economy, society, and public policy: unit 1 affluence, inequality, and the environment · unit 1...

UNIT 1

CAPITALISM: AFFLUENCE,INEQUALITY, AND THE

ENVIRONMENT

INTRODUCTION

• Beginning 250 years ago, a new economic system—capitalism—hasbrought affluence to large numbers of people across the world.

• This was possible because under this new way of organizing the eco-nomy, advances in technology and increasing specialization raised theamount that could be produced in a day’s work.

• This process—the capitalist revolution—has been accompanied bygrowing threats to our natural environment, and by unprecedentedglobal economic inequalities.

• In many countries, unequal access to growing affluence led to socialunrest and demands for democracy.

• Democracy—a new political system—brought greater political equalityamong the citizens of many of the countries that adopted it.

• Democracy has thus far not as successfully addressed the problems ofenvironmental sustainability.

Cyril Ramaphosa, the president of South Africa, was born in 1952, in Soweto.At that time Soweto was a poor township whose black residents were notallowed to live in nearby Johannesburg. Under the apartheid system of racialsegregation, because he was black, he was excluded from the best schools,healthcare, and even public bathrooms. He had no right to vote.

In 2012, the year Ramaphosa became deputy president of South Africa, hehad become the 29th-richest person in Africa, worth more than $700 million.

Under apartheid, in South Africa’s version of a capitalist economy,whites owned the mines, factories and farms that made it the richestcountry in the continent. Black families’ income per head was a tenth ofthat of white families, and had been stuck there for 50 years whenRamaphosa became general secretary of the National Union ofMineworkers in the late 1980s.

Resistance to apartheid was brutally repressed by the powerful whiteminority. At this time the leader of the African Nation Congress (nowSouth Africa’s largest political party), which had been banned, was Nelson

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Figure 1.1 Apartheid and its demise: The value of South Africa’s old age pension.

Murray Leibbrandt, Ingrid Woolard,Arden Finn, and Jonathan Argent. 2010.‘Trends in South African Income Distribu-tion and Poverty since the Fall ofApartheid’ (http://tinyco.re/8617393),OECD Social, Employment and MigrationWorking Papers, No. 101, OECDPublishing, Paris. Note: The names of thepopulation groups are the official SouthAfrican census terms. ‘Coloured’ is theSouth African term meaning people ofmixed European, Asian and Africanorigin.

Mandela. Later he was to become president, but at this time he was servinga life sentence in prison.

As leader of the mineworkers’ union, Ramaphosa was part of a wave ofstrikes and community protests in the mid- and late-1980s that convincedmany white business owners that apartheid had to go. Eventually, the gov-ernment conceded defeat, releasing Mandela from prison.

Democracy, bringing the same legal rights, including voting, to people ofall races, came late to South Africa. In 1994, South Africa’s first democraticelection made Mandela President. Ramaphosa was elected to parliament.

What economic changes have followed?Ramaphosa’s skills as a strategist and organizer served him well in the

business world, now open to all races. He became a major owner of SouthAfrican companies, including McDonalds.

Abolishing a racially segregated political system had some obvious bene-fits for the poor. Figure 1.1 shows how the size of the South African publicold age pension received by different groups changed over the last 50 years.In 1970, for example, the pension received by a white person was more thanseven times that received by a black African person. By the beginning of1993, just before the first democratic election, all race-based distinctions inpension policy were abolished.

The transition to a democratic political system led to economic gains forthe black population. Old age pensions were equalized. For the first time,black workers were paid for their skills, which raised their wages.Schooling and healthcare were desegregated. Piped water and electricitybecame available to many more families. In many areas of the lives of SouthAfricans, the indignities of racial exclusion became a thing of the past.

You might also assume that South Africa has become economically moreequal. But what does this mean?

Someone who argued that this was true would point out that differencesbetween the major population groups declined. So, if you took the typicalincome of a black citizen, it would be closer to that of a typical colouredcitizen, which would be closer to that of a typical white citizen.

UNIT 1 CAPITALISM: AFFLUENCE, INEQUALITY, AND THE ENVIRONMENT

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http://tinyco.re/8617393



Figure 1.2 World income distribution in 2014: Countries are ranked by GDP percapita from left to right. For each country the heights of the bars show averageincome for deciles of the population, from the poorest 10% in the front, to therichest 10% at the back. The width of the bar indicates the country’s population.

GCIP 2015. Global Consumption andIncome Project (http://tinyco.re/8468009). Bob Sutcliffe designed therepresentation of global inequality inFigure 1.2. A first version was publishedin: Robert, B Sutcliffe. 2001. 100 Ways ofSeeing an Unequal World. London: ZedBooks. See the interactive version of thisgraph on the Globalinc website(http://tinyco.re/7434364).

But inequalities within these groups increased dramatically. Ramaphosa’spersonal journey from township to wealth is an extreme example. If weignore race completely, 15 years after the end of apartheid, overall inequal-ity among families in South Africa was higher—and amongst the highest inthe world—than it had been under white rule.

The arrival of democracy with the abolition of apartheid, meant thatmeasured by their political rights all South Africans became equal. But,when we measure what happened to incomes, the population has becomeless equal. The gap between the rich and the less well off had grown.

Extending our view beyond South Africa, we ask how a new economicsystem, capitalism, brought with it affluence, inequality, and threats toenvironmental sustainability as it spread across the world in the last twohundred and fifty years. And how the much later emergence of democracyboth reflected and altered the changes wrought by capitalism. We beginwith a way to represent affluence and inequality across the world bymeasuring average incomes. You can place yourself in this three-dimensional visualization of the world.

1.1 AFFLUENCE AND INCOME INEQUALITY

Measuring inequalityWe know inequality when we see it—look at the unequal scenes(https://tinyco.re/5399771) in different parts of the world captured byflying a drone. We can guess that some countries or societies are moreunequal than others. The drone’s eye view dramatizes this by showing veryrich and very poor neighbourhoods side by side. To be confident in makingcomparisons of incomes within and between countries and at differentperiods of time, we use statistics.

