PATTS College of Aeronautics Economics Paper

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Carefully explain the meaning of the concepts “total product,” “necessary product” and “surplus product.” What are the ways of increasing the surplus product in a society? Which methods of increasing the surplus product are likely to provoke resistance from the producers and which methods are not likely to bring resistance? Explain why each method of increasing the surplus is or is not likely to provoke resistance.Your paper should be 2-4 pages in length and should not include any direct quotations. Your grade will be determined based on the demonstrated understanding of relevant concepts, clarify of explanation, thoroughness (within the space constraints), and absence of mistakes.

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class 7
markets part 2
2/2/2022
Last Time
? Competitive markets consist of many
potential buyers and sellers, none having
power to dictate terms to any other.
? The key concepts used in understanding how
competitive markets work are supply curves,
demand curves, and market clearing.
? A market system constantly reallocates
production in response to changes in
consumer preferences and product costs.
2
Use demand and supply graphs and reasoning using the concepts of supply
and demand to explain these situations.
•
Following an internet article that suggests that aspartame (a common sugar
substitute) may cause serious illnesses, the price of diet drinks falls.
•
All tequila must be made with at least 51% blue agave grown in specified areas
of Mexico. In 1997 a fungus plague occurred, affecting the blue agave plants in
Mexico. The prices of tequila in the following year shot up. Why?
•
DVD players that used to cost between $600 and $700 in 1997 fell in cost to
less than $100 by 2005. What do you think happened to DVD rentals and why?
•
Cover charges for bars are higher on Saturday than on Thursday.
•
A poultry farmer hires you. She wants to know what is going to happen to the
price of eggs because of two events. First a new rumor is sweeping the
country that eggs are great sources of protein that do not raise cholesterol. At
the same time, advances in chicken husbandry increase the number of eggs
that can be produced. What happens to the price and quantity of eggs?
3
Today
? “Invisible Hand”
? Assumptions required
for optimality
? Are markets a good
institution?
? Criticisms of market
allocation
? Alternatives to markets
4
Adam Smith (1723-1790)
• Smith was a student of philosophy and is
considered by many to be the father of
economics.
• His groundbreaking works are The Theory of
Moral Sentiments and An Inquiry into the Nature
and Causes of the Wealth of Nations.
• Smith is famous for popularizing the radical view
that individual self-interest can serve the public
good.
• Smith is often associated with the idea that free
markets generate prosperity, but he also argued
for governments to provide for defense, justice,
education, and infrastructure.
Adam Smith’s invisible hand
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 cases, 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.”
Smith 1776, Book IV Chapter II
Adam Smith on the
cover of Time Magazine
in 1975.
Adam Smith’s nuanced view of selfinterest
“Man has almost constant occasion for
“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.”
Smith 1759, Part I, Chapter I
the help of his brethren, and it is in
vain for him to expect it from their
benevolence only… It is not from the
benevolence of the butcher, the
brewer, or the baker, that we expect
our dinner, but from their regard to
their own interest. We address
ourselves, not to their humanity but to
their self-love, and never talk to them
of our own necessities but of their
advantages.”
Smith 1776, Book I Chapter II
Assumptions behind the Invisible
Hand
The claim that a market system
produces an optimal allocation of
resources assumes
1. Pursuit of individual self-interest
2. Unregulated prices
3. Competitive markets
Plus a long list of additional
assumptions (disscussed soon).
8
??
Neoclassical theory claims that a
market system provides an
OPTIMAL (best possible)
allocation of resources (labor, capital
goods, natural resources) to gain the
maximum possible satisfaction of
consumers.
9
Optimality claim
Neoclassical theory claims that equilibrium
price in a competitive market reflects
1. the benefit to consumers from consuming
the product
2. the cost to society of producing the product.
10
Why price reflects satisfaction
DEMAND:
A consumer keeps buying
units of a product until the
satisfaction gained from the
last unit purchased falls to
just compensate for the
price.
11
Why price reflects cost
SUPPLY:
To maximize profit, a
company will keep
producing more units of a
product until the cost of
producing it rises to just
equal the price received for
selling the product.
12
In equilibrium, price
reflects both
satisfaction to
consumers and cost to
producers.
