Unit1 Feb2015 PDF

1
THE
CAPITALIST
REVOLUTION
September 2014 beta

February 2015 beta
Barmen in 1870, August von Wille
THE CAPITALIST REVOLUTION AND HOW IT CHANGED THE WORLD.

You will learn:

That capitalism is an economic system in which goods are produced by employees and
are sold on markets for a profit.
That capitalism has changed living standards, the ways in which people interact, and the
natural environment.
The conditions that enabled capitalist economies to take off.
How the Industrial Revolution also transformed the economy.
That there are different ways to organise a capitalist economy.
That economics is the study of how people interact with each other, and with the natural
environment, in producing their livelihoods.
See www.core-econ.org for the full interactive version of The Economy by The CORE Project.
Guide yourself through key concepts with clickable figures, test your understanding with multiple choice
questions, look up key terms in the glossary, read full mathematical derivations in the Leibniz supplements,
watch economists explain their work in Economists in Action and much more.
Funded by the Institute for New Economic Thinking with additional funding from Azim Premji University and Sciences Po
coreecon | Curriculum Open-access Resources in Economics

in the 14th century the Moroccan scholar Ibn Battuta (see box) described
Bengal in India as a country of great extent, and one in which rice is extremely
abundant. Indeed, I have seen no region of the earth in which provisions are so
plentiful. And he had seen much of the world, having travelled to China, west Africa,
the Middle East and Europe. Three centuries later, the same sentiment was expressed
by the 17th century French diamond merchant Jean Baptiste Tavernier who, in his
Travels in India, first published in 1676, wrote of the country:
Even in the smallest villages, rice, flour,
butter, milk, beans and other vegetables,
sugar and sweetmeats, dry and liquid, can
be procured in abundance
At the time of Ibn Battutas travels India
was not richer than the other parts of the
world. But India was not much poorer,
either. An observer at the time would
have noticed that people, on average, were
better off in Italy, China and England than
in Japan or India. But the vast differences
between the rich and the poor, which the
traveller would have noted wherever he
went, were much more striking than these
differences across regions. Rich and poor
would often have different titles: in some
places they would be feudal lords and
serfs, in others royalty and their subjects,
slave owners and slaves, or merchants
and the sailors who transported their
goods. Thenas nowthe prospects of
a daughter or a son depended on where
their parents were on the economic
ladder. The difference in the 14th century,
compared with today, was that then it
mattered much less in which part of the
world the son or daughter was born.
IBN BATTUTA
Ibn Battuta (1304-1368) was a
Moroccan traveller and merchant
whose travels were published in his
book Rihla (The Journey). His travels,
lasting 30 years, took him across north
and west Africa, eastern Europe, the
Middle East, south and central Asia
and China. He travelled more than
70,000 miles (113,000km); much
further than the distance covered by
his better-known contemporary, Marco
Polo (1254-1324).
Fast forward to today. The people of

India are far better off than they were
seven centuries ago if we think about
their access to food, medical care, shelter and the necessities of life; but by world
standards today most are poor. On average, people in the UK are six times better off
than in India. Japanese people are as rich as the British, just as they were in the 14th
century, but now Americans are even better off than the Japanese, and Norwegians
better off still.
UNIT 1 | THE CAPITALIST REVOLUTION

Figure 1 tells some of the story (you can follow links from the figure to the sources
of the data). The height of each line is an estimate of average living standards at
the date on the horizontal axis. Income is a common measure of a persons living
standards, because this represents the maximum amount of food, housing, clothing
and other goods and services that the person can buy without having to borrow, that
is, without going into debt or selling possessions. The average living standard of a
country is simply the average income of the country: that is, the total income divided
by the size of the population.
Though it is widely used, income as a measure of living standards misses many of the
things that money cannot buy (or that we typically do not buy) including quality of
life measures such as personal security and autonomy, the quality of the environment
in which we live or our access to knowledge and self-respect. Applied to an entire
country, an income-only measure has further shortcomings, because the average
income is not what most people experience: some of us are much richer, and some
are much poorer than the average. As we will see in Unit 12, economists and others
are working on better measures to address these shortcomings.
Gross Domestic Product (GDP) per capita is the measure of living standards used in the
figure. GDP is a measure of the market value of the output of the economy in a given
period such as a year. GDP per capita is GDP divided by the population. GDP can be
measured using three different kinds of data. Statisticians estimate GDP by adding
up the economys output, or the incomes of its residents, or their expenditure in a
year. If output, incomes and expenditure could be measured accurately, the three
data sources would give the same estimate. Economic historians and statisticians
have used historical data to construct estimates of GDP stretching back for more than
1,000 years, and these estimates help us understand how economies have evolved.
To compare an economys output per capita over time and with other countries,
the market value data must be corrected for changes in prices over time, and for
differences between countries, in exchange rates and relative prices. The first
correction produces estimates of GDP per capita in constant prices and the second
correction produces estimates of GDP per capita at purchasing power parity (PPP).
GDP measures output; it does not measure well-being or the quality of life. It
measures only the market value of output and excludes, for example, home-cooked
meals and care of children at home by family members. On the other hand the
additional fuel use caused by traffic congestion, which obviously lowers well-being,
is measured as higher GDP because people spend more money on petrol. Despite
these shortcomings, estimates of GDP are invaluable for understanding the economy,
not least because it is a systematic measure that is widely available.

A thousand years ago the world was flat, economically speaking. There were
differences in income between the regions of the world; but as you can see from
Figure 1, the differences were small compared to what was to follow. There were
cultural changes and scientific advances in many parts of the world over the entire
period shown in the figure, but living standards began to rise in a sustained way only
from the 18th century.
30,000
25,000
UK
JAPAN
20,000
ITALY
15,000
10,000
CHINA
5,000
2000
1900
1800
1700
1600
1500
1400
1300
1000
1200
INDIA
1100
Living standards (GDP per capita)
Figure 1. Historys hockey stick: living standards in five countries (1000-2010).

Source: Bolt, J. and van Zanden, J. 2013. The first update of the Maddison Project; re-estimating growth before
1820. Maddison Project working paper 4. Broadberry, S. 2013. Accounting for the great divergence. Economic
history working papers, 184/13. London School of Economics and Political Science, London, UK.
INTERACT
Follow figures click-by-click in the full interactive version at www.core-econ.org.
The figure looks like a hockey stick, and our eyes are drawn to the kink. As can be
seen from the figure, the kink is less abrupt in Britain, where slow growth began
around 1650. In Japan the kink is around 1870, in China around 1980, and in India
even more recently. What happened to make the long flat section of the hockey stick
suddenly turn upwards? The answer is what we call the capitalist revolution, which
combines changes in technology with the emergence of a new economic system.

