Capitalism Notes

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Political Science
POS 210

Unit  Three: CCAPITALISM While we have  seen  liberalism  at  work in early  American  history,   particularly  in the  Declaration  of Independence , there  is another  area   of significance  greatly  influenced  by liberalism.   That  area  is  economics,  where  one  might  be  able  to ask  whether  early  capitalism  is  liberalism  extended  into  the  marketplace . Mercantilism In ancient  Greece  and  Rome,  the  revered  examples  of our  civilized   past,  the  basic  industry  was  agriculture;  the  producing  unit  was  the   household,  and  the  labor  force  was  the  slaves. Little  changed  when  we  move  from  Greece  and  Rome  into  the  Middle   Ages:  the  basic  industry  continues  to be  agriculture;  the  producing   and  consuming  units  are  still the  household,  and  the  labor  force  is  predominately  serfs,  one  step  up  from  slaves. The  economic  scene,  however,  changes  significantly  in the  middle  of  the  fifthteenth  century.   Here  begins  the  era  of the  merchants;  what  is  also  called  merchant  capitalism  or mercantilism . Mercantilism  lasted  about  300  hundred  years,  to the  middle  of the   eighteenth  century  (roughly  1450­ 1750)­ ­which  marked  two  important   events  in economics:   1) the  beginning  of the  industrial  revolution. 2) the  publication  of Adam  Smith's  Wealth  of Nations   (1776) Both  of these  events  were  at  least  in part  in stern  reaction  to the   economic  policies  and  practices  of the  mercantilists. WHAT IS MERCANTILISM? There  is no good,  single  definition  of mercantilism.   But from  the   beginning  of the  Middle  Ages  trade  had  been  expanding  within  the   European  lands,  between  them  and  the  eastern  Mediterranean.   In the   age  of the  merchants  this  trading  greatly  increased,  as  did the   markets  for trading.   Banks  appear,  first  in Italy; these  are  money   exchanges,  where  the  coins  of different  countries  could  be  weighed   and  exchanged.   They  became  a regular  feature  of commercial  life.   1 Value  of coins  was  determined  by the  amount  of gold  or silver  in each   coin. Of course,  one  of the  major  developments  leading  up  to mercantilism   was  exploration ­­the  voyages  of discovery  to America  and  the  Far  East.   The  result  of these  explorations  was  an  increase  in new  and   exotic  products  for Europe.   These  products  created  demands  for  goods  and  thus  gave  merchants  merchandise  to sell.   More  important,  a flood  of gold  and  silver  from  the  mines  of the  New  World brought  more  and  more  people  the  possibility  of possessing   money,  often  lots  of money.   Thus  people  were  more  and  more   motivated  to seek  money  for its own  sake.    The  pursuit  of money  became  respectable:  Christopher  Columbus   said:  "Gold  is  a wonderful  thing!   Whoever  possesses  it is   master  of  everything  he  desires.   With  gold,  one  can  even  get   souls  into  paradise."    Before  this  flood  of gold  and  silver,  money  was  monopolized  by  monarchs  and  their  courts,  or by the  churches.   Remember  the   importance  of “indulgences”  for the  Catholic  Church  (and  for Luther;   see  Ball & Dagger,  50­51).   Gold and  silver  almost  enabled  various   monarchs  to finance  their  wars  without  needing  to tax,  and  thus  risk  alienating,  the  people. The  merchants,  those  involved  in trading,  became  a respectable  social   group  with  access  to lots  of money.   The  merchant  towns­ ­Venice,   Florence,  Amsterdam,  London­ ­had  merchant  communities  of  distinction.   Indeed,  merchants  begin  to compete  for social status  with   the  landed  aristocracy.  So great  became  the  prestige  and  power  of the   merchants  that  soon  they  were  not  simply  influential  in the   government  of their  cities;  they  were  the  government  of their  cities. National  governments,  which  at  this  time  were  monarchies,  were  also   beholden  to the  merchants.   It was  the  merchants  who  enabled  these   governments  to gain  monopolies  and  to hold  power  by providing  the   state  with  the  economic  resources­ ­MONEY­­that  enabled  state   authorities  to consolidate  and  sustain  internal  and  external  power.   So  the  merchants  helped  to consolidate  authority  into  the  modern  state.    