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How the West Got Rich: Political Economy 101

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Political Science

POL101 st Jan. 31 , 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 systems Hong Kong known as the freest economy & most capitalistic, 3 pillars that allow this: 1) tourism, 2) business services, & 3) logistics 17thCentury Dutch Hegemony Decline of the Spanish dominance end of 16 centuryh Multicultural 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 Trade Economy successful because it was based on international trade, was a multinational trading economy which made the 17 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 British 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 effect) 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 whole. Cosmopolitcal Theory, Adam Smith *How the world should be organized No government intervention (distort the natural order, invisible hand; Smith doesn’t care about nation-states they are a hindrance to global peace & prosperity) Focus on the individual (nationality does not matter) Universal equilibrium, peace & prosperity (system in which there will be global prosperity) 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: List is writing in response to Adam Smith, basically says that Smith is na
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