ECONOMIC HISTORY AND HISTORY OF ECONOMIC THOUGHT- Università Bocconi, Appunti di Storia Del Pensiero Economico

Scarica ECONOMIC HISTORY AND HISTORY OF ECONOMIC THOUGHT- Università Bocconi e più Appunti in PDF di Storia Del Pensiero Economico solo su Docsity! History of economic thought Bocconi University BEMACC Capitalism. - Lesson 1 Capitalism is one of the most dense and elusive concepts in the history of economics. It has come to be almost a synonym of the West. More precisely, though, it is a product of the west: the distinctive way of the western way of building its economic system - one of the fundamental features of what we know as ‘west universalism’. The west in its distinctive urge to spread its culture throughout the world has, among other things, exported capitalism (and it has done so quite successfully). Until the collapse of centrally planned economics, it was quite easy to define what capitalism is simply by contrasting it with the historical alternatives. Ex-communist countries are now catching up with a system that has imposed itself as the only possible. Grasping what capitalism is, is not easy at all, because we are immersed into it. - To define capitalism is to define ourselves. When it comes to social sciences, the distinction between the subject and the object is not completely clear cut: History is, in fact, always about human beings, it starts with humanity - we don’t look at it from the outside. The words we use to tell this story, are a product of the story itself. Even the scientific method is a product of that story. The Italian professor Napoleoni draws our attention to the fact that capitalism and economics were born together. “The economic discourse gained its autonomy and established itself as a science in its own right, at the same time when the economic process reached its own autonomy, in history, with the rise of capitalism.” The quote means that capitalism and economy were born together and that economics as a science gained its autonomy when economic activity gained its autonomy. = The emancipation of economics in “its own right” from philosophy happened simultaneously to the gaining of autonomy of economic activity from political/social constraints rendering it the most pervasive sphere of activity. Until the rise of capitalism economic was embedded in society. After that, it was the contrary: economics provided the sense for life. Economic itself is completely immersed in capitalism, that is why we don’t define it. Weber: the protestant ethic and the spirit of capitalism. Weber was not an economist, but a social scientist. The main thesis of the book has to do with capitalism and an explanation of it. Commonly, it is thought that in his book he recounts that capitalism appeared in some places and not others due to certain cultural, religious and ethical conducts that favors the accumulation of capital (and produce growth). A peculiar confession within the Christian religion – Protestantism - for some reason seems to encourage work discipline, work ethics and the capacity to do so. Weber defines capitalism as an “extremely rational system, where rational individuals pursue the maximization of self-interest based on a completely irrational assumption. The end of life is to accumulate money: a completely abstract concept.” The use of accumulating money is giving it away for something else. • Irrational. “If you ask them what the meaning of their restless activity is, why they are never satisfied with what they have, thus appearing so senseless to any purely worldly view of life, they would perhaps give the answer […]: that business with its continuous work has become a necessary part of their lives. That is in fact the only possible motivation, but it at the same time expresses what is, seen from the view-point of personal happiness, so irrational about this sort of life, where a man exists for the sake of his business, instead of the reverse.” They won’t say, “I accumulate money to then spend it”. The discipline and work ethic have an end in themselves. • The new man. Weber is characterizing the spirit of capitalism as something that has to do with an attitude, an approach to life. But not simply psychological attitude that you are free to adopt or not (greedy vs altruism). Capitalism is precisely accumulation: the rule of the game is to make money – the driving criterion is “time is money”. Capitalism requires a man capable of accumulating as condition for its functioning. o “Thus, the capitalism of today, which has come to dominate economic life, educates and selects the economic subjects which it needs through a process of economic survival of the fittest” (Weber 1905, 20). o “The capitalistic system so needs this devotion to the calling of making money”. (Weber 1905, 33) o “He gets nothing out of his wealth for himself, except the irrational sense of having done his job well”. (Weber 1905, 33) o “the conception of money-making as an end in itself to which people were bound, as a calling, was contrary to the ethical feelings of whole epochs”. (Weber 1905, 34) Is a singularity. It happened and opened a new world. There is a watershed: a before and after. Before economic systems and life were inspired by sufficiency (autarkeia = self-sufficiency). Happiness was about having enough. Capitalism is the appearance of a new humanity that pursues what before was considered a vice: greed. This vice becomes the ultimate virtue. Recap from last time. Weber was trying to answer two questions: - What is capitalism, and more specifically: what is the spirit of capitalism? - Where does it come from? After having discarded certain traditional misconception of Weber’s thesis (causal relation between reformation and capitalism), he moved on to characterize the essence of Capitalism. To do so, he doesn’t give an elaborate definition, rather, he picks a booklet – by Franklin- that, in his view may be taken as representative for the spirit of capitalism. A book which may be reduced to the equation time=money. This assumption means that time has a price tag on it, in the form of salary or wage -> depending on how much you work, you get paid. If you’re lazy, and don’t work, you spend money at the bar, and spend money because you don’t earn it. Time has also another price: the rate of interest (The more time goes by, the more money you get). This is the core of capitalism: borrow money today and pay tomorrow. You can buy money. The equation also implies the idea of control: you can control both time and money trough financial institutions that are expressively there to do so e.g. banks will direct money where it will be the most beneficial. Money will make more money. Weber is interested in the rise of a system where you are constantly induced to make money: making money is not an option, is a necessity. Capitalism is the place where either you stick to the rule or you’re out. “The fact to be explained historically is that in the most highly capitalistic center of that time, in Florence of the fourteenth and fifteenth centuries […] this attitude was considered ethically unjustifiable, or at best to be tolerated. But in the backwoods small bourgeois circumstances of Pennsylvania (talking about Franklin) in the eighteenth century, […] the same thing was considered the essence of moral conduct, even commanded in the name of duty. […] What was the background of ideas which could account for the sort of activity apparently directed toward profit alone as a calling toward which the individual feels himself to have an ethical obligation?” Apart from understanding the “spirit of Capitalism”, what Weber was interested in, was to understand where did Capitalism come from. The money-making motive is nothing new. Is a permanent feature of human beings which, however, has always been considered a deviance (greed). Until the beginning of the 19th there was an idea according to which accumulation of money was not good: there were even laws against usury (e.g. interest rates). The hunger for growth always represented a vice, a misbehavior, in contrast with moral, civil life and legal framework. Weber knew that capitalism existed even before the outbreak of the Reformation, however, it was the exception. Even at the time of the Renaissance, during the ruling of the Medici, identifying wealth with money, was evil. Money was not intended to be accumulated. How is that, a vice becomes a virtue – the pillar of the all system? Weber’s hypothesis: - “We are particularly interested in the origin of precisely the irrational element which lies in this, as in every conception of a calling” There is a deeply irrational element in systematically pursuing the accumulation of money (for the only aim of accumulating). It is irrational to think that the accumulation should proceed as an end. Weber characterizes capitalism as rational (everything can be calculated) and yet, this rational system has an irrational foundation. It is difficult to represent capitalism as the linear implication of the west tradition: scientific revolution – enlightenment – capitalism. But it doesn’t hold. It doesn’t satisfy any plausible definition of happiness. - “Modern capitalism has become dominant and has become emancipated from its old supports. But as it could at one time destroy the old forms of medieval regulation of economic life only in alliance with the growing power of the modern State, the same, we may say provisionally, may have been the case in its relations with religious forces. Whether and in what sense that was the case, it is our task to investigate” Capitalism manages to set itself as the leading system thanks to two instruments: the state and religion. The task Weber sets himself is to explain how capitalism is born trough the alliance between state and religion (reformation) and managed to transform itself as it appears today: completely independent. Luther. While dealing with the theme of the Reformation, Weber does not focus on Protestantism in general, but particularly on Calvinism. In Luther we find certain elements, which are in resonance with the distinctive features of Capitalism: • Idea of work ethics: religious life closely associated with profession. “Beruf” is a German word that means ‘profession’ (what you do in society) and at the same time ‘calling’, as task entrusted by God. • Fulfillment of worldly obligations as the only way to please God (in contrast with the Catholic doctrine, which distinguishes praecepta and consilia – basically, according to the Catholics there was a clear hierarchy among men: the rules that each good christian should follow are different from the rules that only those who take the votes have to follow (e.g. priests). For Luther there is no distinction → more direct relation between God and men – no mediation. At the same time, however, Luther condemns usury, and money. For Luther money is diabolic and should be banned. Thus, it is difficult to associate capitalism with a strict understanding of Luther’s position. Calvin This is why, Weber looks at Calvin’s thought – the doctrine of predestination. o Man is not in the position of understanding what is good and what will lead him to salvation. o “By the decree of God, for the manifestation of His glory, some men and angels are predestinated unto everlasting life, and others foreordained to everlasting death.” There is predestination that determines from the beginning of time what you’re doomed to (salvation vs damnation) and there is no way to change this. o There is an evidence of predestination: those who are predestinated are called and directed towards goods and salvation. What strikes Weber is that this is a rather uncomfortable position. There is nothing you can do to change this destiny. On this predestination depends whether you are saved of damned. This dogma is a belief, a Calvinist knows that his position in the world comes from a declaration of faith, arbitrary and yet necessary. Implications of the dogma: ▪ Disappearance of sacraments and all “magical” intermediation between God and men. ▪ Individualism, isolation and anguish in the face of the uncertainty of one’s selection. ▪ Profession, work “in maiorem gloriam Dei” as an instrument to acquire the certitude of salvation. (You cannot change your destiny, but you can be reassured to belong to the It is impossible to relate the infinity of God to a concrete event – reduction of God. Fernand Braudel and Immanuel Wallerstein: Capitalism and the capitalistic world economy - Lesson 2 History is not something already written, we need to reinvent it according to rules and methods that legitimate it (however, we are suggesting to look at it in a critical attitude, without the prejudice of linear time, or causal relationship). Weber and Braudel aimed at understanding their time using a kind of synthetic criterion: capitalism has, precisely, this synthetic capacity. Capitalism is the energy towards which the whole planet was converging to. - Understanding capitalism was really trying to understand what was shaking contemporary reality. (In doing this, we need to know that this attempt to encompass everything that was happening into a single concept might prove to be problematic.) Weber decided to offer a cultural/religious/ethical perspective: capitalism is something that happened at a certain point after certain historical event that probably no one could forecast. Braudel had a different view. Fernand Braudel and the School of Annales Braudel → has been one of the last great members of the French School of Annales after Marc Bloch and Lucien Febvre. The School of Annales developed in the 30s (same time as Weber). It encompasses the paradigm of a multiplicity of times (→ Bergson develops a subjective concept time) and the idea that the couple time/space might offer the possibility of connecting the knowledge produced by the different social sciences in the perspective of synthesizing the complexity of human experience. The Annales School develops the image of a history of civilization as the result of the coexistence of different evolutive rhythms within different historic layers (C. Levi Strauss) Reconstructing single factual sequences required a great effort, the School of Annales tried to use history as a place of synthesis of social disciplines (geography, anthropology...) → multidisplinarity. Time becomes a connecting tool, a plastic material for everything that is produced by social sciences synthesizing the complexity of human experience. After the monumental essay on the Mediterranean in the age of Philip II (wrote before WW2, in which he talks about how the people around Mediterranean lived and their capacities), Braudel engaged himself in the trilogy “Civilization and Capitalism XII - XVIII cent.” in which elaborated a confrontation with the Marxian vision of capitalism and history. This effort will lead him towards a comparative analysis of the development processes. Braudel conceived history as the history of peasants, of common people, not the history of kings and richness. He dedicated all his life to the study of this. He would focus on how people of the Mediterranean area would live. To do that and explain capitalism, he would confront himself with Weber and Marx. Braudel and capitalism Braudel reconsiders capitalism through the enactment of three main concepts: 1. The distinction between three layers of life: material life, economy and capitalism. 2. A relavitization of time and duration in its relation with economies. (each layer has different times e.g. time of material life different from time of economy) 3. The construction of the notion of “World Economy”, that imply the geographic dimension of global economic relations. (Geography of competence) this is a huge connection among different communities. E.g. olive oil is cultivated in Africa and Greece, despite religious or social differences both communities know how to do the work. Times and functions of civilization Fernand Braudel re-elaborates the perspective on civilization defined by L. Febvre and M. Bloch, defining three main layers of economic life: ▪ Material Life / Civilization ▪ Economy ▪ Capitalism Material life/civilization→ defines and denotes the way in which humanities manage the relation with nature and natural resources: technical abilities, particularly related to the energy extraction, the technologies of agriculture, the everyday work tools and disposables, arriving to folklore. All of this defines the limits of what is possible in the everyday life. E.g. having a good plough is crucial to have good crops and therefore, provide subsistence needs for families. At this level, survival is at stake, thus, it is characterized by a really slow evolution, invariance, long-term. Contact and distances with cultural anthropology. Economy → is a permanent layer of civilization, about markets. The A type market (F. Simiand), is a public market, an institutionalized place in which producers exchange their products in a logic commodity-money-commodity and within a frame of regulation that imposes the condition of a perfectly contestable market. (Annona law → Law that defines the conditions of sale in a market and limits the accumulation of merchandise by a single merchant. Commodity-money-commodity. This is a market where you don’t accumulate.) The market was a specific place in town, it was not everywhere so that it could be controlled. The exchange had to happen in a situation of perfect information about other prices and perfect competition (perfect market). Both profit and prices tend to 0 because of Annona law regulating internal market – e.g. a farmer sells his surplus products, with the money earned he buys something else and bring it back (commodity-money-commodity logic, profits tend to zero because they are used them to buy something else.). Market is institutionally defined as a free zone but operating within a strong regulatory scene. The A type market is not a place for capital accumulation. Cities were divided in belts: the belts nearer to the market in the center specialize in products perishable in a short time and those further in less perishable merch because to bring it to the market they need more time than those closer. City is the center of local economy. Capitalism → is about power relations (the one who has the highest accumulation level will prevail over the others). The B market typology (Simiand) is not a public, ruled market: it is a (self-)regulated, private market where exchanges happen with the logic money-commodities- money, a reversed logic in respect with the one of the A type of market. This new logic is inspired by capital gain (about interest, postponed). It is generated by the level of risk implicit in the long range maritime exchange. Main international exchanges characterized by high risk, competition and asymmetrical information. Braudel doesn’t explain capitalism in terms of religion but in terms of risk. E.g. Venice needs spices, which are not locally produced: they need to buy them. Venetian ships sail full of venetian merch (merch in surplus or merch produced specifically to be exchanged, which is useless in Venice) to exchange it for spices. After the exchange for spices, Venetian ships do not go straight back to Venice, they buy something that is needed in Egypt, to exchange it for something Venetians need and that can be found only there, and so on. After all the journeys, eventually Venetians will obtain revenues to cover the original investment made to have the ship and the venetian merch. All of this, implies risk: sink of the ship, bad deals, bad weather conditions, competitors... to reduce risk it is possible to organize multiple tours with different ships at the same time and buy an insurance but pay back for the risk and all the extra costs to contain it, higher surplus is needed. Also, the communities you sell to are strangers, you don’t care about justice.). You can impose power trough knowledge or arms - or a combination of both. The original process of capital accumulation has a mercantile origin: it started and developed outside regulated markets in a private zone, ruled by power relationship, by antagonism, by social practices oriented at the enforcement of accumulation practices. This kind of practice dates back to way before the Protestant Reformation (e.g. in the 11th-3th century, even in the Roman Empire). Stable merchants are the agents for capitalism. They operated as creditors, like banks, lending money to other merchants. (Great merchants and bankers - wholesalers – shoppers, they were all mutually connected by flows of credits and commodities). Merchant networks/pipelines → stratified exchanges structures (local, regional, international). e.g. Venice became a hegemonic capitalistic place. It developed its own laws, consistent with capitalistic rules. Negotiating a kind of independence from the Church and the political central power. At a higher level the main international long-range exchanges, characterized by higher risks, competition of information and asymmetrical information, use of military power, development of insurance mechanisms. The notions of capitalism, world economy and long-term revolution coexist with material life, and slowly produce changes. Capitalism is thought as the final affirmation of the practice of accumulation. - Coexistence of these three levels and the progressive affirmation of centers of accumulation = Ecologies of accumulation (Venice, Milan, Florence and Genova). Merchants ruled cities. Capitalism and hegemonies. European merchant capitalism The Capitalistic World Economy → defined as an exchange area through the density of capitalistic exchanges. With the so called «pax mongolica» (XIII cen.) this area is extended from the European borders to the Far East (Marco Polo). The Mediterranean Sea is the connective platform; the axe Northern Italy – Flanders is the stronghold and the hegemonic structure of the exchange system. The merchant cities became the ecologies of accumulation processes: Florence, Venice, Milan and Genova Braudel’s research offers a crucial contribution to the studies of the so-called merchant’s revolution that has been located between the XI and the XIV century. This «long term» revolution coexists with the edification of the feudal regime, growing along/ beyond its edges and boundaries within the cities and ports that were exposed to the long- distance merchant exchanges. The key findings of Braudel’s research can be synthetized as follows: ▪ The relevant growth of the long distance maritime exchanges and their orientation toward capital accumulation (as a reaction to the implicit risks and also thanks to the relative immunity from the rules of feudal communities). ▪ The institutionalization of these exchange system