Unformatted text preview: How Rich Are You?
Example: A person making $10,000
ranks in the top 15% of the world’s
Basic Lesson: Citizens of the USA –
relative to much of the world – are
RICH! Source: lecture of Brad DeLong
Source: Source: lecture of Brad DeLong Source: lecture of Brad DeLong
Source: History Notes
o h The United States employs an economic
system called Mixed Capitalism. How did
we come to employ this system?
see notes (on class website) Chapter Two Definitions,
h h h REVIEW HISTORY NOTES
Feudalism - an economic system in which traditions rule.
Mercantilism - an economic system in which the government
determines the allocation of resources by assigning the rights to
certain economic activities.
Capitalism -an economic system based upon private property and the
market in which, in principle, individuals answer the basic questions
of the economic system.
Socialism (according to Marx) - an economic system where the
incentive system of capitalism remains in place, but the workers own
the means of production. More definitions…
o h Socialism (as it is practiced) - an economic system where
the four economic questions are primarily addressed by
government actions, not unregulated market forces.
Mixed Capitalism - an economic system characterized by
largely private ownership of the factors of production,
market allocation of resources, and decentralized decision
making. Most economic activities take place in the private
sector in this system, but government plays a substantial
economic and regulatory role. You might be a Marxist if…
o . . . .
. ….. you have ever been given stock in the
company you work for
Marx argued that workers should own the
means of production.
…. you believe capitalism is better than
Marx argued that capitalism was a better
system than feudalism.
... you ever thought you were underpaid
Marx argued that capitalism exploits workers. The Work of Thomas Malthus
The Thomas Malthus: 1766-1834
Malthus, Thomas. 1798. An Essay on the
Principle of Population as It Affects the Future
Improvement of Society Published
Anonymously The Basics Assumptions of Malthus
The Food is necessary for the existence
of Passion between the sexes is
necessary and will remain
unchanged. The Conclusions of Malthus
The Population tends to grow faster than the
food Food increases arithmetically Population increases geometrically
This is the cause of poverty and misery Policy Implications of Malthus
Policy Policy implications from Malthus Rising wages lead to rising populations
Rising Rising populations lead to falling wages Hence, policies to improve the plight of
the poor are futile.
the Malthus Today
Malthus Galor, Oded and David N. Weil. 1999. “From Malthusian
Stagnation to Modern Growth”American Economic
Review. (May): 150-154.
The article focuses on three aspects of economic
1. Malthusian Regime
2. Post-Malthusian Regime
3. Modern Growth Regime
Refer to Figure 1 in the article. Summarizing Malthus
Two aspects of the Malthusian Model
A factor of production (land) is in fixed supply. Hence diminishing returns applies to all other factors of production. Law of Diminishing Returns As a variable input increases, holding all else constant, the amount of output from each additional input employed will eventually decline. In other words, if you hire more an d more labor, but don’t change the amount of land or capital employed, each person you hire will be less and less productive. Hence, output from land may increase, but at a diminishing rate.
There exists a positive relationship between standard of living and population growth. Increases in income will lead to increases in population. Conclusion: Level of percapita income will remain the same in the longrun. Increases in income will only lead to more people, which will lower percapita income. Evidence Supporting Malthus
2. 3. 4. Agnus Madison (1982) estimates that the growth rate of GDP percapita in Europe between 500 and 1500 was zero.
Massimo Livi-Bacci estimates that the growth rate of world
population between 1 A.D. and 1750 to be 0.064%. In other words,
population was very stable.
The argument that population and wages are linked was borne out
by the Black Death. The plague in Europe in the 14th century
reduced population, which in turn raised wages. Higher wages, in
turn, lead to increases in population.
Population could rise if technology improved. However, increases in
technology would not change per-capita income, only the size of
population. We do observe differences in technological levels across
pre-capitalist societies, but little difference in standard of living.
pre-capitalist What Happened?
What As per-capita income rose in Europe, initially population also rose.
However, the increase in population could not keep pace with the
increase in technology. Hence, Western civilization escaped the
Between 1740 and 1840, life expectancy in England
increased from 33 to 40. In France, life expectancy rose from 25 to
40. In other words, standards of living were improving.
Initially population also increased. Fertility rates, though, by the
end of the19th century slowed.
How is it that the link between income per capita and population
growth was severed?
How does one account for the sudden spurt in growth rates? The Galor-Weil model
1. 2. 3. Technological progress raises the rate of return to human
capital and hence induces parents to substitute quality for
quantity of children. Evidence: Rates of schooling in Europe
increases from 2.3 years to 9.1 years from the beginning of the
19th century to the onset of the 20th century.
As children become more educated, the speed of technological
As population rises, the land to population ratio falls, and wages
decline. Hence, population will fall. Rapid technological
progress, though, overcomes the land constraint, allowing wages
to Galor and Weil Regimes
Galor Malthusian Regime Increases in income lead to increases in population, which means percapita income falls back to its original levels. Therefore, income per-capita is roughly constant
Post-Malthusian Regime Increases in income lead to increases in population But income rises faster than population so per-capita income rises
Modern Growth Regime Per-capita incomes continues to rise.