This combination of new ways of producing things with new ways of organising
production, and the distribution of its benefits, transformed the way of life of people
across the globe. We can see from Figure 1 that this transformation did not happen
everywhere at the same time. Where it did happen there was an explosion in what
Adam Smith called The Wealth of Nations, in the title of his great book.
This does not mean that everyone in those countries benefitted equally. In the
economies that took off, many people remained (and remain) poor and economically
insecure, while some made fortunes from the manual labour of other peoplefor
example, factory workerswho had neither a vote nor the right to join a trade union,
and as a result had little bargaining power to improve their own standard of living
through the wages they earned.
We can also see that where the capitalist revolution did not happen, or until it
happened, entire countries remained comparatively poor. For the first time the world
came to be made up of rich and poor nations, as well as rich and poor people. The
outcome was that the amount of economic inequality among families across the
world was much greater in 1975 than it had been 200 years earlier when Adam Smith
was writing The Wealth of Nations.
For a large number of peoples, it took independence from colonial rule before
substantial improvements in peoples living standards could be seen. When three
centuries of British rule of India ended in 1947, according to the economist Angus
Deaton [I]t is possible that the deprivation in childhood of Indians was as severe as
that of any large group in history. In the closing years of British rule, a child born in
India could expect to live for 27 years. Half a century later, life expectancy at birth in
India has risen to 65 years.
Rule by European or other colonial powers was not the only reason why many
countries experienced the capitalist revolution only recently, or not at all. China
had once been richer than Britain, but by the middle of the 20th century GDP per
capita in China was one-fifteenth that of Britain. In contract, other countries quickly
followed Britains take-off by having their own capitalist revolutions. First came the
Netherlands and Belgium, then Germany and Japan. Recently China and India, the
worlds two most populous nationsand until recently among the pooresthave
experienced their capitalist revolutions and are catching up to the rich countries (see
Figure 1). As a result, income inequality among all the households across the world
has finally levelled off and may now be on the decline. This is happening because
inequality between countries is falling even though inequality within many countries
(including India, China and the US) has increased considerably during the last
quarter of the 20th century.
Many developments contributed to the capitalist revolution, but among the most
important was the advance of knowledge, and its application to improving the
production and distribution of goods and services.

PAST ECONOMISTS
ADAM SMITH
Adam Smith (1723-1790), considered by many
to be the father of economics, was raised by
his widowed mother in Scotland. He studied
philosophy at the University of Glasgow and later
at Oxford where, he wrote: the greater part of
the professors have given up altogether even
the pretence of teaching.
He travelled widely throughout Europe, visiting
Toulouse, France where because he had very
little to do, he said, he had begun to write a
book in order to pass away the time. It became
the most famous book in economics.
In An Inquiry into the Nature and Causes of the Wealth of Nations, published in 1776,
Smith (17231790) asked: how can society coordinate the independent activities of
large numbers of economic actorsproducers, transporters, sellers, consumersoften
unknown to each other and widely scattered across the world? His radical claim was
that coordination among all of these actors might spontaneously arise, without any
person or institution consciously attempting to create or maintain it. This challenged
previous notions of political and economic organisation, in which rulers imposed
order on their subjects.
Even more radical was his idea that this could take place as a result of individuals
pursuing their self interest: It is not from the benevolence of the butcher, the brewer,
or the baker that we expect our dinner, but from their regard to their own interest, he
wrote, adding that each would be led by an invisible hand to promote an end which
was no part of his intention.
Since then this invisible hand has been a metaphor for how markets can coordinate
the self-interested pursuits of people to produce a socially desirable outcome.
Smith did not think that people were guided entirely by self-interest, and he wrote
a book about ethical behaviour called The Theory of Moral Sentiments, published in
1759.
He also understood that the market system had some failings, especially when the
ownership of property was unclear, or when markets were monopolised. People in the
same trade seldom meet together, He wrote, even for merriment and diversion, but
the conversation ends in a conspiracy against the public; or in some contrivance to
raise prices.
He specifically targeted monopolies that were protected by governments, such as the
British East India Company that not only controlled trade between India and Britain,
but also administered much of the British colony there.
He agreed with his contemporaries that government should protect the nation from
external enemies and ensure justice through the police and the court systemhe also
advocated government investment in education, and in public works such as bridges,
roads, and canals.
1.1 THE PERMANENT TECHNOLOGICAL REVOLUTION
remarkable scientific and economic advances occurred more or less at the

same time as capitalism.
As late as 1800, traditional craft-based techniques, using skills that had been handed
down from generation to generation, were still used in most production processes.
The new era brought new ideas, new discoveries, new methods and new machines,
making old ideas and old tools obsolete. These new ways were, in turn, made obsolete
by even newer ones.
Although in everyday usage, technology refers to machinery, equipment and devices
developed using scientific knowledge, in economics, technology is a process
that takes a set of materials and other inputsincluding the work of people and
machinesand creates an output. For example, the technology for making a cake can
be described by the recipe that specifies the combination of inputs (ingredients such
as flour, and labour activities such as stirring) needed to create the output (the cake).
Our ancestors cookbooks contained technologies much like the ones we use today:
it still takes about 30 minutes to mix the ingredients and an hour to bake a cake; the
combination of ingredients has hardly changed, and the cake tastes the same.

Until the capitalist revolution the economys cookbook, like the skills needed to
follow its recipes, was updated only slowly and passed from generation to generation.
The capitalist revolution changed that. The time required to make a pair of shoes fell
by half in only two decades; the same was true of spinning and weaving. This process,
called technological progress in economics, continued for generation after generation.
As technological progress revolutionised production, it reduced the amount of time
required to produce most products.
To get some idea of the unprecedented pace of change, consider the way we produce
light. For most of human history technological progress in lighting was slow. Our
distant ancestors typically had nothing brighter than a campfire at night. The recipe
for producing light (had it existed) would have said: gather lots of firewood, borrow
a lighting stick from some other place where a fire is maintained, and start and
maintain a fire.
The first great technological breakthrough in lighting came 40,000 years ago, with
the use of lamps that burned animal or vegetable oils. We measure technological
progress in lighting by how many units of brightness called lumens could be
generated by an hour of work. One lumen is approximately the amount of brightness
in a square metre of moonlight. One lumen-hour (lm-hr) is this amount of brightness
lasting an hour. For example, creating light by a campfire took about 1 hour of labour
to produce 17 lm-hr, but animal fat lamps produced 20 lm-hr for the same amount of
work. In Babylonian times (1750 BC) the invention of an improved lamp using sesame
oil meant that an hour of labour produced 24 lm-hr. Technological progress was slow:
this modest improvement took 7,000 years.
Three millennia later, in the early 1800s, the most efficient forms of lighting (using
tallow candles), provided about nine times as much light for an hour of labour as had
the animal fat lamps of the past. But the advent of capitalism and the technological
explosion that followed meant that lighting became more and more efficient with the
development of town gas lamps, kerosene lamps, filament bulbs, fluorescent bulbs
and other forms of lighting. Today compact fluorescent bulbs are about 45,000 times
more efficient, in terms of labour time expended, than lights were 200 years ago.
Today the productivity of labour in producing light is half a million times greater
than it was among our ancestors around their campfire.
Figure 2, below, charts this remarkable hockey-stick growth in efficiency in lighting.
200,000
150,000
6,000,000
100,000
50,000
4,000,000
1950
1900
1850
0
1800
Lumen-hours per hour of labour
8,000,000
2,000,000
The present
Years ago
20,000
40,000
60,000
80,000
100,000
Figure 2. The productivity of labour in producing light: Lumen-hours per hour of labour
(100,000 years ago to the present). An hour of labour produced 17 lumen-hours of light
100,000 years ago; 4,000 years ago, an hour of work produced 25 lumen-hours. It was a
considerable improvement, but undetectable given the scale on the figure necessary to show
more recent improvements.
Source: Nordhaus W. 1998. Do Real Output and Real Wage Measures Capture Reality? The History of Lighting
Suggests Not. Cowles Foundation Paper Number 957, Mimeo, Table 1.6.
By reducing the amount of work time it takes to produce the things we need,
technological changes have been accompanied by significant increases in living
standards. Wherever and whenever capitalism took hold, peoples incomes and
consumption levels began to rise. Although the rises were sometimes followed by
short-term declines, over a long period there have been substantial improvements in
living standards. Figure 3 is an index of the average real wage of skilled craftsmen in
London between the years 1264 and 2001. The term real means that the money wage
(say, six shillings per hour at the time) in each year has been adjusted to take account
of changes in prices between different time periods. The result of this adjustment
represents the real buying power of the money they earned.
Before capitalism, fluctuations in the real wage were often the result of changes in
the size of the population, and hence in the number of people looking for work. For
example, the increase in the real wage in the century after 1350, shown in Figure
3, followed peasant rebellions which succeeded in raising rural incomes because
landlords had to accept some of the peasants demands due to a shortage of labour.
The labour shortage was in turn a result of the massive loss of life resulting from
bubonic plague (known as the Black Death) that hit London and other European
cities in 1348. The shortage of labour and political unrest combined had increased the
bargaining power of workers. When population recovered in the 15th century, labour
again became abundant, and you can see in the figure that wages fell.
DISCUSS 1: CAPITALISM AND THE INDUSTRIAL REVOLUTION

