Topic 5.7 Economic Developments and Innovations in the Industrial Age
Thematic Focus - Economics Systems (ECN)
As societies develop, they affect and are affected by the ways that they produce, exchange, and consume goods and services.
Learning Objective
Explain the development of economic systems, ideologies, and institutions and how they contributed to change in the period from 1750 to 1900.
Historical Developments
Western European countries began abandoning mercantilism and adopting free trade policies, partly in response to the growing acceptance of Adam Smith’s theories of laissez-faire capitalism and free markets.
The global nature of trade and production contributed to the proliferation of large-scale transnational businesses that relied on new practices in banking and finance.
Transnational businesses:
- Hong Kong and Shanghai Banking Corporation (HSBC)
- Unilever based in England and the Netherlands and operating in British West Africa and the Belgian Congo
Financial instruments/innovations:
- Stock markets, Banking, financing
- Limited-liability corporations
The development of industrial capitalism led to increased standards of living for some, and to continued improvement in manufacturing methods that increased the availability, affordability, and variety of consumer goods thus leading to consumerism .
Reading Questions
1. In your own words, define capitalism.
2. What makes the free market "free" (think about the business owner and the customer)?
3. How does competition between businesses create new products? How does it create a variety of products?
4. Describe the effect consuming new and different products has on the people.
5. How is democracy connected to capitalism?
6. Why do capitalists want government to rarely interfere with the markets?
7. Explain the new financial instruments/innovations of Stock markets, and limited-liability corporations.
8. According to this article, why does capitalism cause poor working conditions?
9. What does Latin America, Africa, and Asia have that factories want?
10. How does capitalism affect these areas?
Essential Question: What is the promise of capitalism? What are the limitations?
Capitalism
What is Capitalism?
Capitalism: an economic and political system in which a country's trade and industry are controlled by private owners for profit, rather than by the state. Capitalism focuses on the idea of how a business owner can control their factors of production, which refers to the materials, technology, and labor (workers) needed to make their product. By controlling these factors of production, a business owner can generate more profit by increasing the production of their product within the goal of people buying it. People who utilize capitalism, or capitalists, want to gain as much profit as they can from selling their products. During the Industrial Revolution, a different type of capitalism emerged known as industrial capitalism, which emphasizes investment in machines and new technology to increase mass production of their product, which still exists today as the dominant economic system globally. |
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The central focus of capitalism is the marketplace. Imagine the “marketplace” as a metaphorical mega-mall where every company in the world is represented as a single store. People can go to this “mall,” see all the different companies’ products, and buy whatever they want. Economists often refer to this “marketplace” as the free market. In the free market, the owner of the business can determine the product’s price. They can make the price really high so only elite people can buy it, or low enough for the general population. But the people can influence what is successful in the free market through their purchases. That is the law of supply and demand. For example, if people purchase more Diet Coke over Cherry Coke, then the Coca-Cola factories will produce more Diet Coke and less Cherry Coke. So while businesses or companies can produce and price their products, the people ultimately decide how successful the product will be.
Encouraging Innovation and Consumerism
Capitalism focuses on the idea that a free market is not only a place to buy and sell goods but also a place of competition. Every business is competing over who will buy their product. Thus, businesses are encouraged to experiment and create new products that will cause more people to buy their products over their competitors. For example, Apple was first introduced as a computer company, selling desktop computers that were highly successful in the 1980s. But after a series of failed products during the 1990s, Apple saw more people buying computers from their rival, Microsoft. To increase sales, Steve Jobs and his production team began experimenting with new products, looking to the music industry for innovation. In 2001, Apple released the iPod, a portable music player that still leads in MP3 sales. Apple had to innovate to give people a reason to buy their products again. Capitalism follows the idea that “only the strongest will survive.” Since the people make up the free market, they determine which businesses will succeed or not.
Capitalism focuses on the idea that a free market is not only a place to buy and sell goods but also a place of competition. Every business is competing over who will buy their product. Thus, businesses are encouraged to experiment and create new products that will cause more people to buy their products over their competitors. For example, Apple was first introduced as a computer company, selling desktop computers that were highly successful in the 1980s. But after a series of failed products during the 1990s, Apple saw more people buying computers from their rival, Microsoft. To increase sales, Steve Jobs and his production team began experimenting with new products, looking to the music industry for innovation. In 2001, Apple released the iPod, a portable music player that still leads in MP3 sales. Apple had to innovate to give people a reason to buy their products again. Capitalism follows the idea that “only the strongest will survive.” Since the people make up the free market, they determine which businesses will succeed or not.
