Chapter 3 Theories of Economic Change

Developmental Theories
Stage (Friederich, Sombart, Rostow, Karl Marx) Non Stage (Hamilton) Development of Economic Doctrines:

Theories of Economic Decline

WalBank

Diaclectical

A_ Scholasticism: It represents the teleological and ethical stage in economic thought. It is the philosophical trend which merges religion with Aristotelian logic. The economic theory was normative. 1- Saint Thomas Aquinas: Italian Philosopher and theologian most important figure in Scholastic Philosophy. B_ Mercantilism: it is power through National Wealth. 1- Jean-Baptiste Colbert: French Minister of Finance under the rule of King Louis 14. He achieved a high reputation due to improving the state of French Manufacturing and bringing the economy back from the edge of Bankruptcy. C_ Laissez Faire: self interest which is in harmony with society. 1-Adam Smith: Scottish Moral philosopher, pioneer of political economy, author of Wealth of Nations D_ Socialism: Self Interest of man is not glorified. It refers to various theories advocating public ownership and administration of the means of production and allocation of resources, and a society characterized by equal access to resources for ALL individuals. 1-Karl Marx: most influential thinker in 19th century.

2-Validimir Lenin: 1 of the leading political figures and revolutionary thinkers in the 20th century. He was the 1st head of the Soviet State.

1- Stage Theories They describe the economy as moving from one stage to the other. But without determining either the rate or the cause of change. They are commonly associated with the German historical school in the 19th century. Why it rose? It rose as a reaction to the classical deductive economic school which began with Adam Smith. They criticized the classists for: a) The classical claim of universality of economic laws, meaning that these laws can be applied everywhere. b) Their excessive use of deductive reasoning. c) Man was denominated by personal gains. On the other hand, German historians were for induction, interested in the welfare of the whole nation, they specified the stages through which society passes, emphasized that economic policy should vary with stage of development and not being universal abstract laws. Frederich List: He conceived the economy as proceeding from primitive conditions to what he called agricultural stage. It then evolves to the stage of manufacturing. Once they are developed, the need for commerce arises. Once the economy has matured to this degree, free trade becomes possible and prevails. Primitive Agriculture manufacturing commerce free trade. Sombart He confined his analysis to the evolution of capitalism. a) Early Capitalism (1200-1750), the beginning of the industrial revolution. It is characterized by small scale production, manual labor and traditionalism. b) Full Capitalism: the period of the industrial revolution. It is characterized by rational decision making, competitive spirit, innovation, and specialization. c) Late capitalism: Here begins the period of combinations, monopolistic practices, and the need for control. It began after the 1st world war.

Rostows Stages of Growth He viewed the pattern of economic change to be uniform throughout the world and classified the stages ad follows: a) Traditional Society: This stage is mainly agricultural and closely tied to the family. There is limited technology. b) Pre Conditions for Take Off: began in late 17th century with the beginning of application of modern science to agricultural and industrial production. Also this stage is accompanied by building up a central political power. c) Take Off: industries expand rapidly, saving and investment rise, incomes increase, new techniques in agriculture and industry. d) Drive to Maturity: growth is sustained at high level of savings and investments, output increases more rapidly than population, and institutions develop. e) Maturity: Age of high mass consumption, production shifts towards durable consumer goods and services

Karl Marx He viewed history as a dialectic process in which internal forces cause modifications in the total economy. This dialectic process is best reflected by what Marx called MODE OF PRODUCTION (economic system): The set of relationships between owners and users and the means of production. He viewed change as a result of the contradictions between a thesis and its antithesis. Marx identified 4 modes of production through which the European civilization has evolved: a) Primitive Communal: the purpose of work was subsistence rather than production for market or creation of exchange value. There is no private property nor ruling class because primitive society produced no surplus. b) Slavery: is a form of forced labor in which people are considered the property of others. The initial form of class society. Thesis vs. antithesis. 2 classes: slaveholders and slaves that struggle.

c) Feudalism: For Marx, what defined Feudalism was the power of the ruling class (aristocracy), rested on their control of arable land, leading to a class society based upon the exploitation of peasants who farm the land. Lords vs. servants. d) Capitalism: emergence of modern industrial society. The 1ry force of exploitation is wage labor. The ruling class is the bourgeoisie which exploits the proletariat. Capitalism
may produce one class (bourgeoisie) who possess the means of production for the whole of society and another class who possess only their own labor power, which they must sell in order to survive

e) Socialism would then replace capitalism and lead to a classless society called pure Communism.