Give one or more reasons why the permanent technological revolution occurred with
the beginnings of capitalism, and not earlier.
800
700
600
500
400
300
200
100
2000
1900
1800
1700
1600
1500
1400
1300
0
1200
London craftsman real wage (Rebased to 1850 = 100)
10
Figure 3. Real wages over seven centuries: craftsmen (skilled workers) in London (12642001).
Source: Methods used for calculating the data are covered in: Allen, R. 2001. The Great Divergence in European
Wages and Prices from the Middle Ages to the first world war, Explorations in Economic History 38, pp. 411-447:
LINK.
Around the middle of the 19th century real wages for many people, such as the
London craftsmen represented in this figure, rose dramatically. As with the wage
increase following the bubonic plague 500 years earlier, the wage increases reflected
the rising bargaining power of workers, which had increased for both economic and
political reasons.
Workers and their advocates demanded and won reforms, for example limiting
the length of the working day and the use of child labour in factories. Massive
demonstrations by the Chartists and others demanded political reforms. The Reform
Act of 1867 doubled the number of adult males entitled to vote (although women of
all classes and rural workers still did not have the right). Along with these political
reforms, a simple economic fact aided workers in their quest for higher wages: the
rapid expansion of factory employment had exhausted the supply of new workers for
the factories coming from poor farmers and women working at home for a pittance.
The only way factory owners could now get workers was to pay them more.
11

The dramatic increase in wages was far from the only consequence of the capitalist
revolution.
In the Economist in Action video, economic historian Suresh Naidu explains how
population growth, technological development and political events interacted to
produce the real wage hockey stick shown in Figure 3. The events and technology
milestones he refers to are reported in the interactive version of Figure 3.
1.2 A CONNECTED WORLD
in july 2012 the korean hit Gangnam Style was

released. By the end of 2012 it had been the bestselling song in 33 countries, including Australia,
Russia, Canada, France, Spain and the UK. With
2 billion views by the middle of 2014, Gangnam
Style became the most watched video on YouTube.
Even British Prime Minister David Cameron and
US President Barack Obama tried the dance. The
permanent technological revolution has produced a
connected world.
Gagnam Style
Everyone is part of it. The materials making up

this introduction to economics were written by teams of economists, designers,
programmers and editors, working togetheroften simultaneouslyat computers
in the UK, India, the US, Russia, Colombia, South Africa, Chile, Turkey, France and
many other countries. If you are online, some of the transmission of information
occurs at close to the speed of light. While most of the commodities traded around
the globe still move at the pace of an ocean freighter, about 21 miles (33km) per hour,
international financial transactions are implemented in less time than it took you to
read this sentence.
The speed at which information travels provides more evidence of the novelty of
the capitalist epoch and its permanent technological revolution. By comparing the
known date of a historical event with the date at which the event was first noted in
other locations (in diaries, journals or newspapers) we can determine the speed at
which news travelled. When Abraham Lincoln was elected US President in 1860, for
example, the word was spread by telegraph from Washington to Fort Kearny,which
was at the western end of the telegraph line. From there the news was carried by a
relay of riders on horseback called the Pony Express, covering 1,260 miles (2,030km)
to Fort Churchill in Nevada, from where it was transmitted to California by telegraph.
The process took seven days and 17 hours. Over the Pony Express segment of the
12
route, the news travelled at 7 miles (11km) per hour. A half-ounce (14 gram) letter
carried over this route cost $5, or the equivalent of five days wages.
From similar calculations we know that news travelled between ancient Rome and
Egypt at about 1 mile (1.6km) per hour, and 1,500 years later between Venice and
other cities around the Mediterranean it was, if anything, slightly slower. But, a few
centuries later, as Figure 4 shows, the pace began to quicken. It took only 46 days
for the news of a mutiny of Indian troops against British rule in 1857 to reach London,
and readers of the Times of London knew of Lincolns assassination only 13 days after
the event. One year after Lincolns death a transatlantic cable cut the time for news to
travel between New York and London to a matter of minutes.
12
10
7 MPH:
News of Lincoln's election reaches

west coast of US from Washington
DC in east (1860)
8
6
3.7 MPH:
News of the Indian mutiny

reaches London from Delhi (1857)
2.7 MPH:
1 MPH:
Between Egypt and Italy

(50-222)
1900
1800
1700
1600
1500
1400
1300
1200
1100
0
1000
The speed of news (miles per hour)
12 MPH:
News of Lincoln's assassination

travels across the US (1865)
News of battle of Trafalgar, off

coast of Spain, reaches London
(1805)
1 MPH:
Between Venice and Damascus, Alexandria,

Lisbon and Palermo (1500)
Figure 4. The speed at which information travelled (1000 to 1865).

Source: Tables 15.2 and 15.3 from Clark, G. 2007. A Farewell to Alms: A Brief Economic History of the World.
Princeton: Princeton University Press, pp. 306-307.
1.3 THE GROWTH OF POPULATION AND THE GROWTH OF CITIES
alongside technological progress and rising standard of living, population

has grown rapidly. For most of the last 12,000 years the population of the world
grew slowly, if at all, with increases in good years followed by declines in response to
climatic adversity and other disasters.
13

Figure 5 shows the evolution of world population from the year 1000 onwards.
In a few countries, population started to grow rapidly 200 years ago, but the
worlds population took off in the 20th century with the development and spread
of improved sewerage, clean water, and other public health measures. While the
number of people in the world continues to grow, the pace of growth is slowing (see
Figure 6). The demographic transition refers to the slowdown in population growth
as the fall in death rates is balanced by a fall in birth rates associated with the desire
for fewer children in some cases, combined with public policies discouraging larger
families, as in China.
8,000
World population (millions)
7,000
6,000
5,000
4,000
3,000
2,000
2000
1900
1800
1700
1600
1500
1400
1300
1200
1000
1100
1,000
Figure 5. Capitalism and world population (1000-2010)
2.0
1.5
1.0
2010
1990
1970
1950
1930
0.5
1910
With the increased productivity of

labour in agriculture, fewer farmers
were required to feed the non-farming
population. Higher labour productivity
means that on a given piece of land,
more output could be produced by
each farmer. People left farming to
pursue other occupations, resulting in
another change: the growth of cities.
Before capitalism, most people lived in
the countryside interacting with just
a handful of people mostly family and
neighbours. In the last few centuries,
however, people have been drawnor,
in some cases, pushedinto cities. City
Average Annual Growth Rate %
Source: Angus Maddison historical statistics. US Census: World population growth rate.
Figure 6. How the worlds population growth

in the 20th century rose and fell.
Source: Angus Maddison historical statistics. US
Census: World population growth rate.
14

life is a drastic change, as everyday life is populated by dozens or even hundreds of
strangers.
Tokyo, the worlds biggest urban area, is
home to 34 million people. Thats four times
as many people living in one city today as
existed in the entire world 11,000 years ago,
at the time humans first took up farming.
In 1900, nine of the 10 largest cities in the
world were in Europe or North America
Tokyo was the exception. Today, with the
global spread of capitalism, nine of the 10 are
in Asia or Latin America, with New York the
odd one out.
Tokyo: Birds-eye view
In 1850 there were only three cities with

populations exceeding 1 million peopleLondon, Paris, and Beijingbut, as Figure 7
demonstrates, by 2013 there were more than 500 cities of this size.
Figure 7 Cities with more than 1 million inhabitants (2013).

