From Subsistence to Wealth

Max Weber, Adam Smith and the Revolutions in Political Economy

Review: Material conditions give rise to theories of political economy

• Famine • Agricultural life • Rise in State power

Forces of change: moving toward a commercial revolution

• The Itinerant Merchant breakdown of social

hierarchies and rise of trading clas + money economy • Urbanization no feudal laws applied…outside

framework of social power • The Black Plague created demand for labor • The Absolutist State demand for weapons and

textiles + unified domestic market • Population growth and inflation more demand for

goods (food, clothing) • Mercantilism poor laws, industrial policy, support for

merchants, efforts to create national wealth

Commercial Revolution

• Opening of the Atlantic—the “New World” • Europe and Asia • Europe and Africa

Social and economic consequences

• Developing social mobility and rise of “interests”

• The “profit motive” • War and the “Bubbles” War Govt. debt loans from chartered

companies stock sales + borrowing in exchange for bonds - new companies created stock sales + pyramid schemes crash……

From the Commercial revolution to the

Industrial Revolution: The origins of Capitalism • What does it mean to industrialize?

• Industrialization and Capital • What is Capitalism?

– Private property – Where does capital come from? – Savings and investment

• Why? – The State – Culture

The origin of accumulation and saving: The Protestant Ethic

• A new value • Luther and Protestantism

– The individual – Individual power and freedom

• Calvin: achievement + savings = capital accumulation – Predestination and its challenge as a guide to behavior – Diligence, thrift, and a new kind of guilt: Protestant

Ethic – The Protestant Ethic and the Industrial Revolution

• Problems with the Argument

Adam Smith: The birth of Political Economy

“I have never known much good done by those who affected trade for the Public Good”

Adam Smith

Smith’s view of human nature: individual rationality

• Humans are social beings: They want to “truck, barter, and exchange.”

• But they are also greedy, always wanting MORE

• And they have little incentive to work: “A preson with no property can have no other interest but to eat as much and work as little as possible.”

• They are desperate for power and protection: • “The pride of man makes him love to domineer…he will prefer the service

of slaves to that of freemen. And the planting of sugar and tobacco can afford the expense of slave-cultivation.”

Luckily, Individual Greed promotes social good

• “Every individual….intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. . . .By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”

• What ARE the interests of society?

Through The Market Mechanism

• All of us exercising individual self interest • Will compete for scarce resources • Competition provides the goods that society

wants • In the Quantity that society desires • At the prices society wants to pay

If Everyone is self-interested, how do we get what we want?

“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 self-interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our necessities, but of their advantages.”

Competition

• Each individual wants to take advantage of his neighbor’s greed: self-interest makes us ruthless…….

• But if self-interest runs away with us, competitors will beat us

• So we can’t charge too much or pay too little • We would like to collude with others to set the

price…..but an upstart will always slip in with a lower-priced product

Through competition society gets what it wants

• Producers must heed society’s demands

Smith's Great Transformation:

Selfishness leads to social harmony • Interaction of selfish motives social

harmony • No Planning authority, no Leviathan, no

“Prince,” no “just price” • Prices are kept in line with production costs • Society tells producers what to do • High prices are a self-curing disease.

The Market is self-regulating

• The Market is it’s own “guardian”

• It is the paragon of “freedom” but the strictest taskmaster

• Is Economic freedom an illusion?

The Theoretical “Freedom” Vision

Reason Individualism

Political Liberalism

Individual Freedom

Happiness

Capitalism Wealth ____

Hobbs Locke Rousseau

John Stuart Mill Thomas Jefferson

Locke Mill Jefferson

Adam Smith

1780 Last Witch burned in Europe 1784 American Society to Abolish Slavery 1787 British Society to Abolish Slavery 1792 Wollstonecroft “Vindication of Rights of Women