Their reward  was  often  in the  form  of political  influence  by the   monarchs  in helping  the  merchants  into  political  offices. Thus  the  state  can  be  seen  as  the  creation  of warring  commercial   interests  whose  only common  aim  was  to have  a strong  state,   provided  the  merchants  could  manipulate  it to their  exclusive   advantage. 2 WHAT BROUGHT THE END OF MERCANTILISM? 1. First  was  the  merchants'  negative  attitude  toward  competition.   In  short,  they  couldn't  stand  it, for it limited  their  wealth  and  thus  their   power.   So they  sought  to establish  monopolies , to control  prices  and   production.   To do this  they  used  the  power  of the  state,  and  their  own   political  influence  and  offices,  to intervene  in the  markets.   Thus  their   personal  pursuit  became  governmental  policy: to accumulate  money­ ­ gold  and  silver.   Governments,  in collusion  with  merchants,  were  most   often  happy  to lend  a hand. Thus  what  occurs  is the  precursor  to some  of what  we  see  in advanced   industrial  countries  today: •state  intervention  on behalf  of  industry; •tariff protection •the  beginnings  of the  modern   corporation. That  is, merchants  joined  their  efforts  or money  with  others  on some   voyage.   The  Crown  assured  them  that  they  would  have  a monopoly   so that  no other  merchants  would  have  monarchical  support.   The   Crown  protected  the  merchants’  ships,  mines,  plantations,  etc.  and   gave  the  merchants  political  power  in the  colonies.   In return  the   merchants  brought  the  Crown  gold  and  silver  and  goods. This arrangement  thereby  assured  a noncompetitive  price  for the   resulting  products  when  they  were  purchased  and  sold.   A share  of  this  noncompetitive  price  went  to the  government.   These   arrangements  between  Crown  and  merchants  later  become   permanent,  permanent  support  of operations  =  Dutch  East  India   Company  and  British  East  India  Company,  which  lasted  over  250  years   (1600­ 1874). 2. But what  brought  mercantilism  to an  end  was  the  beginning  of  economics­ ­and  that  begins  with  the  work of Adam  Smith. Early  industrial  revolution During  the  age  of merchants,  production  was  considered  a secondary   action,  limited  in scope.   The  traditional  guild  system  was  adequate   for it, as  the  state  guaranteed  the  guilds  a monopoly  of production   and  all products  had  to pass  certain  standard  tests.   One  could  not  be   a bricklayer  or weaver,  a baker  or a miller,  a witch­ burner  or a skilled   craftsman  or worker  of any  kind  without  belonging  to a guild. 3 The  guilds  were  like early  unions;  no one  could  work in a trade  without   being  in one.   And no one  could  work that  trade  without  progressing   through  the  steps  of apprentice,  journeyman,  up  to master  craftsman. At the  same  time,  production  was  regulated  by local consumption ;  labor  was  decentralized;  capital  supplied  was  small; labor  was   specialized;  artisans,  craftsmen,  masters,  and  apprentices  all had   clearly  defined  rights  and  duties. Production  took  place  in individual  settings,  usually  country   cottages.   This was  the  time  of "cottage  industry ," when  merchants   took  their  raw  materials  to village  cottages  where  peasants  turned   that  material  into  finished  goods.   These  cottages  were  isolated,   unconnected,  independent. Building  the  Pyramids : If you  want  to see  how  large  the  projects  of cottage  industries  could   be,  look to the  building  of the  pyramids  in ancient  Egypt.   To create   the  pyramids  Egypt  didn’t  have  huge  factories  spitting  out  block  after   block  to be  moved  into  place.   Nor did they  have  some  kind  of massive   assembly  line  producing  bread  for the  workers.   Instead,  the  pattern   for baking  bread  was  the  same  as  creating  the  blocks  for the   pyramids:  The  pattern  for both  was  simply  to duplicate  the  household   process  for baking  bread,  over  and  over  and  over  again  throughout   the  environment  surrounding  the  pyramids. Who were  the  thousands  of workers  who  built the  pyramids?    Research  shows  that  they  were  not  slaves.   They  were  laborers  who   were  incredibly  well fed.   