13
Reallocation via the market
If demand for a product
increases:
P increases
1. Firms produce more since
price is now greater than cost
2. Those consumers for whom
the product is not worth the
new higher price will
consume less of it, leaving
more for those who want
more.
14
Five Assumptions Required for
Optimality of Market Allocation
No externalities.
An externality occurs when an act of production or
consumption affects others besides the producer or
consumer.
What’s an
example of an
externality?
15
Five Assumptions Required for
Optimality of Market Allocation
Complete information.
Everyone has complete and accurate information about
all products.
Examples of
incomplete
information
16
Five Assumptions Required for
Optimality of Market Allocation
No “public goods”
• Goods that can be provided only collectively, not
separately to individuals
• Goods for which one person’s consumption does not
reduce the amount available for others.
examples:
17
No market
power
exists.
The labor market must
examples:
work like any other
market.
18
Are competitive markets a good
institution?
Do markets …
? produce goods consumers
desire?
? produce goods consumers
need?
? produce goods in a costefficient way?
? allocate goods fairly?
Think…Pair… Share…
Europe has competitive markets for delicious bread.
Criticisms of
Market
Allocation
1.
Negative
externalities are
widespread and
positive
externalities are
important.
20
Governments could
…tax goods with
negative
externalities.
Can markets
incorporate
externalities?
… subsidize goods
with positive
externalities.
21
Criticisms of Market Allocation
2.
Asymmetric
information is
common.
The producer or seller often
knows much more about the
product than the consumer.
Can markets
solve
information
problems?
Requires
government
regulation.
22
Criticisms of Market Allocation
3.
There are many
important
public goods.
These should
be provided by
government
and financed
by taxes.
23
Criticisms of Market Allocation
4.
Many industries
cannot be
competitive but
can support only a
few buyers or
sellers.
This requires
government
oversight of
companies’
behavior to achieve
efficient prices.
orphan drugs
24
Criticisms of Market Allocation
5.
Labor markets
do not work
like other
markets.
Political economy approach
holds that working conditions
are determined by the relative
power of employers and workers.
(not market forces)
Only collective
actions by
workers can bring
major
improvements in
working
conditions or
wages.
25
Criticisms of Market Allocation
6.
The rich are
favored under
market
allocation.
“one dollar,
one vote”
26
Criticisms of Market Allocation
7.
Market allocation
creates economic
insecurity.
27
Criticisms of Market Allocation
8.
A market system
teaches and
reinforces
narrowly selfinterested
behavior.
Economic institutions
Preferences
28
Alternatives to market
allocation
2. planning
1. custom
Whoa! That’s a big number, aren’t you proud?
29
economic planning
A process aimed at determining or
influencing the allocation of
resources* so as to conform to a
pre-determined goal or program.
100%
*what is produced
how it is produced,
who gets what
30
Economic Planning The “visible hand”
MARKET ALLOCATION:
Demand ? causes P ? causes profit ? causes Qs ?
ALLOCATION BY ECONOMIC PLANNING:
Demand ? so seller notifies planning body which
weighs demand increase and other considerations,
ending with possible ? Qs
31
Types of economic planning
? Top-down central planning
Central authority decides allocation.
? Indicative planning
Government issues non-binding investment
plan for private industry.
? Government modification of market allocation
via taxes, subsidies, credit allocation, public
32
investment
Types of economic planning
? Democratic participatory
planning
Representative public
bodies allocate
resources through
negotiation among
affected parties.
33
Arguments for Economic Planning
1. Can take
account of
externalities.
4. Avoids problem
of monopoly
pricing
6. More equal
distribution of
goods
2. Can avoid
asymmetric
information
problem
5. Better at
determining
wages and
working
conditions and
assuring full
employment.
3. Produces
sufficient public
goods
7. Stabilizes prices
and incomes
8. Fosters
cooperative
behavior
34
Arguments against Economic Planning
1. Inflexible and resistant to change
2. Not good at responding to consumer wants
3. Not effective at utilizing information
4. Incentive problems if there is no profit motive
5. Requires a costly administrative apparatus
6. Gives too much power to the government which will
restrict individual freedom.