in the Mediterranean first through the merchant diasporic evolution and then through the subsequent development of banks and credits facilities in the merchant cities. ▪ The geographic impact of those exchange networks that produces the definition of world economies at continental scale. The globalization wave produced by the crusades in the XIII cen. ▪ The competitive development of hegemonic centres at international scale. Other relevant findings: ▪ The struggle for political independency in the merchant cities against the traditional system of feudal / imperial powers ▪ The convergence of imaginaries between the traditional aristocracies and the new riches (Venezia, Mantova, etc.) ▪ The crusades as vectors of the overlap between religious, political, merchant, and military instances, enforcing the western dominance on the Mediterranean world Economy. ▪ The progression of an acquisitive social reference that progressively imposes itself among the traditional persistence of the Ancien Regime inequalities. (Inequality was at the base of social structure. Society was not acquisitive. Before it was unthinkable for societies to accept the change of someone’s social status) Sociology says that there are two ways of organizing social mobility: ▪ ascriptive society: you are what your father was (e.g. you belong to a family of peasants, you’ll always be a peasant. You can’t change your status) ▪ acquisitive society – you can ascend thanks to your skills. – this kind of rule was not legitimated in the ancient regime society. Immanuel Wallerstein Wallerstein develops Braudel’s World economy theory emphasizing the idea of the uniqueness of the capitalistic world economy after the 16th century. The transition toward capitalism in Wallerstein’s perspective relaunches a vision which is consistent with the Marxian interpretation of capitalism as a form of production. Only starting from the XVI century and the creation of a capitalistic word economy a global hierarchy of economic spaces developed, leading to the creation of a system characterized by a center, a periphery and a semi-periphery and a consistent international division of labor. “Introduction part II” Which are the limits of this perspective? Braudel’s approach objectifies history as if it was a thing, it creates a structure of images, facts we only have to look at. Braudel would say “it’s not me but history” but, actually it was him who created the structure (the sequence of facts in it) in the first place. Historical knowledge is an interpretation and an invention. Benjamin: history is not a line, it is a matter of creating simultaneities, of preparing the flash of an intuition about the past; it is not about considering time as something objective. Not homogeneous something that goes by. History is a way of developing memory. The past becomes your present and future. Freeing us of the idea of learning history from the book: it is a free environment where we can exercise our critical knowledge and look at simultaneities. You squeeze time all together (in simultaneity). Memory is art. History is a creative activity: it is not fantasy, though!! Limit of Braudel → he is so strong in creating this structure, that he convinces us that history is a set of structures, of “lines”, an enormous construction. The pre-capitalistic economy. - Lesson 3 We will enquire what the western world looked like before the rise of Capitalistic. A prominent economic historian, Bob Allen, wrote an introduction booklet to economic history, which gives a good representation of the state of the art. Which is not what Braudel or Weber would have done, it is what the today’s approach would do. At the very beginning of the book, he enters a picture that should summarize what economic history is in a single snap. The picture shows the average income per person starting from year 1000 BC and depicts a clear watershed that is the industrial revolution. After the industrial revolution there is a bifurcation: the income per head has a sharp increase in some countries and dramatically decreases in others. Before, the revolution all there is, is stagnation: centuries in which the income per person fluctuated around the same level. Bob Allen refers to this ‘stagnation’ as the “Malthusian Trap” – the name comes from Malthus, who in 1798 wrote an essay called “Essay on population”. Malthus stated that population grows according to a geometric progression whereas resources according to a linear one. A point arrives where people are way more than available resources. When population exceeds resources, a trap arises, namely the Malthus Trap. In this context, periods of prosperity (there is more than enough for everyone) eventually bumps into a limit: sooner or later resources won’t suffice for everyone. As a consequence, population stop growing just like income (they are related). People will be fighting against each other to gain access to those scarce resources (wars, plagues…). Malthus recommendation is to adopt preventive methods e.g. decrease number of kids. Living for centuries trapped in this Malthusian trap; a constrain, an urge to grow, eventually manages to break out thanks to the industrial revolution - It represents the emancipation of mankind, the unleashing of production forces. The industrial revolution was such a breakthrough because it allowed resources to start growing as a geometric function – just like population. Neo-Malthusianism - The more people there are, the more GDP is produced, the more pressure on certain resources (clean air, clean water, sources of energy…) The Malthusian description makes the pre-industrial period look pretty gloomy and sad. However, it is not completely accurate, in fact, it is very complicated to know what the actual income was in year 1000 BC. We only have statistics starting from the industrial revolution. Economic history shows that the world starts to grow from the industrial revolution, but if we look at it for what it is, we recognize that maybe, before there were other concerns rather East → Serfdom. It was a condition of bondage between landowners and slaves. They worked and were entitled to protection, justice, and the right to hold part of the crops to face their subsistence needs. North → was characterized by an abundance of land (the virgin forest) and not particularly inhabited communities. This allowed for fluid tenures → people appropriating land to exploit it. West (in particular, England and Netherlands). → the main systems of organization were: • Tenures. The landowner rents the land to tenant who is responsible for organizing the agricultural activity. The latter pays a rent to the landowner and keeps the rest to payout providers of factors of production and as his own compensation. This system is going in the direction of a capitalistic way of managing agriculture. The tenant, in fact, is a ‘mediator’ putting together factors of production and the owners of factor of production, for the sake of his own interest (profit). • open fields. The prevailing form, however, was that of open fields – no fence around fields because the field is not private property. b. Commercialization of agriculture Pre-industrial agriculture is completely different from modern commercial agriculture, which spread throughout Europe starting from the Netherlands. This ‘revolution’ is neatly described as follows: “The modernization of agriculture was intimately associated with the equally striking rise of Dutch commercial superiority; without one, the other could not have occurred.” Agricultural development is the pre-requisite for industrial revolution. Industrialization implies the growth of industry (the 2ndary sector), however, it is necessary a parallel growth of the primary sector to ensure the presence of enough resources for bigger communities (= without food you can’t grow in terms of industry and population). “The key to the success of the transformation of Dutch agriculture was specialization, a specialization that was made possible in the first instance by the buoyant demand of the prosperous and rapidly growing Dutch cities, but in time enabled Dutch cheeses, for example, to be sold in the markets of Spain and Italy. Instead of trying to produce as much as possible of the goods necessary for their own consumption, as most peasants elsewhere in Europe did, Dutch farmers tried to produce as much as possible for the market, also buying through the market many consumption goods as well as capital and intermediate goods” What was really pathbreaking was the fact that Holland was the 1st country in the world to dedicate its agricultural production to outside markets. They stopped producing locally merely for subsistence and started exporting. By doing so, markets gradually extended and completely changed the traditional way of conceiving economy. In a world of self-subsistence, you depend on the rest of the world e.g. if you don’t sell flowers, you won’t have enough food. Here you have profit and cost. Property of land a. Medial concept of property. Property already existed in the Middle Ages, and yet the concept is completed different from what we think today. Land is fief, a land is held by a lord on condition of homage and service. → The lord receives the land in possession from “above” – from whoever sits higher in the feudal hierarchy. To receive it, the lord had to pay an act of homage (kneel in front of their ‘superior’ and are endowed with it). Land was not a factor of production. → the lord, did receive a simple piece of earth, he was entrusted with a land and the people inhabiting it – he has the responsibility to administer it following specific conditions in view of assuring the self-sufficiency for the people. Thus, property is subject to constraints. (you’re the owner but you cannot do whatever you want.) • Constraints on the transmission of property. You can’t sell it nor transfer it to whomever you like. It is your land, if you behave rightfully but not even upon death the lord is free to decide. After the decease of the lord, the land return to the original owner, who will grant it according to: - primogeniture. The first son of the deceased Lord receives the land (of course, by paying homage to the person above him). The logic beyond this kind of transmission is that the land belongs to no one, it belongs to God. - Fideicommissum (trust). Another kind of practice is trust, it implies that a person holds the land in behalf on someone else, he will have to return it and is under the duty to preserve it. • Constraints on the use of land - Open field: not allowed to build a fence. Every three years you’d leave the land free for fertility and would become field for animals. (E.g. woods belonged to lords who could go hunting.) - Servitude. Restriction to private property. - Commons. Typically, in middle ages, land was neither public nor private, it belonged to public community. The Bible also offers its own definition of property, according to which, property is an inalienable patrimony. In a passage of the Leviticus, we read: “The land shall not be sold for ever: for the land is mine, for ye are strangers and sojourners with me. And in all the land of your possession ye shall grant a redemption for the land. […] that which is sold shall remain in the hand of him that hath bought it until the year of jubilee: and in the jubilee it shall go out, and [the seller] shall return unto his possession.” The land belongs to God, in fact, ownership is not for good: it is precarious, not permanent and subject to limitations. What is more, every 50 years (=Jubilee) the land is re-possessed, because God wants equality among all his children. As per Roman Law, property was justified (and delimited) by use. “If anyone allowed his field to be covered by weeds, without ploughing it and cleaning it with the due diligence or failed to take care of his trees or vineyard, he did not go without punishment, and was blamed by the censors, who barred him to the category of those citizens that were deprived of their political rights.” Romans invented private property, but it was associated with duties. Owning a land implied rights and duties one ought to perform. A failure to do so, would lead to expropriation and loss of political rights (citizenship). b. Modern property. In modern society, the concept of private property exists. Property is full and exclusive, including the right not to use; the owner can also exclude everyone else from the use of his property. “The owner has the right to enjoy and dispose of the thing in a full an exclusive way, within the limits and obligation defined by law.” The transformation of land into a commodity occurred in the very moment when the concept of private property i.e. a property that is full and exclusive, imposed itself. It first started in Holland and England, between the late 15th - early 16th century, through the establishment of what is known as “enclosures”. - Tenets started interpreting ownership in a capitalistic way: they became aware that, by enclosing their lands, they’d be more profitable allowing them to grow richer to the detriment of peasants. Initially enclosures were illegal, banned and not allowed by Parliaments until the 18th century. The city: industry Going back to the painting by Lorenzetti, if we focus on the city, the first thing we notice is that even in the pre-industrial era, there were industries (in terms of secondary sector). There are shops, where producer sell what they produce, construction industries (depicted by bricklayers building new houses), and a teacher, who represents University. a. Industry before industrialization. “The market orientation of the European economy, greater in industry than in agriculture, encouraged entrepreneurs who could reduce production costs and respond quickly to changes in consumer demand. But there were formidable obstacles to innovation as well. One of the most ubiquitous was the opposition of both authorities who feared unemployment as a result of labor- saving innovations and monopolistic guilds.” Just like in agriculture, there was a transformation going on in industry. Entrepreneurs tried to strongly innovate the system with the aim of reducing costs, increasing revenues and better respond to consumers’ demand. However, changes are gradual, it took centuries for them to be achieved because they encountered the resistance of public authorities and monopolistic guilds (= corporazione). Guilds were a sort of intermediate body between individual workers and the state. The main rules of guilds are: • Monopoly of production. Production doesn’t occur in a competitive sector, there is a monopoly of production. Either you are part of the guild or you don’t produce. • No competition among members: all follow the same rules, developed and consolidated in centuries. • Setting of standards. Not just procedures, but standards of quality and prices (the price is set) • Welfare. Entering into a guild implied a long period of apprenticeship. However, people had to follow their family’s step: there was no mobility whatsoever. What is more, the labor market was practically non-existent: wages were fixed, and most of the time, it was not even a monetary compensation. It was the guild to take care of its members’ wellbeing. • Internal magistrates, who enforced the rules and punished the violators. • Institutional role within the state. Guilds were intermediate bodies between workers and the State, thus there were some representatives within public bodies. • Protectionism. Guilds were conservative institutions that blocked the tentative of production maximization and innovation. b. Commercialization of industry. ➢ Guilds used to take care of everything: from production (labor, instruments and raw materials), to refinement and sale. – labor was not a commodity. ➢ At the same time, in the countryside, families of peasants exploited winter months to produce on their own (as self-employed. No intermediary between families and market). This is known as rural domestic manufacture. Their home-made goods were then sold on the local market. ➢ The scope of this market expands, once again starting from Britain, when the putting-out system appears. This approach was threatening the monopoly of guilds. Some merchant entrepreneurs would employ peasant families (unskilled workers), providing them with raw materials. Then, they would take care of refinement processes and sale them in distant markets. (The entrepreneur was buying both the labor and the intermediate product). This system developed at the margin of the city, where guilds could somehow control it, but unskilled workers producing end-goods would respond to competitive mechanisms and free market. → in fact, local markets are regulated by the public authority (and guilds), whereas, in distant markets there are no rules, that is a real free market. Guild gradually withered away as the woolen industry moved to rural areas, where it could escape such monopolistic organizations and better respond to the dynamics of free market. Common good on the throne is accompanied by the six virtues: the cardinal/secular peace, strength, liberality, prudence and, again, justice. Around the head of the ruler, we have the virtues of faith, hope and charity. Dual currency system The distinction between the two economic spheres is not only an abstract principle represented by an allegory, but a very concrete phenomenon embodied in the monetary system. A system that is, precisely divided in two. There was a peculiar type of coinage valid for the domestic economy and one dedicated to foreign markets. They did differ: - In shape (means of payment) → small coins vs large coins - Metal → copper vs precious metal, - Intrinsic value (metal content) → variable value (decreasing) vs fixed intrinsic value - Extrinsic (legal) value → small coins have a fixed value vs large coins have a variable and generally increasing extrinsic value For us, the legal value of coins is inscribed in coin itself (the coin has a value in itself e.g. with a coin of 1€, you can pay a debt of 1€). This was not the case until the early 19th century. Since the beginning of coins 7th century AD, coins did not have their value inscribed on them. There is a distinction between money as means of exchange (the thing) and the value of the coin. Public authorities were encharged for establishing the value of (small) coins (Tariff) e.g. ! ducat = 1£ 2 scellins and 1 penny. The way of counting money was a dual-decimal system, which was used until the decimal system prevailed, particularly in the field of finance and international trade. (1s=12d 1£=20s) – in Britain it remained in force until 40y ago. It is a very intricated system: it is much easier to base on a decimal system and associate the value with the coin. Since the dual-decimal system is so hard, why did it remain in use for so long? Because, if one the one hand, the decimal system is convenient for multiplication, a dual- decimal is more convenient for divisions (12 can be divided by 2,3,4 and 6, whereas 10 only by 2 and 5). For the purpose of distributing, the dual-decimal system is more convenient → It is adopted in a system where distributive justice prevails. The decimal system, on the contrary, prevails when the system hinges on accumulation (in the dual system you can’t have %. Percentage is by definition only applicable is a decimal system). What is the purpose of a monetary system where you use money without a number? In the realm of commutative justice, people wanted to be sure that they gave something precious was returned something equally valuable. - I don’t care about the extrinsic but only about the intrinsic value (how much gold I get for my commodity. e.g. Venetians kept their zecchin with the same value for 500 years: regardless of what value rulers attributed to it, the zecchin kept stable its intrinsic value). In the domestic economy, trade is not based on equivalence, but on distributive justice. Therefore, what people care about is the proportion between what you earn and what you get. The coin is a token money. (You need a constant extrinsic value, you don’t care about how much metal is in there, you simply want to be certain that that coin can be exchanged with bread, to ensure subsistence). What is the rational of having two separated currency systems? To distinguish but at the same time, keep together two things: domestic economy and foreign trade. What Lorenzetti is telling → For many centuries, it was possible to keep together market (type A) with a broader international trade (capitalism) without clashes. There was a local economy aimed at preserving the well-being of the local community, while at the same time, openness to international trade was granted. Today, it seems that the more a Country is globalized, the more detrimental effects it will produce on the local economy (that takes the form of nationalistic temptation). We fluctuate between these two poles. At least part of the world, was globalized (starting from 13th c massive amount of international trade) and national economy which functions with completely different rules. It preserves factor of production to be transformed into commodities. “Older textbooks described the sixteenth century as an era of “commercial revolution”. As we have seen, there are earlier candidates for that title, but there is no doubt that a substantial increase occurred in the volume of long-distance trade or international trade during that century. […] The most important changes that occurred during the next 200 years [16th and 17th centuries], in addition to the opening of the overseas routes, were the shift in the center of gravity of European commerce from the Mediterranean to the northern seas, a slight but perceptible change in the character of the commodities involved in distant trade, and changes in the forms of commercial organization.” Cameron and Neal (2016: 126) Many historians deemed the 16th century as the century of ‘commercial revolution’. Even though there were previous ‘revolutions’ that could take on the same title, it is undeniable that in that period long-distance trade expanded dramatically. The gradual imposition of the rules of capitalism (long-trade economy) over local economy lead to the abandonment of the principle of self-sufficiency in the name of industrialization. This, changed drastically the balance between domestic and foreign economy. There are various degrees of evidence which drive to this conclusion: 1. New overseas routes - This 1st stage is the most evident: Europeans managed to cross the Atlantic, Pacific and Indian ocean, starting new trades with America and India. 