With new businesses rising and competing against each other in the free market, capitalism causes the increase of different products. For example, Forever XXI does not sell one shirt style or one style of pants. They have a large variety of products to choose from, for all sizes and genders so that different shoppers could find a product that meets their demand. And since they are competing against other clothing companies, they will lower prices to get more people to buy from Forever XXI. With all of these new and cheaper products, people in industrialized regions have become the consumers, or buyers, of the capitalist economy. However, consumers are always buying more goods produced by businesses. This has created a phenomenon known as consumerism, where people buy more and more goods, regardless of their purchase history. Consumers buy cheap goods like clothes, furniture, and technology, but the products have a temporary lifespan, therefore encouraging consumers to buy more later. Some economists argue that this has a positive effect on the economy, since it generates economic growth if consumers frequently buy more. While others argue consumerism has a negative psychological effect on consumers, who believe they can achieve happiness if they buy the companies’ products. But since these products don’t last forever, they must buy more anyway, thus stuck in the never-ending cycle of buying, using, throwing away, and buying more.
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The Role of the Government in Capitalism
Capitalism is often seen as the economic equal to democracy. While the people in a democracy have the power to determine who is in government, the people in capitalism have the power to determine the success of products in the market. Capitalists believe democracy is meant to protect the rights of the people, which includes their right to own property and to participate in the free market. With that in mind, capitalists also want democratic governments to not interfere within markets. Economists call this type of economy laissez-faire (pronounced Lay-zay Fair), or “hands-off” capitalism. In his book The Wealth of Nations, Enlightenment thinker Adam Smith (on the left) carries the message of how governments should interact as little as possible in the economy and leave the markets alone.
Capitalism is often seen as the economic equal to democracy. While the people in a democracy have the power to determine who is in government, the people in capitalism have the power to determine the success of products in the market. Capitalists believe democracy is meant to protect the rights of the people, which includes their right to own property and to participate in the free market. With that in mind, capitalists also want democratic governments to not interfere within markets. Economists call this type of economy laissez-faire (pronounced Lay-zay Fair), or “hands-off” capitalism. In his book The Wealth of Nations, Enlightenment thinker Adam Smith (on the left) carries the message of how governments should interact as little as possible in the economy and leave the markets alone.
Capitalists argue that NO government interference in the free market would cause economic growth and more innovation. According to capitalists government interference with the market includes adding taxes to goods (i.e. sales tax), setting minimum wages for workers, or creating business regulations that all companies must obey or face closure. Capitalists don't want the government interfering because it causes their prices to increase, affecting consumers to buy less or from a competitor, thus decreasing profit. This is one reason why capitalists were against the monopolistic practices of government-chartered joint-stock companies such as the British East India Company. They argued that mercantilism distorted market competition and hurt consumers.
A New Way of Organizing
A new way of organizing business began. People began to form corporations. A corporation is a legal entity that is separate and distinct from its owners. As a result, owners can profit from corporations but are not personally responsible for the losses. If the corporation goes bankrupt, the owner does not lose their home, car, or other private property. That means that corporations are limited in liability. Corporations enjoy most of the rights and responsibilities that individuals possess: they can enter contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes. Some refer to it as a "legal person." Individuals can purchase shares or parts of the company and then can receive profits.
Some corporations became so powerful that they created monopolies (complete control over one product with no competition). For example, John D Rockefeller created a monopoly over the oil industry in the 1880s. Many of these companies extended beyond their country of origin and would create transnational companies. One example is The Hongkong and Shanghai Banking Corporation (HSBC). It focuses on global financing and investing in other corporations. Another example is Unilever which was based in England and the Netherlands and operating in British West Africa and the Belgian Congo. They focused on household products.
A new way of organizing business began. People began to form corporations. A corporation is a legal entity that is separate and distinct from its owners. As a result, owners can profit from corporations but are not personally responsible for the losses. If the corporation goes bankrupt, the owner does not lose their home, car, or other private property. That means that corporations are limited in liability. Corporations enjoy most of the rights and responsibilities that individuals possess: they can enter contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes. Some refer to it as a "legal person." Individuals can purchase shares or parts of the company and then can receive profits.