Source: Thomas Brinkhoff: Major Agglomerations of the World. Data is for agglomerations (a central city and
neighboring towns (suburbs) forming a connected region of dense, predominately urban population) with more
than 1 million inhabitants: LINK.
15
1.4 ENVIRONMENTAL DESTRUCTION
as production has soared, so too have both the use and degradation of our
natural environment. With the development of capitalism, elements of the ecological
system such as air, water, soil, and weather have been altered more radically than at
any time in human history.
Figure 8 presents evidence that activities that involve our use of fossil fuelscoal,
oil, and gasolinehave profoundly affected our natural environment. After having
remained relatively unchanged for many centuries, increasing emissions of carbon
dioxide into the air during the 20th century have brought about perceptible increases
in the northern hemispheres average temperatures (Figure 8a) and resulted in
measurably larger amounts of carbon dioxide in the earths atmosphere (Figure 8b).
Figure 8c shows that carbon dioxide emissions from fossil fuel consumption have
risen dramatically over the past 250 years.
0.6
0.4
0.2
0
-0.2
-0.4
-0.6
2000
1900
1800
1700
1600
1500
1400
1300
1200
1100
-0.8
1000
Deviation from 1961-1990

mean temperature
Figure 8a shows that average temperatures of the earth fluctuate from decade to
decade. Many factors cause these fluctuations, including volcanic events such as
the Mount Tambora (1815) eruption in Indonesia. Mount Tambora spewed so much
ash that the Earths temperature was reduced, and 1816 became known as the year
without a summer.
Figure 8a. Fluctuations in northern hemisphere temperature over the long run (1000-2006).
Source: Mann, M., Zhang, Z., Hughes, M., Bradley, R., Miller, S., Rutherford, S., Fenbiao, N. 2008. Proxy-based
reconstructions of hemispheric and global surface temperature variations over the past two millennia.
Proceedings of the National Academy of Sciences.
16
Atmospheric CO2,
parts per million
400
350
300
2000
1900
1800
1700
1600
1500
1400
1300
1200
1100
1000
250
Figure 8b. Carbon dioxide in the atmosphere (1010-2010).
10,000
8,000
6,000
4,000
2000
1950
1900
1850
1800
1750
2,000
1700
Millions of metric tons of Carbon
Source: Years 1010-1975: Etheridge D., Steele, L., Langenfelds R., Francey, R. 2012. Division of Atmospheric
Research, CSIRO, Aspendale, Victoria, Australia. Historical record from the Law Dome DE08, DE08-2, and DSS ice
cores. Years 1976-2010: Data from Mauna Loa observatory.
Figure 8c. Global carbon emissions from fossil fuel burning (1750-2010).
Source: Boden, T.A., Marland G., and Andres R. J. 2010. Global, Regional, and National Fossil-Fuel CO2
Emissions. Carbon Dioxide Information Analysis Center, Oak Ridge National Laboratory, US Department of
Energy, Oak Ridge.
In the last century, average temperatures have risen in response to increasingly high
levels of greenhouse gas concentrations. These have resulted from the CO2 emissions
associated with the burning of fossil fuels. The likely consequences of global
warming are far-reaching: melting of the polar ice caps, rising sea levels that may put
large coastal areas under water, and potential changes in climate and rain patterns
that may destroy the worlds food-growing areas.
CLIMATE CHANGE
The causes, and the reality, of climate change are now not widely disputed in the
scientific community.
The Intergovernmental Panel on Climate Change (LINK) is the authoritative source
for research and data. The likely consequences of global warming are far-reaching:
melting of the polar ice caps, rising sea levels that may put large coastal areas
under water, and potential changes in climate and rain patterns that may destroy
the worlds food-growing areas.The long-term physical and economic consequences
of these changes, and the appropriate policies that governments could adopt as a
result, are discussed in detail in Unit 18.
1.5 CAPITALISM
how can we explain the shift from a world in which living conditions
improved or deteriorated when the weather changed, or when there was an
epidemic, to an era when most of the time each generation was noticeably,
and predictably, better off than the previous one? For many of us, our great
grandparents lived in a world of family and neighbours; yet we encounter dozens
of complete strangers in the course of the day. We use methods of communication,
household equipment, entertainment devices, transport, and ways of shopping and
banking that our great-grandparents could hardly have imagined.
If we were forced to give a one-word answer, it would be capitalism.
Capitalism is an economic system: it is a way of organising how we produce and
distribute the goods and services that make up our livelihood. Two characteristics
define this economic system. First, the people who produce goods and services are
employed for wages or salaries. This means that they are paid for the time they
work for their employer. This could be an hourly or monthly wage or an annual
salary. They do not own the goods they produce, and they work under the direction
of their employer. We use the term wage labour to describe this characteristic.
The novelty of wage labour is illustrated by an example. Before capitalism,
craftsmen purchased leather and transformed it into shoes, which they then
sold. But the shoes produced by workers in a capitalist shoemaking company
17
18

belong to the owners of the firm, not to the
workers. In other types of economic system,
those producing the goods were slaveswho
of course did not own what they produced,
and worked under the direction of a slave
owner. They were not paid in cash, but they
were provided with food and shelter. In other
economic systems farmers own what they
produce and direct their own labour, but in
some cases pay rent for the land they work, if it
was not their own. None of these systems uses
wage labour, and are not capitalism.
Wage labourers at a Bata shoe factory
In many economic systems, instead of being paid a wage for a specific period of
working time, people are paid for each product they makefor example, for the
number of lines of text they proofread on the Mechanical Turk website (LINK). This
form of work organisation is called piece-rate; it is not wage labour.
TEST YOUR UNDERSTANDING

Test yourself using multiple choice questions in the full interactive version at
www.core-econ.org.
The second characteristic of capitalism is that those who direct the production
process do so with the intention of making a profit by selling the output that the
workers have produced at a price that exceeds the cost of producing it. We call this
characteristic production for profit. This is characteristic of other economic systems as
well: in the above example, slave owners profited from the cotton or sugar that their
slaves produced; self-employed farmers or shoemakers want to sell their products
at a profit. But, in the past, most production was not undertaken for a profit. Our
distant ancestors hunted wild animals and gathered wild plants. They were not for
sale. They were for their own consumption, and to share with the other members of
their group.
In a capitalist economy, the owner of the company that hires the workers not only
owns the profit but also bears the risk of the venture: if it fails the employer will get
no profits and will have lost outgoings on machinery, equipment, premises and the
like. The employer is obliged to pay wages, input costs and taxes before taking any
revenue as profits.

