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POL101Y1 Lecture Notes - Index Of Economic Freedom, Invisible Hand, Friedrich List

Political Science
Course Code

of 6
Jan. 31st, 2011
How the West Got Rich: Political Economy 101
Ethic of rationalism, hard work how people get rich (last lecture) *Last week, this
week & next week lectures for essay
Thesis: Getting rich has less to do with people, or the Protestant ethic, but rather
Hong Kong known as the freest economy & most capitalistic, 3 pillars that allow this: 1)
tourism, 2) business services, & 3) logistics
17 th
Century Dutch Hegemony
Decline of the Spanish dominance end of 16th century
Amsterdam was the most multicultural city in the world at this time, place where
Catholics, Protestants, Jews, North Africans, & South Asians all lived together in
the name of commerce bringing with them knowledge & skills beginnings of a
knowledge-based society
Industrial innovation
Wind turbine power, & saw mill began to proliferate by means in which you could
build an industrial economy)
Modern finance
Amsterdam also the center of modern finance, where the first stock exchange was
created & a central bank willing to invest in industry, could raise capital from
public sources which allowed it to build huge companies
Economy successful because it was based on international trade, was a
multinational trading economy which made the 17th century Dutch economy
similar to today’s Hong Kong economy
*The flute ship was critical, & extraordinarily significant: it was cheap to make
because of turbine power & mechanized sawmills (than in Spain, England at the
time), required less manpower decreased the cost of trade
Shallow hull of the ship allowed the Dutch merchant fleet to visit, dock, & trade
at any port & maneuver inland extending trade
Rounded hull meant that it had an increased cargo capacity (30-50% greater than
any ship at the time); it was because of this ship that the Dutch outpaced the
Market Principles
Decrease the cost by which you provide a service or good, you increase the supply,
& decreasing the price by the increase of supply
Decrease the price = increase in consumption, increase consumption = increase
trade, & market share
Chinese Manufacturing
It has nothing to due with Protestantism, the reason why China is becoming rich,
center of manufacturing because they have figured out if you lower the cost of
manufacturing, have workers working long hours & supply abundant labour you
can increase the supply
Decrease the prices = greater market share
Market principle at work
Countries get rich by supplying things
How do you move the supply curve in order to decrease the price?
PBS documentary: comparatively lower wages in China means cheaper labour
more supply
Principles of the Market Economy
1.Assuming demand is constant, consumption is a function of price the lower the
price the better (Buffalo)
2.An increase in supply decreases price -> increase in consumption (the Wal-Mart
3.A decrease in supply increases price -> decrease in consumption (energy)
*Point is that a change in supply means a change in price
Adam Smith, The Wealth of Nations (1776)
Invisible hand of the market (countries should focus on what they’re good at)
Absolute (& comparative) advantage
Specialization (backbone of the market economy, e.g. the value chain that
make up a Barbie are specialized throughout the world each economy
specializes in what they’re good at that makes it cheaper)
Productive efficiency (do not mess with the market, as long as people
specialize in what they’re good at then there will be efficiency)
Universal division of labour exports & imports
*The market means that everyone wins, invisible hand of the market (free
trade), extraordinarily efficient
David Ricardo
Under a system of perfectly free commerce each trade naturally devotes capital
& labour to such employments as are the most beneficial to each. The pursuit of
individual advantage is admirably connected with the universal good of the
Cosmopolitcal Theory, Adam Smith
*How the world should be organized
No government intervention (distort the natural order, invisible hand; Smith
doesnt care about nation-states they are a hindrance to global peace &
Focus on the individual (nationality does not matter)
Universal equilibrium, peace & prosperity (system in which there will be global
Can the market be manipulated?
1.Adam smith says no the invisible hand of the market for productive efficiency,
should not be manipulated
2.Friedrich List (German) & Alexander Hamilton (American) say yes the invisible
hand of government for national power, should & can be manipulated
List is writing in response to Adam Smith, basically says that Smith is naive
It is not a positive sum world, not an everyone is happy kind of world
List argues is that nations matter, its matters what your nationality is in this
respect, if Smith offers a liberal vision of the world, List offers the realistic
perspective (nation state at the core)
England would become a huge manufacturing city if Smith had his way, according
to List
Smiths theory of the invisible hand of the market & cosmopolitcal view is the
hegemonic view of the most powerful economy in the world (you want free trade
because its to your advantage, a system that denies others the ability to rise
according to List)