Using statistics, we can measure inequality in many ways, but one ofthe most common is to rank everyone in the world by income, from therichest to the poorest. When we do this, we can organize the informationto get Figure 1.2.


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https://tinyco.re/5399771







gross domestic product (GDP) percapita A measure of the marketvalue of the output of the economyin a given period (GDP) divided bythe population.

purchasing power parity (PPP) Astatistical correction allowingcomparisons of the amount ofgoods people can buy in differentcountries that have differentcurrencies. See also: constantprices.

This is a 3D visualization of global inequality, which we will call the‘skyscraper’ figure. Countries in the world are lined up from poorest on theleft, to richest on the right. For each country, the average income of thepoorest 10% is the low bar in the front. The average income of the richest10% is the higher bar for that country at the back. The width of the barcorresponds to the population.

Take China, for example. Its block is wide because of its large popula-tion. Because countries are ordered by average income, the countriesimmediately to its left and right have similar average incomes. But somehave taller skyscrapers at the back, meaning a greater disparity between thetop 10% and the rest of the population, whereas others have a less steepprofile. China is coloured red, but its neighbours are yellow and green. Weexplain how the countries got their colours in Figure 1.2a, below.

Measuring incomeWhen we measure something in the real world by applying a rule or set ofrules to data, the number we get is a known as a statistic. The mostcommon statistic used to measure incomes is called GDP per capita, and it’swhat we used to construct Figure 1.2.

People earn their incomes by producing and selling goods (these arethings you can touch, like a loaf of bread) and services (which you can’ttouch, but which you buy, like Internet access). Gross Domestic Product(GDP) is the total value of all the goods and services produced in acountry in a given period, such as a year. To get GDP per capita, we divideGDP by the population of the country. GDP per capita is a measure ofaverage annual income.

No statistic shows the whole truth, and there are other ways to measureincome (tax records, for example). There are also other ways to measureliving standards (such as the wage of the person halfway up the income dis-tribution). But GDP per capita has one big advantage: statisticians havecalculated it using the same rules for many countries and over long periodsof time, sometimes using historical records that go back for centuries.

But, to make Figure 1.2, we also had to do another calculation, whichis to adjust GDP per capita so that we can compare countries. We used atechnique called purchasing power parity, or PPP for short. Figure 1.2uses US dollars at 2005 prices at PPP. This adjusts the statistic to reflectwhat $1 will buy in the local shops, even after it has been changed intolocal currency.

You might think that measuring only what people earn rather than whatthey own, and only what money can buy, doesn’t tell the whole story ofaffluence and inequality. You are right, and in Unit 3 we look at other waysthis can be done.


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Dissecting the skyscraper figureIn Figure 1.2a, we’ve taken two extreme cases. On the right-hand end isSingapore with the highest GDP per capita of the countries shown. Towardthe left end, we look at Niger. We can see how income is distributed withineach of these countries. Recall, the income of the poorest 10% is the heightof the front bar, then the next 10%, and so on. It’s easy to compare incomesof the rich and poor using this data. We show this in a table, because thebars for Niger are all very low:

Rich (top 10%) Poor (bottom 10%) Rich/Poor

Niger 3,453 92 37.5

Singapore 67,436 3,652 18.5

This shows that income inequality in Niger is much higher than it is inSingapore, because the gap between the richest and poorest groups is twiceas large in Niger.

Two things are clear from the 2014 distribution. First, differencesbetween the rich and the poor are huge within every country—the rich havemuch more than the poor. And secondly, there are huge differences inincome between countries.

Inequality within countriesWe can use the difference in height between the front and back bars as onemeasure of inequality in a country. It is called the 90/10 ratio, for obviousreasons. As we saw, for Singapore it was 18.5.

Using this ratio, we can rank countries by how unequal they are in 2014.In this list, even Norway—one of the world’s most equal countries—ispossibly less equal than you imagined.

Rich Poor 90/10 ratio

Botswana 24,523 169 145

Nigeria 4,449 203 22

India 4,446 223 20

US 60,418 3,778 16

Norway 45,302 8,325 5.4

Inequality between countriesNorway might be the most equal country on this list, but the averageincome in Norway is 19 times the average income in Nigeria. And thepoorest 10% in Norway receive on average almost twice the income of therichest 10% in Nigeria.

This was not always the case. A thousand years ago, the world was flat,economically speaking; although there were differences in incomebetween the regions of the world, the differences were small compared towhat was to follow.


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Figure 1.2a Dissecting the global income distribution1. Singapore and NigerThe average income of the poorest 10%to the richest 10% of the population areshown for Niger and Singapore atopposite ends of the global income dis-tribution.

2. SkyscrapersThe skyscraper bars in the back right-hand side of the figure are the richest10% in some of the richest countries.

3. World income distribution in 1980The poorest countries, coloureddarkest red, were Lesotho and China.The richest (darkest green) wereSwitzerland, Finland and the US. At thattime, the skyscrapers were not as tall asthey would become by 2014; the differ-ences between the richest 10% and therest of a country’s population were notas pronounced.

4. World income distribution in 1990You can see that some countrieschanged their ranking between 1980and 1990. China (dark red) is nowricher. Some taller skyscrapers haveappeared; in other words, inequalityincreased in many countries during the1980s. See the interactive figure(https://tinyco.re/9553483) to find indi-vidual countries, for example, toidentify the country with the highestskyscraper.

5. World income distribution in 2014By 2014, many countries had changedtheir ranking. China had grown rapidlysince 1990. But the countries that wererichest in 1980 (darkest green) werestill near the top in 2014.

6. Inequality within countries has risenIncome distributions have becomemore unequal in many of the richercountries; some very tall skyscrapershave appeared. In the middle-incomecountries, too, there is a big step up atthe back of the figure; the incomes ofthe richest 10% are now high relative tothe rest of the population. CompareChina in 1980 and 2014.