How did he explain the collapse of the capitalism system?

Labor Theory of Value: like Adam Smith, labor gives value to commodity. Marx believes the
exchange value of a commodity was determined by the labor time necessary for its production.

Surplus Value:
To understand, Marx began by describing a system of simple commodity production in which each producer owns his factors of production and sells the commodity he produces. This was contrasted with the capitalist commodity production which the capitalist begins the process by money. He buys means of production and labor power. When the labor completes the process, he sells the commodity for money. So, the money which he ends with > which he begins with. This difference is what Marx calls surplus value. He considered it the source of capitalist profit. This profit was made because the value of labor power (wage) was less than the value of the commodities produced by labor power. Value of Commodity = C (constant capital) + V (variable capital, labor) + S (surplus value) Business Cycles / Recession The capitalist will begin with having more machines. This will require a proper increase in workers. The capitalist had been able to keep the wage rate at subsistence level only because of the industrial reserve army of the unemployed labor. As the industrial expansion took place, the increase demand for labor reduced the number of unemployed. The most profitable course of action seemed to be changing the techniques of production by introducing new labor saving machinery. Labor saving expansion permitted the increase in total production without increasing wages paid to workers. Therefore, while new goods were coming to the market, wages were being restricted with the result that consumer

demand was limited. In the depression, worker wage would fall but not as rapidly as output of goods. Thus, supply would be lower than consumer demand therefore recovery would occur (because the fall in output is greater than the fall in wages). Business cycles will occur regularly with increasing severity as the capitalist economy developed. Life under the capitalist will become unbearable, workers would revolt over through the whole system, and create a more rational socialist economy. Therefore, antagonism between classes is finished.

Non Stage Theories

Hamilton: He has advanced the theories of change. His theory may be summarized as follows: The inflow of precious metals, much of which was minted (imprinted), increased the quantity of money & thus led to a rapid rise of prices relative to wages. The lag of wages behind prices resulted in what is called profit inflation. The inflation of profit was a significant factor in the revolutionary economic change experienced during the industrial revolution. Theories of Economic Decline: Frank Walbank: He advanced a theory in the decline of the Roman Empire (5th century). His causes are mainly economic like slavery, low levels of technology. So any attempts to save the Empire were fruitless. Reasons: 2 internal & 2 external Internal Low Technology, institution of slaves (no incentive to work hard). This reduced the living of standards to subsistence. External Barbarian attacks, advance of Christianity Could the fall be evaded? There were 2 possibilities 1- Either the bourgeoisie give higher wages to workers (proletariat) and abolish slavery incentive to produce 2-Depressed classes (slaves) might have revolted and seized power.

This was impractical because in the presence of slavery, there was no incentive to pay higher wages. The 2nd alternative also couldnt have worked because lower classes were disorganized and the slaves themselves were divided to different degrees.

An Eclectic (Diverse) Approach to economic Decline: What is decline In more recent times, many countries have experienced decline. Although the conditions differed, certain similarities may be observed and generalized as an eclectic theory. He compares what happened to European countries (16 th 18th century). Why they rose and the fell? (Netherlands, Spain, Italy) Causes of rise: The development of services (trade) rather than on production or manufacturing. The size of the population and the external market were important as a source of raw material & demand for the service. External competition was not acute, so economic rise was possible. Cause of Decline: External Markets dropped and competition was acute (unable to sustain low costs). Institutional rigidity and lack of flexibility to sustain economic development. Increased competition from other economies. Demand in the economy increased while techniques and organizations failed to change rapidly.

