Unit 1: The capitalist revolution
Capitalism and the study of Economics 1:
1. Since the 1700s, increases in average living standards became sustained
2. At the same time, the capitalist economic system emerged
3. Capitalism was associated with private property and production and distribution through firms
and markets
4. Advances in technology and specialisation raised the output potential of economies
5. These industrial and technological revolutions have produced growing threats to the natural
environment and unprecedented global economic inequalities
6. Economics is a social science which studies how people and organisations interact with each other
and with the natural environment in producing their livelihoods
GDP
7. Gross Domestic Product (GDP): A measure of
total income and output of the economy in a
given period.
• Usually expressed in per-capita terms (as an
average income): an (imperfect) measure of
well-being of people.
• 1990 USD ppp: a common unit of measurement
to ensure a like for like comparison across
countries over time (avoids problems associated
with differing fluctuations over time in prices
and exchange rates)
Adam smith and the “invisible hand”
Hockey stick growth demonstrated by GDP per capita growth, labour productivity growth & CO2 rise
• What changed from around 1700?
- 1,000 years ago, differences in average GDP per
capita were relatively small. GDP-pc was about
twice as high in China and Italy as in Britain, for
example (little data before 1800)
- Yet by 2020, differences across countries were
much greater: GDP-pc in Britain was about 6
times that in India and twice that in China.
• Today, there are large differences both within and
– especially - across countries. Why?
- Because of economic Inequality Within
countries; across countries; overtime.
- In Singapore, the richest country on the furthest
right, the average incomes of the richest and
poorest 10% are $67,436 and $3,652
respectively.
- In Liberia, the furthest left, the corresponding
incomes are $994 and $17
- Inequality is explained by the sustained technological changes that started across countries
, - Countries that took off economically a century or more ago—UK, Japan, Italy—are now much
richer than those that took off only recently, or not yet at all
- Look at the movement of different countries in the ranking over time, for instance China
Growth take-off occurred at different points in time for different countries
• Britain → 1650
• Italy → 1800
• Japan → 1870
• India → mid 1900s
• China → mid 1900s
• In some economies, substantial improvements in people’s living standards did not occur until they
gained independence from colonial rule or interference by European nations.
The Technological Revolution associated with the ‘hockey-stick’ growth we have observed
• Technology: A process that uses inputs to produce an output.
- By reducing the amount of worktime it takes to produce the things we need, sustained
technological changes, beginning from around 1650 in Britain, allowed increases in output and
living standards (measured by GDP per capita)
- The most remarkable scientific and technological advances occurred more or less at the same
time as the significant upward kink in the hockey stick in Britain – especially after the middle of
the 18th century
What inputs at different periods of time enable people to light their homes?
• Today the productivity of labour in producing light is half a million times greater than it was among
our ancestors around their campfire
• Industrial Revolution: a wave of technological advances starting in Britain in the 18th century,
which transformed an agrarian and craft-based economy into a commercial and industrial
economy.
Modes of domestic lighting overtime
The Liter of Light project
• The Liter of Light project was launched in 2020 by the My Shelter Foundation, a Philippines-based
NGO which aims to provide light to 1 million of the roughly 12 million homes who are either still
without light or live on the threshold of having their electricity shut down.
• The scheme uses plastic bottles filled with a solution of bleached water, installed into holes made in
shanty towns' corrugated iron roofs, which then refracts the equivalent of 55W of sunlight into the
room – during the day, at least.
• It takes five minutes to make, and using a hammer, rivet, metal sheets, sandpaper, and epoxy, it
costs $1 to produce.
,Gas for lighting
• Early in the 19th century, gas was used almost exclusively for lighting
• The first gas works were small private ones built to light the new mills and factories which were
springing up in Britain at that time, and which worked long hours, if not all through the night.
• Urban areas soon recognised the benefits of gas street lighting so, by 1826, almost every city and
large town in Britain, as well as many in other countries, had a gas works, primarily for lighting the
streets
• In these towns, public buildings, shops and larger houses generally had gas lighting but it wasn’t
until the last quarter of the 19th century that most working people could afford to light their homes
with gas
• Whilst these were much brighter than candles or oil lamps, they were poor by modern standards.
• In 1885, the Austrian scientist Carl Auer invented the gas mantle, which consisted of a fine ceramic
gauze impregnated with rare earth metals. When heated to a high temperature by an aerated gas
burner (invented 30 years earlier by Robert Bunsen), this produced a much brighter light than a
naked flame.
• In 1885, the Austrian scientist Carl Auer invented the gas mantle, which consisted of a fine ceramic
gauze impregnated with rare earth metals. When heated to a high temperature by an aerated gas
burner (invented 30 years earlier by Robert Bunsen), this produced a much brighter light than a
naked flame
Technological progress
• Technological progress also greatly improved the speed at which information travels, making the
world more connected.
• The transmission of information around the world occurs at close to the speed of light
• But information has not always travelled so fast…The Times of London knew of Lincoln’s death 13
days after the event.
The environment
• Increased production and population growth affects the environment
- Global impacts →climate change
- Local impacts → pollution in cities/ deforestation
Economic Growth, Inequality and the Environment are connected:
• “For the sake of life on Earth, we must put a limit on wealth” Article by George Monbiot, Guardian
Newspaper 19.09.2019
Capitalism and Economic Growth
• Capitalism: An economic system where the main institutions are private property, markets, and
firms.
• Institutions: The laws and social customs governing the production and distribution of goods and
services
• Private property: ownership rights over possessions
- E.g. land, consumer goods, capital goods (the non-labour inputs used in production), with legal
protection of ownership rights against theft, fraud etc
• Markets: a way for people to exchange products and services for their mutual benefit. Unlike other
types of exchange, markets
, - are reciprocated transfers (e.g. through barter or financial payment)
- voluntary (with legal protections against coercion)
- assumption of at least minimal
degree of competition
• Firms: business organization that
uses inputs to produce outputs, pays
wages to market-hired labour, and
sets prices to at least cover
production costs
• Markets and private property are
essential parts of how firms
function for two reasons:
1. Inputs and outputs are private property – the firms buildings, equipment, patens and other
inputs into productions, as well as the resulting outputs, belong to the owners
2. Firms use markets (i) to sell outputs, (ii) to hire or purchase inputs (labour, capital);The aim is
usually to make profit
• A striking characteristic of firms, distinguishing them from families and governments, is how quickly
they can be born, expand, contract and die.
• Profit motive drives birth (e.g. spotting a niche in the market)
• Less efficient firms won’t survive a competitive market
Capitalism led to growth in living standards because of:
• Impact on technology: firms competing in markets had strong incentives to adopt and develop new
technologies and to invest in capital goods that would have been beyond the reach of small-scale
family enterprises
• Specialisation: the growth of firms employing large numbers of workers and the expansion of
markets linking the entire world allowed historically unprecedented specialization in tasks and
production
• Together with the technological revolution, this increased worker productivity.
Specialisation
• Specialisation: increases productivity of labour because we become better at producing things
when we (as firms or as individuals) each focus on a limited range of activities e.g. the pin factory
• ‘Learning by doing’ a specific task improves performance (and leads to innovation)
• Economies of scale: Producing a large number of units of some good is often more cost-effective
than producing a smaller number (and the division of labour)
• Taking advantage of natural differences in capabilities (comparative advantages)
• People/firms can specialize only if they have a way to acquire the other consumer/producer goods
they need through market exchange
• comparative advantage: A person or country has comparative advantage in the production of a
particular good, if the cost of producing an additional unit of that good relative to the cost of
producing another good is lower than another person or country’s cost to produce the same two
goods.