7. SkyscrapersNorway and the US in 2014. As you cansee, Norway has the second highestGDP per capita, but does not have aparticularly tall skyscraper; this isbecause income is more evenlydistributed in Norway than in someother rich countries.


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Figure 1.3 Gross domestic product per capita in five countries (1000–2015).

Jutta Bolt and Jan Juiten van Zanden.2013. ‘The First Update of the MaddisonProject Re-Estimating Growth Before1820’ (http://tinyco.re/4974590).Maddison-Project Working Paper WP-4(January). Stephen Broadberry. 2013.Accounting for the great divergence(http://tinyco.re/9958123). 1 November.Conference Board, The. 2015. Total Eco-nomy Database (http://tinyco.re/1587851)

If you have never seen anice-hockey stick (or experienced icehockey (https://tinyco.re/5637337))this shape is why we call thesefigures ‘hockey-stick curves’.

Recall that GDP per capita has the advantage of being able to usehistorical records in its calculation. We have used these figures to create theline graph in Figure 1.3. A line graph is a chart that shows the behaviour ofa particular variable or variables over time. The height of each line is anestimate of average income at the date on the horizontal axis.

It helps us to understand the big differences between countries today.Some countries—Britain, Italy and Japan in this figure—‘took off’ eco-nomically before 1900. They (and countries like them) are far to the right,at the richer end of the skyscraper in Figure 1.2.

But this happened recently. All countries spent most of the last thousandyears in the flatlands to the left. If you want to know more, watch the shortvideo by Hans Rosling, a statistician. It presents an animated picture of theprocess by which the world became so unequal, with some countries takingoff and others being left behind.

EXERCISE 1.1 INEQUALITY IN THE FOURTEENTH CENTURYWhat do you think a ‘skyscraper’ figure like Figure 1.2 (page 3) would havelooked like in the fourteenth century)?

Hans Rosling’s 200 Countries, 200Years, 4 Minutes—The Joy of Statshttp://tinyco.re/3761488


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Figure 1.4 Income data and the 90/10 ratio.

EXERCISE 1.2 USING EXCEL: INCOME DATA AND THE 90/10 RATIOYou can see the interactive graph and download an Excel spreadsheet ofdata that we used to create Figure 1.2 by going to the Globalinc website(https://tinyco.re/9553483) and clicking ‘xlsx’ where it says, ‘You can alsodownload the data here …’.

Choose five countries that you are interested in.

1. For each one, calculate the 90/10 ratio in 1980, 1990 and 2014. (Followthe step-by-step instructions in the walk-through in Figure 1.4 on howto do this in Excel.)

2. Describe the differences you find between countries and the changesover time.

3. Can you think of any explanations for these differences?

1. The dataThis is what the data looks like. Column A contains country names, Column Bcontains the year, and Columns C to L contain the average income in eachdecile. Column M contains the mean income in the population, which is themean of Columns C to L.


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2. Filter the data to see only the country/countries we needTo make the data easier to work with, we will apply a filter so we only see thedata we need. We will filter according to the country names, given in Column A.

3. Filter the data to see only the country/countries we needAfter completing step 5, only the data for your selected country/countries isshown in the spreadsheet. Data for the other countries is still there, but hidden.


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4. Filter the data to see only the years we needAfter completing step 6, our spreadsheet should look similar to the exampleabove, with only the countries and years you are interested in.

5. Calculate the 90/10 ratio for one rowWe will calculate the 90/10 ratio in a new column. Rather than calculatingratios manually, you can enter the calculation as a cell formula so Excel will doit for you.


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6. Repeat this calculation for the rest of the rowsTo calculate the 90/10 ratio for other years, instead of re-typing in the sameformula again and again, you can copy the first formula to other cells.

7. Round the calculated values to 1 decimal placeCurrently the calculations are not rounded to a given number of decimal places.To change the number of decimal places shown, we need to reformat the cells.


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8. Round the calculated values to 1 decimal placeAfter step 15, the cell values will be displayed to 1 decimal place. Excel stillstores the full number, but only shows the number of decimal places youspecified.

9. The final productThe calculated 90/10 ratios are now rounded to 1 decimal place.


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EXERCISE 1.3 USING EXCEL: LOOKING AT INCOME DISTRIBUTIONSYou will be using the same data as in Exercise 1.2 (https://tinyco.re/9553483) to understand the difference between the mean and the median.Follow the walk-through in Figure 1.5 on how to do the Excel parts of thisexercise.

Choose one country from this list (which we will refer to as Country A):Czech Republic, Finland, Netherlands, Norway, or Slovenia. Now chooseone country from this list (we refer to this as Country B): Botswana, CentralAfrican Republic, Haiti, Jamaica, or Lesotho.

1. In Excel, filter the data so that only rows corresponding to these coun-tries in 2014 appear.

2. The median is the 50th percentile (or Decile 5). You can think ofeveryone in the population lining up according to income, and pickingthe person who is right in the middle of the line. What is the medianincome in Country A? How about in Country B?

3. Suppose that the income in Decile 10 changed to $1 million. Would themedian in either country increase, decrease, or stay the same? Why?

4. Plot a separate vertical bar chart (called a column chart in Excel) forCountry A and Country B, showing the decile on the horizontal axis andincome on the vertical axis. The mean is a summary statistic that wecalculate by adding all values and dividing by the number of values.You can think of the mean as what would happen if everyone in theircountry brought their income to the same place, and all the money wasput in a pile, and the money was then shared equally betweeneveryone. The amount that each person got would be the mean.

5. Look at the bar charts from Question 4. In which decile would you guessthat the mean amount would fall? Verify that your answer is similar tothe mean income reported in Column M.

6. Column M (labeled ‘Mean Income’) shows the mean of Columns C to L.In a new column, calculate the mean using the AVERAGE function inExcel and verify that your answer is the same (rounded to the nearestdollar).

7. Suppose that the income in Decile 10 changed to $1 million. Would themean income in either country increase, decrease, or stay the same?Why? Verify your answer in Excel by changing the value in the cells forDecile 10 and calculating the mean income.


