POSC 1200U Lecture Notes - Lecture 4: Invisible Hand, Consumer Sovereignty, Perfect Competition
Welfare State
Lecture 4
1776-1914
• Time of increasing market liberalization
• Domestically:
o Companies, for example, could operate free from government regulation and
taxes were low on profits
o This is similar to today:
▪ Taxes on dividends are lower than taxes on income
• In Canada currently, you can earn up to $50,000 in dividends
without being taxed
• That is the equivalent net income as a labourer who makes
$75,000 per year
• A worker earning $50,000 a year would pay about $10,000 in
income taxes
• Also Capital gains tax = gains X 50% X normal income tax rate.
Invisible Hand
• Remember liberal economic theory (Adam Smith)
• Private property creates markets
• It should be protected
• This will promote entrepreneurialism
• Invisible hand will make sure the greed of individuals translates into maximum output to
the benefit of all (who deserve it)
But..
• In business: economies of scale
o Larger your companies output, the lower are your cost per unit
o Therefore incentive for companies to get bigger, and destroying all (especially
small) competition
• Personal income: Money attracts money in capitalism (because of economies of scale)
o Those with wealth can invest in larger ventures
o Money made from rents tends to grow exponentially, while wages do not.
Markets fail ithout
• Perfect competition
• Perfect information
• No eooies of sale igger at e etter
• Consumer sovereignty
Results of Market Economy
• Increasing inequality
o Leading to economic instability
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o Leading to political instability
• Casio eoo
o Leading to volatile markets
o Leading to political instability
• Increasing resource exploitation
o Leading to environmental degradation
o Leading to political instability
• Result: Income Inequality
• Internationally:
o Free Trade dotrie as folloed
o Adam Smith had argued that Great Britain would benefit from free trade
because of its advanced industries
o Later, the theory of comparative advantage was used to make the case that in
an absence of trade-barriers (like import taxes, quotas), all countries will be
made better off
o Comparative advantage says that countries should not try and produce all
products, just the product that they are currently best at producing. Then they
can trade with other countries that may be good at producing a different good.
Since each country is specializing in their best good, more of both goods will be
produced.
Declining terms of trade
• This is what actually seemed to happen
• Colonies and former colonies were established to sell primary commodities (raw
materials such as bananas, soy beans, coffee, rubber, metals, cotton, cocoa)
o They did bot have the knowledge or investment money to make manufactured
goods (TVs, cars. Etc)
• Former colonial powers (developed countries) made high-value manufactured goods
(TVs, Pants, etc.)
• The markets for primary goods were flooded and were worth less and less compared to
manufactured goods
• Results: rich countries get richer and poor countries get poorer
Result of market failure (at national and/or international scale)
• Huge market fluctuations (with increasingly large crashes)
• Increasing inequality
• Keynes, Marx, business cycles
• Great depression
Another Result
• Intensified colonialism (industrial countries needed raw material inputs and also access
to new markets)
• World War I
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find more resources at oneclass.com
Document Summary
1776-1914: time of increasing market liberalization, domestically, companies, for example, could operate free from government regulation and taxes were low on profits, this is similar to today, taxes on dividends are lower than taxes on income. In canada currently, you can earn up to ,000 in dividends without being taxed: that is the equivalent net income as a labourer who makes. ,000 per year: a worker earning ,000 a year would pay about ,000 in income taxes, also capital gains tax = gains x 50% x normal income tax rate. Invisible hand: remember liberal economic theory (adam smith, private property creates markets, this will promote entrepreneurialism. Invisible hand will make sure the greed of individuals translates into maximum output to the benefit of all (who deserve it) Markets (cid:862)fail(cid:863) (cid:449)ithout: perfect competition, perfect information, no e(cid:272)o(cid:374)o(cid:373)ies of s(cid:272)ale (cid:894)(cid:271)igger (cid:272)a(cid:374)(cid:859)t (cid:271)e (cid:271)etter(cid:895, consumer sovereignty.