The  amount  of cattle  bone  found  at  sites  on  the  Giza  plateau  was  enough  to feed  several  thousand  people.   Yet if the  workers  were  not  slaves,  why  would  they  toil under  the   hot  desert  sun,  working  long  hours  at  arduous  tasks?   They  did so out   of a sense  of community  obligation.   It was  part  of their  social and   religious  upbringing.   This was  the  norm  and  the  expectation.   There   was  no thought  to avoiding  the  work; it was  part  of one’s  bak  or  community  obligation.   Think back  to the  concept  of ascribed  status .  That’s  what  we  see  when  looking  at  who  built the  pyramids.  What  was   the  community  then?   It wasn’t  Egypt.   It was  the  local community,   under  the  protection  and  oversight  of the  Pharaohs.   “This is what  our   local village  is doing—making  the  pyramids.   That’s  what  we  do  because  our  village  wills it.” Back to our  story:  In the  second  half of the  18th  century,  however,   things  began  to change.   WHAT HAPPENED? 4 • Technical  advances  such  as  mechanical  spinning  and  weaving,  the   steam  engine,  and  the  use  of coal to extract  and  work iron   transformed  old cottage  industries.    • Machinery  replaced  specialized  skills and  allowed  for an  influx  of  labor.   Machines  centralized  work in factories,  thus  concentrating  labor   and  vastly  increasing  the  overhead  of business.  People  had  to move   from  farms  to factories  in order  to get  work. • Machines  increased  production  beyond  local consumption  so that   local consumption  was  no longer  equal  to the  supply,  thus   necessitating  the  discovery  of wider  markets  and  the  extension  of the   chain  of middlemen  to link producers  and  consumers. Guilds  were  threatened  by the  power  of the  machinery.   Woolen   merchants  and  guilds  conspired  to erect  protectionist  measures   against  machine  production.   But this  led  to the  rise  of the  cotton   industry,  as  entrepreneurs  looked  for a substitute  for wool and  freely   used  machines  and  used  labor  unconnected  to the  guilds.  INDEED,  ADAM SMITH REBUKED THE UNPROGRESSIVE AND PROTECTED  WOOLEN INDUSTRY AS EARLY AS 1776. So what  was  the  result?   Now COMPETITION and  NOT GUARANTEES OF  THE STATE could  police  the  production  and  quality  of goods.   Shoddy   products  would  not  be  purchased,  so manufacturers  had  to be  sure   their  products  were  of high  quality.   Competition  becomes  the   consumers'  best  defense:  It reduced  prices,  forced  manufacturers  to  produce  quality  goods,  forced  them  to keep  prices  down  by upgrading   their  machines  and  thereby  cutting  costs­ ­thus  increasing  their   volume. So, the  capital  that  had  once  been  invested  by merchants  in sending   raw  materials  to villages  to be  turned  into  finished  goods  was  now   invested  more  and  more  in factories  and  machinery  in the  cities.   The   dominant  figure  is no longer  the  merchant­ ­whose  interest  was  in  the  purchase  and  sale  of goods­ ­but  the  industrialist , interested  in  the  production  of goods.   This happened  because  the  manufacturers'   power  replaced  merchants'  power. WHY DID THE INDUSTRIAL REVOLUTION HAPPEN IN ENGLAND AND  NOT FRANCE? So what  sorts  of ideas,  political  ideas,  appeal  to these  industrialists   and  even  the  merchants?   LIBERAL IDEAS and  LIBERAL IDEOLOGY. 5 Thus  in England , where  the  industrial  revolution  began  and  grew,  the   middle  class,  the  backbone  of liberalism,  was  an   industrial     middle    class ; whereas  on the  continent  the  middle  class  was  still tied  to   agriculture  and  land. Whereas  the  English  middle  class  was  individualistic ­­relying  on the   factory  and  not  on the  state,  the  continental  middle  class­ ­especially   the  French­ ­still looked  to the  state  for the  boundaries  of  its  land ,  and  thus  of influence,  set  by the  state.   This difference  travels  down   into  the  19th  century. Why is it important  that  people  in England  were  individualistic  and   those  in France  were  bound  to the  land?   It is important  because  it  tells  us  why  the  industrial  revolution  happened  in England  and  not  in  France.    France,  which  knew  about  the  new  technologies  and  inventions,  did  not  develop  industrially  as  early  as  England  did.  Why not?   