Note: All of the arguments for and against market
allocation and economic planning are highly
contested.
35
Economic Transition to War Economy
1. Market mechanism: Let price of weapons rise to
reallocate production from civilian products to
weapons production.
2. Economic Planning: Government orders industry to
shift from civilian production to weapons production.
Question: Which is better?
36
Big Economic Transformations
Question: Can the US, and global, production,
transportation, and energy systems be transformed
quickly enough to avoid disastrous global climate
change?
Can this be done through market mechanisms?
Or would it require elements of a planned economy?
37
Next:
Read chapter 5 for M 2/7.
Short paper #1 due M 2/7.
class 8
economic systems
2/7/22
Last Time
?
Markets are an example of production coordination through
rules, in an economy where there is private property and there
exists competition among firms.
?
Competitive markets provide a decentralized system of
motivations (“Invisible Hand”)
?
Assumptions required for beneficial markets are often not
present.
?
Economic planning is an alternative to market allocation. There
are arguments for and against market allocation and economic
planning, which are highly contested.
2
economic planning
A process aimed at determining or
influencing the allocation of
resources* so as to conform to a
pre-determined goal or program.
100%
*what is produced
how it is produced,
who gets what
3
Economic Planning The “visible hand”
MARKET ALLOCATION:
Demand ? causes P ? causes profit ? causes Qs ?
ALLOCATION BY ECONOMIC PLANNING:
Demand ? so seller notifies planning body which
weighs demand increase and other considerations,
ending with possible ? Qs
4
Types of economic planning
? Top-down central planning
Central authority decides allocation.
? Indicative planning
Government issues non-binding investment
plan for private industry.
? Government modification of market allocation
via taxes, subsidies, credit allocation, public
5
investment
Types of economic planning
? Democratic participatory
planning
Representative public
bodies allocate
resources through
negotiation among
affected parties.
6
Arguments for Economic Planning
1. Can take
account of
externalities.
4. Avoids problem
of monopoly
pricing
6. More equal
distribution of
goods
2. Can avoid
asymmetric
information
problem
5. Better at
determining
wages and
working
conditions and
assuring full
employment.
3. Produces
sufficient public
goods
7. Stabilizes prices
and incomes
8. Fosters
cooperative
behavior
7
Arguments against Economic Planning
1. Inflexible and resistant to change
2. Not good at responding to consumer wants
3. Not effective at utilizing information
4. Incentive problems if there is no profit motive
5. Requires a costly administrative apparatus
6. Gives too much power to the government which will
restrict individual freedom.
Note: All of the arguments for and against market
allocation and economic planning are highly
contested.
8
Economic Transition to War Economy
1. Market mechanism: Let price of weapons rise to
reallocate production from civilian products to
weapons production.
2. Economic Planning: Government orders industry to
shift from civilian production to weapons production.
Question: Which is better?
9
Big Economic Transformations
Question: Can the US, and global, production,
transportation, and energy systems be transformed
quickly enough to avoid disastrous global climate
change?
Can this be done through market mechanisms?
Or would it require elements of a planned economy?
10
This Time
? An economic system can be defined by its
class relationship.
? Who produces the surplus? Who receives
it? How do they lay claim to it?
? Capitalism is a particular economic system
with defining features.
? Commodities are produced for profit using
privately owned capital goods and wage
labor.
11
Class-Based Economic
Systems
If a distinct group in a society controls and
lives off the economic surplus, it is called a
class-based economic system.
12
Class-Based Economic Systems
Slave system
Feudal system
Capitalist system
Trans-Atlantic slave voyage.
13
State Socialism
?
State owns the means of
production instead of private
owners.
?
Economy is centrally planned
rather than a market
economy. Production is not
for profit but based on the
economic plan.
?
A small group controls
decision-making in the
government and the
economy.
14
Two Interpretations of State
Socialism
? State socialism is a class-based economic
system.
? Top officials are a class that controls the
surplus product.
? State socialism is a non-class based economic
system.
? Top officials monopolize political and
economic power, but they are not a
surplus-appropriating class.
15
Class does
not mean
income
group.
16
Meaning of Class in PE
A group with a
particular role in
the production and
control of the
surplus product.