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Figure 1.5 Mean and median, and bar chart.1. The dataWe are using the same data as in Workout 1.2. Column A contains countrynames, Column B contains the year, and Columns C to L contain the averageincome in each decile. Column M contains the mean income in the population,which is the mean of Columns C to L. In this example, we have filtered the datato show the income deciles for our chosen country – Finland, in 2014. (See Exer-cise 1.2 for how to do this).

2. Draw a column chartYour column chart will look similar to the chart shown above, with income onthe vertical axis and decile number (1 to 10) on the horizontal axis.


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3. Add axis titles and a chart titleExcel’s ‘Add Chart Element’ allows you to add axis titles and a chart title.

4. Calculate the mean incomeExcel’s AVERAGE function will calculate the mean of the selected cells.

Comparing income at different times, and across differentcountriesThe United Nations collects and publishes estimates of GDP(https://tinyco.re/5263669) from statistical agencies around the world. Wehave used these statistics in Figure 1.2. We use these statistics, along withthose made by economic historians, to construct charts like Figure 1.3,which compares living standards across countries and at different timeperiods, and looks at whether the gap between rich and poor countries hasnarrowed or widened over time. Before we can make a statement like, ‘Onaverage, people in Italy are richer than people in China, but the gap betweenthe countries is narrowing,’ statisticians and economists must try to solvethree problems:


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constant prices Prices correctedfor increases in prices (inflation) ordecreases in prices (deflation) sothat a unit of currency representsthe same buying power in differentperiods of time. See also:purchasing power parity.

purchasing power parity (PPP) Astatistical correction allowingcomparisons of the amount ofgoods people can buy in differentcountries that have differentcurrencies. See also: constantprices.

• What do we want to measure? We need to separate these things—changesor differences in amounts of goods and services produced—from thingsthat are not relevant to the comparison, especially changes or differencesin the prices of the goods and services.

• How did prices change over time? When investigating how output changedin one country, we need to know the differences in prices in thatcountry at two points in time.

• What are the differences in prices between two countries? When comparingoutput in this way, we need to know the prices in both places at the sametime.

Notice how similar the last two statements are, because the challenge issimilar. This is to find a set of prices to use in these calculations that willallow us to identify changes or differences in outputs, without making themistake of assuming that, for example, if the price of something rises in onecountry but not in the other, then the amount of output has increased in thefirst country and not in the second one.

To deal with these problems and allow comparisons to be made,statisticians use adjusted data that measures output in:

• constant prices to deal with changes in prices over time and at• purchasing power parity (PPP) prices, as we used in the skyscraper

figure, to enable comparisons across countries. Read ‘What Is aPurchasing Power Parity?’ (https://tinyco.re/6874533) for a step-by-stepexplanation of how measures of GDP are constructed to allow countriesto be compared.

1.2 ECONOMIC GROWTHBetween the years 1000 and 1600 in Figure 1.3, it’s hard to see what’s goingon. The graph uses a ‘linear’ scale—this means that each ‘unit’ on the ver-tical axis represents the same amount (each $1,000 of income is representedby the same distance on the vertical axis).

In some ways, this scale doesn’t represent the experience of real peoplewell. For example, if you are in the poorest 10% in Niger and you earn anextra $1,000, your income is now $1,092. Your life is transformed. If you’rein the poorest 10% in Singapore, and you earn an extra $1,000, your incomeis now $4,652. Your life is better, but mostly the same, because $1,000 is asmaller proportion of what you earn already.

Another way of looking at the data in Figure 1.3 is to consider, not justby how much income has grown over these years, but also how fast it hasdone so—in other words, the rate at which it has grown.

Calculating growth ratesIn the media, you may have seen headlines about GDP growth, such as‘Country A’s economy grew by 2% in 2016–2017’ or ‘Country B reports aGDP growth rate of 5% this year’. How do economists calculate thesefigures?

1.2 ECONOMIC GROWTH

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The GDP growth rate is the percentage change in GDP from one year tothe next. National statistics agencies usually publish annual GDP data, whichis an estimate of GDP, measured at the end of every year. Using this data, wecan calculate the annual growth rate of GDP in Year t (let’s call it gt) as:

Example: If GDP at the end of this year was $3 billion, and GDP at the end oflast year was $2.8 billion, then the annual growth rate of GDP this year is:

As before, a $1 billion increase in a country’s GDP would be very large ifGDP was $3 billion, but not if GDP was $300 billion. For this reason,percentage changes allow us to compare GDP growth of a country in dif-ferent years. That’s why we use percentages. If GDP per capita in Country Agrew by 1% compared to 2% in Country B, we can say that Country B’s eco-nomy grew faster than Country A’s.

When we see growth reported, it is often reported as the average rateduring a period of years. For example, knowing that GDP per capita inChina grew by an average of 2.97% per year between 1952 and 1978, and8.12% between 1978 and 2007, is much more useful than knowing thenumber in any year. Calculating this statistic involves more advancedmathematics. If you want to learn how to work this out, see the ‘Find outmore: Compound growth rates’ below. The ‘Find out more: The rule of 70for growth rates’ gives a simple rule of thumb that lets you calculate howmany years it takes for GDP per capita to double when you know thecompound growth rate.

FIND OUT MORE

Compound growth ratesOnce we’ve calculated the annual growth rate for a particular year, howcan we tell if the country’s economy has grown faster or slower thanusual? One way is to compare the annual growth rate with the averageannual growth rate (known as the compound annual growth rate orCAGR) over a given time period. For example, if real GDP per capitagrew by 1% this year, but on average it grew by 2% over the period1950–2010, then we can say that the economy’s growth performancethis year is below average.

To calculate the compound annual growth rate, we do not takeaverages, but instead use the principle of compounding. We usuallycalculate compound annual growth rates over long periods, such asdecades. As the example below shows, failing to account forcompounding would give vastly different growth rate figures.