Per-capita Parents choose quality of children over quantity and population starts to
fall. Technological Progress and
1. 2. Higher incomes allow families to have more
The return on human capital increases,
encouraging families to substitute quality for
In the Post-Malthusian world, the first effect
dominates. In the Modern Growth era,the
second effect is more important.
second Technophysio Evolution
Technophysio Fogel, Robert W. 1999. “Catching Up with the Economy.” American
Economic Review. March: 1-21.
“Technophysio evolution (the existence of a link between technological
and physiological improvements) implies that human beings now have
so great a degree of control over their environment that they are set
apart not only from all other species, but also all previous generations
of Home Sapiens. The new degree of control has enabled Homo
Sapiens to increase its average body size by over 50 percent, to
increase it average longevity by more than 100 percent, and to
improve greatly the robustness and capacity of vital organs.”
improve What is the impact of
technophysio The human species is increasing in size. A male of average
size (5 ft. 10 in, 172 pounds) requires
2300 calories per day. If the population of Europe
averaged this size in 1700, the quantity of food would have
proved insufficient to support work. Hence, we can
conclude (and the evidence supports this conclusion) that
the population had a smaller average size.
Fogel argues that technophysio evolution accounts for
about 50% of British economic growth over the past two
centuries. + Economic growth: Transformation of a nation’s inputs into greater and greater amounts of output.
+ Intensive growth: Growth due to an increase in the quality of a nation’s factors of production.
+ Extensive growth: Growth due to an increase in the quantity of a nation’s factors of production.
+ The Rule of 72 and growth in the U.S.A and China + Intensive growth is due to changes in technology Is technological change likely in a precapitalist society?
+ In a society based primarily on tradition, innovation is not only not encouraged, but actively discouraged (again, see history notes)
– Why? In a community where people are primarily living at subsistence, any change could potentially destroy the community. In other words, tradition represents certainty, uncertainty threatens the survival of the community. + Increasing labor, while holding the quality of labor constant, does not alter percapita growth.
+ Increasing land is only possible via warfare.
+ Capital accumulation is limited because of – technology does not exist.
– even if technology did exist, usury laws discourage the lending of funds from savers to borrowers. + Conclusion: Economic growth in precapitalist societies is zero. + Consequently, precapitalist societies designed institutions with the expectation of zero economic growth. Such institutions included a prohibition on usury (the charging of interest on loans) and the ‘Just Price.’ + The possibility of economic expansion was not envisioned in precapitalist. Without growth, how do you satisfy people’s “unlimited” wants? + The key is to limit desire. An examination of the philosophies of Aristotle and Thomas Aquinas reveals the emphasis each places on limiting wants, rather than expanding capabilities.
+ The limit on wants means that the terms of exchange must be regulated so that substantial gains or losses are not incurred. Such an event would encourage people to ignore traditional obligations (with gain) or prevent the fulfillment of societal obligations (with losses). + In a society without economic growth, all transactions are perceived as being zerosum – the gains of winners = the losses of losers
+ In this environment, how would people regard the lending of funds?
+ People with wealth are giving money to people without funds. In return, the people without funds pay the people a greater sum of money. In other words, the poor are transferring wealth to the rich. + In sum, charging interest increases the divide between the wealthy and the poor. + Mercantilism: An economic system in which the government determines the allocation of resources by assigning the rights to certain economic activities. + Further technological change expands the trade possibilities, opening people to new products (primarily food related).
+ Expansion of trade requires political stability. Hence the merchants conspired to promote kings at the expense of the church and the aristocracy.
+ Hencechange occurred on two fronts both politically and geographically. These changes should be seen as linked. + Following the scholastics (scholars in the middle ages), who assumed the gain of one person via trade was another person’s loss the mercantilist’s assumed the total wealth of the world is fixed. Exchange between nations via international trade was thus a zerosum game.
+ The wealth of a nation was increased via increased production, increased exports, and decreased domestic consumption. In other words, maximize the difference between exports and imports. + A nation should encourage exports via – government encouragement of domestic production
– acquisition of cheap raw materials via imports
– maintaining low wage levels
+ Imports should be discouraged via tariffs, quotas, subsidies, and taxes + A “favorable” balance of trade will lead to an increase in a nation’s stock of precious metals, which is how a nation’s wealth was defined. + Review the Quantity Theory of Money
– MV = QP + Favorable balance of trade would increase the +
+ flow of gold and silver (specie) into the economy.
The increased money supply would increase the level of price.
Higher prices will lead to a decline in exports and an increase in imports.
For nations with an unfavorable balance of trade, the opposite would occur. Thus no nation could maintain a favorable balance of trade in the long run. + Under feudalism the focus of society is on the community. The individual cannot be the primary focus, since life is a zerosum game.
+ Under capitalism the focus shifts to the individual. In essence, the viewpoint of the merchants increasingly dominates society. The shift in focus creates incentives for innovation, which leads to higher incomes, which further encourages technological change. + In other words.... the vicious cycle which dominated much of human history (life is a zerosum game so we create institutions that encourage a zerosum game) was replaced by a virtuous cycle. (life is a positivesum game so we create institutions that encourage a positivesum game). ...
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