Centuries ago, landowning elites in many parts of the world directed their serfs,
or other unfree labour, to produce goods to enhance the elites luxury and power.
The goods were not for sale. Under communist rule during the 20th century, firm
managers directed the work of employees who were paid wages, but the intention was
not to sell the goods for profit. The goal of production was to meet the requirements
of a centrally determined plan. The plan dictated what firms had to produce. Thus
these were not capitalist economies. Figure 9 summarises these distinctions.
Figure 9. Capitalism defined. Most of the worlds economies are capitalist today, and even
in those where centralised planning continues to play a rolesuch as China and Vietnam
wage labour and production for profit are major features of the economy.
There are many forms of capitalist economy in the world today, each with distinctive
ways of organising production and distribution. All are characterised by the
employment of wage labour for the purpose of making profits. Below, we will see
that different types of capitalist economy have different institutions that determine
the distribution of the output of the economy among its participantsand hence
the degree of economic inequality. We will also see that some capitalist nations have
sustained rapid growth in living standards, while others have not.
Capitalism, like slavery, centralised planning, and the other examples in Figure 9 is
one of many economic systems. In the course of history, capitalism has coexisted
with many political systems. A political system determines how governments will be
selected, and how those governments will make and implement decisions that affect
all or most members of a population. Democracy is one political system, defined by
individual rights such as freedom of speech and the press, fair elections in which
virtually all adults are eligible to vote and in which the loser leaves office.
19
20

Capitalism emerged long before democracy, but since the spread of democracy over
the past century most major capitalist economies are now governed by democratic
political systems. Yet even in the recent past, capitalism has coexisted with
undemocratic forms of rule, as in Chile from 1973-90, in Brazil from 1964-85, and in
Japan until 1945. In contemporary China, much of the economy is organised along
capitalist linesyet the system of government is not a democracy. In most countries
today, however, capitalism and democracy coexist, each system influencing how the
other works.
Like capitalism, democracy comes in many forms. In some the head of state is elected
directly by the voters; in others it is an elected body, such as a parliament, that
elects the head of state. In some democracies there are strict limits on the ways in
which individuals can influence elections or public policy through their financial
contributions; in others private money has great influence through contributions to
electoral campaigns, lobbying, and even illicit contributions, such as bribery.
1.6 HOW CAPITALISM EXPLAINS THE GREAT HOCKEY STICK OF HISTORY
the capitalist system of economic organisation, combining wage labour and

production for profit, coincided with the development of new technologies. The wave
of technological development began in Britain in the 18th century, and its cumulative
character led to it being called the Industrial Revolution. In the new economic system,
large numbers of workers were employed in one firm for the first time. The firm sold
the goods it produced in competition with other firms, and if it was successful it
made a profit for the firms owners, after paying wages and other costs. The owners
had a lot to gain by introducing new technology to keep up with the competition
and, if possible, get a step ahead.
Capitalism works through incentives in the form both of carrots (reward for success)
and sticks (punishment for failure). Greater profit is the carrot for the owner of a
firm. Getting a good job or a promotion is the carrot for the worker. The threat of
going out of business if the firm fails is the stick for the business owner. Losing ones
job is the stick for the worker. In the capitalist system, people with wealth (or the
ability to borrow) take the risk of introducing new technologies and entering new
markets, and win profit if the risk pays off.
Capitalism and rapid technological development go together. The reason: capitalism
was the first economic system in human history in which membership of the
elite depended on a high level of economic performance. The elite of a capitalist
economythe owners of these firms and their managersmight inherit the wealth
that gives them a start, but remaining in the club of its elite requires that they
produce goods that people want to buy at a lower price than the competition. As

a firm owner, if you fail, you are no longer part of the club. Nobody kicks you out,
because that is not necessary: you simply go bankrupt.
This is the greatest innovation of the capitalist revolution. It is greater than its
astounding technical progress or any of the other changes measured by our hockeystick graphs. It also, in part, explains them: the owner of a slave plantation who was
not very good at growing cotton retained his status. He was a less-than-averagelywealthy slave owner; but still an undisputed member of the elite. A feudal lord who
managed his estate poorly was just a shabby lord. But the owner of a firm that could
not produce goods that people would buy, at prices that more than covered the cost,
was bankruptand a bankrupt owner is an ex-owner.
For the carrot mechanism of the capitalist system to function, the business owner
has to know that the rewards for risk-taking will come to him or her, and not be
confiscated by the government or by criminals stealing his or her property. For the
stick mechanism to operate there have to be opportunities for competitors, such as
new start-up firms, to produce and sell products. Uncompetitive businesses have to
be allowed to fail rather than being bailed out, or to be bought by people with better
ways of using the firms assets.
Therefore, to thrive, capitalism also requires sufficient order in society for the
wealthy to risk their capital. Investing in the buildings, machinery and equipment to
create workplaces that employ large numbers of people is risky, because the expected
profits will materialise long after the investments have been made. Investors need
a legal framework and a judiciary that will respect the owners property rights, and
their right to manage their assets. They need confidence that the government will
not steal the capital they sink in a factory and that other businesses, such as their
suppliers, will honour their contracts.
1.7 VARIETIES OF CAPITALISM: OUTPUT AND INCOME ACROSS COUNTRIES
some capitalist economies have been very successful in raising living

standards, while others have been less so. The new way of making a living (a
fortune for some, a pittance for others) has, as we have seen, changed the world in
many ways. But many parts of the world got capitalism without the technological
revolutionor experienced the revolution belatedly. Italy, for example, had thriving
textile industries, banking, and international trade by the 14th century, and was
much richer than either Britain or Japan. But, 500 years later, economic historians
estimate that Italian living standards, as measured by GDP per capita, had fallen.
21

Figure 10 tracks the fortunes of a selection of countries across the world during
the 20th century. In 1928, when the Soviet Unions first five-year economic plan
was introduced, living standards were similar to those in Brazil, and considerably
higher than in Korea. Central planning in the Soviet Union produced steady but
unspectacular growth for nearly 50 years. Capitalism is able to produce faster growth
in living standards but it does not always do so; compare Brazil and South Korea with
the Soviet Union in Figure 10.
25,000
Living standards (GDP per capita)
SOUTH KOREA
20,000
15,000
10,000
FORMER USSR
BRAZIL
5,000
BOTSWANA
NIGERIA
2010
2000
1990
1980
1970
1960
1950
1940
1930
0
1920
22
Figure 10. Divergence of living standards among countries (1928-2010).

Source: Bolt, J. and van Zanden, J. 2013. The first update of the Maddison Project; re-estimating growth before
1820. Maddison Project working paper 4.
An important reason why central planning was later abandoned as an economic

system is its failure in the second half of the 20th century to deliver the
improvements in living standards achieved by some capitalist economies. Even
so, it was a surprise to the citizens of the former Communist countries that, when
capitalism replaced central planning, their living standards declined. Figure 10
illustrates this in the case of the former Soviet Union during the 1990s. This shows
how difficult it is to create effective capitalist economic institutions, as well as
a government that functions well enough to support them. Abandoning central
planning did not guarantee countries would progress to the upward slope of the
hockey stick.
In Africa, Figure 10 shows that the success of Botswana in achieving sustained
growth contrasts sharply with Nigerias relative failure.
As we shall see in later units in the course, differences in government and the legal
system help explain why capitalism functions better in some countries than in
others. Differences in institutional quality, for example, account for the contrasting
growth and stagnation of Botswana and Nigeria.
23
1.8 VARIETIES OF CAPITALISM: INEQUALITY AND PUBLIC POLICY
we have seen that the capitalist revolution, with its late starters (China, India,
Botswana, Korea), and nonstarters (Nigeria), led to increasing disparities in average
living standards across countries since 1820. As the late starters have begun to catch
up, this is a trend that in recent years has slowed or even reversed.
Within countries we have a different picture. Figure 11 shows a measure of inequality
for the US (since the 18th century), Britain and the Netherlands over the same time
period.
The data shows a more or less continuous decline in income inequality in the
Netherlands since the middle of the 18th century. In Britain and the US inequality
rose during the early 19th century, and then fell until the closing decades of the 20th
century, after which it increased again.
0.65
Gini Coefficient
0.60
0.55
BRITAIN
US
0.50
0.45
NETHERLANDS
0.40
2010
1990
1970
1950
1930
1910
1890
1870
1850
1830
1810
1790
1770
1730
0.30
1750
0.35
Figure 11. Income Inequality in the US, Britain and the Netherlands (1730-2010).
Source: Lindert, P. 2013. Two centuries of American growth and inequality, 1650-1860, Stanford University
Economics Department.
The measure of inequality shown, called the Gini coefficientafter its creator, Italian
statistician Corrado Gini (1884-1965), indicates how much disparity there is in
income, or another measure of living standards, across the population. If everyone
has the same income, so there is no inequality, the Gini coefficient takes a value of
0. The maximum inequality, a value of 1, means a single individual receives all the
income. In Unit 19 we explain how to measure the Gini coefficient.
24