Chapter 4 Medieval Europe

The middle ages can be divided into four sub periods: 1. 5th to 11th centuries when a manorial economy was being established. 2. From the 12th through 13th centuries when there was a revival of trade and increase in population. 3. 14th and early 15th centuries was a period of wars and black death (plague) particularly in France and England. (stagnation). 4. Later period of the 15th centuries when the renaissance occurred particularly in Italy. Europe of the 11th century was affected by four factors Roman Heritage: with its complex traditions and laws, felt mostly in the southern areas of the continent. Germanic Invaders who settled in the land and assimilated with the native population but who retained certain characteristics of their own culture. Arabs economic, political and social interaction was important. Arabs who had penetrated various parts of Europe. Although their expansion has stopped, their economic and sociocultural expansion was important. The universality of the Catholic church. Christianity has advanced with its power centers in Rome. Its influence was in politics, economics and religion. The Economy of the middle ages is essentially agrarian As long as agriculture remains the prime source of livelihood, land ownership carries with it economic, political and social power.

When economic mobility and alternatives are lacking, traditions tends to be a powerful stabilizer of the society. (traditions rather than contracts).

Feudalism: was a system whereby all members of the society had an obligation to
someone above. It is a system of hierarchy where the strong protected the weak in return for payment or money, labor, or military service. Another way to explain Feudalism, it is a type of government in which political power was treated as private position. This political power was divided among large number of Lords. It is not something that belongs to the whole nation. So the Lords rules is the important political figure that people has to abide by. The Feudal system was no more than a relation between king, nobles, Lords, knights and serves. It implies political and military status.

With the fall of the Roman Empire there was a vacuum that was filled with Feudalism. Theory of Coercion: system not fair, exploitation Theory of Mutuality: mutual benefits

Manorialism: The manor or agricultural village included a landlord, a small minority of free
tenants and a majority of serfs. (Economic system, Types of landholding). It describes economic integration between the various hierarchy levels. Slavery existed but was no longer common. Types of land holding (Tenure): arrangements regulating the rules of Land and the distribution of power and the relationship between the social groups. Land of the Lord: In essence, the Lord controls all lands but he has a part that belongs to him. He applied Corvees who cultivated the land. Lords Demesne cultivated by force labor. Free tenant Holdings: free farmers, not serves. small farmers who have the right to use the land but they should pay the rent usually in kind. It is cultivated by serves.

Serf Holding: paid the rent in the form of labor services. He has to work for the Lord (forced labor)

Chapter 10 The End of the middle Ages

There was increase in population and in urbanization, growth of monetary and credit institutions, there was better technology. As a result, basic trends happened: 1) Expansion of Agriculture: through colonization and settlements, they built new canals, moved to other areas. 2) There were changes in the internal relations of the manor (agriculture village). Labor dues were replaced by money rent. The serf had to work by force, now as a result of the increase in the population; peasants can move to new places, receive wages, pay rent to the Lord and take the rest. Commutation You can move to a new place. This commuting means that the serf can go and cultivate the land somewhere else, earn a wage and retains part of it. So, he has an incentive to produce and the Lord benefits. So there are more alternatives, more cities, more urbanization than in 11 century.

Compare between the end and the beginning of the Medieval Period:
a) Sociopolitical Structure b) Economic Structure

SOCIOPOLITCAL STRUCTURE 11th century: Rise of Feudal Lords who were political masters and economic patrons. He owned the land, dispensed justice, and represented the community in political affairs. No middle Class: the community was highly polarized between the nobility (Lords) and the serfs although there was a small group pf free peasants. The structure was relatively stable because of the diffusion of power (economic, social, political) among Lords and their representatives.

15th century: Decline of Feudal power, and a tendency towards central authority . Bourgeoisie on the rise (like merchants and also corvee was substituted with rent dues and peasants are more free) Rapid change in social relations

ECONOMIC STRUCTURE 11th century: Subsistence Economy based on agriculture Lords controlled means of production Rigid interdependence between landlord and peasant Corporate organization traditionally managed. Supply and demand relatively in balance at a low level of outputs, no surplus

15th century Rise of commercial economy (agriculture predominant) Many land owners (mobility of factors especially labor): land became less important and capital more important.

Rise of contractual agreements (the rise of the urban economy reduced the dependence on tradition and increased dependence on contracts) More rational decision making: parties of the contract made their own decisions without being boundered by tradition. Diffusion of control led to more efficiency in economic activity and efficiency. Commutation gave peasants incentives to cover rent and retain remaining resources. Imbalances between supply and demand. Production of surplus permitted exchange and expanded markets. Production of surplus permitted exchange of goods. The economy was not only one of surplus and exchange but also one of higher production and consumption.