17
The different class-based
economic systems are
distinguished by the
means by which the
dominant class gains and
controls the surplus.
18
Slave system
2 basic classes
1. plantation
owners
2. enslaved
people, the
producers
How was the surplus obtained?
Producers were owned by
plantation owners, who
controlled the enslaved
people’s labor and owned the
final product.
19
How was the Slave Relation Enforced?
IDEOLOGY
ARMED FORCE
•
Idea that it is wrong to
rebel.
•
Belief that system had
benefits for slaves.
•
Belief in right of the strong
to rule the weak.
•
Belief in racial superiority.
20
How was the surplus in the slave
system used?
Luxury consumption by
masters.
Build monuments.
Educate the producers.
Support the pursuit of
art, literature, and
philosophy.
Support war and
conquest.
21
Feudal system
2 basic classes
1. lords
2. serfs, the
producers
How was the surplus obtained?
? Lords owned the land; serfs
were tied to a particular lord’s
land.
? Serfs were required to turn
over part of what they
produced to lords.
22
Uses of the surplus under
feudalism
1.
Luxury consumption
of lords.
2. Build churches and
monuments.
3. War and conquest.
4. Some pursuit of art,
philosophy.
forms of surplus
? Labor
? Goods
? Money rent
23
How was the Feudal Relation Enforced?
ARMED FORCE
IDEOLOGY
Belief in obligation and rank.
24
Role of ideology in class
systems.
A class-based economic system cannot survive based purely on
force.
Ideas play a key role:
25
1.
To get the producing
class to accept its
position
2.
To allow the dominant
class to see its role as
“right” or “justified.”
Capitalist system
a) Free markets
Which of these b) Limited role for government in
the economy.
is an essential
c) Most people earn their living
feature of a
by working for a wage or
capitalist
salary.
system?
d) A democratic form of
government.
e) Freedom of thought and
expression.
26
Defining features of
capitalism
1.
Commodity production.
Commodities are something produced for sale.
2. Capital goods are commodities and are
owned by a distinct class of capitalists.
Capital goods are goods used in production.
3. Producers are wage workers who are
legally free and own no capital goods.
4. The aim of production
is profit.
27
Capitalist system
2 basic classes
1. Owners of capital goods
2. Free laborers, who produce goods to be
sold by the capitalist with the aim of
obtaining a profit.
How is the surplus obtained?
28
Capitalist system
1. Workers are legally free.
2. Workers decide whether to work for a
wage based on their own free choice.
3. Capitalists have no legal right to force a
worker to do anything.
Puzzling that capitalists can a surplus?
29
Symbolic Representation of Capitalist Process
Step 1: M – C
The capitalist exchanges
M (money)
for
C (commodities: means of
production and labor power)
30
Symbolic Representation of Capitalist Process
Step 2: C – C’
c’ is the final product of the production process.
NOT AN EXCHANGE.
Production process
(labor process)
prereq: capitalist has control
over production process.
31
Symbolic Representation of Capitalist Process
Step 3: C’ – M
exchange of final
product c’ for money m
prereq: someone is willing
and able to buy the final
product.
32
Why does the capitalist go to all this
trouble to start and end up with money?
Capitalists like to
produce things.
It is safer to invest their
wealth in production
than to keep it in the
form of money.
Capitalists want to
increase their wealth.
Capitalists like to sell
things.
33
Wealth of capitalist increases
the final M’ is greater
than the initial M.
34
What happens to M’?
The value of the used-up capital
goods is called depreciation.
The final M’, the money revenue, goes to:
1. Replace the money spent to hire workers
2. Replace the money spent on capital goods
that were used up on production
3. The part of M’ still remaining is profit.
Key point:
In capitalism, the surplus product
initially takes the form of profit.
35
How is the Profit Distributed?
Industrial profit
Commercial profit
Rent
Interest
36
Next:
read ch. 7 p. 132-141 &
ch.10 p. 207-220
class 9
capitalism +profits
2/9/22
Last Time
? Economic systems are defined
by their class relationships.
? Capitalism is a particular type of
class relationship between
those who use M to hire C and
those who use their labor time
to produce C’.