To get a feel for the degree of inequality associated with different values of the Gini
coefficient, think of a pie that will be divided in two pieces. The Gini coefficient
measures how unequally you divide it. If G stands for the Gini coefficient, then the
fraction of the pie going to the person who gets the smaller piece is:
(1-G)/2
If G is zero, the smaller piece is half the pie: there is no inequality. When G = 1, the
size of the smaller piece is zero. The person with the larger piece gets everything.
Figure 12 shows four examples. On the left is the case where the Gini equals 0, so the
smaller piece is actually as big as the other piece; the second picture illustrates a Gini
equal to 0.2, which is similar to measures of income inequality in Denmark. The size
of smaller piece is 0.4: the person who gets the smaller slice gets two-fifths of the
pie. The third picture represents a Gini of 0.6, which could represent South Africa. In
this case, the smaller piece is 0.2, that is, one-fifth of the pie. In the fourth case, when
the Gini equals 1, the plate is empty. The entire pie goes to one person. Of course,
there are no countries in which the richest person gets all of the income, because
the others would not survive. There are also no countries in which the pie is equally
divided.
G=0
G=0.2
G=0.6
G=1
Figure 12. Measuring inequality by the Gini coefficient: the size of the smaller piece when
two people share a pie.
Going back to Figure 11, we see that three centuries ago the Netherlands had a
Gini coefficient of 0.63, but over the following centuries the degree of inequality
declined to 0.42. This would be like the size of the smaller slice of the pie increasing
by a little over 50%. In the US, inequality rose from the time of the Declaration
of Independence in 1776 until the Civil War in 1860, and then declined for the
next century, only to rise again in recent years. Inequality of income in the US, as
measured by the Gini coefficient, is now slightly higher than it was when slavery
existed, on the eve of the American Civil War.
DISCUSS 2: A MEASURE OF INEQUALITY

Consider a landlord, and the farmer who works his land and pays rent. In a year
the farmer can produce grain (net of the grain that is set aside as seeds for the next
crop) that will provide 10,000,000 calories when it is consumed. The crop is divided
between the farmer and the rent paid (in grain) to the landlord. For the farmer and
his family to survive they need 2,000,000 calories per year. We can describe the
inequality between the landlord and the farmers family by the Gini coefficient of
the grain produced. If the landlord charges a rent, in grain, equivalent to 6,000,000
calories, what is the resulting Gini coefficient? What is the largest Gini that is
consistent with the survival of the farmer and his family?
The inequality measures in Figure 11 do not take account of taxes paid to the
government and income transfers received by households from the government
(such as old age pensions, unemployment benefits and disability benefits). For most
of the period shown in Figure 11, these payments to and from the government had
little effect on inequality. Taxes and transfers were very limited. Since the 1950s
however, these payments have become an important part of how much a family can
spend, so when comparing countries in recent years we measure inequality in what
is called disposable income: that is, a family or individuals income after paying taxes
and receiving transfers from the government.
Figure 13 shows countries ordered from left to right from those with the lowest
inequality of disposable income as measured by the Gini coefficient to the most
unequal. The range is from a Gini of 0.2 in Denmark to 0.6 in South Africa and the
representation of the Gini coefficient in Figure 12 helps convey the difference in
inequality across this set of countries. We can see that among the most unequal rich
countries are the US and the UK, while Denmark and Norway are among the most
equal. In between are countries like South Korea, Taiwan, Belgium and Germany.
Many poorer nations are very unequal, with Gini coefficients around 0.5; for
example, Colombia.
25

0.6
0.5
0.4
0.3
0.2
2010
2009
2009
2010
2004
2011
2009
2004
2004
2004
2004
2004
2004
2010
2004
2003
2006
2011
2010
2005
2000
2004
2004
2004
2004
2004
2004
2011
2005
0.0
2004
0.1
Denmark
Sweden
Iceland
Finland
Norway
Netherlands
Czech Republic
Austria
Germany
Belgium
France
Japan
Taiwan
Korea
Australia
Ireland
Spain
Canada
Poland
Greece
Italy
UK
US
Israel
Russia
Mexico
Brazil
China
Colombia
South Africa
Gini of disposable income (various years, 2003-11)
26
Figure 13. Differences in inequality of disposable income among economies.

Source: Wang, C. and Caminada, K. 2011. Disentangling income inequality and the redistributive effect of
social transfers and taxes in 36 LIS countries, LIS working paper series No. 567. Solt, F. 2013. Standardised
world income inequality database.
The policies resulting in modest levels of inequality in South Korea, Belgium,

Germany and Taiwan differ. In some, incomes received as wages and profits before
the payment of taxes and transfers are very unequal. For example, Gini coefficients
for income before taxes and transfers in Germany and Belgium are as high as in
Colombia. This means that there are substantial differences among the people of
Germany and Belgium in the things that determine how much income, before taxes
and transfers, each of them gets. These differences include the ownership of incomeearning assets such as buildings, land or factories, someones education, or the other
determinants of success in a high-paying job.
Unlike the case of Colombia, in Germany and Belgium taxes and transfers reduce
the inequality in disposable income to half of the inequality before taxes and
transfers. The reason is that transfers go mostly to the less well off, and taxes are a
larger fraction of the income of the rich than the poor. Some poorer countries with
high levels of economic inequality have adopted tax and transfer policies that are
designed to reduce inequality in disposable income. Brazil in the 21st century is an
important example.
South Korea and Taiwan are the opposites of Belgium and Germany. In these
countries, taxes and transfers hardly affect the distribution of income at all, because
they are paid and received nearly in proportion to income before taxes and transfers.
Inequality in disposable income is limited because the Korean and Taiwanese
people differ less in what they own or in the value of what they bring to the labour
market. Like the equalising effect of government policies in Belgium and Germany,

the relatively equal distribution of income before taxes and transfers in these two
countries is, in part, the result of government policies. In the middle of the 20th
century large land holdings were broken up and distributed to farmers with little or
no land. Also, both countries have high-quality public education systems.
Figure 14 summarises the comparisons among countries. The columns refer to
differences in the degree of inequality in individual income earning assets such
as skills, ownership of buildings, factories, land and other things contributing to
an individuals income before taxes and transfers. The rows refer to differences in
the extent to which taxes and government transfers of income have the effect of
substantially equalising the distribution of disposable income.
Figure 14. Inequality of income before and after taxes and transfers: The average Gini
coefficient shown in each cell refers to disposable income (that is, after taxes and transfers).
DISCUSS 3: GLOBAL AND NATIONAL INEQUALITIES COMPARED