Some corporations became so powerful that they created monopolies (complete control over one product with no competition). For example, John D Rockefeller created a monopoly over the oil industry in the 1880s. Many of these companies extended beyond their country of origin and would create transnational companies. One example is The Hongkong and Shanghai Banking Corporation (HSBC). It focuses on global financing and investing in other corporations. Another example is Unilever which was based in England and the Netherlands and operating in British West Africa and the Belgian Congo. They focused on household products.
Local Impact
In 18th and 19th century Western Europe, capitalism became the prevailing economic system. The Industrial Revolution triggered numerous agricultural workers to move to urban cities, seeking employment in factories or coal mines. But remember, capitalism’s goal is about gaining the most profit out of their products. So a factory owner has to pay their workers, which decreases their share of profit. With no government interference within the economy, Western Europeans saw the emergence of unregulated capitalism. To ensure they are getting the most out of their workers, factory owners allowed working conditions that were less than ideal but did not decrease profit. For example, workers were paid low wages, had 12 to 16-hour workdays, 6-day workweeks, with only 30 minutes for lunch and dinner, and probably worked in a factory or mine with machines that could cause severe injuries. Women and children working were paid significantly less than men, even if they had the same job. Lastly, capitalists are always looking for ways to cut costs. So if a new machine can produce and work faster than a worker, a capitalist will invest in that technology in order to cut the cost of paying their workers. Some began to see capitalism as an unfair economic system where the rich gained and the workers suffered.
In 18th and 19th century Western Europe, capitalism became the prevailing economic system. The Industrial Revolution triggered numerous agricultural workers to move to urban cities, seeking employment in factories or coal mines. But remember, capitalism’s goal is about gaining the most profit out of their products. So a factory owner has to pay their workers, which decreases their share of profit. With no government interference within the economy, Western Europeans saw the emergence of unregulated capitalism. To ensure they are getting the most out of their workers, factory owners allowed working conditions that were less than ideal but did not decrease profit. For example, workers were paid low wages, had 12 to 16-hour workdays, 6-day workweeks, with only 30 minutes for lunch and dinner, and probably worked in a factory or mine with machines that could cause severe injuries. Women and children working were paid significantly less than men, even if they had the same job. Lastly, capitalists are always looking for ways to cut costs. So if a new machine can produce and work faster than a worker, a capitalist will invest in that technology in order to cut the cost of paying their workers. Some began to see capitalism as an unfair economic system where the rich gained and the workers suffered.
Global Impact
In order to make these new products at the factories, factory owners needed a constant supply of raw materials like cotton, wood, and coal to make their products. The problem was that Western Europe lacked many of these resources at home. So they looked to the rest of the world for raw materials, mainly Latin America, Africa, and Asia, often known as the Global South. Capitalists set out to acquire resources in these regions, send them to the factories, and then sell the finished product at a low price on the global market. While this could be seen as positive interaction, this had a destructive impact on the economies of Latin America, Africa, and Asia. First, capitalists prevented these regions from becoming industrialized and having factories of their own. Europeans achieved this by controlling their governments and forcing the regions to sell the raw materials at low prices. By preventing industrialization, these regions became economically dependent on the West for their finished products. Second, local manufacturers could not compete with Western Europe’s cheaper and mass-produced commodities. Since industrialized technology amplified global trade, local businesses and regional economies in the Global South declined as Western goods flooded their markets. So while Europeans were getting richer, the people in Latin America, Africa, and Asia were slowly sinking into poverty and became dependent on the West for their cheap, mass-produced goods.
In order to make these new products at the factories, factory owners needed a constant supply of raw materials like cotton, wood, and coal to make their products. The problem was that Western Europe lacked many of these resources at home. So they looked to the rest of the world for raw materials, mainly Latin America, Africa, and Asia, often known as the Global South. Capitalists set out to acquire resources in these regions, send them to the factories, and then sell the finished product at a low price on the global market. While this could be seen as positive interaction, this had a destructive impact on the economies of Latin America, Africa, and Asia. First, capitalists prevented these regions from becoming industrialized and having factories of their own. Europeans achieved this by controlling their governments and forcing the regions to sell the raw materials at low prices. By preventing industrialization, these regions became economically dependent on the West for their finished products. Second, local manufacturers could not compete with Western Europe’s cheaper and mass-produced commodities. Since industrialized technology amplified global trade, local businesses and regional economies in the Global South declined as Western goods flooded their markets. So while Europeans were getting richer, the people in Latin America, Africa, and Asia were slowly sinking into poverty and became dependent on the West for their cheap, mass-produced goods.