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Lecture 15

Lecture 15


Department
Political Science
Course Code
POL101Y1
Professor
Jeffrey Kopstein
Lecture
15

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Political Economy 101 - "how the rest got rich"
January-31-11
12:16 PM
"...capitalism & bureaucracy have found each other & belong intimately together." Max
Weber, 1911
oGetting rich has less to do with the people, but more to do with the system (economic
system) & how these are structured by the gov't & policy
Audio recording started: 12:19 PM January-31-11
oPolitical Economy 101 - how the rest got rich .wma
oHong Kong - the freest economy in the world/the most capitalist
` tourism, services, logistics (3 pillars of Hong Kong economy)
17th Century Dutch Hegemony
Decline of Spanish dominance end of 16th C
Multicultural
Industrial innovation
Modern finance
Trade
Naval supremacy; decline of Spanish empire, rush of the Dutch economy in the 17th
Century (Amsterdam most multicultural city in the world at the time - Catholic,
Protestant (South/North Europe, respectively), Jews, South Asians, etc. all lived
together in the name of commerce)
` not only social diversity, but also knowledge/skills
Tremendous conglomeration of global knowledge concentrated in Amsterdam; the
beginnings of a knowledge-based economy
` wind-turbine power effectively proliferated at this time; used for mechanized
industrialization; the saw mill began to proliferate, as a means by which to eventually
build an industrial economy (cut wood faster/more precisely)
Amsterdam was the centre of modern finance
` where the first stock exchange was created, the first place where we saw a central
bank (furthermore, was willing to invest in central economy & raise funds from public
sources)
` could then build big companies (need capital, etc.)
- big company, first to issue stock, backed by this bank
Based on trade, first time really see international trade of the sort of scale evident
by Dutch economy in the 17th century (trade routes crossing Atlantic, to North
America, South America, Africa, in particular to Asia - and specifically for the Dutch,
to Indonesia)
` made Dutch economy similar to Hong Kong economy of the 21st century
Invention of The Flute ship -> the main ship used by Dutch merchant fleet through
the 17th century
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` this ship was v. significant -> cheaper to make (due to mechanized saw mills) than it
was to in say, Spain, at the time -> required less man-power
` hull of the ship is very shallow (other deep-hull boats could only use certain ports
(with deeper water), while these allowed them to dock & trade & manoeuvre inland
shallower water)
` increased cargo capacity because of rounded hull (design allowed the ship to hold
more goods)
Because of this ship that the Dutch out-competed the British
Market Principle
oIncrease supply -> decrease price
oIncrease consumption
oIncrease trade & market share
oFast forward to Chinese manufacturing
(pbs.org/wgbh/pages/frontline/shows/wal-mart/view)
Increased supply, decreased price, therefore able to increase consumption, so trade &
market share are also increased
` that's how countries get rich: by making things, exporting things, etc. that people
want
- moving that supply curve to increase supply & decrease price
oAssuming demand is constant, consumption is a function of price - the lower the
price the better (e.g. Going to Buffalo to shop because the prices there are cheaper)
oAn increase in supply decreases price -> increase in consumption (Wal-Mart)
oA decrease in supply increases price -> decrease in consumption (energy)
` e.g. Oil, deciding whether to fill up the car with gas depending on the price
` try to find alternatives (for fuel sources)
` the impending food crisis; less yield, lower supply, increased price in food
Change in supply = change in price
Adam Smith, The Wealth of Nations (1776)
Invisible hand of the market
Absolute (& comparative) advantage
Specialization
Productive efficiency
Universal division of labour - exports & imports
Invisible hand of market means that countries should focus on what they're good @ -
as a consequence, specialization results
How specialization is the backbone of the economy (refer to "Barbie Manufacturing"
article for this week's reading)
` each economy specializes in what they're good at
e.g. Drugs (pharmaceutical)
~ $500 million dollars on average to create a new drug & bring it into the market
` R&D probably took place in US, clinical trials probably Latin America/Asia,
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financing in London, UK, Hong Kong, etc. in other words, these "British" or
"American" drugs are really results of specialization
By producing what you're good at, productive efficiency - as long as people specialize
in what they're good at, then as a global system, productive efficiency -> a universal
division of labour then results
An economy made up of exports & imports; the natural order, the invisible hand of
the market, according to Smith - means that everybody wins (by doing what they're
good at)
` mutually beneficial
` the invisible hand, free trade, is a system in which everybody wins
` an extraordinarily efficient win-win situation
On the Universal Economic Benefits of Free Trade
"Under a system of perfectly free commerce, each country naturally devotes its capital
and labour 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
For Ricardo & Smith, capitalism is not a bad word, not a system of winners/losers
It's a system of universal good, where everybody wins; only those who behave
defiantly lose
Cosmopolitical Vision
"[M]ost of the state regulations for the promotion of public prosperity are unnecessary,
and a nation in order to be transformed from the lowest state of barbarism [the rest]
into a state of the highest possible prosperity [England] needs nothing but bearable
taxation..."
oNo government intervention
oFocus on the individual
oUniversal equilibrium, peace & prosperity
Lead to a more peaceful world order where everyone profits
` gov't (especially excessive) not necessarily a good thing; distorts things
- for Adam Smith, gov't intervention is bad, distorts the market
` Adam Smith doesn't even care about nation-states (& gov'ts) - hindrance to global
peace & prosperity; it's the individual that matters; has to take advantage of his or
her advantages; irrespective of nationality
` entire world could benefit
Can the "Market" be manipulated?
oAdam Smith says no - the invisible hand of the market - for productive efficiency,
should not be manipulated
oFriedrich List (German) & Alexander Hamilton (American) say yes - the visible
hand of the gov't - for national power, should & can be manipulated
Suddenly the positive sum world becomes a negative sum world
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