2. Shift of the center of gravity of European commerce → from the Mediterranean to the northern seas. The expansion of international trade caused the end of the economic hegemony of Venice, Genoa and other medieval powers. The new economic powers were north-European cities like London, Amsterdam and Lisbon. Apart from these radical changes, slight modifications involved: 3. The character of the commodities involved in distant trade → Traditionally, long-distance trade was for luxury good coming from east (spices) and precious metals going to the opposite direction. Long-distance now becomes a trade of more basic products, bought in bulk. 4. The forms of commercial organization → The private market pervades the entire trade. The commutative principle, that typically characterized long-distance trade, gains importance in local trade too; until it eventually takes control of the entire economic system. A clear example: enclosure movements. Before, it was clear that domestic economy hinged on the well-being of the community: the lord was responsible for the subsistence of his subjects. With the taking over of enclosures, the land is used for the satisfaction of international market demand. The rise of the Western world: the first globalisation and the mercantile system. - Lesson 6 and 7 The event which caused the first radical transformation of the world, normally referred to as the “first globalisation”, was the age of explorations. Already at the end of the 15th, Europeans started to expand their trade outside their confines, Portuguese started their exploration along the African shores. In a very short time-span, an incredible amount of expeditions led to the accomplishment of the circumnavigation of Africa and eventually, of the world. The sponsors of these expeditions were mainly north-west countries like Portugal, Spain, Britain and France. The expansion of trade routes across the globe changed the balance of power within Europe itself. However, the implications of this ‘revolution’ are more far-reaching than this. The consequences of discoveries. “The discovery of America, and that of a passage to the East Indies by the Cape of Good Hope, are the two greatest and most important events recorded in the history of mankind.” Before an economist, Smith was a philosopher and historian. He does not hesitate to say that the discovery of America and, thus the first globalisation was a real watershed, which marked the beginning of a global history: a history that concern the world all together, in the same horizon (there was no globe before). “Their consequences have already been very great; but, in the short period of between two and three centuries which has elapsed since these discoveries were made, it is impossible that the whole extent of their consequences can have been seen. What benefits or what misfortunes to mankind may hereafter result from those great events, no human wisdom can foresee.” Already in 1776, the consequences where evident but it was too early to fully appreciate them. Smith is fully conscious that after such discoveries, the history of the world changed, however, he also underlines that, despite writing 200 years after it, we are far from grasping the real impact it will have. He believes that, on the basis of what we’ve seen so far, it is difficult to even make forecasts the events that globalisation will bring about. “By uniting, in some measure, the most distant parts of the world, by enabling them to relieve one another's wants, to increase one another's enjoyments, and to encourage one another's industry, their general tendency would seem to be beneficial.” Smith gives his own judgment on globalisation, in the light of his own theory. The discovery and establishment of new routes, lead to the expansion of the scope of the market. By unifying the most distinct parts of the market, allowing counterparts to more intensively exchange needs/goods/services/capabilities, a higher level of well-being should be achieved. Since globalisation expanded the scope of the market, Smith would expect it to be beneficial. In fact, his main thesis is that of the ‘invisible hand’, an image representing the market. The dimension of the market is the answer to the question ‘where does the wealth of nation come o Colonial expansion The adoption of protectionist commercial policies, gives rise to a pattern of trade quite clearly characterised by a degree of restriction (is not free market). Mercantilism as state building In order to enact such policies, it was necessary to create a set of institutions that could strengthen and reinforce the system. The power of mercantile states rests upon: • Permanent army – until then, the army were temporary and seasonal, they would be formed whenever they were required and dismissed after the end of the war. Starting from the 15th century, armies become permanent to be at the disposal of the expansion of trade routes. • Public administration – gets larger and larger to support the mobilisation of resources (permanent army = permanent expenditure. Better taxation system) • Public finance - rationalisation of fiscal machinery. Taxes become a permanent feature of the economic system. • Consolidation of public debt. Debt is no longer a private debt of the crown, of the sovran. It becomes the debt of the States as a legal entity. This allows to have a permanent public debt → The state as legal entity survives not only to the death of the king, but also to the change of dynasty. The creation of a permanent public debt was an extraordinary invention. The debt is basically never repaid but negotiated on the market: It takes the form of a TB (bonds). If you lend money to the state in the form of TB, you get your money back by re-selling the bond. This allows the State to finance itself permanently: It provides the state with a potentially unlimited warchest. (The name ‘treasure’ comes from the fact that the ministry of finance was the place where the treasure is kept. The state would accumulate gold to the finance war.) Part II Last time we passed through the main point of rupture (the watershed) represented by the Age of Explorations i.e. the opening of communication across the entire world that, as Smith anticipated, involved an exchange of cultures, goods, services and violence (exploitation and use of strength). We focused on what Smith himself considers the main implication of this revolution: the mercantile system. The mercantile system represents a new form of statehood, of politics, which implies a new way of organising and conceiving economic relationships (very close bound between economic and politic spheres). We saw that the main feature of the mercantilism system regards commercial policies i.e protectionism: barriers against imports and incentives for exports. (Nowadays we talk about neo-mercantilism i.e. protection of national economies against foreign competition.) China, for example, has been accused of mercantilism, in fact, it based its well-being on the strength of its exports and the capacity to run decades in exports surplus. Today, the greatest mercantilistic power is the EU. Indeed, trade surplus of the Euro-area has increased steadily in the last few years, as result of specific policies. The objective was to dig out of a recession by boosting exports. Mercantilism, is not only about revolutionising the economic system, indeed, it is strictly related to the strengthening of the public administration so as to bolster the growth of the financial power of the state. This was achieved through the establishment of a permanent army, public finance and administration but most importantly, the invention of public debt (a debt that is not in the name of the crown but of the State as a juridical entity). National debt, as it is called, is a permanent debt: not intended to be repaid, but intended to be postponed, to be fluctuated on a financial market. It is continuously bought and sold as an asset. Public debt is really convenient, for example, it means liquidity for creditors (whenever you need cash you can simply sell the TB and convert them into cash) and source of unlimited resources for debtors. The country that invented public debt is the UK, in fact, it is called “English financial revolution” - this is what gave England the power to finance the main sources of the mercantile system: army and trade. Just as it happens for capitalism, national debt is completely natural for us: it is part of our economic system and we take it for granted. • Privileged joint stock companies (also called ‘public companies’ not because they are public, but because the ownership is represented by stocks - listed on the stock market). Joint stock companies are another example of permanent debt: they borrow money on a permanent basis but don’t have to give it back. At the same time, creditors can always get their security back. The establishment of such companies represents a huge innovation. Previously, companies were not eternal. - They had a limited lifetime, which was conveniently tailored on the specific economic task that the company was intended to perform. E.g. let us imagine that a company wanted to establish trade with the far-east. To do so, it was necessary to invest in the goods to be exported as well as in the construction of ships. Then, one has to consider the time necessary to sail to India and conclude the exchange. Such an investment may have taken up 9/10 years. The company would have had a lifetime of 9 years. Of course, this kind of organisation implied an enormous level of risk: indeed, whoever committed money to the business, would have to wait those 9 years to see whether the investment was profitable or not. There was a bond among the members of the company. On the other hand, the potential lifetime of the joint stock companies becomes unlimited; in this case, investing was not binding till the end, investors can sell the stocks, recover their money and come out of the company. • Establishment of financial market. Establishment of the institutional setting where this peculiar form of trade takes place (To have a public debt and joint stock companies, the institution of a financial market was needed.). • Admission of interest on loans. One of the distinctive trait of pre-industrial economic systems (medieval) was the ban of usury. Usury laws prohibited interests. There was no way to know in advance the remuneration for a loan. (One could not ask to be given back money with interests). E.g. the creditor could not ask in advance the repayment of the money lent plus interests. The gaining of the creditor depended on the success of the investment itself: profit and loss were shared between the debtor and creditor. (Financial instruments do not envisage the possibility to know in advance the return of the creditor). The rise of financial institutions (e.g. financial markets and joint stock companies) goes hand in hand with legitimation of usury, another of the things we take for granted nowadays. (Indeed, I can legitimately expect that I’ll receive interests after having lent money). The idea of usury is that you cannot put a price tag on money. As opposed to what was stressed by Franklin (time=money). In Catholics’ view, time belongs to God. In Middle Ages, it was not thinkable that time could be object of rational calculation. Introducing interest rates, financial markets, permanent debt and joint-stock companies, allowed for the emergence of a market for money and credit → commoditisation of money = transformation of money (capital) into a commodity. The rise of capitalism, in fact, has to do with the transformation of production factors into commodities. Capitalism is not the invention of money or capital, they already existed; they are simply transformed into commodities. At the same time, we register: • Institution of private property (commoditisation of land) • Abolition of guilds (commoditisation of labour). All of this, drove the: • Mobilisation of resources. Construction of a State with these characteristics, long trade supported by army and supported by a bureaucratic system, finance, stock markets and mobilisation of all production markets (mobilised as commodities). Economic nationalism. “The economic policies of nation-states in the period of Europe’s second logistic had a dual purpose: to build up economic power, to strengthen the State and to use the power of the state to promote economic growth and enrich the nation” Economic, state and army mutually enforce each other. - The State and the army defend trade, while trade is necessary to achieve wealth and power to strengthen the State and mobilise the army. (=The mercantile state is built on the power of the merchant). (According to what Goethe says in the Faust, economic power and state power are the main ingredients for the rise of capitalism.) Thus, we have: o Identification of wealth and growth. o Conjunction of commercial political power. (Mercantile state is based on the economic and political power) o Continuous competition between nation-states, whose objective is to expand their influence o Centralisation of power within the State. i.e. protectionism, fiscal policies Where does all this come from? In particular, where does the tendency of associating wealth with growth come from? Starting precisely from this period economic systems start to growth - under the regime of capitalism (which implies growth as an impelling necessity). Legitimacy We have to bring into the picture the issue of legitimacy. Is it all a matter of luck that certain countries were better off than others? That certain are weak and other strong? Unfortunately, it is difficult for might and justice to go together. We don’t even a common universal concept 3. Jus inventionis (discovery). You can’t occupy them on the mere fact that you discovered them. 4. Refusal of Christianity. The Pope legitimised the mission for promoting the evangelisation of barbarians, however, mission is different from imposition. It has to be freely accepted 5. Crimes committed by the barbarians. Barbarians have a different sense of justice, you cannot impose yours. 6. Presumed free will of the Indians. 7. Special mission from God. →What legalise occupation (tituli idonei ac legitimi): 1. Jus commerci (hospitalitas). - Violation, of the part of the “barbarians” of a space of possible encounter. Right to carry out economic activity. Europeans first sailed for commercial purposes, initially they had peaceful intentions and they were attacked while exchanging 2. Jus propagandae fidei. Europeans went to America with the peaceful intention to proclaim and spread their faith. 3. Jus protectionis (of Indian converts). - Right to protect the natives that have converted to catholicism. 4. Jus mandati (papal mission) – Europeans were on a mission to evangelise. They regarded themselves as representatives of the Church to announce true faith. 5. Jus intervention (contra local tyrannos). 6. Jus liberae elections. Right to defend (alleged) democracy and have free elections. 7. Jus protectionis sociorum. Right to defend your associates in commercial affairs. Francisco de Vitoria, “Relectiones de Indis et de jure belli”, 1539. Part III New routes all of a sudden opened up to the eyes of the Europeans to a new world. A world that, for the 1st time, appeared in its entirety: the world we know today. This is the meaning of “First globalisation” i.e. the first realisation of the world as a globe. The first consequence of the opening of these new routes, is that Europeans, at least initially, interpreted the new world simply by extending the principles that had characterised the old world. → Europeans projected their medieval beliefs on to the new world: Whatever was outside the unity of the Christian republic, and outside the influence of Muslim, was pagan. – Pagan territories were a land of mission, not of conquest. They were supposed to be evangelised. – Violence, thus, was legitimate only when justified (as “a form of defence” when barbarians violate the principle for a peaceful encounter). The discovery of a new world is not enough to change prospective and beliefs, in fact, Europeans simply extended their principles to new conquered lands. (e.g. rayas are an extension of the previous partition.) “Just like the horns of the bull are tied by a rope, so people are tied by words” – the common idea was that human relationships are not solely based on sheer violence. Men are bound by words, respect, promises and contracts. There’s a difference in saying ‘strength is what counts’ (like Pascal) and saying that it is right that whoever is stronger can arbitrarily exercise control. The idea behind this is that, it does not matter if one has the power, they can exercise their strength only if there are good reasons to do so. Christopher Columbus and his view. Christopher Columbus, just like the majority of colonisers, thought he was on a mission: Europeans were convinced to have the duty to bring the Gospel to people who didn’t know nothing about it. “Buscar el levante por el ponente”. – After the Portuguese reached India, the Genoese sailor Columbus, proposed the alternative of sailing west from Europe directly to Asia. He talked with the King and Queen of Spain and found their support to finance his expedition. However, another subtle way to interpret this famous phrase is that, no matter where he would end up, Columbus would stick to his initial commitment. In fact, when he realised that he did not arrive in India, he still followed the ultimate purpose of his expedition: He wanted to bring back riches that would allow Spanish sovereigns to terminate the “Reconquista” of the Iberian peninsula. (His aim is not to discover America but to finance the Reconquista). «When I set forth towards the Indies, I did it with the intention to beg the King and the Queen, our Lords, to spend for the conquest of Jerusalem all the riches that they may have drawn from the Indies; and indeed, this I asked of them». - To exploit the new world to finance a crusade and reconquer the Holy Land - 1492: the discovery of America as the ideal continuation of the Reconquista. Under universal powers. In the fresco by Lorenzetti, we can see that in the upper border, the painter represented the sky, the starts and, most importantly, the symbols of the universal powers of the Emperor and the Pope (- two keys represent the spiritual power of the Pope: they recall the ‘keys’ of the Kingdom of heaven given to San Pietro). Possibly, the artist did so to remind the rulers of Siena that, all their daily tasks and their decisions, occurred under the skies, the moon and the superior powers of the pope and emperor. A change of ideology In a very brief time-span, the picture dramatically changed, not because of the newly discovered lands, but because of changes in ideology and regulations. In 1559, the “lines of amity” were verbally agreed upon by the French and Spanish negotiators of the Treaty of Cateau-Cambrésis (agreement marking the end of the 65-year struggle between France and Spain for the control of Italy). These lines had to be the Tropic of Cancer and the prime meridian passing through Ferro in the Canaries. On the European side of both lines, the treaty shall be binding; west and south it was to be disregarded. The previously held principles of international law, were no longer accepted. Rather, it was thought that, while in Europe there exist regulations and public policies which limit the possibility to occupy foreign countries or move war against each other, outside Europe, all there was were free land and open sea where no other law, other than the law of strength, can be enforced - might is right. (Outside, everything was admissible. Conquest is legitimate: the only law is the law of arms. From here on, the world goes through a dramatic escalation of violence). If we had to identify one of the driving principles of this utter change in mentality, we could find it in the Reformation – (1st half of the 16th century). In 1517, in fact, Luther published his 95-theses against what he saw as the abuse of the practice of clergy selling plenary indulgences, complaining about the rules and morals governing contemporary Church. → The reformation brought to the collapse of previous unity. Before, everyone used to recognise a common authority (capable of settling any dispute), with rules and limitation. But afterwards, the Christian republic split in two: Reformation and Counter-reformation. This “religious civil war” was somehow settled in 1555, with the peace of Augusta. The Peace established the principle “Cuius regio, eius religio” ("whose realm, his religion"), which allowed the princes of states within the Holy Roman Empire to adopt either Lutheranism or Catholicism within the domains they controlled, ultimately reaffirming their sovereignty over those domains. Subjects, citizens, or residents who did not wish to conform to the prince's choice were given a grace period in which they were free to emigrate to different regions in which their desired religion had been accepted. “With the Reformation Christianity was done for. From hence forth it existed no more. Catholics and Protestants or Reformers stood further apart from one another in their sectarian conflict than from Moslems and pagans. […] The new politics arose during this time: individual powerful states sought to take possession of the vacant universal see, now transformed into a throne…” Novalis, Christianity or Europe: A Fragment [1799] With the Reformation, the universal authorities of the Middle Ages came to an end: a whole part of the Church did no longer recognise the authority of the Pope. That which started as a religious phenomenon, an invitation by Luther to rediscover the roots of the message of the Gospel, turned out to be a political event: the birth of modern nation states namely, sovran states i.e. political entities that didn’t recognise any superior power. Pre-modern states like Siena recognised, above the city itself, different authorities. The rulers of the city had to respond to the representatives of intermediate bodies e.g. guilds, universities… The previous concept of sovereignty was not original: the authority of rulers came, ultimately, from God, but practically, from the Law (Latin saying “the king is made by the law” – the king exercise jurisprudence, not the other way round.) Nation states, conversely, produce themselves the law. In this sense, sovereignty is original and exclusive (= There are no other forms of power, unless those who receive their legitimacy from the state. No intermediate bodies). In the international scenario, the birth of Sovran States marked the beginning of the competition for hegemony: Nation-States become entities that are in a position of fierce competition one with the other. They have nothing in common, unless the recognition of an authority capable of imposing itself: strength. Adam Smith - Lesson 8 and 9 There are peculiar traits of the West that do not necessarily belong to the rest of the world. Until the beginning of modernity, traits that are so familiar to us, didn’t belong to Europe neither. In fact, Medieval Europe used to cherish peaceful relationships and self- sufficiency. - Even the most terrible act of violence was justified by the ultimate objective of reaching peace. This reality lasted up to 1559 (Treaty of Cateau-Cambrésis, “lines of amity”) when the principle of autarky and peace were surpassed, and the ultimate objective became the satisfaction of self-interest. Today, we have relapsed in this kind of approach. Remarks on our method of investigation: By now, we have discussed how the history of facts and thoughts are strictly tied together. In particular, when it comes to economic history and thought, we underlined that economics as a science is born together with capitalism. 