Briefly explain how it is possible for income inequality among households in
the world to decline at the same time as income inequality within the two most
populous poor economies has increased.
27
28

1.9 ECONOMICS AND THE ECONOMY
in the units that follow we will introduce you to how a capitalist economy
works, using the tools of economics.
Economics is the study of how people interact with each other and with their natural
surroundings in producing their livelihoods, and how this changes over time.
Our definition of the economy, and therefore of economics, has three parts.
1. It is about how we produce our livelihoods. How do we come to acquire the things
food, clothing, shelter, free timethat make up our standard of living.
2. It is about how we interact with each other in doing this. In a capitalist economy
we interact in the economy as consumers and producers, buyers and sellers,
colleagues at work, employers and employees, savers and investors, taxpayers and
public servants. Our distant ancestors would have interacted as hunters seeking
out a prey, gatherers collecting tubers or fruit, and as members of a group sharing
food around a common pot.
3. Economics is about how we interact with nature. Today this includes all of the
ways we enjoy and exploit our natural environment: from breathing, to a day
at the beach, cultivating crops and raising animals, extracting and using raw
materials, transforming raw materials into finished goods and waste products,
and potentially altering the climate.
Economics has a distinctive way of posing and attempting to answer questions,
and this is what you will learn. But economics is defined by what it is trying to
understand. For some questionsthe implementation of new technologies, for
examplewe use facts from engineering, biology and physics. For otherseconomic
inequality and why it differs among countrieswe draw upon studies from history
and politics. Insights from psychology help us investigate why people behave as they
do when they shop, work, and invest.
Just as economics borrows knowledge from other fields, we borrow the tools from
other areas of research. We learn from the study of historical documents, from
experimental methods first developed in the physical sciences, from mathematics,
and from the analysis of statistics.
29

The economy itself is part of a larger natural
and social system. Figure 15 shows that the
economy is part of the entire social system
which itself is part of the biosphere, that is the
collection of all forms of life on earth.
BIOSPHERE
SOCIETY
ECONOMY
Figure 16 illustrates the flow of goods and

people between households, firms, and
the biosphere. Firms combine labour with
structures and equipment, and produce goods
and services that are used by households,
and also by other firms. Similar to firms,
Figure 15. The economy is part of
production of goods and services also takes
society, which is part of the biosphere.
place within households. Unlike firms, some
of these outputs are not sold on the market: in
addition to producing goods and services, households are also producing people
the next generation of the labour force. The labour of parents, care givers and others
is combined with structures (for example, your home) and equipment (for example,
the oven in that home) to reproduce and raise the future labour force working in
firms, and the people who will work and reproduce in the households of the future.
BIOSPHERE
Machinery,
equipment
Pollution,
waste
FIRMS
Goods, services
Labour force
Parents,
caring labour
HOUSEHOLDS
Pollution,
waste
Land, raw materials, energy, water
Figure 16. Households and firms are connected to each other and to the biosphere by flows
of goods, services, workers, pollution, and raw materials.
30
DISCUSS 4: MEASURING LIVING STANDARDS

Explain what is measured by GDP per capita, and discuss its limitations as an
indicator of living standards, by reference to the representation of the economy in
Figure 16.
Hint: Which of the flows shown in Figure 16 do economists include in income, and
which do they not include?
All of this takes place as part of a biological and physical system in which both firms
and households make use of our natural surroundings and resources, ranging from
fossil fuel based energy to the air we breathe. In the process households and firms
transform nature by using its resources, but also by producing inputs to nature.
Currently some of the most important of these inputs are the greenhouse gases,
which contribute to the climate change illustrated in section 1.4.
DISCUSS 5: ECONOMICS DEFINED

The economist Lionel Robbins wrote: Economics is the science that studies human
behaviour as a relationship between given ends and scarce means which have
alternative uses.
1. Contrast this definition with the one we have just given.
2. Are the ends of economic activity, that is, the things we desire, fixed?
3. Robbins wrote these lines in 1932 when 15% of the British workforce was
unemployed; labour, in other words, was not scarce. It was abundant. Does this
mean that, according to Robbins definition, unemployment is not part of the
study of economics?

By the end of this course you will be able to discuss the questions below. You may not
know all the answers, but you will be able to consider the pros and cons of answers
that may be suggested. And, for some, you will know the answers.
1. What is economics about?
How has capitalism changed the way that people make their livelihoods, interact
with others and with the natural environment? How has capitalism changed the
world?
What explains the wealth and poverty of nations and people?
What is the connection between capitalism and innovation in both new
technology and new knowledge?
What are the environmental constraints on the growth of output?
How, why, and when does increased average income in a nation enhance the
quality of life of its people?
2. What and who are the main economic actors?
Are people selfish, generous, ethical, or all three in their economic interactions
with others?
For firms producing goods and services, including banks, how do top-down
relationships within them (such as between managers and workers), and
competition among them affect the economy?
For governments, what is their role in allowing markets to work and in dealing
with situations where markets fail to work well?
3. What can markets do, and what can they not do?

How do societies organise their economic activities?

How do markets work, when they work well?
Why do markets sometimes fail to work well?
Can a restriction of competition, such as the way the patent system prevents the
copying of inventions, improve economic performance?
How do labour and credit markets differ from the market for shirts?
What are the benefits and costs of international flows of goods and services,
finance and people?
4. How can public policies improve economic performance?

Why does unemployment persist, and why is it a problem?

What is inflation and why does it occur? When is inflation a problem?
Why are there booms, recessions and financial crises?
Can government spending, taxation, and interest rate policy stabilise the
economy?
31
32

Why do governments sometimes fail to improve the economic outcomes for
citizens?
5. How do economists produce knowledge?
Can economics be a science like physics or biology, and what would this mean?
How do economists resolve differences among themselves and scientists in other
disciplines, and why are differences sometimes not resolved?
How has economic knowledge evolved over time in response to new data, new
methods, and problems?
As you will see, these are not simple questions. Many have answers with which most
economists would agree. Many are under debate. Our objective is to introduce you
to the state of knowledge in economics and to equip you with the basic tools both to
form your own views on the matters under debate and, if you choose, to continue to
develop your skills as an economist in further courses and readings.
1.10 CONCLUSION
capitalism is the most dynamic economic system the world has ever known.
So far, this has been mostly good news: many capitalist economies have brought
substantial, sustained increases in access to material goods and to free time for
their citizens. On the other hand, despite the permanent technological revolution,
material deprivation and insecurity persist, and many people consider the extent
of income disparities among households unfair. While capitalisms dynamism has
the potential to create technologies that will lessen pollution, innovation that is
unregulated by environmental policy poses a threat to the natural surroundings on
which life depends.
The study of economics provides a way to analyse facts about how capitalism works:
why it is dynamic, what choices people have in leading their own lives, and how they
can improve our economic system. In the next unit we show how economics explains
two things about the hockey stick of history: why the long handle of the stick is so
flat, and why the kink happened.
DISCUSS 6: WHERE AND WHEN WOULD YOU CHOOSE TO HAVE BEEN BORN?
Suppose you can choose to be born in any time period in any of the countries in
Figure 1 or Figure 10, but thats all you can control. You cannot be sure if you would
be born in the city or the country, would be male or female, rich or poor. In which
time and country would you choose to be born? In which time and country you
would least want to be born? Use what you have learned from this unit to explain
your choices.
To do this, we study how the growth of population and of output have interacted:
increases in output have often been quickly followed by increases in population,
leading to temporary increases in living standards, but no more. We will also see why,
in Britain two and a half centuries ago, labour-saving technologies were introduced
and diffused throughout the economy which created sustained improvements in
living standards. An example is a novel spinning machine called the spinning jenny.
These two ideas will explain both the centuries-long handle of the hockey stick, and
the abrupt kink at the time of the capitalist revolution.
33
34
UNIT 1 KEY POINTS
1. The wealth of nations, and the small differences in average living standards betwen
them, changed little for thousands of years until around 1750. Then, beginning in
Britain, some countries became dramatically richer.
2. The kink in the hockey stick of GDP per capita would occur when the country
experienced what we call the capitalist revolution. The revolution combined rapid
improvements in technology with the emergence of a new economic system.
3. The economic system, capitalism, is a way of organising how we produce and
distribute goods and services. Two characteristics define it: wage labour and
production for profit. The owner of a firms incentive is greater profit, although there
is the risk of going out of business.
4. Technology is the process of taking a set of materials and other inputs, including the
work of people and machines, and creating an output. The search for profit by the
owners of a firm increases the overall pace of technological development.
5. The economy consists of interactions between the environment and both households
and firms. As a consequence, the capitalist revolution has been associated with a
global population explosion, rapid urbanization, depletion of our natural resources
and climate change. It may also lead to increasing inequality within a country.
6. Many countries have struggled to create the conditions for rapid growth but, as more
countries achieve take-off, nations are beginning to converge economically once
again.
UNIT 1: READ MORE