? Under capitalism, the surplus
product initially takes the form
of profit (M’-M).
2
main questions – today
? Why are capitalists
able to get profits?
? What determines
the profit rate?
? What could
disrupt profit
making?
3
Why do workers go to work for capitalists?
To meet someone who is
rich.
To be able to buy the
means of sustaining life.
To make a profit.
Every adult should work .
4
Worker’s aim is to be able
to obtain the means of
sustaining life.
Capitalists aim for profit.
5
Symbolic representation of the worker:
Exchange of labor power for
money wage.
Step 1: C – M
6
Symbolic representation of the worker:
Exchange of wage for
consumer goods.
Step 2: M – C
Profit does not enter this
process.
7
Simple Model of
Capitalism
1.
2.
3.
Only 2 groups, productive capitalists
and workers.
All workers are identical and are
paid the same wage.
No government or foreign trade.
8
Simple Model of
Capitalism
TP = value of total output per year
D = depreciation (value of capital goods used up per
year)
Y = net output = TP – D
W = total wages paid per year
L = labor hours worked per year
y = net output per hour worked = Y/L
w = wage per hour worked = W/L
P = total profit received per year
9
Simple Model of
Determination of profit:
Capitalism
P = TP – D – W
P = Y– W
TP = value of total output per year
D = depreciation (value of capital
goods used up per year)
Y = net output = TP – D
P/L = Y/L – W/L
W = total wages paid per year
P /L = y – w
L = labor hours worked per year
y = net output per hour worked =
Y/L
w = wage per hour worked = W/L
P = (y – w)L
P = total profit received per year
10
P = (y – w)L
L = labor hours worked per year
y = net output per hour worked = Y/L
w = wage per hour worked = W/L
P = total profit received per year
Profit is determined by the relation
among y, w, and L:
What determines y?
What determines w?
What determines L?
Technology
Human biology
Power relations
Power relations
Power relations
Custom
Custom
Capitalists get profit because y is greater than w.
Power relations and technology play an important role in keeping
y above
w.
11
Where does this power come from?
A right to coerce workers or control a worker’s
choice to labor
? Capitalists own the means of production.
? Capitalists are rich
they have an
advantage in class struggle over the wage and
labor intensity.
? Capitalism normally has unemployment
12
Alternatives to Unemployment to
Secure Profit for Capitalists
State represses labor
unions or imposes wage
controls.
The strikers were banned from working for the federal
government until President Clinton reversed the ban in
1993.
Some faced jail time and
fees for participating.
In 1981, President Reagan fired over 11,000 air traffic controllers.
13
Alternatives to Unemployment to
Secure Profit for Capitalists
Capital-labor
compromise.
After WW2, most of
big capital informally
agreed to engage in
collective bargaining
with the trade unions.
https://digitalcollections.library.gsu.edu/digital/collection/
labor/id/1101
14
Mainstream
economic theories
of profit
1. Payment for
contributing capital
goods to production.
The capitalist
buys the capital
goods, why
would they
recover more
than their cost?
15
Mainstream
economic theories
of profit
2. Payment for
contributing money to
production.
Capitalists must postpone
consumption.
Capitalist is not
motivated by
consumption, but by
increasing wealth.
Capitalists consume
a lot even though
they are investing in
production.
16
Mainstream
economic theories
of profit
Active capitalists do
not appear to be risk
averse, but risk
seeking.
3. Compensation for risk.
Capitalists are risk averse and so will
not invest in production without
compensation for bearing risk.
Worker also takes
risk in production.
17
Uses of the surplus under
capitalism
1.
2.
3.
4.
5.
6.
Consumption by capitalists
(and others who are not
producers or reproducers).
Build monuments.
Some government functions
(police and military).
Uses that increase the
Advertising.
quantity or quality of output
Lobbying.
in the future.
Investment.
18
Capital Accumulation
The use of some of the surplus product, or profit, to
increase the quantity or quality of output in the future by
1. Producing more capital goods
than are used up in production.
3. Developing new and better
products.
2. Developing superior
technologies.
4. Hiring a larger number of
workers.
These activities are called capital accumulation because
they increase the value of the capital owned by
capitalists.