Because   rights  for Frenchmen  came  historically  from  the  King.  The  feudal   hierarchy  was  more  difficult  to break  in France  since  the  King was  the   source  of rights  and  power.   Therefore,  the  King of France  reinforced   the  feudal  hierarchy  that  required  serfs  and  peasants,  through   ascribed  status,  to remain  tied  to the  land. Why was  the  King in France  the  source  of rights  and  power?   In France   the  monarch  was  weak  in comparison  to the  kings  of England.   In  order  to secure  and  maintain  power,  the  French  kings  therefore   formed  alliances  with  the  French  nobility  against  the  burghers  or  merchant  class  (the  middle  class).   That  alliance  was  powerful  and   served  to limit the  commercial  interests  and  power  of the  middle   class. In England,  on the  other  hand,  the  king  was  strong.   Therefore  the   English  nobility  formed  its alliances  with  the  middle  class  against  the   King.  The  result,  for example,  was  the  Magna  Carta  in 1215,  when  this   early  alliance  forced  the  King to grant  to English  noblemen  certain   unabrogated  rights  and  the  establishment  of an  influential  Parliament.   The  English,  therefore,  had  a rich tradition  of rights  resting  on the   individual,  dating  for all people  as  far back,  of course,  as  1651  and   Hobbes. So in France  the  French  monarchy  claimed  a monopoly  of political   right,  while  in England  Parliament  claimed  to be  sovereign.   The  result   was  that  in France  the  idea  of rights  flowed  from  the  King to the   people.   The  control  of the  country  was  entirely  in the  hands  of the   King and  his agents.   People  had  to do whatever  the  king  said. 6 In England  rights  were  seen  as  personal  possessions,  and  thus  a sense   of independence  arose.   So when  the  industrial  revolution  led  to the   consolidation  of labor  in factories,  the  English,  without  needing   permission  from  the  Crown,  could  move  from  their  homes  in the   country  and  go to the  cities.   To the  French,  such  movement  might  be   seen  as  a threat  to the  power  of the  King. There  is another  side  to this  “story,”  which  is not  so, well, “glowing.”    The  English  government  passed  a series  of “enclosure”  laws,  which   required  farmers  to fence  off or enclose  their  property.   But fences   were  expensive,  and  many  farmers  could  not  afford  to do it.  So  because  they  couldn’t  build the  fences,  the  farmers  were  in defiance   of the  governmental  edict,  and  their  property  was  seized.   Where  were   these  dispossessed  farmers  to go for work? What  was  the  life of the  workers  like in the  industrial  revolution?    Before  the  advent  of machines  workers  were  protected  by the  statutes   of their  guilds,  assuring  them  at  least  permanence  of labor  and   livelihood.   With machines,  this  protection  is lost.    But this  loss  was  proclaimed  "freedom."   The  laborer  was  free  of the   old guilds.   Now laborers  could  associate  with  whom  they  pleased,   with  any  level  of workingmen.   Yet this  freedom  also  had  costs.    Without  the  protection  of the  guilds  the  laborer  was  deprived  of the   means  of subsistence  and  the  tools  of labor;  his freedom,  as  one   commentator  put  it, was  merely  the  freedom  to sell himself  into   slavery.   So: •hours  of labor  multiplied; •employment  of women  and  children  lowered   wages; •competition  between  workingmen  cheapened   labor; • no longer  tied  to their  land,  but  free  to move,   travel,  and  congregate  where  they  were  most  in  demand,  workers  drifted  and  swelled  the  ranks  of  the  unemployed  as  crises  struck  due  to unstable   consumption.   Hegel  referred  to the  unemployed  as   “the  rabble  of paupers.” Thus  begins  the  formation  of a class  separate  from  and  increasingly   hostile  to the  middle  class,  a class  Marx would  call the  "proletariat,"   and  one  we shall study  in Unit Seven.    7 Out  of the  industrial  revolution  emerge  "the  two  most  celebrated   figures  in the  history  of economics,"  as  economic  historian  John  Kenneth  Galbraith  claimed.   Though  both  were  giants  in economics,   they  worked  the  opposite  sides  of the  street,  as  we  shall see.   One  was   Adam  Smith,  whom  we’ll look at  now.   