Foundations of the differences between the 2 periods: Low technology

The production in agriculture was based on primitive methods. Men & beasts (animals) were the sources of power. Productivity was relatively low, no surplus.

Improved technology
1. Agriculture was using heavier plows, field rotation & some crop rotation was practiced, new crops have been introduced. 2. Technology had improved even more outside agriculture. Additional sources of power had been introduced. 3. Gunpowder had come into use. 4. The printing press 5. Double-entry bookkeeping had become common practice in manufacturing & trade.

Favorable land labor ratio vs. Unfavorable land labor ratio

Another fundamental difference between the two periods was the change in the land/labor ratio .

The land/labor ratio had diminished through population increases & public policy.

Limited horizon vs. Wide horizon

The pressure on the land was an important influence towards seeking alternatives outside agriculture. This push factor was increased by pull factor. - Transportation improved - Expansion of credit & the establishment of credit institution. - Capital was also made available. - Growth of international trade & international mobility of labor

Chapter 11 Mercantilism
What is Mercantilism? It is Economic State Building. It is a term used to refer to all economic theory from 15th century to 18th century. The lumping together is unfortunate because both economic theory and practice changed from place to place (Spain vs. England). In the 18th century, mercantilism came under attack by the classists. Thus, the doctrines of Laissez-faire were direct attacks upon Mercantilism and marked the beginning of its end. It is also called the era of commercial revolution. Principles of Mercantilism: 1- Nationalism and power are closely related to self-sufficiency a country must produce what it needs so that in time of war, it can stand on its own. 2- Self-sufficiency depends on regulated trade and production which are the main source of wealth. 3- Wealth through trade is represented by a + Balance of Trade (E>I). International trade if properly conducted is a way of increasing the wealth of the nation. Trade between nations in the long run is an antagonistic relationship (some 1 wins and some1 loses). To win is to achieve a net inflow of bullion. Trade is a matter of National Consequence government intervention is imperative. Colonial possessions help to win wealth either by direct exploitation of Gold & silver (Spain) or by having a market for trade (England). 4- Government has a responsibility to increase economic wealth.

5- Poverty and sickness are social ills and hence government authorities have a responsibility to cure those ills. 6- National Wealth and Power are relative values which can be measured only by comparison with other nations. Ex: England compared itself with Spain in 16 th century, with Holland in 17th century, with France in 18th century and with Germany in 19th century. Jacob Viner formulated 4 principles upon which no mercantilist will object: 1- Wealth is essential for economic and political power. 2- Political power is essential to acquire wealth. 3- Both are appropriate ends to national policy. 4- The separate aims of wealth and power are in the long run harmonious Therefore, Mercantilism in theory and practice is economic state building!

Why separate the period from 1500 1700 from the period before & the period after? 1- Because the theories which deal with this era treat it as a stepping stone towards the next period. For Example, Weber saw the rise of rationality in the reformation of this period. Marx saw in this era the beginning of capitalism. Rostow saw it as the pre-take off stage for development. Hamilton discovered that the profit inflation which was enjoyed in this period contributed to the development of capitalism. 2- Also because this period has its own characteristics: In 1492 America was discovered by Columbus and opened a new world for Europeans. In 1817 Luther began his conflict with The Catholic Church. 3- It is a period of transition: Changes in economic philosophy: shift from an economic doctrine based on ethic (Scholasticism during medieval times, normative economics) to one based on rational calculations (Mercantilism, positive economics, interested in facts not in what should be, Economic State building). Changes in economic activity:

a- Expansion of Regualted Chartered Trade: Each company was created by a charter (laws) which gave it a monopoly of trade in a given region or for a given commodity for a certain period of time. b- Putting out system: system for increasing production. It involved 2 parts the master artisan (producer) who knows the know how The merchant capitalist. The master performed 1 activity, the merchant contracted with a different artisan for each process. Both a & b were transited bcz they were proving inconsistent with economic requirements of industrialization. Monopoly was to be followed by competition. As to the putting out system, it was not adequate when Demand increased and when mechanization made the gathering in of production necessary. Political change a- Continuation of the tendency towards the formation of nation state. b- Political expansion into new lands. Setting up of colonies & eventually the creation of empires.