19
Key Feature of Capitalism:
A powerful drive to accumulate.
‘’
“The bourgeoisie … has been the first to
show what man’s activity can bring
about. It has accomplished wonders far
surpassing Egyptian pyramids, Roman
aqueducts, and Gothic cathedrals…The
bourgeoisie cannot exist without
constantly revolutionizing the
instruments of production…The
bourgeoisie, during its rule of scarce one
hundred years, has created more
massive and colossal productive forces
than have all preceding generations
together.”
20
Why does capitalism have a
powerful accumulation drive?
Capitalists want to be richer.
Accumulation is necessary to win the
battle of competition.
A capitalist who does not accumulate is in danger of
becoming an ex-capitalist.
Same factors that explain profit maximization drive of capitalisms.
21
Education
One key factor in economic
growth does not result from
capitalists accumulating:
education of the labor force.
The state and other non-profit
institutions are the main
providers of education, mainly
financed by taxation.
22
Other outcomes of the competitive drive for
profit and accumulation:
Tendency to intensify or
prolong labor.
Mergers and acquisitions.
Effort to reduce wages.
Speculative investments.
Sales effort
(commercialization of society)
Undermining of other
economic systems.
Geographic expansion of capitalist economic activity across
national boundaries.
23
Economic crises
An interruption of the accumulation process, in which
output stagnates or declines for the whole economy.
? During an economic crisis, the
usual accumulation drive of
capitalism stops working
normally.
? Economic crises are a specific
phenomenon of capitalism.
24
Economic crises
25
Short-run Crises
? Often called a “business
cycle recession.”
? This type of crisis typically
lasts 6 months to 2 years
during which GDP declines.
? The normal working of a
capitalist economy will
eventually end this type of
crisis.
26
Long-run Crises
? Often called a “structural crisis.”
? This type of crisis is a period of many years in which GDP
growth and profits are below the normal levels and
unemployment is high.
? A long-run crisis is not resolved by the workings of a
capitalist economy.
? Resolving a long-run crisis requires structural changes
in capitalism (changes in institutions and class
27
relations).
Profit level
P = (y – w)L
The rate of profit (r)
can be expressed as:
r=
K= capital
Y = output
If r falls, it is because one
??
or the other ??
ratio falls.
r=
??
??
r=
Multiply both
sides by 1 (Y/Y)
28
?? = Share of profit in output
??
??
= output-capital ratio
??
Three causes of an economic crisis in
the political economy literature:
Underconsumption
Profit Squeeze
Over-Investment
29
Underconsumption
Underlying cause:
capitalists are
too strong to negotiate
wages with workers.
This occurs when capitalists have a lot of power over
workers.
? The high degree of capitalist power -> wages
stagnate or fall while profits keep rising.
? This causes a problem: Who will buy the rising
amount of goods?
? Result: A shortage of demand for output.
? Y/K falls -> r falls -> crisis
30
Profit Squeeze
Underlying cause:
Workers become too strong
for capitalists to obtain the
normal rate of profit.
If the economy expands rapidly enough and long
enough, all the available workers get jobs.
? With no (or very low) unemployment, workers’
bargaining power increases.
? Result: wages rise, reducing profit.
? Profits are “squeezed” by rising wages.
? P /K falls -> r falls -> crisis
31
Over-Investment
Underlying cause:
Unplanned nature
of capitalism
As capitalists accumulate, they increase the amount of
fixed capital (goods that last a long time, factories, office
buildings, machines).
? If they accumulate too fast, they can produce too
much fixed capital relative to total demand for
output.
? Result: the capitalists cannot use all of their
productive capacity.
? Y/K falls -> r falls -> crisis
32
Effects of Economic Crises
Increased unemployment hurts
workers.
Bankruptcies of weaker firms hurt
capitalists and independent producers.
Decline in tax revenues -> cutbacks in
public programs and services.
Inefficiency of coexistence of
unemployed workers, idle productive
capacity, and unmet needs.
Long-run crisis can have political
consequences – conflicts, repression,
war
33
Credits
Special thanks to all the people who made and
released these awesome resources for free:
? Presentation template by SlidesCarnival
? Photographs by Unsplash
35
class 10
economic crises
+ US capitalism
2/14/22
Last Class
? Built + analyzed a model of how profits are
determined.