1. Smith, deemed as one of the founders of modern economics, lived around the end of the 18th century, so he was completely inscribed in the horizon of capitalistic economy. Unlike Weber, with Smith, we’ll analyse Capitalism from the inside. 2. In contemporary times, there is an obsession to provide “micro foundations for macroeconomics” → since microeconomics analyses individual decision making, it is believed that, to understand aggregate phenomena one shall start from individuals and then build up his knowledge (“methodological individualism”). This, however, is not what Smith and his contemporaries did. On the contrary, they believed that: to investigate the nature of capitalism and capital accumulation, means to analyse the framework within which individual economic decisions take place (macroeconomics). → the only chance to understand the individual is to understand the world he’s living in. 3. We will be inquiring about the role of time in economics. We know from Weber that capitalism is about controlling and achieving a rational management of time. Time is not a commodity in itself, but it can be dealt with as if it were (like in micro e.g. allocation of scarce resources to the best possible end). What is at stake, within the economic science, is trying to understand whether markets can bridge time or not (can there be a market for time?). The main question that economic historians try to address is: What lies behind the process of capital accumulation (which is one the driving force of all the transformations)? However, we have to bear in mind that, in the history of economic thought, there is no objective point of view from which we can judge whether Smith and other authors were right or wrong. “An inquiry into the Nature and Causes of the Wealth of Nation”. Because Adam Smith - a man of the Enlightenment, who started from being a moral and political philosopher - is regarded as the first economist, before becoming one, he had to ‘invent’ economic history. As philosopher, Smith raises a question concerning the economic system, precisely, “an inquiry into the Nature and Causes of the Wealth of Nation” → thus, his first problem is to define wealth, before asking where does it come from. STRUCTURE OF THE BOOK (already from the index we can see the common ideas on Smith are wrong, wealth comes from capital not the market) • Book I – Of the Causes of Improvement in the productive Powers of Labor, and of the Order according to which its Produce is naturally distributed among the different Ranks of the People. Smith lives at the beginning of the industrial revolution, in his book, he foresees the beginning of the new world – the beginning of development. Hence, he wonders where do such changes and that radical development originate. • Book II – Of the nature, accumulation, and employment of stock (=capital). In this second book Smith focuses more strictly on capital. The Standard version of Smith, what people usually think of him, is that his main focus of study is the market, nevertheless, he’s telling that the answer is capital. • Book III – Of the different Progress of Opulence in different Nations • Book IV – Of systems of political economy. → In this book Smith analyses different ways of managing economic systems, here, in particular, he criticises the mercantile system. • Book V – Of the revenue of the sovereign and commonwealth. His major work is “an Inquiry on the Nature and Causes of the Wealth of Nature”, a title which gives an idea on what will be the main objectives not only of the author, but also of the new discipline he was starting to define. Adam Smith, in fact, was not only an economist, he was the founding father of economic history. Hence, he had to develop a method and some definitions by scratch. The common understanding of Smith’s thought portraits him as a supporter of the free market. It is believed that his main thesis can be summarised with the metaphor of the ‘invisible hand’, which means that everyone is free to pursue their own self-interest and, by doing that, they’d contribute to the promotion of common good. This interpretation is not completely true nor faithful to what Smith actually says. As a matter of fact, in all his works, there are only three points where he uses the expression ‘invisible hand’. The picture is more complicated than that. National product. “The annual labor of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes, and which consist always, either in the immediate produce of that labor, or in what is purchased with that produce from other nations.” If in the title of the book, Smith lays down the query to which he will try to find a solution, in the very first sentence of he preface, he gives a summary answer. - The wealth of nations has to do with the necessaries and conveniences of life (i.e. what is necessary or even convenient to satisfy consumption) → Wealth comes from the annual labor which is employed to produce what is necessary or convenient, or from what is imported. The setting for this analysis is an open economy (foreign trade is involved). Production doesn’t go straight into consumption: part of it is exported, part of what you need is imported. “According therefore, as this produce, or what is purchased with it, bears a greater or smaller proportion to the number of those who are to consume it, the nation will be better or worse supplied with all the necessaries and conveniences for which it has occasion.” Smith is suggesting the idea of modern GDP. Depending on whether what is produced, over the time span of one year, is more or less than the number of consumers, the nation will be better or worse off. (Even nowadays the GDP is one of the key variables in economic policies and its maximisation is among the objectives of all States. → it is a measure of wealth, as a proxy for happiness). Smith in 1776 is witnessing the beginning of the industrial revolution, he is anticipating the fact that the wealth of nations is growing, it is accelerating. Why is it so? Where does this change comes from? Once he roughly defines the wealth of nation is these terms (i.e. the amounts produced in relation to the number of population), Smith goes on to analyse the causes of the wealth of nations. The division of labor. “The greatest improvement in the productive powers of labor, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labor” The increase in productivity and improved results depends on the division of labor. “The effects of the division of labor, in the general business of society, will be more easily understood, by considering in what manner it operates in some particular manufactures.” Smith describes a pin factory and suggests that, it is definitely more productive to divide labor (the modern way of organizing the productive process). Each worker specialises in a peculiar task of the value chain. Division of labor means specialisation: it is possible to exploit individual’s skills, also by repeating a simple action, workers get better and better. Effects “This great increase of the quantity of work, which, in consequence of the division of labor, the same number of people are capable of performing, is owing to three different circumstances; • first, to the increase of dexterity in every particular workman; • secondly, to the saving of the time which is commonly lost in passing from one species of work to another; (→ if the same person had to take care of the whole production process, he would have to move around the factory to carry out different operations. On the contrary, by dividing the process into small tasks, one reduces transitioning phases) • and lastly, to the invention of a great number of machines which facilitate and abridge labor and enable one man to do the work of many → once you start conceiving labor as a process that can be split into elementary tasks, you can substitute men with machines. Specialisation ultimately means mechanisation. Smith was prophetic, he said these things way before Ford. Of course, this is at odds with the approach of the guilds, where one had to ‘master the art’ i.e. one had to be able to know how to carry out the whole process. have for what you need. Indeed, one of the answers to ‘where the division of labor’ comes from is the market (with all the authorities and laws that help the enforcement of policies). The market alone, however, is not sufficient: In the system, there are consumers who don’t produce anything. In order to sustain the existence of such consumers, it is necessary to store away enough stuff to satisfy needs. This is called capital - something previously accumulated in order to allow investments. The market. “As it is the power of exchanging that gives occasion to the division of labor, so the extent of this division must always be limited by the extent of that power, or, in other words, by the extent of the market. When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment, for want of the power to exchange all that surplus part of the produce of his own labor, which is over and above his own consumption, for such parts of the produce of other men's labor as he has occasion for.” One of the policies implications of Smith’s is that, to maximise wealth it is necessary to extend the market. Wealth, in fact, is directly related to the extension of the market. Specialisation relies on large scale markets. When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment. Commercial society “When the division of labor has been once thoroughly established, it is but a very small part of a man's wants which the produce of his own labor can supply. He supplies the far greater part of them by exchanging that surplus part of the produce of his own labor, which is over and above his own consumption, for such parts of the produce of other men's labor as he has occasion for. Every man thus lives by exchanging, or becomes in some measure a merchant, and the society itself grows to be what is properly a commercial society.” Everyone in a commercial society becomes in some way a merchant. Only a small part of what he produces he keeps for himself. The greater amount is exchanged on the market. There is a tendency for the market to expand and spread its reach on broader spheres of the economic and social system and hence, there is commercialisation. → Smith is analysing what we’ve seen in terms of commercialisation of agriculture and industry (e.g. Dutches specialising and expanding their markets. E.g. putting-out systems). The market extends its reach onto the various steps the processes of production (market for land, for labor, for intermediate product). Products are made to be sold on the international market and not anymore for self- sufficiency or for the local market. Double coincidence of wants. Smith is still not satisfied, now the question is, ‘how does the market work?’ “But when the division of labor first began to take place, this power of exchanging must frequently have been very much clogged and embarrassed in its operations. One man, we shall suppose, has more of a certain commodity than he himself has occasion for, while another has less. The former consequently would be glad to dispose of, and the latter to purchase, a part of this superfluity. But if this latter should chance to have nothing that the former stands in need of, no exchange can be made between them.” Smith describes a situation in which exchanges are constrained by a ‘double coincidence of wants’, this happens when one man has more than what he needs, and another has less. The former would like to sell the surplus, while the other would like to buy it. The exchange, though may not take place if the latter does not dispose of anything which the former needs. (you need to find one who has what you need and needs what you have.) “In order to avoid the inconveniency of such situations, every prudent man in every period of society, after the first establishment of the division of labor, must naturally have endeavored to manage his affairs in such a manner, as to have at all times by him, besides the peculiar produce of his own industry, a certain quantity of some one commodity or other, such as he imagined few people would be likely to refuse in exchange for the produce of their industry” The problem can be solved either with a granary (common stock) based on distribution or by adopting a universal commodity for exchanges (‘a commodity that few people would refuse in exchange for the produce of their industry’), a commodity that everyone consumes. Aes rude “Different metals have been made use of by different nations for this purpose. Iron was the common instrument of commerce among the antient Spartans; copper among the antient Romans; and gold and silver among all rich and commercial nations. Those metals seem originally to have been made use of for this purpose in rude bars, without any stamp or coinage. […] These bars, therefore, performed at this time the function of money. The use of metals in this rude state was attended with two very considerable inconveniencies; first, with the trouble of weighing; and, secondly, with that of assaying them. Different types of metal have been used for the purpose of facilitating exchanges (and avoiding the inconvenience of ‘double coincidence’). Initially, “rude bars” were used i.e. unpolished metal, without any stamp nor coinage. However, this gave rise to two problems: • weighting the bars • assaying the bars Aes signatum “The inconveniency and difficulty of weighing those metals with exactness gave occasion to the institution of coins, of which the stamp, covering entirely both sides of the piece and sometimes the edges too, was supposed to ascertain not only the fineness, but the weight of the metal. Such coins, therefore, were received by tale as at present, without the trouble of weighing. […] It is in this manner that money has become in all civilized nations the universal instrument of commerce, by the intervention of which goods of all kinds are bought and sold, or exchanged for one another” To avoid the annoyance of weighting and testing metals to assess how precious they are, the practice of stamping metal has developed. This is the origin of coinage. → the stamp of coins, covering entirely both sides of the piece and sometimes the edges too, was supposed to ascertain not only the fineness, but also the weight of the metal. It is in this manner that metal coins enter into use as a universal commodity, because of its intrinsic qualities (not perishable). In all civilized nations the universal instrument of commerce → It facilitates exchanges, getting around the problem of double coincidence (you can trade for money, a commodity that everyone is willing to accept). What realises the purpose of common stock is a monetary market. This is what allows for specialisation. Value. How does the market work? What determines the value of the stuff on the market? “What are the rules which men naturally observe in exchanging them either for money or for one another, I shall now proceed to examine. These rules determine what may be called the relative or exchangeable value of goods. The word value it, is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called 'value in use;' the other, 'value in exchange.’” To examine the rules which govern the exchanges on the market, Smith distinguishes between: Value in use - consists in the utility of a particular object: the value of a thing because it satisfies a certain need or convenience. Value in exchange – the value that an individual can obtain by changing the good with something else. [Again, this notion comes from Aristoteles.]. Initially coins have a value in use and end up with a value of exchange) Labor “The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What everything is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people. What is bought with money or with goods is purchased by labor as much as what we acquire by the toil of our own body. That money or those goods indeed save us this toil. They contain the value of a certain quantity of labor which we exchange for what is supposed at the time to contain the value of an equal quantity. Labor was the first price, the original purchase money that was paid for all things. It was not by gold or by silver, but by labor, that all the wealth of the world was originally purchased; and its value, to those who possess it and who want to exchange it for some new productions, is precisely equal to the quantity of labor which it can enable them to purchase or command.” Ultimately, the real price of things is labor i.e. the trouble and annoyance of acquiring the thing. Whatever we consume, it is the result of a working activity. The labor is the measure for the relative value of things exchanged in the market (I’ll buy whatever spares me the time to produce it on my own.) “The market price of every particular commodity is regulated by the proportion between the quantity which is actually brought to market, and the demand of those who are willing to pay the natural price of the commodity, or the whole value of the rent, labor, and profit, which must be paid in order to bring it thither. Such people may be called the effectual demanders, and their demand the effectual demand; since it may be sufficient to effectuate the bringing of the commodity to market. It is different from the absolute demand. A very poor man may be said in some sense to have a demand for a coach and six; he might like to have it; but his demand is not an effectual demand, as the commodity can never be brought to market in order to satisfy it. […] The natural price, therefore, is, as it were, the central price, to which the prices of all commodities are continually gravitating” Smith says: 1. Nothing useful exists without labor (i.e. labor is the real price of things) 2. The relative value of things depends on the amount of labor employed to produce them. However, he also says that the market price depends on the relation between the supply and demand. How do you reconcile these two statements (i.e. price as determined by labour and price as determined by demand and supply)? Smith does so by distinguishing: • Market price: depends on the proportion between supply and effectual demand with relative fluctuations in the short term. • Natural price: reflects the labor contained. It is the “force of gravity” around which the market price fluctuates. What determines the long-run value of good is the labor contained. Note: Smith does not talk of ‘supply and demand’ but effective and absolute demand. Whatever a person saves from his revenue he adds to his capital. […] every prodigal appears to be a public enemy, and every frugal man a public benefactor" […] the principle which prompts to save is the desire of bettering our condition, a desire which, though generally calm and dispassionate, comes with us from the womb, and never leaves us till we go into the grave. In the whole interval which separates those two moments, there is scarce perhaps a single instant in which any man is so perfectly and completely satisfied with his situation as to be without any wish of alteration or improvement of any kind. […] It is the means the most vulgar and the most obvious; and the most likely way of augmenting their fortune is to save and accumulate some part of what they acquire, either regularly and annually, or upon some extraordinary occasions” If wealth depends on the market and on accumulated capital, it is necessary for people to be parsimonious: someone who refrains from consumption and accumulates capital. The desire of men is to improve one’s situation, to do so, men are induced to save. This is quite in line with Franklin: both praise the virtue of savings as opposed to consuming. Smith is describing what is happening in Britain in his epoch. The most dynamics part of the market are organising a division of labor while also reinvesting their earnings (instead of consuming them). Profit-making motive “The produce of industry is what it adds to the subject or materials upon which it is employed. In proportion as the value of this produce is great or small, so will likewise be the profits of the employer. But it is only for the sake of profit that any man employs a capital in the support of industry; and he will always, therefore, endeavour to employ it in the support of that industry of which the produce is likely to be of the greatest value, or to exchange for the greatest quantity either of money or of other goods.” The only reason why people use their revenues to invest is because they expect capital out of it. In deciding how to allocate revenues, people try to employ their money in view of the maximisation of profits (you’d invest in those industries that promise to produce the highest remuneration of investment). “But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value, every individual, therefore, endeavors as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily works to render the annual revenue of the society as great as he can.” By deciding where to invest his money, systematically pursuing the maximisation of profit, men contribute to the production of society’s wealth. (Reconcile individual’s interests with society’s interests). Invisible hand. “[cont.] He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he 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 eases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it. The entrepreneur, always aims at his profit maximisation, he neither intends to promote the public interest, nor knows how much he is promoting it. He does not have the wealth of nation in mind. He’s simply pursuing the maximisation of his own interest and yet, by doing so he reaches division of labor, capital accumulation and