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Example: If GDP per capita was $12,800 in 1950 and $42,300 in2011, then the compound annual growth rate (CAGR) over these 61years is:

If we instead take the average of the growth rate, then we would get:

In this example, failing to account for compounding gives an answer thatis almost twice as large as the actual annual growth rate.

FIND OUT MORE

The rule of 70 for growth ratesCalculations involving compound growth rates are difficult to domentally, but there is a handy rule of thumb that we can use for oneparticular situation. If the economy is growing at a constant rate, thenumber of years it will take for GDP per capita to double isapproximately 70 divided by the annual growth rate:

For this reason, we refer to this approximation as the ‘rule of 70’. Therule of 70 is useful if we are looking at growth rates over long periods oftime, in which case the number in the denominator is the compoundannual growth rate.

Example: If the compound annual growth rate of GDP per capita is 2%,then it would take approximately 70/2 = 35 years for GDP to double.

If GDP per capita was growing more slowly at a rate of 1%, then itwould take approximately 70/1 = 70 years for GDP per capita to double.

OPTIONAL EXERCISE 1.3.1 USING EXCEL: CALCULATING COMPOUNDGROWTH RATESDownload and save the spreadsheet (https://tinyco.re/4744778) containingsome of the GDP data used to make Figure 1.3.

1. Calculate the CAGR for China, Britain, Italy, and India over the years1950–2011. Follow the walk-through in Figure 1.6 on how to do this inExcel.

1.2 ECONOMIC GROWTH

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Figure 1.6 Calculating CAGR in Excel.1. The dataShown above is an excerpt of the data. In this example, we are using data fromJapan for the years 1950–2011. Column A contains years, and Column Bcontains GDP per capita values.

2. Calculate the difference in yearsFor the CAGR calculation, we need the values for GDP per capita, and the differ-ence in years (end year minus start year).


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ratio scale A scale that uses ratiosto represent distance. For example,the ratio between 3 and 6, andbetween 6 and 12, is the same (thelarger quantity is twice thesmaller). This contrasts with alinear scale, where the distancebetween 3 and 6, and between 6and 9, is the same (3). See also:linear scale.

3. Calculate the CAGRTo calculate the CAGR, we will type the CAGR formula from ‘Find out more:Compound growth rates’ into Excel, using the cells containing GDP values in1950 and 2011.

2. For each of these four countries, find the approximate number of years(rounding up) that it took for GDP to double its 1950 value.

Example: In Japan, GDP was 1920.72 in 1950. Scrolling down thespreadsheet, we can see that GDP was 3986.43 in 1960, which isapproximately double the value in 1950. Therefore, it took Japanroughly 10 years for GDP to double its 1950 value.

3. Use the rule of 70 and the CAGR from Question 1 to calculate theapproximate number of years required for GDP to double. Check thatthese numbers are close to your answer to Question 2.

A ratio scaleWe can directly compare growth rates across countries over time if we plotthe same hockey stick data using a different scale on the vertical axis. InFigure 1.3, the scale went from 10,000 to 15,000 to 20,000 etc. by adding5,000 at each step. Instead, in Figure 1.7, we go from 500 to 1,000 to 2,000,to 4,000 by doubling the number at each step. This is called a ratio scale. Ifyou find this description confusing, just compare the numbers on the ver-tical axis of Figure 1.3 with those in Figure 1.7. Remember that we are usingexactly the same data in each of these figures.

We say that the ratio scale captures growth rates. Why?With the ratio scale, if GDP grows by the same percentage every year,

or every 100 years, the graph will be a straight line. So, if GDP doublesevery 100 years, the line would be straight, sloping upwards. If, insteadof doubling, the level quadrupled every 100 years, the line would still bestraight, but it would be twice as steep. We say the growth rate was twiceas high.

So, with a ratio scale:

• A straight line means a constant growth rate.• A steeper line means a faster growth rate.

1.2 ECONOMIC GROWTH

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Using the ratio scale, we can immediately see something that was notobvious in Figure 1.3—when the hockey stick turns up, the lines for thelatecomers Japan and China are much steeper than was the case in Britainor Italy. This means that their growth rates have been much faster.

Figure 1.7 History’s hockey stick: Living standards in five countries (1000–2015)using the ratio scale.

Jutta Bolt and Jan Juiten van Zanden.2013. ‘The First Update of the MaddisonProject Re-Estimating Growth Before1820’ (http://tinyco.re/4974590).Maddison-Project Working Paper WP-4(January). Stephen Broadberry. 2013.Accounting for the great divergence(http://tinyco.re/9958123). 1 November.Conference Board, The. 2015. Total Eco-nomy Database (http://tinyco.re/1587851).

1. History’s hockey stickThere were cultural changes andscientific advances in many parts of theworld over the entire period shown inthe figure, but living standards onlybegan to rise in a sustained way fromthe eighteenth century (1700–1799)onwards. The figure looks like a hockeystick, and our eyes are drawn to thekink.

2. Before 1800, we have lessinformation and so there fewer datapoints (dots) in the graphFor the period before 1800, we haveless information about GDP per capita,which is why there are fewer datapoints in that part of the figure.

3. A line is drawn through the datapointsFor each country the data points shownat the previous step have been joinedwith straight lines. Before 1800, wecan’t see how living standardsfluctuated from year to year.

4. BritainThe hockey-stick kink is less abrupt inBritain, where growth began around1650.

5. JapanIn Japan, the kink is more defined,occurring around 1870.

6. China and IndiaThe kink for China and India happenedin the second half of the twentiethcentury (post-1950). GDP per capita fellin India under British colonial rule fromthe early seventeenth century until themid-nineteenth century. (An evensharper decline took place in Chinafrom the beginning of the sixteenthcentury until the Chinese revolutionended the domination of China’spolitics and economics by Europeannations).

7. Compare growth rates in China andJapanThe ratio scale makes it possible to seethat recent growth rates in Japan andChina were higher than elsewhere.


