reaction and reform: new economic theories
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Reaction and Reform: New Economic Theories
World History - Libertyville HS
Industrialization’s Effects
• Gap between rich and poor grew
• Dominant economic theory = mercantilism– Worked for pre-
industrial societies– Actually hurt
development of industrialization
Effects of Industrialization• Big question: What was the
appropriate role of government, in society and the economy?– Should government stay completely out
of the economy?– Should government help poor people?– Should government completely control
the economy?
Laissez Faire policy: Government, Stay Out!!!
• Literally means “hands off”, in French
• Based in French enlightenment criticism of mercantilism– Criticized high tariffs
on foreign goods– Supported free trade
(flow of commerce between countries w/ no gov’t interference)
– Idea was that the best products would “win”, bringing wealth to that nation
Laissez Faire: Adam Smith (1723-1790)
• Scottish economics professor
• Wrote Wealth of Nations (1776)– Defended free markets– Economic freedom =
economic progress– No gov’t interference
in markets!• Influenced
development of capitalism
Capitalism Policy: Land, Labor and Capital, OH MY!!!
• Belief that factors of production should be privately owned– FOP = land, labor,
capital– Private money
should be invested in business ventures to make profit for investors
Capitalism• Believed in natural laws
of Smith’s Wealth of Nations– People work for their own
benefit– Competition forces people
to make better goods– Law of Supply & Demand:
enough goods will be produced at the lowest possible price, to meet demand in a market economy
Capitalism• Capitalist belief in a
permanent underclass was basis for its opposition to government assistance for poor people– Interference upset balance
of market economy– Minimum wage, working
conditions, etc would reduce profits of business, resulting in hiring fewer people b/c of owner’s increased costs
Socialism: You’ve Got Your Government in My Economy!!!
Belief that government was the only force strong enough to fight against
unfairness created by capitalism, markets
Socialism: Reformers• John Stuart Mill (1806-
1873)– Challenged “pure” capitalism– Argued that ordinary workers
should have share of profits of company
– Demanded that gov’t should equalize people’s wealth by taxing the rich and giving it to poor
• Other reformers focused on evil effects of industrialization
Theory of Socialism• Belief in social justice
– Gov’t was a force for good, in society
– Gov’t should control key industries to end poverty & encourage equality
– Key industries in 1800s were factories, mines & RRs
• Public ownership would keep workers from being at mercy of employers
Communism (Radical Socialism): Workers of the World, Unite!!!
• Karl Marx (1818-1883) and Friedrich Engels (1820-1895)– Believed that
economic forces alone dominated history, society
– Wrote The Communist Manifesto in 1848
The Communist Manifesto• Human society was
divided into social classes, each in conflict with other– Haves = “bourgeoisie” =
factory owners, employers
– Have nots: proletariat = factory workers
• Industrial revolution had made bourgeoisie rich and the proletariat poorer
• Predicted uprising of the proletariat: workers would overthrow the owners and establish workers’ paradise
Marx’s Dictatorship of the Proletariat• Belief that capitalism would destroy
itself• Process
– Big business would drive artisans out of business
– Eventually, only a few manufacturers would control all wealth
– Proletariat would revolt, take over factories and mills from the owners (“Dictatorship of the Proletariat”)
– Proletariat would run industry, producing only what society needed
– Workers would share all profits equally (economic equality)
– Gov’t would be controlled by proletariat until state withered away and a “classless society” emerged
Marx’s Classless Society• “Classless society” =
communism– Factors of production
(land, labor, capital) would be owned by the people
– Private property would not exist
– All goods & services would be shared equally by all people
– Marxist slogan: “From each according to his ability, to each according to his need”
The Evolution of Economic TheoryMercantilism
(zero sum game; imp. of colonies)
Laissez Faire(Hands off!; open
markets; best product wins)
Capitalism(profit motive;
competing good; winners &
losers)
Socialism(social justice; gov’t owns key
industries)
Communism(Dictatorship of the proletariat;
“workers’ paradise”)
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