ultimately, the wealth of nation. By doing this they contribute to the public good more than when they declare to be interested in the public. Recap from last time We read passages from “The wealth of nations” to understand what Smith has to say about economic systems, and to understand what he intends for ‘invisible hand’. Smith aimed at explaining the source of the extreme acceleration of growth factor he was witnessing (where does this growth comes from?). His immediate answer: division of labour – in fact, through specialisation is possible to achieve better production, rapidity and invention of machinery. But, where does specialisation come from? From man’s natural propensity to bargain. Human beings, conversely to animals, are sociable and not self-sufficient. They need others to survive. However, it is not only a matter of propensity but, more precisely, of certainty of exchange. This certainty hinges on two conditions: the market and capital. The degree of division of labour depends on the extension of the market: the larger the extension of the market, the larger the possibility to specialise in a niche. Smith, however, stresses that the market is a place where individual pursue the maximisation of their own well-being (self-love). Each individual is motivated by self-love, not benevolence (market is place for exchange of equivalence, things are not given for free). Capital i.e. the accumulation of stock allows to bring together savings and investments. Capital is indispensable because it takes time to bring commodities to the market, in the meantime, one survives thanks to accumulated goods. (We can imagine the market and capital as the geographical and temporal dimensions of economy: the market is the spatial dimension - from here to there. Capital is the temporal dimension - from today to tomorrow). The concept of the invisible hand comes into play to describe the motivation of those who most contribute to the wealth of nations: everyone is interested in his own self-improvement. To be better than today, one has to save, because savings allow investments and thus, increase in productivity and higher revenues. Each individual will allocate savings to those sectors that promise higher return, to secure the capital with the highest profit. The invisible hand describes a community of individual pursuing their interest, which consequently leads to better allocation of capital. The better way to achieve the common good is let everyone pursue his personal interest. Declaration of independence “The sole trouble Virtue demands is that of just Calculation, and a steady preference of the greater Happiness" David Hume, An Enquiry Concerning the Principles of Morals, section LX In “An Enquiry Concerning the principles of morals”, David Hume states that “the only virtues are Just calculation and the pursuit of happiness”; in other terms, one has to be rational and self-interested. These conditions are not only true for individual happiness but for Common good too. We could interpret this statement as the modern (‘enlightened’) response to Lorenzetti, who showed how rulers had to follow certain virtues e.g. justice, faith... in order to guarantee a good government) and to the principles leading the Ancient Regime. The only responsibility of the State is to refrain from limiting the freedom of its citizens - the State has to safeguard freedom. The only violation of good government, is undue restriction of freedom. For citizens, their sin could be that of being stupid - to be irrational and not knowing what is just for oneself. “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness." In the first statement of the “Declaration of Independence”, liberty and pursuit of happiness are deemed as “undeniable rights” – these truths are self-evident, (the 1st version of the declaration called them “sacred and undeniable”. It was Hume to suggest replacing ‘sacred’ with ‘self-evident’ – so as to avoid any reference to religious evidence.). The good state is the one that protects not only the life but also the liberty and pursuit of happiness of its citizens, to do so it has to assure a free market, with no monopolies. “The theory of moral sentiments” In his book entitled “the theory of moral sentiments”, Smith addresses moral issues and raises the problem known as “Das Adam Smith Problem”. Sympathy “How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it. Of this kind is pity or compassion, the emotion which we feel for the misery of others, when we either see it, or are made to conceive it in a very lively manner. That we often derive sorrow from the sorrow of others, is a matter of fact too obvious to require any instances to prove it; for this sentiment, like all the other original passions of human nature, is by no means confined to the virtuous and humane, though they perhaps may feel it with the most exquisite sensibility. The greatest ruffian, the most hardened violator of the laws of society, is not altogether without it.” However selfish one may be, there is a principle which makes him interested in others’ well- being. Man is not only selfish, in fact, there is a sentiment, an interest and involvement with the feelings, pleasure and happiness of his neighbours. belly” never was more fully verified than with regard to him. It means that ‘with the eye one can encompass more than what he can actually eat’. This man is selfish, he has no other desire than to live in the most greater splendour and yet, to do so, he’s forced to share his wealth with all the people who contribute to make his standard of living possible. Not because of benevolence but precisely because of his selfishness, he must share. “The produce of the soil maintains at all times nearly that number of inhabitants which it is capable of maintaining. The rich only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labors of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species.” The invisible hand stands for a principle embedded in the functioning of the economic system. Starting from the self motivation of individuals, the invisible hand produces an outcome consistent with the general interest of humanity as a whole. - It is clear that the landlord has no such thing as common wealth in his mind: he simply pursues his own interest. However, to achieve the maximisation of his own well-being, he shares the fruits of his property with all other people. There is a balance between commutative and distributive justice: the invisible hand. The invisible hand is the institutional machinery between self-love and common good (in this case, it cannot be simply compared to the market). John Locke: the natural limits of property. In his book on Governments, Locke starts by making a remark, similar to that of Smith, to which however he provides an exception. “God gave the world to men in common; but since he gave it them for their benefit, and the greatest conveniences of life they were capable to draw from it, it cannot be supposed he meant it should always remain common and uncultivated. He gave it to the use of the industrious and rational, and labor was to be his title to it. […] The measure of property nature has well set by the extent of men's labor and the conveniences of life: no man's labor could subdue, or appropriate all; nor could his enjoyment consume more than a small part; so that it was impossible for any man, this way, to intrench upon the right of another, or acquire to himself a property, to the prejudice of his neighbor, who would still have room for as good, and as large a possession (after the other had taken out his) as before it was appropriated. […]” Locke draws a scenario where God has created the world and gave it to men “in common”. The legitimacy of private property comes from the use of things: “labour is the title to it”. (You can apply your ownership to whatever you can work on.) The measure of private property is a natural law based on labour and conveniences: one can appropriate everything he manages with his work and everything he needs to satisfy his necessities. In this way, there would be no way for a man to intrench upon the right of another or to prejudice someone else because property would be equally distributed (one could not have more than what he needs or more than what he can consume). “whatsoever he tilled and reaped, laid up and made use of, before it spoiled, that was his peculiar right; whatsoever he enclosed, and could feed, and make use of, the cattle and product was also his. But if either the grass of his enclosure rotted on the ground, or the fruit of his planting perished without gathering, and laying up, this part of the earth, notwithstanding his enclosure, was still to be looked on as waste, and might be the possession of any other. […] “The greatest part of things really useful to the life of man, and such as the necessity of subsisting made the first commoners of the world look after, as it doth the Americans now, are generally things of short duration; such as, if they are not consumed by use, will decay and perish of themselves: And indeed it was a foolish thing, as well as dishonest, to hoard up more than he could make use of. […]” Property is limited by labour and use in fact, by nature, products that satisfy the needs of human beings are perishable e.g. grain. It would be foolish and dishonest to accumulate things that one cannot make use of. (E.g. if you accumulate more grain than you can consume, it decays. You violate a law of nature and the principles of reason). What moves the riches to share is the natural limit (‘natural law’) to the capacity of enjoying whatever they accumulate (due to their perishable nature). Money as a store of value “And thus, came in the use of money, some lasting thing that men might keep without spoiling, and that by mutual consent men would take in exchange for the truly useful, but perishable supports of life. And as different degrees of industry were apt to give men possessions in different proportions, so this invention of money gave them the opportunity to continue and enlarge them […]” This first statement is very close to the passages by Smith and yet, Locke departs from this view. When money come into use, the world has changed completely. The invention of a good which is not subject to decay, granted men the possibility to accumulate property beyond the possibility of consumption. Not only industrialisation allowed for the increase in productivity, the invention of money gave the opportunity to further enlarge possessions. Money doesn’t perish and allows to legitimately enlarge one’s business. (If you keep grain for yourself, you do that illegitimately because you don’t use it all and prevent others from satisfying their needs.) “But since gold and silver, being little useful to the life of man in proportion to food, raiment, and carriage, has its value only from the consent of men, whereof labor yet makes, in great part, the measure, it is plain, that men have agreed to a disproportionate and unequal possession of the earth, they having, by a tacit and voluntary consent, found out, a way how a man may fairly possess more land than he himself can use the product of, by receiving in exchange for the overplus gold and silver, which may be hoarded up without injury to any one; these metals not spoiling or decaying in the hands of the possessor. This portage of things in an inequality of private possessions, men have made practicable out of the bounds of society, and without compact, only by putting a value on gold and silver, and tacitly agreeing in the use of money.” Initially, the value of money was variable, but, in the very moment in which it was decided to attribute a value to gold and silver, money became a ‘store of value’ allowing for accumulation. The invention of money allows for unequal distribution of property → Accumulation of money is legitimate, you are no longer spoiling anything, but property is distributed unequally directly because this new possibility of money accumulation. “Wealth of Nations” Book IV Money = wealth? “That wealth consists in money, or in gold and silver, is a popular notion which naturally arises from the double function of money, as the instrument of commerce, and as the measure of value. In consequence of its being the instrument of commerce, when we have money we can more readily obtain whatever else we have occasion for, than by means of any other commodity. The great affair, we always find, is to get money. When that is obtained, there is no difficulty in making any subsequent purchase. In consequence of its being the measure of value, we estimate that of all other commodities by the quantity of money which they will exchange for. We say of a rich man that he is worth a great deal, and of a poor man that he is worth very little money. A frugal man, or a man eager to be rich, is said to love money; and a careless, a generous, or a profuse man, is said to be indifferent about it. To grow rich is to get money; and wealth and money, in short, are, in common language, considered as in every respect synonymous.” “A rich country, in the same manner as a rich man, is supposed to be a country abounding in money; and to heap up gold and silver in any country is supposed to be the readiest way to enrich it.” In ‘common language’ money (“gold and silver”) and wealth are used as synonyms. This association is due to the fact that money is both the instrument for commerce and the measure of value. It is understandable to make this association, in fact, when one has money, he has power (i.e. purchasing power) and can readily obtain whatever he desires. So to speak, money ensures a form of freedom, because allows you to access whatever you like. [In an individual perspective, it is better to have more money but from the states government this is a mistake.] Smith vs. Locke “Mr. Locke remarks a distinction between money and other moveable goods. All other moveable goods, he says, are of so consumable a nature that the wealth which consists in them cannot be much depended on, and a nation which abounds in them one year may, without any exportation, but merely by their own waste and extravagance, be in great want of them the next. Money, on the contrary, is a steady friend, which, though it may travel about from hand to hand, yet if it can be kept from going out of the country, is not very liable to be wasted and consumed. Gold and silver, therefore, are, according to him, the most solid and substantial part of the moveable wealth of a nation, and to multiply those metals ought, he thinks, upon that account, to be the great object of its political oeconomy.” Locke is one of the main supporters of mercantilism and precisely because of his position, the conflict between him and Smith begins. Whether directly or indirectly, to save means to add up things that can help the productive process. He doesn’t intend investment as an investment in market shares). Smith is a supporter of free markets for commodities, he doesn’t say much about money/financial markets: it is clear that money is an intermediary not a commodity. Theory of Moral Sentiments A part from the Wealth of Nations, we read the Theory of Moral Sentiments, which, at least at first glance, may sound contradictory with what we’ve seen so far. Indeed, we analysed the concept of sympathy, which seems at odds with the principle of self- love. Smith states that human beings are not only characterised by self-love and selfishness, rather they have a tendency to care for other’s well-being. His argumentation, in fact, does not reduce men to the “homo oeconomicus”: he is well aware that human beings are more complicated than that. Indeed, he dedicates his book to analyse the processes that underlie human behaviour. At the same time though, he’s conscious that benevolence and sympathy are not enough: beneficence is far less important than justice. A society must be built on justice. Even in this book Smith talks about the invisible hand, and he does so by means of a proverb (“eye larger than a belly”). He uses it to describe the story of a rich, greedy and selfish landowner that has accumulated a property that goes well beyond what he can consume and enjoy. In such situations, the invisible hand forces him to share with the persons contributing to his well-being. This is not a matter of benevolence, in fact, even the most greedy of men will be forced to divide. There’s a limit to what a person can enjoy (the dimension of the belly are limited). It is precisely from this assumption that the conflict with Locke begins. Locke believes that property is limited by labour and consumption: everyone can legitimately appropriate everything he manages with his work and that he needs to satisfy his needs (this ensures that there’s enough for everyone). This principle was true until the invention of money. Conversely to consumable goods, which by their nature perish and spoil if not used; money is solid, a store of value, liable of accumulation without decaying. Lastly, we encountered the concept of “society as mirror”. It assumes that the accomplishment of man in his entirety is only achieved in society (i.e. we can tell what human being is only in society). A similar concept was also stressed in the Wealth of Nations. In this peculiar passage, he argues that there are certain things which become apparent only when in society: society, for instance, allows human beings to distinguish beauty-evil, right-wrong, merit-demerit. The implications are far-reaching: from the perspective of an isolated individual, it is feasible to fall in the misunderstanding of conceiving money as a form of wealth in itself. (The more money you earn the stronger you feel. Indeed, you may pursue the money-making goal as the ultimate supreme goal – as we read in Weber). And yet, as soon as one reads the economic system as a whole, you immediately notice that money accumulation is not the supreme goal. What constitutes the wealth of nations is the actual goods and services (“necessaries and conveniences”) that are produced with money. This is when, in the narrow economic system, society acts as a mirror: it allows you to understand something that is not obvious from the individual’s perspective. [Misconception of money intended to be accumulated instead of an intermediary to obtain goods and services.] What we deemed as the “Adam Smith problem” i.e. the apparent inconsistency between what he says in the Wealth of Nations and in the Theory of Moral Sentiments, has a solution: Indeed, a consistency exists. To put it bluntly, thanks to the arguments in the Theory of Moral Sentiments, we can better understand what he means when talking of “self-love”. Smith does not intend self-love as egoism but as the capacity to know what is one’s the best interest. This consciousness is only possible in the relation with others. (This is completely different approach from microeconomics’ one which starts from individuals to understand the whole). Smith believes that to understand the economic actions of individuals, the functioning of the whole must be analysed first. Locke is not only the author of treaties on governments. He’s one of the father of the English Financial Revolution and of the establishment of National Central Banks. In fact, he inspired a major reform in England: the “Great Recoinage” (1694-96) which lead to the establishment of money as a store of value. What Locke describes in the lines we read, dates back to the 1688: he was defining money as a legitimate form of accumulation, even though it was a still non-existing practice. Only from 1696, the relation between coin and unit of account became fixed (until then the value of coins changed continuously; by making it fixed, it is possible to write numbers on coins.) Coins become a store of value, through which payment power becomes fixed too. (Purchasing power i.e. ability to transform money into a commodity. This is not fixed vs. Payment power i.e. possibility to discharge a debt, this becomes fixed.) The industrial revolution - Lesson 10 As we’ve seen, the industrial revolution was a real watershed: it marked the passage from stagnation to growth, from antiquity to modernity. David Landes, The Unbound Prometheus To analyze this major event of the history of men, we’ll be quoting David Landes’ book “The unbound Prometheus”. Landes starts by defining very clearly the place and date of this change: we are in the 18th century Britain, more specifically in the cotton-manufacturing sector. “In the 18th, a series of inventions transformed the British cotton manufacture and gave birth to a new mode of production – the factory system.” The Industrial Revolution was not, as one might thing, a mere increase in the dimension of the secondary sector with respect to primary and tertiary; in fact, it inaugurated a whole new mode of production. Of course, industrialization implies a gaining of importance of industries, but this happened as a consequence of a change within the secondary sector itself: the emergence of the Factory system. Pre-Industrial manufacture was characterized by the presence of guilds i.e. monopolistic entities taking care of all steps of production. At the same time, rural domestic manufacture developed: in winter, families of peasants would produce goods not only intended for self-consumption but to be sold on the local market (there is a rural manufacture, already in). Eventually, in the country-side, far from the control of guilds, something started to change, giving rise to the putting-out system. Entrepreneurs would hire local labour, providing them with raw materials. Then, they would refine intermediate products and sell them on distant markets (this process is also known as proto-industrialization). The factory system is remarkable because of the establishment of a centralized manufacture, which brings production factors together, to maximize productivity thanks to the division of labour. The factory system, however, is not only centralization of manufacture, in fact, such system already existed in the pre-industrial world (under the supervision of royals or for specific strategic sectors e.g. ship building or porcelain). The factory as a way of organizing production is, in itself, nothing new; pre-industrial ones however were public, state-run factories. The true novelty is not the organization of production, but commercialization of factors of production: the logics of commercial relation expands to all stages of production, incapsulating them (commercialization of labour, raw materials and capital). The factory is a place where factors of production are hired through a competitive market: expansion of the scope of private market. Industry as an integrated system The industrial revolution is not only the rise of a new way of production, accompanied by innovations and inventions. Indeed… “At the same time, other branches of industry made comparable and often related advances, and all of these together, mutually reinforcing, drove further gains on an ever-widening front.” …the invention in one sector induced and required other sectors to innovate too. Competitive system This mechanism is strictly related to the concept of competitive system. A company, in fact, is embedded in a broader context (input markets, clients, costumers, competitors …) which imply the necessity to continuously adapt to the changes taking place in the system. the Parliament in Britain). In addition to that, sovereign nation-states competing for hegemony were born and well-being started to be identified with growth (“commonwealth endures no diet” Hobbes). Thanks to these utter changes, which lead to the creation of domestic markets, the recognition of entrepreneurs’ interests and introduction of interests on loans, gave rise to the appropriate financial and political framework which allowed for the revolution. To sum up: preconditions of the Industrial Revolution The Industrial Revolution inaugurated the era of potentially unlimited growth hence, it is viewed as the watershed and turning point of the history of the world. The basis upon which the revolution rest on are: • formation of the mercantile nation state – one of the concerns of the mercantile nation state, apart from defending the Country, is to establish a regime of free competition by dismantling previous laws and regulations that had limited it (by enclosing land and suppressing guilds). • scientific revolution and Enlightenment • establishment of the modern concept of private property • commodification of land (commercial agriculture) • commodification of money and credit (financial markets) • commodification of labor (dismantling guilds inaugurating the factory system) To sum up: factors of British success One of the main concerns of economic historians, is to understand “Why the industrial revolution was English?”