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EXERCISE 1.4 USING EXCEL: INTERPRETING GRAPHS DRAWN USING ARATIO SCALEFigure 1.3 (page 8) used a conventional scale for the vertical axis, andFigure 1.7 used a ratio scale.

1. For Britain, identify a period of time when its growth rate wasincreasing, and another period in which its growth rate was roughlyconstant. Which figure did you use, and why?

2. Identify a period during which GDP per capita in Britain was shrinking(a negative growth rate) faster than in India. Which figure did you useand why?

3. Advanced: if you studied the optional ‘Find out more: Compoundgrowth rates’ (page 18), use Figure 1.7 to identify whether Britainbetween 1800 and 1900 or Japan between 1900 and 2000 grew at afaster rate. Use the GDP data for Figure 1.3 (https://tinyco.re/4744778)to calculate the CAGR for Britain over the period 1800–1900, and forJapan over the period 1900–2000, and use these calculated growthrates to verify your answer.

QUESTION 1.1 CHOOSE THE CORRECT ANSWER(S)CHOOSE THE CORRECT ANSWER(S)The GDP per capita of Greece was $22,494 in 2012 and $21,966 in 2013.Based on these figures, the growth rate of GDP between 2012 and 2013(to two decimal places) was:

–2.40%2.35%–2.35%–0.24%

What influences growth and inequality?From Figures 1.3 and 1.4, we learned three things about growth andinequality:

• For a very long time, living standards did not grow in any sustained way,anywhere.

• In some countries—India and China notably—per-capita income fellover long periods.

• When sustained growth occurred, it began at different times in differentcountries. It happened first in Britain, then in Japan and China (thoughat different rates), and finally in India and China. This led to vast differ-ences in living standards around the world, as Hans Rosling’s videoshowed.

Why were there leaders and laggards?

1.2 ECONOMIC GROWTH

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QUESTION 1.2 CHOOSE THE CORRECT ANSWER(S)CHOOSE THE CORRECT ANSWER(S)The following graphs show the GDP per capita of four countries,plotted according to the linear scale and ratio scale respectively.

Figure 1.8 GDP per capita: Linear scale.

Figure 1.9 GDP per capita: Ratio scale.

Based on this information, which of the following statements arecorrect?

Country B’s GDP per capita grew at a constant rate.Over the 10 years shown, Country A’s GDP per capita grew at thefastest rate, on average.Over the 10 years shown, Country D’s GDP per capita grew at theslowest rate, on average.Country C’s GDP per capita grew at a constant rate.


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economic system The institutions that organize the productionand distribution of goods and services in an entire economy.capitalism An economic system in which private property,markets, and firms play an important role.political system A set of principles, laws, and procedures thatdetermine how governments will be selected, and how thosegovernments will make and implement decisions that affect allor most members of a population.democracy A political system, that ideally gives equal politicalpower to all citizens, defined by individual rights such asfreedom of speech, assembly, and the press; fair elections inwhich virtually all adults are eligible to vote; and in which thegovernment leaves office if it loses.government Within a given territory, the only body that candictate what people must do or not do, and can legitimatelyuse force and restraints on an individual’s freedom to achievethat end. Also known as: state.

In some economies, as illustrated in Figure 1.7, substantialimprovements in people’s living standards did not occur until they gainedindependence from colonial rule or interference by European nations:

• India: According to Angus Deaton, an economist who specializes in theanalysis of poverty, when 300 years of British rule of India ended in1947: ‘It is possible that the deprivation in childhood of Indians … wasas severe as that of any large group in history’. In the closing years ofBritish rule, a child born in India could expect to live for 27 years. Fiftyyears on, life expectancy at birth in India had risen to 65 years.

• China: It had once been richer than Britain, but by the middle of thetwentieth century, GDP per capita in China was one-fifteenth that ofBritain.

• Latin America: Neither Spanish colonial rule, nor its aftermath followingthe independence of most Latin American nations early in thenineteenth century, saw anything resembling the hockey-stick upturn inliving standards experienced by the countries in Figures 1.3 and 1.4.

The emergence in the eighteenth century of a neweconomic system in Europe, called capitalism,encouraged a ‘permanent technological revolu-tion’. In the rest of this unit, we look at howcapitalism changed the world around us, and why,much later, it was followed by a new politicalsystem, democracy.

In the introduction, we saw how bothcapitalism and democracy influenced the lives ofSouth Africans in the twentieth century.

South Africa was (and is) a capitalist country,and its economy continued to grow, even duringapartheid, fueled in part by the mineworkers thatRamaphosa’s union represented. Whites benefiteddisproportionately. With the coming ofdemocracy, many expected that the benefits ofgrowth would be shared more equally. But weknow that some stayed poor, and some did a lotbetter. The relationship between capitalism anddemocracy, and how well the economy functions,is not simple.

As we move through the units, we will help you to see howgovernments can use well-designed policies to make economic outcomesbetter and fairer, but can be the cause of worse or unfair outcomes too.

First, we need to understand more about how a process of continuousgrowth emerged.

Jean Drèze and Amartya Sen. 2013.An Uncertain Glory: India and itsContradictions, Princeton, NJ:Princeton University Press, p. 2

1.2 ECONOMIC GROWTH

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economics The study of howpeople interact with each otherand with their natural surroundingsin providing their livelihoods, andhow this changes over time.

institution The laws and socialcustoms governing the way peopleinteract in society.

division of labour Thespecialization of producers to carryout different tasks in the produc-tion process. Also known as:specialization.

specialization This takes placewhen a country or some otherentity produces a more narrowrange of goods and services than itconsumes, acquiring the goods andservices that it does not produce bytrade.

The nature and causes of economic growthUnderstanding why and how growth has occurred in the way that it has, isone of the most important questions that economists have asked. Thefounder of modern economics, Adam Smith, gave his most important bookthe title, An Inquiry into the Nature and Causes of the Wealth of Nations.

GREAT ECONOMISTS

Adam SmithAdam Smith (1723–1790) is con-sidered by many to be the founderof modern economics. Raised by awidowed mother in Scotland, hewent on to study philosophy at theUniversity of Glasgow and later atOxford.

