Lecture 1 – Capitalism, inequality, and the study of economics
History’s hockey stick:
In the past century, there has been a significant
increase in GDP per capita.
➔ Why did this happen?
Capitalism
Capitalism consists of three institutions:
- Private property
- Markets
- Firms
➔ It is possible to have an economic system
with just private property → hunter-gatherers
➔ In Medieval times, markets were created where people started exchanging goods
➔ Due to urbanization, labour markets were created, and firms were able to grow
because of an abundance of labour workers
➔ An alternative to capitalism is communism, where everything is shared and divided
equally. The government organizes the economy and decides what, how, and how
much is produced.
➔ But during the Cold War, it was clear
that West Germany, which implemented
capitalism, was more successful when it
came to economic growth than East
Germany, which implemented communism
,But capitalism does not guarantee economic
growth!
So why do some nations fail at capitalism?
This is mainly due to institutions. They need
to support and promote this system.
But there is a possibility of corruption, crime, and
too little competition, which makes them unsuccessful.
Permanent technological revolution
The productivity of labour in producing
light →
Capitalism has inspired many
technological innovation which has
stimulated further economic growth.
Productivity has increased due to
specialization in tasks. Due to specialization,
more can be produced in shorter periods of time, which allows prices to be lowered and
thus capitalism to enlarge.
Specialization has not just occurred in firms but also in markets. You can see this in products
(e.g., a pencil): every piece is made by a different firm and creates a new market that
collaborates with thousands of people on just one product.
Modern Economics: “Political Economy”
Adam Smith (1776) and An Inquiry into the Nature and Causes of the
Wealth of Nations.
➔ He was one of the first to question “How do markets function?” and
“What causes the wealth of nations?”
,Challenges to capitalism
The focus on capitalism can have serious drawbacks.
The economy is embedded in society; it does not just stand on its own.
For constant economic growth, we extract a lot of resources from our
environment that hurts it.
Definition of Economics
➔ Ends: economic growth
➔ Scarce means: physical labour, energy
➔ How do we use these scarce means to accomplish what we want to accomplish?
Economics is about:
- How we come to acquire things that make up our likelihood (food, shelter, free time)
- How we interact with each other (buyers and sellers, employees and employers, parent
and children)
- How we interact with our natural environment (breathing, raw materials from earth)
- How each of these change over time
“The Economy” as a model:
Shows how firms, households, and the physical environment are linked
, The Positive-Normative Dichotomy
- “Positive science”:
Objective, systemized knowledge – about “what is”
- “Normative/regulative science”:
Subjective, systemized knowledge – about “what ought to be”
➔ Distinguishes the ideal from the actual
- “Art”:
The tools that are used in economics, such as statistical methods, GDP, accounting tools
Three dimensions of inequality
1. Wealth: all we possess
2. Market income: the income we receive from the market
3. Disposable income: the market income, taxed and benefits added
You can see that wealth inequality is the largest
and then market income.
The GINI coefficient
= a measure of the average difference in income between every pair of individuals in the
population
➔ Between:
ZERO/0: no inequality
ONE/1: maximum inequality
➔ So, the higher the GINI index, the more inequality
History’s hockey stick:
In the past century, there has been a significant
increase in GDP per capita.
➔ Why did this happen?
Capitalism
Capitalism consists of three institutions:
- Private property
- Markets
- Firms
➔ It is possible to have an economic system
with just private property → hunter-gatherers
➔ In Medieval times, markets were created where people started exchanging goods
➔ Due to urbanization, labour markets were created, and firms were able to grow
because of an abundance of labour workers
➔ An alternative to capitalism is communism, where everything is shared and divided
equally. The government organizes the economy and decides what, how, and how
much is produced.
➔ But during the Cold War, it was clear
that West Germany, which implemented
capitalism, was more successful when it
came to economic growth than East
Germany, which implemented communism
,But capitalism does not guarantee economic
growth!
So why do some nations fail at capitalism?
This is mainly due to institutions. They need
to support and promote this system.
But there is a possibility of corruption, crime, and
too little competition, which makes them unsuccessful.
Permanent technological revolution
The productivity of labour in producing
light →
Capitalism has inspired many
technological innovation which has
stimulated further economic growth.
Productivity has increased due to
specialization in tasks. Due to specialization,
more can be produced in shorter periods of time, which allows prices to be lowered and
thus capitalism to enlarge.
Specialization has not just occurred in firms but also in markets. You can see this in products
(e.g., a pencil): every piece is made by a different firm and creates a new market that
collaborates with thousands of people on just one product.
Modern Economics: “Political Economy”
Adam Smith (1776) and An Inquiry into the Nature and Causes of the
Wealth of Nations.
➔ He was one of the first to question “How do markets function?” and
“What causes the wealth of nations?”
,Challenges to capitalism
The focus on capitalism can have serious drawbacks.
The economy is embedded in society; it does not just stand on its own.
For constant economic growth, we extract a lot of resources from our
environment that hurts it.
Definition of Economics
➔ Ends: economic growth
➔ Scarce means: physical labour, energy
➔ How do we use these scarce means to accomplish what we want to accomplish?
Economics is about:
- How we come to acquire things that make up our likelihood (food, shelter, free time)
- How we interact with each other (buyers and sellers, employees and employers, parent
and children)
- How we interact with our natural environment (breathing, raw materials from earth)
- How each of these change over time
“The Economy” as a model:
Shows how firms, households, and the physical environment are linked
, The Positive-Normative Dichotomy
- “Positive science”:
Objective, systemized knowledge – about “what is”
- “Normative/regulative science”:
Subjective, systemized knowledge – about “what ought to be”
➔ Distinguishes the ideal from the actual
- “Art”:
The tools that are used in economics, such as statistical methods, GDP, accounting tools
Three dimensions of inequality
1. Wealth: all we possess
2. Market income: the income we receive from the market
3. Disposable income: the market income, taxed and benefits added
You can see that wealth inequality is the largest
and then market income.
The GINI coefficient
= a measure of the average difference in income between every pair of individuals in the
population
➔ Between:
ZERO/0: no inequality
ONE/1: maximum inequality
➔ So, the higher the GINI index, the more inequality