. For a variety of reasons geography and geology, for instance; but, most importantly with institutions and a unique structure of wages and prices. • relative abundance of raw materials, coal and iron ore (and relative scarcity of labor) • position and development of foreign trade – the first globalization and the consequent expansion of trade, changed the center of balance of trade shifting it to the Atlantic Ocean. Indeed, those who obtained the greatest advantage were western Europeans because of their favorable position. • transport system and integration of domestic market – even before the application of new technologies to means of transportation (train, steamships), England developed a dense network of domestic transportation, particularly through channels and roads that unified the country. Indeed, as Smith suggested, to take full advantage of the benefits of specialization, it is necessary to unite and expand the scope of the market. • commercial agriculture –By definition people working in manufacturer, do not produce their food. Thus, they need someone who can feed them. Industrialization relies in increased productivity in primary sector → agricultural revolution is a pre-requisite for the IR. • development of cottage manufacture – proto-industrialization • financial revolution – establishment of a monetary system and a central bank issuing paper money convertible into gold. This was the condition for Britain to grow successfully: Finance the war through gold and convert gold into money for internal trade. Within the mercantile system, it is necessary to move war to defend trade while, at the same time, enhancing trade to mobilize resources. Trade and military power are mutually enforcing each other: there is no way for a country to succeed without one of these conditions. Before the invention of financial institutions, a country had to decide whether to dedicate its resources to military expeditions or to trade. If a country engaged in a war, the crown borrowed money to pay the troops and the gold would be sent overseas; diminishing the resources to be employed in internal markets. The British financial revolution represented the optimal solution. – indeed, the establishment of public debt, a central bank (issuing paper money) and of stock markets, allowed the State to focus on both wars and trade simultaneously. The financial revolution unleashed potentially unlimited resources: public debt was permanent and continuously financed through TB (i.e. negotiable securities). At the same time, creditors did not have to wait the end of the war, because they could get their securities back (in form of cash). While public debt and financial markets offer the possibility to better mobilize resources and finance the army, the central bank gives liquidity to the market and sustains domestic trade. This system allows for a sort of ‘duplication’ of money (gold is used for war while banknotes for trade) and reconcile these two contrasting issues: war and trade. This is the secret of British success. To anticipate: implications of the Industrial Revolution • beginning of a potentially unlimited growth • long run: continuous revolution • imposition of a model: leader vs. followers The unbound Prometheus In the myth, “Prometheus” was a man who challenged the Gods by stealing the secret of fire from them. As a punishment, he was chained on a cliff and every day his stomach would be eaten off by an eagle. Landes talked about the industrial revolution as an “Unbound Prometheus” because with the industrial revolution mankind steals from nature the secret of producing, potentially unlimited sources of energy for the scope of enhancing production. The steam engine becomes the symbol of the Industrial Revolution and his associated with the deeds of Prometheus. However, precisely because it is ‘unbound’, Landes is suggesting that this time Prometheus manages to accomplish his aims without being punished. In France: very tight ancient regime before Revolution, no entrepreneurial class, more integrated internal market, no financial revolution until Revolution (that only produced inflation etc. at that time), no endowment of coal (Belgium had more coal in fact it was the first country on the continent to follow Britain). David Ricardo - Lesson 11 and 12 David Ricardo was born around the 1770s, the years when Smith published the Wealth of Nations. Then, in 1817, he published his major work “On The Principles Of Political Economy And Taxation”. In the very brief time span which ranges from the end of the 1700 and the beginning of the new century, a lot of things have happened. First of all, the industrial revolution → By the time Ricardo is writing, England had experienced the process of industrialization and became the leader, the capital of the world in terms of manufacturing. It had set a path: the only option for other countries was to evolve according to a similar line. (This is precisely what marks the difference between industrialized and industrializing nations.) What is more, England had won the Napoleonic war (Waterloo), the Congress of Wien and the Restauration had occurred. As a matter of fact, Ricardo is known for having made a fortune out of the Waterloo battle. He was a stockbroker and received some first-hand information about the British having won against Napoleon. Hence, he started to sell his shares on the stock and, given his good reputation, everyone followed him. After stock prices had decreased, he rebought everything making a fortune. Ricardo has an abstract approach, build out of other authors considerations, from which he is trying to establish a formalized system with the purpose of supporting free trade. Indeed, he is deemed as the founder of modern economic history. He was a convinced supporter of free market and free trade; indeed, his works inspired the shift of British policies from mercantilism to free-trade, which happen in 1846. Already at the end of the 18th century, Britain was the world leader in manufacturing, it feared no competition and thus, could turn to non-protectionist policies. Ricardo’s theory appears to draw a clear distinction between capitalists and landowners. In particular, he provides a justification for the monied-class (endowed with money) i.e. capitalists – they provide the fuel. The ultimate policy implication of Ricardo’s assumptions is that capitalists are supposed to be favored to landowners because they bring capital into the market and it is precisely thanks to capital accumulation that the division of labour and wealth are generated. On the contrary, landowners are ‘parasites’ that are simply endowed with land (i.e. a scarce resource). These theories lead to the repeal of corn laws (i.e. protectionist laws against import of corn, intended to protect corn national production) – through which England renounces to self- sufficiency in the name of growth. In fact, after the repeal, England is flushed with corn coming from abroad that lowers landowners’ revenues. (Cheap corn means low cost of labour and thus advantage for capitalists.) While the “Wealth of nation” is characterized by practical digressions that support Smith’s ideas; Ricardo’s work has a peculiar abstract and mathematical approach. The principal problem in Political Economy “The produce of the earth—all that is derived from its surface by the united application of labour, machinery, and capital, is divided among three classes of the community; namely, the proprietor of the land, the owner of the stock or capital necessary for its cultivation, and the laborers by whose industry it is cultivated.” Ricardo starts by saying that the produce of the earth is the ultimate source of wealth. Such produce, derives from the united application of the labor and capital (also capital equipment i.e. machinery) and is then divided between three classes of the community: landowners, capitalists and labourers (all of which concur to the production process). Ricardo is talking about agriculture, but he describes it as a capitalistic activity - it is mechanized and involves capital. Accumulation of capital makes no difference in the theory of labour. In sect. 4 he makes a different statement. Section IV: “The principle that the quantity of labour bestowed on the production of commodities regulates their relative value, considerably modified by the employment of machinery and other fixed and durable capital. [30] Capital “In the former section we have supposed the implements and weapons necessary to kill the deer and salmon, to be equally durable, and to be the result of the same quantity of labour, and we have seen that the variations in the relative value of deer and salmon depended solely on the varying quantities of labour necessary to obtain them,—but in every state of society, the tools, implements, buildings, and machinery employed in different trades may be of various degrees of durability, and may require different portions of labour to produce them. […] According as capital is rapidly perishable, and requires to be frequently reproduced, or is of slow consumption, it is classed under the heads of circulating, or of fixed capital. * [*A division not essential, and in which the line of demarcation cannot be accurately drawn.]” Initially Ricardo argues that the sole determinant of a commodity’s exchangeable value is the labour contained in it. However, he goes on arguing that equipment and tools used to produce it, may also have different amount of labour contained (e.g. fishing rod vs fishing boat. It takes longer to produce the boat, but it is more productive). In addition to that, we can also draw a distinction on the durability of such tools – this is the difference between circulating and fixed capital, even though it is deemed as not fundamental. The distinction between circulating and fixed capital was essential to understand the nature of money in Smith’s theory, while for Ricardo it is not essential at all. From the very beginning we saw that time plays a role in capitalism - a productive process that takes time. For Smith → there are periods. For Ricardo → time is continuous Example In the first case, a farmer employs 100 men to produce corn and he does so one year after the other. In the second, the farmer becomes capitalist. He hires 100 men to produce a machine, starting a business in manufacturing. How much is the value of the corn in relation to the value of what is produced in the 2nd case (machine+cotton)? Sticking to the theory of value that Ricardo has explained so far, which shows a similar approach to that of Smith: the value of corn depends on the labour of 100 men, while that of cotton depends on the machine and 200 men (those who build the machine and those who produce cotton). “[…] the machine and cotton goods of the cotton manufacturer, ought to be twice the value of the corn. But they will be of more than twice the value of the corn, for the profit on the clothier’s and cotton manufacturer’s capital for the first year has been added to their capitals, while that of the farmer has been expended and enjoyed.” However, the value of cotton is more than twice. In fact, we need to take account of something else. – Ricardo is introducing a different notion of capital (which is no longer mere physical capital): abstinence. In the 1st case, the capitalist receives its share of corn and eats it. While in the 2nd, the profit of the capitalist is added to the capital; he’ll have to wait to get rewarded in the form of surplus. In other terms, there exist a reward for time. Time is money “On account then of the different degrees of durability of their capitals, or, which is the same thing, on account of the time which must elapse before one set of commodities can be brought to market, they will be valuable, not exactly in proportion to the quantity of labour bestowed on them,—they will not be as two to one, but something more, to compensate for the greater length of time which must elapse before the most valuable can be brought to market. [34] It is hardly necessary to say, that commodities which have the same quantity of labour bestowed on their production, will differ in exchangeable value, if they cannot be brought to market in the same time. […] the superior price of one commodity is owing to the greater length of time which must elapse before it can be brought to market. [37]” Ricardo believes in the existence of a legitimate remuneration for the capitalist who is willing to wait and postpone the enjoyment of his profits. - not only labour but also abstinence is compensated. Time has a value in itself (The more you wait, the more you’ll gain). Time is money in the sense that the abstinence from consumption is rewarded. [This is very close to what we read in Weber’s work and partly explains why Ricardo converted to Protestantism] Invariable measure of value How to find an invariable measure of value? Since labor is not. It is impossible to determine an invariable measure for value, but we pretend money is. “Of such a measure it is impossible to be possessed, since it would require: • same quantity of labour • same proportion of fixed capital • same durability of fixed capital] To facilitate, then, the object of this enquiry, although I fully allow that money made of gold is subject to most of the variations of other things, I shall suppose it to be invariable.” On Rent After having dealt with the origin of commodities’ value, Ricardo sets out to determine how wages, rent and profits are created. - His biggest contribution is the theory on rent. “Rent is that portion of the produce of the earth, which is paid to the landlord for the use of the original and indestructible powers of the soil. The rent is what is paid to the landowner for the use of its land, since he happens to own a piece of soil endowed with an intrinsic production capacity. The rent, however, … It is often, however, confounded with the interest and profit of capital, and, in popular language, the term is applied to whatever is annually paid by a farmer to his landlord. [67] … is often confused with profit. This is a distinction of great importance, in an enquiry concerning rent and profits; for it is found, that the laws which regulate the progress of rent, are widely different from those which regulate the progress of profits, and seldom operate in the same direction. [68]” Rent is what is payed to the landowner for the use of land, because he happens to have something endowed with a productivity capacity. When paying a rent, we pay the productivity of the land itself and the machinery. Rent is different from profit: they come from different sources and follow different paths. Applies to appropriated resources “On the first settling of a country, in which there is an abundance of rich and fertile land, a very small proportion of which is required to be cultivated for the support of the actual population, or indeed can be cultivated with the capital which the population can command, there will be no rent; for no one would pay for the use of land, when there was an abundant quantity not yet appropriated, and, therefore, at the disposal of whosoever might choose to cultivate it.* [69] [*“The earth, as we have already seen, is not the only agent of nature which has a productive power; but it is the only one, or nearly so, that one set of men take to themselves, to the exclusion of others; and of which, consequently, they can appropriate the benefits. The waters of rivers, and of the sea, by the power which they have of giving movement to our machines, carrying our boats, nourishing our fish, have also a productive power; the wind which turns our mills, and even the heat of the sun, work for us; but happily no one has yet been able to say, the ‘wind and the sun are mine, and the service which they render must be paid for.’” When a community is first settled, land is overabundant with respect to labour and capital hence, no rent is to be paid (In America, for instance, they had so many lands that it was free). The source of rent, in fact, is not the productive power of land, but the scarcity of fertile land. Indeed, there are other sources of nature which are equally important for production e.g. wind and water, however, they’re not object of appropriation: they’re commons. Rent is not paid because of some intrinsic quality of land, but because it is the subject of private property. - Hence, the sources of rent are scarcity and private property. Differential rent “If all land had the same properties, if it were unlimited in quantity, and uniform in quality, no charge could be made for its use, unless where it possessed peculiar advantages of situation. It is • First of all, that of bringing market prices back to natural price. - shifting their investments from a sector to another according to what is more profitable avoids having sectors too much financed and that produce too much so that prices are too low and other sectors with not enough financing, whose production is scarce and so prices are higher. • Moreover, through their willingness of maximizing their self-interest and by competing one against the other, they ensure that optimal allocation of capital among alternative investments opportunities (- which ultimately leads to increased social well-being). “It is this competition which so adjusts the exchangeable value of commodities, that after paying the wages for the labour necessary to their production, and all other expenses required to put the capital employed in its original state of efficiency, the remaining value or overplus will in each trade be in proportion to the value of the capital employed. Thanks to competition among them, profit-rates are proportionate to the capital employed. It is allocated according to its productivity. (the rate at which an investment in a specific sector contributes to the maximization of capital accumulation and of profit is similar across industries, you earn only according to how much you invest, no matter where you decide to invest.) “The present time appears to be one of the exceptions to the justness of this remark. The termination of the war has so deranged the division which before existed of employments in Europe, that every capitalist has not yet found his place in the new division which has now become necessary.” Ricardo writes in 1817, just after the war against France and believes that the present time represented an exception to the rule according to which capital is always optimally allocated. He believed that they were experiencing a post-war depression. In fact, the war had ended, and yet, not all capital has found its most adequate collocation. In fact, some capitalists have not yet decided where to put invest their money. Foreign trade: comparative advantage “Under a system of perfectly free commerce, each country naturally devotes its capital and labour to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole. By stimulating industry, by rewarding ingenuity, and by using most efficaciously the peculiar powers bestowed by nature, it distributes labour most effectively and most economically: while, by increasing the general mass of productions, it diffuses general benefit, and binds together by one common tie of interest and intercourse, the universal society of nations throughout the civilized world. It is this principle which determines that wine shall be made in France and Portugal, that corn shall be grown in America and Poland, and that hardware and other goods shall be manufactured in England.” International trade is a market where each country participates by producing what it does best. It is essentially an international division of labour (each country does what it does best in relation to all other possible activities it could do). For instance, Britain may not be the best producer of cotton cloth in the world, but if compared to Portugal its wine is less good. Portugal is better at doing both and yet, Britain gets to do what it does relatively better. If one country did everything, there would be no international trade, everyone has to be allowed to produce something. Condition: no capital movements “The same rule which regulates the relative value of commodities in one country, does not regulate the relative value of the commodities exchanged between two or more countries. In one and the same country, profits are, generally speaking, always on the same level; or differ only as the employment of capital may be more or less secure and agreeable. It is not so between different countries. Experience, however, shews, that the fancied or real insecurity of capital, when not under the immediate control of its owner, together with the