? Discussed the role of power relationships in
determining the profit rate.
? Discussed neoclassical theories of profit.
? Defined capital accumulation + discussed why
capitalism has a powerful accumulation drive.
? Named outcomes of capitalism’s key
feature.
2
Review
? What is capital accumulation?
? Why is it a key feature of capitalism?
? What are the outcomes of the competitive
drive for profit and accumulation?
3
Other outcomes of the competitive drive for
profit and accumulation:
Tendency to intensify or
prolong labor.
Mergers and acquisitions.
Effort to reduce wages.
Speculative investments.
Sales effort
(commercialization of society)
Undermining of other
economic systems.
Geographic expansion of capitalist economic activity across
national boundaries.
4
Today
? General concepts:
? Why do crises occur in capitalism?
? Specific concepts:
? How did capitalism develop in the United
States?
? What features does it have?
5
Economic crises
An interruption of the accumulation process, in which
output stagnates or declines for the whole economy.
? During an economic crisis, the
usual accumulation drive of
capitalism stops working
normally.
? Economic crises are a specific
phenomenon of capitalism.
6
Economic crises
7
Short-run Crises
? Often called a “business
cycle recession.”
? This type of crisis typically
lasts 6 months to 2 years
during which GDP declines.
? The normal working of a
capitalist economy will
eventually end this type of
crisis.
8
Long-run Crises
? Often called a “structural crisis.”
? This type of crisis is a period of many years in which GDP
growth and profits are below the normal levels and
unemployment is high.
? A long-run crisis is not resolved by the workings of a
capitalist economy.
? Resolving a long-run crisis requires structural changes
in capitalism (changes in institutions and class
9
relations).
Profit level
P = (y – w)L
The rate of profit (r)
can be expressed as:
r=
K= capital
Y = output
If r falls, it is because one
??
or the other ??
ratio falls.
r=
??
??
r=
Multiply both
sides by 1 (Y/Y)
10
?? = Share of profit in output
??
??
= output-capital ratio
??
Three causes of an economic crisis in
the political economy literature:
Underconsumption
Profit Squeeze
Over-Investment
11
Underconsumption
Underlying cause:
capitalists are
too strong to negotiate
wages with workers.
This occurs when capitalists have a lot of power over
workers.
? The high degree of capitalist power -> wages
stagnate or fall while profits keep rising.
? This causes a problem: Who will buy the rising
amount of goods?
? Result: A shortage of demand for output.
? Y/K falls -> r falls -> crisis
12
Profit Squeeze
Underlying cause:
Workers become too strong
for capitalists to obtain the
normal rate of profit.
If the economy expands rapidly enough and long
enough, all the available workers get jobs.
? With no (or very low) unemployment, workers’
bargaining power increases.
? Result: wages rise, reducing profit.
? Profits are “squeezed” by rising wages.
? P /K falls -> r falls -> crisis
13
Over-Investment
Underlying cause:
Unplanned nature
of capitalism
As capitalists accumulate, they increase the amount of
fixed capital (goods that last a long time, factories, office
buildings, machines).
? If they accumulate too fast, they can produce too
much fixed capital relative to total demand for
output.
? Result: the capitalists cannot use all of their
productive capacity.
? Y/K falls -> r falls -> crisis
14
Effects of Economic Crises
Increased unemployment hurts
workers.
Bankruptcies of weaker firms hurt
capitalists and independent producers.
Decline in tax revenues -> cutbacks in
public programs and services.
Inefficiency of coexistence of
unemployed workers, idle productive
capacity, and unmet needs.
Long-run crisis can have political
consequences – conflicts, repression,
war
15
rise of capitalism
in the U.S.
Origins of Capitalism
? Capitalism first appeared in the 1300s in northern
Italian city-states – it did not last long
? Capitalism did not become a well-established
system until the 1600s in England
? Capitalist development in the US came later.
17
US Economy at the end of the Colonial
Period
Independent Commodity Production
This was the dominant system in the
north.
Slave System
This was the dominant system in the
south.
18
Independent Commodity