§ Adam Smith’s theories of laissez-faire capitalism and free markets

• Scottish economist and philosopher wrote An Inquiry into the Nature and Causes of the Wealth of Nations in 1776.

  • • explores ideas about what makes a nation wealthy.

    • The economic system described in An Inquiry into the Nature and Causes of the Wealth of Nations is now known as capitalism

• introduces three concepts:

productivity

• a measure of economic performance that indicates how efficiently inputs are converted into outputs

• productivity growth = increasing ones output (through experience and innovation) without increasing the time worked

  • • results in higher wages

    • wealth creation

There is one sort of labor which adds to the value [...and] there is another which has no such effect [...] The labor of a manufacturer adds generally to the value of the materials which he works upon and [that] of his master’s profit [...]

division of labor

• the specialization of cooperating individuals who perform tasks and roles.

  • • as workers specialize efforts, they increase productivity

One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head [...T]he important business of making a pin is [...] divided into about eighteen [...] operations [...] Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day. [...] But if they had all [made pins] independently [...] they certainly could not each of them have made twenty, perhaps not one pin in a day.

• Concept can be applied to individuals and nations through the concept of Voluntary Exchange

invisible hand

• The invisible hand is a metaphor that explains how Adam Smith saw the economy working.

  • • According to Adam Smith, there are unseen, or invisible forces that move the economy.

    • These unseen forces allow people to act in their best self-interest and allow people to produce and consume what they want.

• According to Adam Smith, when everyone acts in their best self-interest without interference, everyone benefits.

• Laissez-faire

  • • meaning "let do/let go" approach to the economy

    • Laissez-faire is a French theory which argues that the market will find its balance and that the government should not intervene.

    • businesses operate most efficiently without the government telling them what to do.

and he is in this [...] 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.

[...E]very individual [...] can [...] judge [what to do with his business] much better than any statesman or lawgiver can do for him.

§ free trade policies

• Milton Friedman - I, Pencil

  • • full version illustrated

Empire building guarantees Free Trade

Aided by powerful technologies, European states launched an unprecedented round of empire building in the second half of the nineteenth century. Imperial expansion began with the British conquest of India. Competition between imperial powers led to European intrusion into central Asia and the establishment of colonies in southeast Asia. Fearful that rivals might gain control over some region that remained free of imperial control, European states embarked on a campaign of frenzied expansion in the 1880s that brought almost all of Africa and Pacific Ocean territories into their empires.

Examples of how Free Trade used to justify Imperial expansion

• British against Qing dynasty (China) with the Opium War (1839-1842)

• British against Egypt in order to secure access to the Suez Canal (1882)

§ Hong Kong and Shanghai Banking Corporation (HSBC)

• founded in the wake of the British victories in the Opium Wars (1839-1842 and 1856-1860) against China.

  • • These two wars were very important to the strengthening of the British Empire

    • Hong Kong ceded to the British in 1841 with the Treaty of Nanjing

• 1865 -- HSBC was founded in Hong Kong by a Scottish merchant specializing in the opium trade— the basis of 70% of Hong Kong trade with the Indies.

• 1880s -- HSBC was acting as banker to the Hong Kong government and also participated in managing British imperialism’s government accounts in China, Japan, Malaya and Singapore

• 1884 -- first branch in Malaya on the island of Penang

  • • HSBC given special powers to issue currency

• 1899-1900 Boxer Rebellion

  • • HSBC banking branches in China were stormed by the Boxers and the staff were executed.

    • The remaining Europeans retreated to the British Legations building in Peking and after a 55 day siege, that killed thousands of combatants and civilians, the European armed forces were able to rescue them.

    • these events gave Europeans the final excuse for a full blown invasion of China and heavy reparations were ultimately paid by China over the next 39 years to a host of European nations.

• 1900 -- largest financial institution in Asia, creating massive profits for Britain

• 1920s -- opened up and new industries developed and trade in commodities such as rubber (French Indo-China and British Malaya) and tin (Malaya)

  • • British Malaya accounted for 45% of the world’s natural rubber and 30% of global output of tin by WWII

    • Between 1939 and 1949 the wages of the laborers who worked the plantations and mines fell by nearly 80%, while plantation owners announced record dividends.

§ Unilever based in England and the Netherlands and operating in British West Africa and the Belgian Congo

§ other notable examples

• German firm IG Farben

  • • world’s largest chemical concern until the middle of the twentieth century

    • grew out of a complex merger of chemical and pharmaceutical manufacturers that controlled as much as 90 percent of production in chemical industries

• Standard Oil Company and Trust

  • • controlled almost all oil drilling, processing, refining, marketing, and distribution in the United States

    • Control over all aspects of the petroleum industry enabled Standard Oil to operate efficiently, cut costs, and undersell its competitors

    • Vertical organization of this kind offered large corporations great advantages over smaller companies.

• Ford Motor Company

  • • produce half the world’s automobiles in the early twentieth century

    • introduced the assembly line to automobile production

    • Ford designed a conveyor system that carried components past workers at the proper height and speed.

    • Each worker performed a specialized task at a fixed point on the assembly line, which churned out a complete chassis every 93 minutes—a task that previously had taken 728 minutes.

    • gains in productivity = car prices plummeted, allowing millions of people to purchase automobiles.

§ Stock markets

Origins:

• joint-stock companies arose in the early 1600s with an interest in spreading risk, achieving efficiency, and maximizing profits

Evolution:

• Entrepreneurs in early modern Europe formed private businesses in the hopes of profiting from market-oriented production and trade.

• an array of investment banks, brokerage firms, and other financial businesses arose to serve the needs of industrial capitalists organized in corporations

§ Limited-liability corporations

1850s and 1860s, government authorities in Britain and France laid the legal foundations for the modern corporation, which quickly became the most common form of business organization in industrial societies.

Structure of a Corporation

• A corporation was a private business owned by hundreds, thousands, or even millions of individual and institutional investors who financed the business through the purchase of stocks representing shares in the company

• When a corporation flourished, investors received dividends in proportion to their stake in the company.

• if a corporation went bankrupt, laws protected shareholders from any liability or financial loss beyond the extent of their investments

By the late nineteenth century, corporations controlled most businesses requiring large investments in land, labor, or machinery, including railroads, shipping lines, and industrial concerns that produced iron, steel, and armaments.