In An Inquiry into the Nature andCauses of the Wealth of Nations,published in 1776, Smith asked:how can society coordinate theindependent activities of largenumbers of economic actors—producers, transporters, sellers, consumers—often unknown to eachother and widely scattered across the world? Previous notions of polit-ical and economic organization relied on rulers imposing order on theirsubjects. Smith’s radical claim was that coordination among all of theseactors might spontaneously arise, without any person or institutionconsciously attempting to create or maintain it.

Even more radical was his idea that this could take place as a result ofindividuals pursuing their self-interest, rather than attempting tocoordinate, cooperate or care for each other: ‘It is not from thebenevolence of the butcher, the brewer, or the baker that we expect ourdinner, but from their regard to their own interest,’ he wrote.

In The Wealth of Nations, Smith introduced one of the most enduringmetaphors in the history of economics—the ‘invisible hand’. The busi-nessman, he wrote:

… intends only his own gain, and he is in this, as in many othercases, led by an invisible hand to promote an end which was nopart of his intention. Nor is it always the worse for the society thatit was no part of it. By pursuing his own interest, he frequentlypromotes that of the society more effectually than when he reallyintends to promote it.

Among Smith’s insights is the idea that a significant source of prosperityis the division of labour, or specialization. Smith illustrated this ideain a famous passage on the pin factory: ten men undertaking to make anentire pin from start to finish separately and independently: ‘certainlycould not each of them have made twenty [pins], perhaps not [even] onepin in a day.’ But where the ten men each fully specialized in one or twoof 18 distinct operations involved in making pins, they could produceclose to 50,000 pins a day. Specialization greatly increased productivity.

Adam Smith. (1776) 2003. AnInquiry into the Nature and Causesof the Wealth of Nations(https://tinyco.re/9804148). NewYork: NY: Random HousePublishing Group.


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50-02-glossary.html#glossary-specialization

Adam Smith. 1759. The Theory ofMoral Sentiments(https://tinyco.re/6582039).London: Printed for A. Millar, andA. Kincaid and J. Bell.

market A way of connectingpeople who may mutually benefitby exchanging goods or servicesthrough a process of buying andselling.

monopoly A firm that is the onlyseller of a product without closesubstitutes. Also refers to a marketwith only one seller. See also:monopoly power, naturalmonopoly.

Smith also observed that such specialization is constrained by the‘extent of the market’; such an enormous number of pins would neverbe produced unless there were many buyers and those could only befound if the market extended far from their point of production. The pinmakers themselves could not possibly need the vast quantity of pins theywere able to produce. The construction of navigable canals and theexpansion of foreign trade thus fostered specialization. And the resultingprosperity itself expanded the ‘extent of the market’, in a virtuous cycleof economic expansion.

But Smith did not think that people were guided entirely by self-interest, nor did he consider the market system perfect. In the samebook in which he first used the phrase ‘invisible hand’, 17 years beforeThe Wealth of Nations, he wrote:

He also saw that the market system had some failings, especially if sellersbanded together to form monopolies, so as to avoid competing witheach other. Smith specifically targeted monopolies that were protectedby governments, such as the British East India Company that not onlycontrolled trade between India and Britain, but also administered muchof the British colony there.

He also agreed with his contemporaries that there was a role for gov-ernment in a market system in protecting its nation from externalenemies, and ensuring justice through the police and the court system.And Smith was an advocate of government investment in education andin public works, such as bridges, roads, and canals.

QUESTION 1.3 CHOOSE THE CORRECT ANSWER(S)CHOOSE THE CORRECT ANSWER(S)Which of the following statements regarding Adam Smith are correct?

Adam Smith believed in the role of the government to improvesocietal welfare.Adam Smith believed that all markets were characterized byperfect competition.Adam Smith advocated that economic agents were guided entirelyby self-interest.Adam Smith claimed that coordination among large number of eco-nomic actors (producers, transporters, sellers, consumers), oftenunknown to each other, might spontaneously arise without anyperson or institution consciously attempting to create or maintain it.

How selfish soever man may be supposed, there are evidentlysome principles in his nature which interest him in thefortunes of others, and render their happiness necessary tohim, though he derives nothing from it except the pleasure ofseeing it.

1.2 ECONOMIC GROWTH

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50-02-glossary.html#glossary-monopoly-power

50-02-glossary.html#glossary-natural-monopoly

50-02-glossary.html#glossary-natural-monopoly

technology A process taking a setof materials and other inputs,including the work of people andmachines, to produce an output.

Industrial Revolution A wave oftechnological advances andorganizational changes starting inBritain in the eighteenth century,which transformed an agrarian andcraft-based economy into acommercial and industrial eco-nomy.

technological progress A change intechnology that reduces theamount of resources (labour,machines, land, energy, time)required to produce a givenamount of the output.

1.3 THE PERMANENT TECHNOLOGICAL REVOLUTION:ENGINE OF GROWTHFigure 1.3 is a ‘hockey stick’ curve; it is flat for a long time, then suddenlycurves upward. We know that remarkable scientific and technologicaladvances occurred at more or less the same time as the upward kink in thehockey stick in Britain in the middle of the eighteenth century.

In everyday usage, ‘technology’ refers to machinery, equipment anddevices developed using scientific knowledge. In the language of eco-nomics, technology is more specific. It is a process that takes a set ofmaterials and other inputs—including the work of people andmachines—and creates an output. For example, a technology for makinga cake can be described by the recipe. It specifies the combination ofinputs (ingredients such as flour, and labour such as stirring) needed tocreate the output (the cake).

The Industrial RevolutionThe eighteenth century in Britain marked the beginning of a wave of tech-nological advances and organizational changes that transformed anagrarian and craft-based economy into a commercial and industrialpowerhouse. David Landes, an economic historian, wrote that the Indus-trial Revolution was ‘an interrelated succession of technological changes’that transformed the societies in which these changes took place.

