Prof. Rizzo began class my discussing the importance of technology. Technology makes each worker more productive, which in turn increases the number of sales producers make and increases wages.
Therefore, there is a chain of events that occurs with the influx of technology:
- Workers become-
- More productive
- Wages rise because there are more sales. This wage rise should motivate those who don't work or who don't produce to get into the production industry because wages are rising in that industry. That, in turn, causes more to be produced, which is good for the improvement of more technology.
A result of wage rises, of course, is that living standards rise as well.
Then Prof. Rizzo went on to discuss some of the reasons why we were able to begin the Industrial Revolution (18th to 19th century). Here are some of them:
- The revolution did not occur because of one particular event, rather it was the culmination of many spontaneous changes that probably took 400-500 years to come into being.
- More and more, people were encouraged to trade with/travel to other countries.
- There was a slow decay of religious mysticism. In other words, life today became just as important as life after death- prior to this era of IR (18th to 19th century), the after-life was emphasized. But now, religions began to preach how important it was to take advantage of our talents and make the most of our lives.
- Certain material changes made market systems possible, as did scientific progresses.
- This era connected groups of smart people who stole each other's ideas, which led to new creations. This was a huge benefit for our society.
- We improved our defense systems- it is important to be able to defend ourselves to maintain our innovations and improvements.
- We had many good ideas. The IR was as much about good ideas as it was about the actual creation of goods.
- One scholar, Adam Smith, argued that institutions are most important determiner of wealth. An institution is something other than money that we do that helps us get better social lives.
- respect of the rule of law=one part of institution
- England's government offered more freedom and tolerance than other countries, which allowed for more innovation among England that led to IR.
- People changed their attitudes on Bourgeoise (middle class)
After this, Prof. Rizzo shared with us some very important information about Mercantilism.
Mercantilism: a system that was present in the Western world before the IR.
- It was a system that existed until the mid-18th century, system where kings saw it as a their right and duty to oversee and plan all economic activity.
- AKA "progressive corporation"
Major aspects of Mercantilism included:
- Heavy restraints on citizens by king
- Protectionism
- Existence of craft guilds
- Licenses
- Government granted monopolies like British East India Company
- Import/Export regulation
- Restriction on free movement of people, free movement was prohibited
- Limits on domestic production by kings. In other words, kings could stop people from making stuff.
- Extensive price controls- king set the prices on items
- Wage controls- There was a maximum wage limit, and people were incarcerated for paying people too much.
One reason why the king could do this was because back then, resources and people were deemed to be property of the kings. The kings owned 100% of the land and people and people accepted this. The king ultimately would only make decisions to better himself.
One the reasons why mercantilism declined was because of the French Physiocrats, who thought you could define how people interacted with one another. The most prominent man was Quesnay, who was the first guy to ever write the Circular Flow of Economic Activity (AKA Circular Flow of Money).
The circular flow was defined as follows (see your notes for diagram):
- It included two groups: individuals and firms. There is always going to be a constant flow of stuff between these two groups because:
- People rent their labor to firms
- Then the firms pay the individuals money
- The individuals then use their money to pay for goods that are made by firms
- Thus, the flow of money is circular- it goes from the individuals to the firms and then from the firms to the individuals and all over again, this continues.
- In other words, all income spent is used as expenditures in some way and all expenditues become peoples' income when they work.
Therefore, the big message of this is that:
INCOME=EXPENDITURES (they are both the same thing)
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