POL101Y1 Lecture Notes - Friedrich List, Protectionism, Comparative Advantage
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Political Science - January 27th 2014
Increase Supply – decrease price
Increase trade and market share
Fastforward to chinese manufacturing
look at basic demand and supply graph
Principles of Market Economy
How do we supply things?
1. Assuming demand is constant, consumption is a function of price – the lower the
price the better it is for you. If the price is too high, you may not purchase it.
2. An increase in supply decreases price in consumption. How do you increase
supply? Lowering input costs (manufacturing costs/wages). Walmart is an
3. A decrease in supply increases price – decrease in consumption. E..G energy and
oil are extremely sensitive to supply.
Adam Smith, The Wealth of Nations (1776)
He would argue that in order to get rich you need to sell something that people will buy.
What you’re going to sell if determined by the invisible hand of the market.
Invisible hand of the market. It is simply natural. If you subscribe to this theory then you
have certain characteristics:
•Advantage – you will sell what you are good at making. The classic argument was
that the British had an advantage in making textiles. Portuguese - wine.
•Specialization. If you take the idea of advantage seriously, you result in
specialized mechanism. If you specialize in what you’re good at then it leads to
•Productive efficiency – if you specialize then you will make your product more
cheaply and more efficiently. The eventual downfall of Blackberry was that it
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ventured into unknown territory. It wasn’t good at hardware but it was amazing at
software, so now it is facing challenges.
•Universal division of labor – exports and imports. Due to this we see increased
trade. What’s most important is free trade. Only then will the English wine and
the Portuguese their English textiles.
On the Universal economic benefits of Free Trade
“Under a system of perfectly free commerce, each country naturally …”
the global division of labor is natural. The market is in many ways the state of nature. It is
the most pure form of economic transactions . by saying that it is pure and natural is also
saying that it is rational. It is a rational capitalist ethic. Each country NATURALLY
devotes its capital and labor to such employments as are most beneficial to each. This
pursuit of individual advantage is admirably connected with the universal good of the
whole. David Ricardo, 1817.
If everyone simply specialized so they made those products really well, then we would
have an international economy in which everyone benefits.
As adam smith writes, “most of the state regulations (govt) for the promotion of public
prosperity are unnecessary and a nation in order to be transformed from the lowest state
of barbarism in to a state of the highest possble prosperity needs nothing but bearable
taxation, fair administration of justice and peace” (Adam Smith)
If you want to be rich and prosperous and civilized and non barbaric like England then
you don’t need government policy. You simply allow the invisible hand of nature to
dictate. For Smith, govt intervention distorts the market and then you don’t allow the rest
to becme rich. For adam smith, it is not about governments but it is about the individual.
Hence capitalism is considered a liberal, economic theory. It focuses on the individual
and this will result in a universal equilibrium in the market, people will make what
they’re good at making and through this it leads to interdepenedcene leading to peace. As
long as there is peace, everyone will proseper and everyone will get rich. Everyone
doesn’t succeed equally but everyone benefits provided you let the market do its job.
•No government intervention
•Focus on the individual
•Universal equilibrium, peace and prosperity.
Can the “market” be manipulated?
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