INTRODUCTION
Manias, panics and crashes
Even when economies began to experience continuous technological progress and
rising living standards, this has never been completely smooth. Financial crises occur
repeatedly, as these books show.
Kindleberger, C. and Aliber, R. 2011. Manias, panics and crashes: a history of financial
crises. London: Palgrave Macmillan.
Johnson, S. and Kwak, J. 2011. 13 bankers: the Wall Street takeover and the next financial
meltdown. New York: Pantheon Books.
Mian, A. and Sufi, A. 2014. House of Debt: How They (and You) Caused the Great Recession,
and how We Can Prevent it from Happening Again. Chicago: University of Chicago Press.
1.5 CAPITALISM
The company of strangers
Paul Seabright investigates how market economies manage to organise complex
trades between strangers, and create specialised work for them.
Seabright, P. 2010. The company of strangers: A natural history of economic life. Princeton:
Princeton University Press.
1.7 VARIETIES OF CAPITALISM: OUTPUT AND INCOME ACROSS COUNTRIES
Guns, germs and steel
Why did Eurasians conquer or displace Native Americans, Australians, and Africans?
Evolutionary biologist Jared Diamond explains the role of environmental factors.
Diamond, J. 1999. Guns, Germs, and Steel: The Fates of Human Societies. W. W. Norton &
Company.
Why nations fail
Why are some nations rich and others poor? Daron Acemoglu and James Robinson
argue that it is man-made political and economic institutions that underlie economic
success (or the lack of it).
Acemoglu, D., Robinson, J. A. and Woren, D. 2012. Why nations fail: the origins of power,
prosperity, and poverty. Crown Business, New York.
35
36
1.8 VARIETIES OF CAPITALISM: INEQUALITY AND PUBLIC POLICY

Inequality in the long run
Thomas Piketty and Emmanuel Saez on the recent history of, and future of, economic
inequality: LINK.
Piketty, T. and Saez, E. 2014. Inequality in the long run. Science, 344(6186), pp. 838-843.
MORE
Steam as a general purpose technology: A growth accounting perspective
Crafts, N. 2004. Steam as a general purpose technology: A growth accounting perspective.
The Economic Journal, 114(495), pp. 338-351.
Two views of the British industrial revolution
Temin, P. 1997. Two views of the British industrial revolution. The Journal of Economic
History, 57(01), pp. 63-82.
The great escape
Angus Deaton shows how wealth and health differ among populations, and suggests what
can be done to help those left behind.
Deaton, A. 2013. The great escape: Health, wealth, and the origins of inequality. Princeton:
Princeton University Press.
Rehabilitating the industrial revolution
Berg, M. and Hudson, P. 1992. Rehabilitating the industrial revolution. The Economic
History Review, 45(1), pp. 24-50.
This work is licensed under the Creative Commons Attribution-NonCommercialNoDerivatives 4.0 International License. To view a copy of this license, visit http://
creativecommons.org/licenses/by-nc-nd/4.0/ or send a letter to Creative Commons,
444 Castro Street, Suite 900, Mountain View, California, 94041, USA.

Unit1 Feb2015 PDF

Загружено:

Сведения о документе

Исходное описание:

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Unit1 Feb2015 PDF

Загружено:

Авторское право:

Доступные форматы

1

September 2014 beta

Barmen in 1870, August von Wille

THE CAPITALIST REVOLUTION AND HOW IT CHANGED THE WORLD.

The conditions that enabled capitalist economies to take off.

How the Industrial Revolution also transformed the economy.

That there are different ways to organise a capitalist economy.

coreecon | Curriculum Open-access Resources in Economics

Fast forward to today. The people of

UNIT 1 | THE CAPITALIST REVOLUTION

coreecon | Curriculum Open-access Resources in Economics

Living standards (GDP per capita)

Figure 1. Historys hockey stick: living standards in five countries (1000-2010).

UNIT 1 | THE CAPITALIST REVOLUTION

coreecon | Curriculum Open-access Resources in Economics

UNIT 1 | THE CAPITALIST REVOLUTION

1.1 THE PERMANENT TECHNOLOGICAL REVOLUTION

remarkable scientific and economic advances occurred more or less at the

coreecon | Curriculum Open-access Resources in Economics

UNIT 1 | THE CAPITALIST REVOLUTION

Lumen-hours per hour of labour

coreecon | Curriculum Open-access Resources in Economics

DISCUSS 1: CAPITALISM AND THE INDUSTRIAL REVOLUTION

London craftsman real wage (Rebased to 1850 = 100)

UNIT 1 | THE CAPITALIST REVOLUTION

1.2 A CONNECTED WORLD

in july 2012 the korean hit Gangnam Style was

Everyone is part of it. The materials making up

coreecon | Curriculum Open-access Resources in Economics

News of Lincoln's election reaches

News of the Indian mutiny

Between Egypt and Italy

The speed of news (miles per hour)

News of Lincoln's assassination

News of battle of Trafalgar, off

Between Venice and Damascus, Alexandria,

Figure 4. The speed at which information travelled (1000 to 1865).

1.3 THE GROWTH OF POPULATION AND THE GROWTH OF CITIES

alongside technological progress and rising standard of living, population

UNIT 1 | THE CAPITALIST REVOLUTION

World population (millions)

Figure 5. Capitalism and world population (1000-2010)

With the increased productivity of

Average Annual Growth Rate %

Figure 6. How the worlds population growth

coreecon | Curriculum Open-access Resources in Economics

Tokyo: Birds-eye view

In 1850 there were only three cities with

Figure 7 Cities with more than 1 million inhabitants (2013).

UNIT 1 | THE CAPITALIST REVOLUTION

1.4 ENVIRONMENTAL DESTRUCTION

Deviation from 1961-1990

coreecon | Curriculum Open-access Resources in Economics

Figure 8b. Carbon dioxide in the atmosphere (1010-2010).

Millions of metric tons of Carbon

UNIT 1 | THE CAPITALIST REVOLUTION

coreecon | Curriculum Open-access Resources in Economics

Wage labourers at a Bata shoe factory

TEST YOUR UNDERSTANDING

UNIT 1 | THE CAPITALIST REVOLUTION

coreecon | Curriculum Open-access Resources in Economics

1.6 HOW CAPITALISM EXPLAINS THE GREAT HOCKEY STICK OF HISTORY