The  other  was  Karl Marx, whose   ideological  system  is the  topic,  as  already  indicated,  of Unit Seven. ADAM SMITH: Adam  Smith  studied  the  changes  that  the  new  technologies  and   entrepreneurship  would  have,  and  were  already  having,  on England.    When  he  published  The  Wealth  of Nations  in1776,  the  shops  and   mines  of the  industrial  age  were  already  in evidence  in England.   It  was  that  book,  more  than  any  other  single  influence,  that  would   destroy  the  old world  of mercantilism.   In it he  argued  persuasively   that  competition,  not  the  state,  should  regulate  markets. Adam  Smith  was  hired  in 1751  by the  University  of Glasgow  as  a  professor  of logic and  a year  later  became  a professor  of moral   philosophy.  Smith  could  not  have  been  hired  to be  teach  economics,   because  at  this  time  there  was  no such  discipline. Smith  first  attracted  attention  with  his publication  in 1759  of The   Theory  of Moral Sentiments .  How is it, he  asked,  that  humans,   creatures  of self­interest,  can  form  moral  judgments  in which  self­ interest  is not  the  most  important  consideration?   If you  want  to know,   read  the  book  [The  answer  lies  in our  desire  for the  approval  of others.   If a third  party,  an  impartial  observer  (whom  Smith  called  “the   Impartial  Spectator”),  were  watching  our  actions,  from,  say,  the   mother  ship  hovering  above  Earth,  how  should  we act  to gain  that   observer’s  approval?   Smith  thinks  that  our  behavior  shouldn’t  be,  and   thus  wouldn’t  be,  selfish.   For Smith,  of course,  the  impartial  observer   isn’t in a mother  ship  outside  of ourselves,  but  is found  within  us,  to  guide  our  actions  with  regard  to how  this  observer  will see  them.  This  internal  “person,”  this  “tribunal  within  the  breast,”  as  Smith  called  it,  is easier  to cajole  and  even  fool than  someone  actually  outside  of us.] One  of the  persons  highly  impressed  with  this  book  was  Charles   Townsend,  later  as  Chancellor  of the  Exchequer  (our  Secretary  of the   Treasury)  responsible  for helping  to start  the  American  Revolution  by  refusing  to permit  the  Colonists  the  right  to elect  their  own  judges  and   by imposing  a heavy  tax  on tea,  some  of which  the  colonists  dumped   into  Boston  Harbor. 8 On the  strength  of his thoughts  about  The  Theory  of Moral Sentiments ,  Townsend  recommended  that  Smith  tutor  his stepson,  the  Duke  of  Buccleuch.   So in 1764,  in part  because  of ill health  brought  on by  overwork  (Who  says  professors  don’t  work hard?),  Smith  resigned  his  position  at  the  university  to become  the  tutor  of the  young  Duke  of  Buccleuch.   The  post  carried  a good  salary  and  a pension  at  the  end.    Smith's  first  tutorial  duty  was  to take  his young  charge  on a tour  of  the  Continent. While in France  Smith  stayed  in the  chateau  of Voltaire,   considered  the  preeminent  man  of reason.   For both  Smith  and   Voltaire  reason  required  that  one  reach  conclusions  not  by recourse   to religion,  rule,  prejudice,  or passion,  but  by bringing  the  mind  fully to   bear  on all relevant  information  and  evidence.  [See  the  connection   here  to liberalism?]  This procedure,  as  it did for such  men  of the   Enlightenment  as  Voltaire,  Diderot,  and  Jefferson,  led  Smith  to new   paths,  including  the  revolutionary  view  that  morals  need  not  be  based   on religion. At the  time  of Smith's  visit France  was  primarily  an  agricultural   society.   Her leading  economic  philosophers  were  known  as  the   physiocrats , those  who  believed  that  all wealth  originates  in  agriculture  [See  Ball & Dagger,  p. 63.].   Wealth,  they  taught,  lay not  in  gold  and  silver  but  in agricultural  production,  which  flows  throughout   the  nation,  from  hand  to hand,  replenishing  the  country  like blood  in  the  body.   The  leading  Physiocrat,  not  surprisingly,  was  Quesnay,  a  physician. While the  Physiocrats  advocated  "laissez  faire "­­"leave  it alone"­ ­for  marketing  produce,  they  felt that  only in agriculture,  as  the  gift of  nature,  did productive  effort  yield  a surplus  over  cost.   In other  words,   only agricultural  labor  produced  wealth  for a n
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