allowing escape from the Malthusian shortcomings, providing insights into living standards and wages.

• Case Examples: Modern scenarios illustrate creative destruction's impacts on various industries, reflecting ongoing changes in labor markets.