1) The Capitalist Revolution

Intro How capitalism revolutionised the way we live, and how

economics attempts to understand this and other economic systems

Dramatic changes in living standards in different countries over last 1,000

years
o Living standards began to rise rapidly at the time of the capitalist
revolution
o Advances in technology/distinctive economic system contributed to
this revolution
Economics study of how people interact with each other, and with the
natural environment, in producing their livelihoods
Capitalism an economic system in which private property, markets and
firms play a major role
The rise in living standards has been accompanied by changes in
population and the way people live, by environmental impacts, and by
changes in inequality between countries and within countries
There is great variation across countries in their success in raising
incomes, and in the degree of inequality in living standards within them
1.1 Historys hockey stick: Growth in income

Ordinary scale is useful for comparing the levels of GDP per capita across
countries
Ratio scale is best for comparing growth rates across countries (i.e. GDP
per capita doubling as move up vertical axis)
o Growth rate = rate of change
o Growth rate = change in GDP(now - original)/original GDP
o Compare growth rates across countries over time
o Ratio scale if grow at constant rate then straight line as
percentage growth rate is constant
o Steeper line faster growth rate
o Growth rate 100% - then doubles
 Distinct kink/high growth rates compared to others hockey stick curve
E.g. China/India (1947) significant improvements in living standards when
independence from colonial rule/interference by European nations
Living standards did no grow in sustained way
When did happen at different times in different countries: so vast
differences in living standards around world
Adam Smith
o Producers/sells/consumers/transporters brought together with no
institution even while acting in self-interest
o Each led by an invisible hand to promote an end which was no part
of his intention
o Invisible hand self-interested actions produce socially desirable
outcomes
1.2 Measuring income and living standards

GDP per capita measure of total income (and output) in a country

divided by population
o Total output over given period
o GDP total income of country/per capita is per person
o Show differences between availability of goods/services
o Note: difference between disposable income
o Omits important factors of wellbeing
Disposable income and wellbeing
o Other aspects that dont buy: environment/public goods e.g.
healthcare or schools/goods and services produced in the house e.g.
meals or childcare
Average disposable income and average wellbeing
o Few rich/many poor increase in average no increase in wellbeing
of country
o Relative position in income distribution people report lower
wellbeing if earn less than others in group
Valuing government goods/services
o GDP includes government contribute to wellbeing but not in
disposable income
o But difficult to value not sold so hard to value

1.3 The permanent technological revolution

Industrial revolution technological advance at upward kink in hockey

stick curve
o UK mid-18th C
o New technology in textiles/energy/transportation
o New techniques
o Technological progress (reduce resources to produce an output)
shift from skills passed from generations
o Decrease work time = increase living standards
Technology in economics takes materials/inputs (inc. people) and create
output
Hockey stick kink in efficiency of lighting
Steam engine
Transportation canals/train/cars
 Most recent information processing/communication

1.4 A connected world

Internet connected increase speed of communication

Permanent technological revolution

1.5 The growth of population and cities

Population start increasing 1900s

o Improved sewerage/clean water/other public health measures
Move from rural to city
o Increased productivity in farming few farmers feed non-farming
population
o Higher output for given land
o Leave to city for other jobs

Demographic transition decrease DR now decrease BR or public policy
(e.g. China)
1.6 Impacts on the environment

Use of natural resources/degrade environment (air/water/soil)

Climate change fossil fuels affect: increase temperatures
o Rising sea
o Change in seasons/farming
o Respiratory illness pollution
o Deforestation rural communities
Rural communities deforestation/clean water/fish stocks affect them

1.7 Capitalism defined

Upward turn in kinked demand curve for: GDP per capita/productivity of

labour (light per hour of work)/connectivity/world population/impact of
economy on environment
Capitalist revolution new economic system (way of organising
production/distribution of goods and services) capitalism introduced
characterised by new institutions (laws/social customs)
Capitalism economic system where private property/markets/firms play
important role
o Shift from production in families to firms
o Or centrally planned economic systems production by government
e.g. communism
1.8 Private property, markets and firms

Private property enjoy own possessions/exclude others/can sell

o Capital goods important in capitalism equipment/buildings/raw
materials/intellectual property
Markets connect people to mutually benefit/exchange goods and
services though buying or selling
o Goods transferred between people
o Reciprocated goods transfer in both direction (unlike gify/theft)
o Voluntary as private property
 Firms people/inputs to produce goods and sell to cover cost of
production
o Way of organising production
o Capital goods used in production
o Pay wages to employees
o Goods/services property of owners
o Intend to sell for profit
Markets/private property vital for firms to function
o Inputs/outputs are private property
o Firms use markets to sell outputs
Labour market firms offer wages to individuals who agree to work for
them
o Employers demand side of labour market
o Workers supply side

1.9 Capitalism as an economic system

Capitalism combine decentralisation with centralisation

o Capitalism decentralises limits power of gov. and other individuals
in process of buying/selling/owning
o Capitalism centralises concentrates power in hands of
owners/managers of firms
1.10 Capitalism, causation and historys hockey stick