natural disinclination which every man has to quit the country of his birth and connexions, and entrust himself with all his habits fixed, to a strange government and new laws, check the emigration of capital. These feelings, which I should be sorry to see weakened, induce most men of property to be satisfied with a low rate of profits in their own country, rather than seek a more advantageous employment for their wealth in foreign nations.” Ricardo, however, specifies that international trade only works if it is a market of goods and services. An international trade for money and capital shall not exist, otherwise there would be countries that specialize in creating debts. Financial markets are good domestically. As a form of barter “Gold and silver having been chosen for the general medium of circulation, they are, by the competition of commerce, distributed in such proportions amongst the different countries of the world, as to accommodate themselves to the natural traffic which would take place if no such metals existed, and the trade between countries were purely a trade of barter.” Say’s law “M. Say has, however, most satisfactorily shewn, that there is no amount of capital which may not be employed in a country, because demand is only limited by production. If ten thousand pounds were given to a man having 100,000l. per annum, he would not lock it up in a chest, but would either increase his expenses by 10,000l.; employ it himself productively, or lend it to some other person for that purpose; in either case, demand would be increased, although it would be for different objects. If he increased his expenses, his effectual demand might probably be for buildings, furniture, or some such enjoyment. If he employed his 10,000l. productively, his effectual demand would be for food, clothing, and raw material, which might set new labourers to work; but still it would be demand. Productions are always bought by productions, or by services; money is only the medium by which the exchange is effected.” Ricardo supports Say’s law, which basically implies that “supply creates its own demand”. – Capital accumulation may never be excessive, there is always a profitable way to allocate it because even if you accumulate more capital, leading to an increase in production, this production will always be absorbed since supply produces its own demand. Increased productivity means higher wages for laborers → Revenues generate purchasing power and thus, more demand. Enhanced demand ultimately means that the market will absorb new supply. Whatever is produced becomes revenues, which can be transformed either into investment or consumption; however, demand is equal to supply. Y = C + I → D = S Assuming that all money earned is spent, economy can go on indefinitely without no risk of overproduction. Capital expands the capacity of the stomach “Adam Smith has justly observed “that the desire of food is limited in every man by the narrow capacity of the human stomach, but the desire of the conveniences and ornaments of building, dress, equipage, and household furniture, seems to have no limit or certain boundary.” [...] and while there is no limit to the desire of “conveniences, ornaments of building, dress, equipage, and household furniture,” there can be no limit to the capital that may be employed in procuring them, except that which bounds our power to maintain the workmen who are to produce them.” Economies can go on to grow indefinitely. Not only are they allowed to grow but this growth can continue indefinitely without the risk of running into a crisis for overproduction. Malthus and Ricardo Controversy with Malthus: demand side “You seem to think that the wants and tastes of mankind are always ready for the supply; while I am most decidedly of opinion that few things are more difficult, than to inspire new tastes and wants. […] I am quite of opinion that practically the actual check to produce and population arises more from want of stimulus than want of power to produce.” Ricardo: differences with Malthus It appears to me that one great cause of our difference in opinion, on the subjects which we have so often discussed, is that you have always in your mind the immediate and temporary effects of particular changes—whereas I put these immediate and temporary effects quite aside, and fix my whole attention on the permanent state of things which will result from them. Perhaps you estimate these temporary effects too highly, whilst I am too much disposed to under-value them. To manage the subject quite right they should be carefully distinguished and mentioned, and the due effects ascribed to each. Malthus: differences with Ricardo I agree with you that one cause of our difference in opinion is that which you mention. I certainly am disposed to refer frequently to things as they are, as the only way of making one’s writings practically useful to society, and I think also the only way of being secure from falling into the errors of the tailors of Laputa, and by a slight mistake at the outset arrive at conclusions the most distant from the truth. Besides I really think that the progress of society consists of irregular movements, and that to omit the consideration of causes which for eight or ten years will give a great stimulus to production and population, or a great check to them, is to omit the causes of the wealth and poverty of nations—the grand object of all enquiries in Political Economy. A writer may, to be The economic growth which began in England, was triggered by an increasingly predominant ideology of progress. According to some thinkers, the ideology of progress was the main peculiarity of the 19th century. However, it shall not be thought of as a mere economic phenomenon, indeed, this ideology penetrated the social, political and cultural spheres and as a matter of fact, one of the main challenges of the course is to try to understand economic changes as inscribed into a broader perspective. We cannot limit our understanding of the Industrial Revolution and the transformations of the 19th to the economic dimension. In fact, during the course of the century, along with accumulation of capitals, there was also a process of accumulation of powers – which was triggered by colonisation, for instance. The accumulation of powers gave rise to a new form of political systems i.e. mass politics (totalitarianism), accompanied by ideological massimalism (general ideas like racism), which was then the peculiarity of the 20th century. Mass politics initiated a period of social and mass mobilisation. The nineteenth-century transition Ecnomic modernisation – The 19th century transformations regarded, first of all economic growth and modernisation, which began with the industrial revolution. At the heart and behind the 1st and 2nd industrial revolution, we have technological innovations and advancement. At the same time, economic modernisation was inscribed into a broader sphere i.e. the political system, which also underwent a series of transformations. The 19th century began with Napoleonic Wars and between 1814-15 the Congress of Wien occurred, which lead to the Restoration. In addition to that, colonisation was pivotal both for the process of economic and political growth. During the 19th century, mass politics was born and its rise was strongly supported by the emergence of a new political language. A third layer we need to consider is the crisis in the public sphere. The mythology of progress unfolded into social problems like extreme politics (nationalism and imperialism), ideological massimalism (anti-semitism, social darwinism, racism) Main Economic Transformations, ca 1820- 1873: Diffusion of the First Industrial Revolution In the course of the 19th century, particularly after the 1850s, the Industrial Revolution (which began in the mid 1800 thanks to the transformation of the British cotton- manufacturing industry); spread across Western Europe (i.e. France, Germany, Switzerland, Belgium, many countries after the 1850s) and throughout the globe (USA and Japan, after 1850 - This phenomenon however, was mainly European). Historians, in fact, indicate the 19th century as the period which brought about the Great Divergence (Europe was growing much faster than the rest of the world, and this caused the actual division of the world between rich and poor countries. Japan was basically the only Asian country which managed to somehow keep the pace with the West). The industrial revolution originated a flow of almost uninterrupted innovations, also because all European countries imitated the techniques that were first adopted by Britain and spurred a century of continuous technological maturation. Another important feature of the 19th century transformations, is the quickening of economic development and growth. (Economies of speed – technological change and economic growth became much quicker). Of course, the spread of innovations and growth happened in Europe according to different timings, e.g. France came much later than Germany; however, what is important to understand, is that the pace of development changed. The diffusion of the 1st Industrial Revolution implied, first of all a spontaneous diffusion of textile and engineering industries all around Europe. Indeed, the industrial revolution started precisely with the innovations in the mode of production of the cotton-manufacturing industry and the invention of the steam-engine. The 1st IR, however, was mainly characterised by small industries and was of course dominated by the UK. During the course of the 19th century, however, heavy industries e.g. railway, artillery, war industries, started to emerge and coexisted together with smaller ones. They were capital intensive i.e. a lot of capital is needed to make them function; large-scale industries, which required public investment strategies. The symbol of this transformation is the railway ▪ because thanks to it different industries could be connected; it facilitated exchanges and trade within the a country but also, across different Nations ▪ In addition to that, railways were themselves an example of heavy industry. Stimuli and strategies What spurred the 19th century transformations and how did European countries cope with them? ▪ One of the main drivers for economic growth, was the growth of population. In fact, during 1900s, 400 million people lived in Europe, that is more than a quarter of the world population. At the same time, the 19th century is deemed as the Age of Migration, which implied not only the movement of people but also of ideas, capital and technologies. ▪ Another factor to consider is cheaper transportation. The diffusion of railways allowed to create broader and tighter communication networks which facilitated the circulation of goods and people (and of course increased trade). The railway first diffused in the UK and USA then, other European countries like Germany and France started to gradually implement their transportation networks. (Europeans also invested in the construction of railways in colonised countries e.g. Africa). ▪ “Financial Revolution”. The financial revolution implied, first of all, the consolidation of public debt and the rise of financial markets, but also the institution of a new banking system (Bank Act in the UK in 1844) - it implied the merge of commercial and investment banks (different deposits, initially gathered into commercial banks, were redirected into the industrial sector). The creation of investment banks, which functioned as joint stock bank that gathered capital from the shares of different investors, contributed to increasing the supply of money to the enterprise and industrial sector and ultimately helped to bolster economic growth. - The first investment bank was born in 1852 with the Peréire Brothers. ▪ To ensure the spread of innovations and policies it was necessary to introduce legal and institutional changes. For instance, new laws that could facilitate trade among countries were ratified. ▪ Lastly, new sources of energy and supply that came both from EU and the colonies, started to be used. The process of economic growth did not depend solely on the augmented power of private, highly-capitalised enterprises; in fact, central governments also played a fundamental role in allowing economic development. ▪ Role of the States within Countries: Plurality of Capitalisms according to National Specificities. A common cliché is that of believing that during the 19th century, central governments adopted a sort of laissez-faire attitude with regard to economic development. Indeed, State investments in the 1800s were much less if compared to actual percentages. However, state role shall not be overlooked, since investments contributed to economic development. An example is, once again, the investments for railway. For example, after the Restoration, Germany created an institutionalised confederation of States which agreed on lowering tariffs to increase internal trade. Another strategy that the German federal states adopted was the construction of the railway (that was sustained by private enterprises and the State). Unlike Germany, France was characterised by a centrally organised Government. Despite the differences, in both cases the State contributed to innovations (there are different ways to reach growth according to each State’s specificities). ▪ International relationships. The role of the state, along with private enterprises, allowed for the development of internal trade and heavy industries. On the other hand, as far as external exchanges are concerned; we have to consider that the 19th century was characterised by an increase in interdependence of European economies one with the other. This happened thanks to the establishment of a Trade Treaty system and the introduction of Favour-Nation clause - countries decided on favoured tariffs on import/export of goods opening the Era of Free Trade. The 19th century did not only imply an increase in the intraeuropean trade but also among non-european countries – such increase was supported by colonisation and the discovery of new products. All these strategies to achieve growth happened in the 1860s - 70s, a period when international trade was still dominated by the UK. International Relationships & Emergence of Colonial Powers What is the political scene that allowed these changes? ▪ After the conclusion of Napoleonic Wars, the Congress of Wien tried to re-establish an authoritarian system, political stability and control which were disrupted after the break out of the French Revolution. This period, also labeled as Pax Britannica, allowed to maintain peace among Western European states for about 100 years (1815- 1914) – peace that lasted up to the break out of the 1st WW. (The period is known as “Pax Britannica” because it was a peaceful period and because it was supported by the fact the UK had political and commercial control over other states). ▪ The establishment of the Peace of Wien ensured stability within Europe, nevertheless, outside European confines no international law was to be regarded: In fact, the process of power accumulation started outside EU with colonisation and the formation of Colonial Powers under a Tacit British Rule. (Starting from the IR, UK was indeed the world leading country, the English Empire reached its peak under a Tacit British Rule). ▪ The overseas Lands as an exogenous stimulus for economic growth o Marriage between science and technology - discoveries and scientific knowledge were applied to economy to increase productivity. o Spread of an ideology of progress – one of the main triggers of economic growth which continued and accelerated during the 19th century, bringing about a second industrial revolution was the ideology of progress. Note: the “second wave of economic growth” is normally called “Second industrial revolution” or, “First Wave of globalisation” – because one of its main features was the increase migration and interdependency among countries. Hypermodernity - Lesson 14 History is much about simultaneities than discontinuity. Today we deal one of the changes that characterises Europe, and the rest of the world, starting from the end of the 19th century (1890-1920) and that has led to our contemporaneity. The changes that characterised European civilisation starting from the end of the 19th century can be seen as the termination of a cycle of revolutions - the activation of the social changes which lead to ‘liquification’ - ‘total mobilisation’ (Jünger) - ‘social atomisation’ (Hannah Arendt). More recently, socialists started to define the mobilisation of society as the cause of “liquid society” (Bauman). Hypermodernity • When? • Why do we talk about it? • What? Main reference: Jan Patočka Jan Patočka (1 June 1907 – 13 March 1977) was a Czech philosopher, indeed, he is considered one of the most important philosophers of the 20th century. He inspired the revolt of spring ‘69 in Prague and, in January 1977, became one of the original signatories and main spokespersons for the Charter 77 (Charta 77) human rights movement in Czechoslovakia. He was also interrogated by the police regarding his involvement with the Charter movement, was held by the police for ten hours. Patočka was a kind of hero for the movement and the very soul of Czech liberation. Patočka wrote a variety of articles that revolve around the idea of hypermodernity - From a certain moment on, we entered into the space of hypermodernity, which is still going on nowadays. → Post- modernity has to be read as a “dimension” of hypermodernity. Starting from the 2nd industrial revolution onwards (19th century), a transformation happened - a revolution that led to dismantle the whole civilisation that had been built after the raise of the modern state in the 17th century. The civilisation based on rationalism and rights has been interrupted by the liberation of power and the breakout of technological innovations that involved the globe as a whole. Liberation of powers freed from all the limits which were previously imposed by civilisation. The WW1, in fact, is to be understood as a war of the west against itself. A war from which the west has not – and cannot- recovered. Science and technology ‘The nineteenth and twentieth centuries are the age of an industrial civilization that has swept away – definitively, it now seems – humankind’s other, older attempts to shape, even to produce their lives without the help of science and technology (of technology based on science and in a sense even fusing with it)”. One of the major changes that lead the 2nd Industrial Revolution, was the marriage between science and technology i.e. application of science, scientific methods and scientific knowledge to technology. Indeed, the 2nd IR was lead by the application of science to technology. It was precisely this unification that triggered accumulation and industrial growth, two of the main characteristics of the end of the 19th century and increasingly accelerated during the 20th. The increased dependency of science and technology is at the core of the new civilisation that began with the 2nd Industrial Revolution, the changes we look at do, however, not only relate to the mere economic sphere but have a broader impact on society as a whole. When Patočka talks about “industrial civilisation”, he does not only refer to the increase in the scale and scope of economic production, rather, he stresses the modification of the way of thinking and living. Along with economic changes and modification in the modes of production, it is, in fact, fundamental to consider the change in the knowledge. Patočka specifies that technology is now based on science. Hence, it is connected to the process of acceleration of findings. Technology is now unstable and depends on innovation. In the past, on the contrary, despite sporadic discontinuities that imported new technologies, technology was generally stable. What’s new? ‘The uninterrupted rationalization becomes during modern times, basically from the end of the XVII century, the main factor characterizing social life. […]. The question to ask is therefore if it is simply a new type of civilization, of a civilization among others, or if we are facing a phenomenon fundamentally different, something that we could identify as « surcivilisation ».’ [Supercivilization / hypercivilization / ~ hypermodernity] Rationalisation implies a shift in knowledge – the increased trust in calculability, the application of scientific knowledge and methodology to perception of reality. This process, which stems from the scientific revolution (end 16th century) and acquires new meanings and features at the beginning of the 20th century, is at the basis of what we can identify as “supercivilization” or “hypermodernity”. The 2nd Industrial Revolution was inscribed precisely in new features of the 19th century. ‘Its new attitude to work and the skeptical use it made of ancient rationalism helped to generate a new conception of knowledge as ultimately practical and mastering nature. […]’ ‘European expansion shifted from the form of Crusades to exploration beyond the seas and in the grasp for the wealth of the world; simultaneously, the internal development of production, of technologies, of commercial and financial practices led to the rise of an entirely new kind of rationalism, the only one we know today: a rationalism that wants to master things’. The main difference between the 1st and 2nd Industrial Revolution is quantitative. During the 2nd IR, economies of scale and scope started to be exploited, and allowed enormous competitive advantages to arise. However, in order to exploit the benefit of scale and scope economies, it was necessary to have control the sources of energy and supply to ensure the correct flow and volumes of goods and resources -strategies for growth, in fact, implied both horizontal and vertical integration. What is more, thanks to application of science to economics, it was possible to evolve production processes by implementing the use of new inventions or new materials (e.g. electricity allows to dispose the plant however you want). [In a sense, the transformations of the 2nd IR are similar to the revolution brought about by the rise of modern state in the 17th century, but the scale was utterly greater]. The possibility to master the practical nature of knowledge implies the possibility to extract a value from it. – the need of extracting a value is directly related to the possibility to increase the scale of industrialisation. The real change is related to the quantitative side of the innovation. (Putting in practice knowledge led to innovation and, ultimately, to the increase in the scale of production and industrialisation.) What’s new? Economic dimension and not only: Mass industrial system… “The accumulation of forces is uninterrupted, followed step by step by the expansion of power. We know the history of this process […]. We know how it spreads then to the whole of our modern life, finding an expression particularly effective in the free capitalist enterprise that controlled the work […], resulting into the division of labour and of the global market”. …the rise of mass society “This mastering of things and reality through rationalism/modern sciences and technology is ‘the modern mechanism which capitalism was only too glad to turn into a cult of the mechanical, so contributing to what came to be known as the industrial revolution. This revolution that penetrates throughout and ever more completely determines our lives. Given its differentiation of vocations and interdependence of interests, European humanity and by now already humanity as such simply are no longer capable of physically surviving but for the mode of production that rest increasingly on science and technology. ‘the industrial revolution that takes place in Europe from the second third of the century [was] a process that, making of Europe the exclusive holder of modern science and technique, ensures to Europe itself the monopoly of power which makes the colonial expansion possible. This process comes with a demographic increase, the emergence of the big urban and industrial centers, and the formation of the mass industrial society. All this necessarily leads to a revision of previous political structures: with the birth of mass democracy [edit mass politics]. The process of industrial growth and accumulation of capital accelerated during the 19th century and was related to accumulation of power. The expansion of power is not only constrained to the economic sphere; indeed, it had a very important impact on human relations, knowledge and modern life. The general consequence of this changes is the empowerment (not only increase of scale of production) but also political power: especially the latter led to a new kind of imperialism, violent colonization. The accumulation of forces followed by expansion of power is the ‘result’ of the mass industrial system and the rise of a mass society. → The empowerment of social, economic and human dimensions led to an increasing mobilisation of resources and human beings. We are trying to discuss the process of industrialisation in a broader perspective, trying to see how this process changed the way in which people thought and lived, and how it concurred to shape our contemporaneity. on the idea of migrating away and changing one’s status (migration and change of status is embedded in mobilization.) The greatest homelessness, is however, that in relation to human nature. At this point, Patočka quotes Hannah Arendt who pointed out that critical capacity is lost. - Human beings content themselves with practical mastery, without however being able to understand what it is that they do and calculate. The sense of homelessness, of being without place, is thus related to isolation and individualism. Perhaps, a way out of ‘modern homelessness’ is to revive and claim the capacity to reason and raise questions. Change in human condition – Dystopian movie: Metropolis 1927 The film clearly shows a change in human conditions, the commodification of everything, the desire for efficiency and modernity swipes away every other concept like freedom, creativity and civilisation that existed before. We don’t know what work the people shown do, there is just a mass of people doing the same things at the same times → productivity and efficiency are the only things that matter. It is because of this period and its transformations that we have the life we have now, major improvements in health and quality of life, happiness. Before, work was the expression of individualism; work was an important part of the human being, his best output. Now, there is a shift: people work with their heads down, everything is mechanised. The only important thing is productivity and efficiency rather than creativity. One of the difficulties of this normative discussion, is the lack of human agency and the capacity to decide. - The question of whether a society hinders, or favours freedom is whether human agency actually exists. Indeed, the core of freedom is critical capacity. (To be critical means to be able to think: it is critical thinking that allows human agency). The rise of masses reduces critical capacity because of ideological pressure on mobilisation. Mobilisation breaks down the framework in which people understood themselves as agent: people become atoms. The solution/antidote to such situation would be the rediscovery of critical capacity. Revendicate the capacity of being critical is political agency - in a society that wants to produce adaptation of people to it, creativity is merely seen as a performing capacity. Being scared makes us take a distance and think. Modern industrial enterprise & Managerial Capitalism Last time we discussed the concept of “hypermodernity”: a label used to describe our contemporaneity. This notion we introduced was aimed as a description for the 20th century, which masses scientific and technological innovations II° Industrial revolution accumulation of capitals empowerment intellectual and political changes mass politics can be seen as a ‘laboratory’ that shaped our current society. As we’ve seen, the scientific and technological innovations, that began in the 19th century and unleashed an era of uninterrupted advances, had as major consequences the 2nd Industrial Revolution and accumulation of capitals (that ultimately led to the birth of modern industrial enterprise). On the other hand, intellectual and political changes (with the rise of mass politics). The 2nd industrial revolution, hence, cannot be understood from the mere economic point of view, but inscribed into broader changes related to the political and intellectual spheres. We used Patočka’s words to discuss the transformations of the 19th and 20th century. “‘The accumulation of forces is uninterrupted, followed step by step by the expansion of power. We know the history of this process […]. We know how it spreads then to the whole of our modern life, finding an expression particularly effective in the free capitalist enterprise that controlled the work […], resulting into the division of labour and of the global market’. ‘the industrial revolution that takes place in Europe from the second third of the century [was] a process that, making of Europe the exclusive holder of modern science and technique, ensures to Europe itself the monopoly of power which makes the colonial expansion possible. This process comes with a demographic increase, the emergence of the big urban and industrial centers, and the formation of the mass industrial society. All this necessarily leads to a revision of previous political structures: with the birth of mass democracy [edit mass politics]” One of the most important outcomes of the 2nd wave of industrialisation, which implies a constant accumulation of capitals and “energy” (as Patočka calls it), is for sure the modern industrial enterprise, which totally transformed the concept of work and production. The constant pressure to grow also brought about mass society: which found an expression in a new way of production but also in a new political system (increased amount of people living in Europe) Main Economic Transformation, from 1880s. The Second Industrial Revolution: its Dynamics Chandler, an American historian, analysed the transformations and main characteristics of modern enterprises. As a response to the necessity of increasing production, new, bigger enterprises emerge → Modern Industrial Enterprise. Together with the change in size, hierarchical and managerial organisation also develops. - managerial capitalism. Such phenomenon mainly regarded heavy industries (chemicals, metals) and these changes didn’t occur simultaneously through Europe, in fact, they happened most intensively in the UK, Germany and US. It was during the 20th century that new superpowers (i.e. Germany and the US) started to emerge at the and started to displace the British rule. The technological changes and the pressure of growth of the II Industrial Revolution fostered the birth of the Modern Industrial Enterprise whose main characteristics were: 1. Large production facilities / multi-functional – size was fundamental to exploit economies of scale and scope and to better respond to the pressure and adapt to the changes and innovations. 2. Investment in management /complex governance structure – The augmented size of plants was accompanied by increased investments in management – which was not present at all during the 1st IR. (During the 1st IR, factories hinges on the idea and geniality of a single entrepreneur). Now, on the contrary, bigger enterprises can produce/distribute larger amounts of goods and services. To accommodate the augmented dimensions, it is necessary to revolutionise and organise the management. 3. Global competition and networks - already from the mid-19th century there’s a much bigger convergence in the market, hence companies start to compete and cooperate in the market. We are at the doom of what we call modern globalisation – enterprise networks both at the national and international level. But why is it necessary to grow? The main incentive leading to the rise of the modern industrial enterprise is the possibility to exploit economies of volume i.e. scale and scope economies. - The logic of economy of scale in production and consumption is that by increasing the volume it is possible to reduce the unit cost. This is true, however, up to a given point. • Economies of Scale (in production): decrease in the cost per unit as the industrial outcome increases • To achieve these economies is necessary to reach the “effective capacity utilization”: reach of the volume of production (throughput) that makes the reduction of cost per unit possible • Economies of Scale (in distribution): large distribution channels reduce the cost per unit as the volume of goods (stock-turn) distributed increases • Economies of Scope: same processes in producing or distributing different products decrease unitary cost These economies foster the growth of the enterprise itself (new functions, new markets, new productions etc.). As the enterprise grows, new functions and you market have to be taken care of, hence in addition to the increased physical dimensions of the firm, the change regards its structure. – indeed, the introduction of Managerial Hierarchies contribute to this growth. Managers control and coordinate the different activities and functions of the firm and they are those who take the main decisions (on investments, expansions and production). The process of growth and accumulation is led by the management in fact, we talk about managerial capitalism. The change in competition: • led to oligopolistic re-organisation of the market: few big firms that control the production and compete globally • Competition is not based on prices anymore, but on ‘market shares and increased profits by means of functional and strategic efficiency, that is, by carrying out more capably the processes of production and distribution […] by moving more quickly into expanding markets and out of declining ones’ (p. 36) Enterprises compete market shares to increase their profits. (By increasing profits, and capital, is possible to foster innovations). – this was only possible by increasing efficiency. Note: This re-organization is typical of capital-intensive industries The imperative is to grow. But how? Vertical and horizontal integration. - Horizontal integration – increasing the scope of production to reduce production costs. E.g. standard oil trusts, firms refining oil decided to merge to reduce their costs - Vertical integration – you integrate downward or upward into the supply chain Geographical expansion (diversification) Production diversification – exploit new acquired skills to expand the range of product. What does individualism mean? It has a negative connotation, people only care of themselves. The 20th century is the historical moment when an individual society emerges i.e. where everyone only takes care of himself even if we have the impression to be surrounded by others (a mass). Individualism as being alone in a crowd → not being able to relate to others, we only take care of ourselves → disaggregation - the mass is an illusion because in the end we are alone. The process of economic modernisation lead by of the diffusion of the 1st and 2nd IR, as well as the rise of mass politics, strongly impacted on society. In particular, it gave rise to the urban phenomena i.e. the rise of crowds. Indeed, before speaking of the 1ww, to be able to make sense of it, we need to discuss the crisis of the public sphere (to understand how the human being became instrumental). Introducing Simmel, we said that the as a direct consequence of the process of industrialisation a new urban phenomenon emerge i.e. increasing amount of people living in cities leading to the rise of urban economy (as opposed to a rural economy) and the formation of crowds. (This social transformation causes new political language and the instrumentalization of human beings to emerge to control crowds.) He studied the way in which crowds change the way in which human beings relate to each other. The crowds: an obsession and an object to be studied Starting from the last part of the 19th century, there is a general obsession with crowds: thinkers started to analyze them in order to make sense of the new urban phenomenon they were witnessing. - questions such as who the people making the crowds were and why was the phenomenon possible. The new scientific theories about crowds were led by social darwinism. → according to it, society changed in evolutionary terms (human groups and races are subject to the same laws of natural selection as Charles Darwin had theorized for plants and animals in nature). As society evolves, only those with the best biological and physical conditions can survive. These scientific theories were essential to understand the transformations that happened between the 19th and 20th century (urbanization). Examples of theories following social Darwinism: • Scientific studies of the crowds, e.g. criminology: according to these theories, crowds were dangerous because made up by criminals. - criminology mainly hinged on the ideas of Cesare Lombroso (1835-1909) and Alphonse Bertillon (1853-1914) → they were convinced that it was possible to relate physical and biological characteristics of humans to the fact of being criminals. (they created a science to map the people that made up crowds, determining by the physical characteristics if someone was a criminal). • Social theory of the crowds e.g. crowds psychology: Gustave le Bon (1841-1931) was a French thinker very convinced by social Darwinist theories. He studied the way in which individuals behave in crowds and how the crowd behaves as a whole. Le Bon’s theory is fundamental because it is known that Stalin and Hitler (perhaps Lenin too) read his book and used his theory in order to mobilize masses and increase their expertise in managing them – His major point: the complete crisis of human beings within crowds make individuals unable to behave independently and thus, easily controlled by an external leader (because of the emergence of a ‘collective mind’). The “collective mind” of the crowds makes it really easy to control them as a whole. ‘the disappearance of conscious personality and the turning of feelings and thoughts in a definite direction […] are the primary characteristics of a crowd about to become organized’ The Crowd: A Study of the Popular Mind (1895), Gustave Le Bon There was a general obsession with the phenomenon of crowds that resulted from industrialization; thinkers started to make reflections on it and crowds became an object of politics. Indeed, a new political language was born because of crowds. What is more, the increasing amount of people living the cities did not have political nor social ties -> they were no longer crowds but mobs. The crowds: the mob as a “new political category”. Even if in common language such words are synonymous, there’s a clear difference: ▪ Crowds – this is the generic term that we use when talking about a gathering of people. It is a urban phenomenon clearly related to the process of industrialisation: More people living in cities. ▪ Mobs – the root of the word “mobs” is ‘mobile’. Mobs are a more complex phenomenon which soon became the new political object of study of movements like imperialism and nationalism. Hannah Arendt defined mobs with the Italian term ‘plebe’ and used it to describe a political category, a group of people, coming from different classes → residue of all classes (déclassés), that because of capitalistic endeavour, cannot find social ties in the social class to which they belong. Mobs are excluded from traditional politics i.e. parliamentary and democratic institutions and political actions. They lack a clear vision/direction → Nihilism. Hence, new political tools have to be used to orient and control them. A mob is a crowd ready to be organised and mobilised: Individuals that can easily shift they’re point of view according to an external leader. (The force that orients the mob is outside the parliament, outside democratic institutions). The rise of mobs is strictly related to the process of industrialisation, but it is not simply the “proletariat”, as Marx would call them, but people unable to find any kind of political representation. Hence, such individuals (the déclassé, the residual) would gather and would be ready to follow an external voice of a leader. Mobs are a by-product of capitalistic expansion and society: people unable to find occupation or social ties within their social class of reference. New political action and language undermining democracy → the mob is a sort of political category because it became an object of politics; it was out of the control of traditional politics, so the problem became how to control it. (e.g. The press became really important, a new political instrument to orient mobs). ▪ Masses – In quantitative terms, masses are bigger gatherings than mobs. However, the most important difference is that, unlike mobs, masses are not the result of capitalistic endeavour: that of masses is a phenomenon that emerged starting from the intra-war period. → They’re a result of the 1st WW. They’re the result of the disruption of social classes which was brought about by the 1st world war. The mob: an entity to be organized/mobilized. The people that made up mobs came from different classes; however, they don’t have to considered as the class lower than workers. In fact, they come from different social classes: they are the residual of society. – The growing population number implied the impossibility to find a job or a place in society just like the one of their families, in their class of origin; they felt no longer represented, in society and in politics. this is why the mob did not refer to politics anymore and could be easily organized around any movement and way of thinking, like: Mythology of progress – the idea of progress, not only related to an economic dimension, based on the assumption that the human condition will inevitably improve. Such belief also has an impact on society: it penetrates society with the promise to develop a better society thanks to the war. (mobs are willing to take part in the war in order to have a better society -> idea of constant growth and change). Antisemitism/Xenophobia/Racism – The idea of race was present even before the mid-19th century but at that time it became scientific and connects with the political as well as with the economic spheres (e.g. political expansion and surplus capital investment) - race was studied in labs and it was then connected to politics and economics. In fact, it led to the creation of new movements to involve mobs, like imperialism, but also to the possibility of exploiting other parts of the world, like Africa etc., to invest the surplus of capitalist economy. Imperialism was encouraged by the mobs: capital and power accumulation were fundamental to start colonization, but it was legitimized by racism → the people in the mobs were mobilized according to this ideology and tried to find their place with imperialism. The mob is the object of new political movements; indeed, ideologies (such as the mythology of progress, antisemitism, racism…) led to and sustained Nationalism and Imperialism. → They shape the sense of belonging of human beings and their relationship with alterity (difference) in a way that testifies the loss of a common sense of humanity (crisis of humanism/violence). ‘completely unprincipled power politics [imperialism] could not be played until a mass of people was available who were free of all principles and so large numerically that they surpassed the ability of state and society to take care of them. The fact that this mob could be used only by imperialist politicians and inspired only by racial doctrines made it appear as though imperialism alone were able to settle the grave domestic, social, and economic problems of modern times’ [Arendt,156-7] The mob in action: the Dreyfus affaire (1894) and the extra-parliamentary politics, e.g. the press and representations Dreyfus was a Jewish French officer that was accused of treason because of his alleged sharing of information with the Germans. The situation exacerbated because of the anti-Semitic feelings of the French society → society was split in two: dreyfusards vs anti-dreyfusards. The situation was fought outside the parliament: there had been no parliamentary discussions on the affaire, so the press became fundamental - other political instruments that were outside the institutions were used to solve the situation. The affaire was used in order to mobilize the people that weren’t interested anymore in the subjects discussed in the parliament (→ individuals in the mobs: these individuals weren’t interested in traditional politics because they felt they had no political representations; hence, the need of new instruments to organize them arose e.g. antisemitism, racism, xenophobia). It is this kind of people that were willing to be part of the big event that was WW1 because they believed that it could have changed their life. Mobs are not simply made by workers that gathered to protect their interests - they are not driven anymore by this initial thought, they are organized by an external leader according to an