During the long flat portion of Figure 1.3, traditional craft-basedtechniques were used in most production processes, such as hand-weaving.Some of the earliest steps in the industrial revolution were in the produc-tion of textiles, such as the spinning jenny, a machine that enabled anindividual to produce multiple spools of threads simultaneously. By thetime the inventor, James Hargreaves died, there were over 20,000 spinningjennys in use across Britain. The power loom, which mechanized theprocess of weaving cloth, was developed in the 1780s. Important new tech-nologies were introduced in energy and transportation as well as in textiles.

The cumulative character of these developments led to them togetherbeing called the Industrial Revolution. The new era brought new ideas,new discoveries, new methods and new machines, making old ideas andold tools obsolete. These new ways were, in turn, made obsolete by evennewer ones.

Technological progressSo far, we have looked at the world using incomes to compare countries, orthe past with the present. This isn’t the only way we can measure change.We can ask other questions, such as: How much work does it take to stayalive? How quickly can we communicate?

As technological progress revolutionized production, the timerequired to make a pair of shoes fell by half in only a few decades. The samewas true of spinning and weaving, and of making cakes in a factory. Thismarked the beginning of a permanent technological revolution, where theamount of time required for producing most products fell generation aftergeneration.

David S. Landes. 2003. TheUnbound Prometheus: Technolo-gical Change and IndustrialDevelopment in Western Europefrom 1750 to the Present.Cambridge: Cambridge UniversityPress.


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Figure 1.10 The productivity of labour in producing light: Lumen-hours per hour oflabour (100,000 years ago to the present). The data between 1800 and 2000 areshown in the magnified segment.

William Nordhaus. 1998. ‘Do RealOutput and Real Wage MeasuresCapture Reality? The History of LightingSuggests Not’ (http://tinyco.re/0949356).Cowles Foundation for Research in Eco-nomics Paper 1078.

Transformational technological change is still occurring. In his TEDTalk, Hans Rosling claims that we should say, ‘Thank you, industrialization’for creating the washing machine, a device that transformed the wellbeingof millions of women.

Working less, producing moreIf we work less to produce the basic things we need, technological changescreate significant increases in living standards.

We can measure this trend over thousands of years. Our distantancestors typically had nothing brighter than a campfire at night. The firstgreat technological breakthrough in lighting from campfire came 40,000years ago, with the use of lamps that burned animal or vegetable oils. TheBabylonians (1750 BC) used sesame oil. Three thousand years later,someone invented tallow candles.

We can measure how many units of brightness (measured in lumen-hour, lm-hr) could be generated by an hour of work (or labour) over time.We know that creating light by a campfire took about 1 hour of labour toproduce 17 lumen-hours, for example. Lighting has become more and effi-cient through gas lamps, kerosene lamps, filament bulbs, fluorescent bulbs,and so on. Compact fluorescent bulbs introduced in 1992 are about 45,000times more efficient, in terms of labour time expended, than lights were200 years ago.

Today, the productivity of labour in producing light is half a milliontimes greater than it was among our ancestors around their campfires. Thisis an example of how growth happens.

Figure 1.10 charts this remarkable hockey-stick growth in efficiency inlighting using the ratio scale.

The magic washing machine, HansRosling https://tinyco.re/7334115

1.3 THE PERMANENT TECHNOLOGICAL REVOLUTION: ENGINE OF GROWTH

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Technology Approximatedate

Lumen-hours per hour oflabour

Open wood fire From earliesttime

17

Animal or vegetable fatlamp

38,000–9,000BC

20

Babylonian sesame oillamp

1750 BC 24

Tallow Candle 1800 186

Tallow Candle 1830 333

Kerosene lamp 1875–1885 4,400

Town gas (Welsbachmantle)

1885–1895 12,000

Town gas (Welsbachmantle)

1916 83,000

Electric Filament lamp 1930 96,000




Electric Filament lamp 1970 1,800,000

Compact fluorescent 1992 8,400,000

Figure 1.11 The productivity of labour in producing light.

QUESTION 1.4 CHOOSE THE CORRECT ANSWER(S)CHOOSE THE CORRECT ANSWER(S)Figure 1.11 tabulates the productivity of labour in producing light,measured in lumen-hours per hour of labour, using different technolo-gies.

Tables 15.2 and 15.3 from Gregory Clark.2007. A Farewell to Alms: A Brief Eco-nomic History of the World. Princeton,NJ: Princeton University Press.

Based on this information, which of the following statements iscorrect?

The labour productivity of producing light increased roughlylinearly over the years.The productivity of labour in producing light using compactfluorescent technology is half a million times greater than with theBabylonian sesame oil lamp.The kerosene lamp in the late 1800s was more than ten times moreefficient in terms of labour productivity than the tallow candles in1830.The labour productivity of producing light roughly doubled inalmost every decade between 1930 and 1970.


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Figure 1.12 The speed at which information travelled (1000–1865).

Tables 15.2 and 15.3 from Gregory Clark.2007. A Farewell to Alms: A Brief Eco-nomic History of the World. Princeton,NJ: Princeton University Press.

The communication revolutionThe speed at which information travels today is more evidence ofpermanent technological revolution. The materials making up thisintroduction to economics were written by teams of economists, designers,programmers and editors, working together—often simultaneously—atcomputers in the UK, India, the US, Russia, Colombia, South Africa, Chile,Turkey, France, and many other countries. To do this, we need to be con-stantly in communication. Until recently, the idea that we could shareinformation in weeks, let alone seconds, would have been a fantasy.

We know that news travelled between ancient Rome and Egypt at about1 mile (1.6 km) per hour. It took ‘only’ 46 days for the news to reachLondon of a mutiny of Indian troops against British rule in 1857.

When Abraham Lincoln was elected US president in 1860, the word wasspread by telegraph from Washington to Fort Kearny at the western end ofthe telegraph line. From there, the news was carried some 1,260 miles(2,030 km) by a relay of riders on horseback, called the Pony Express, toFort Churchill in Nevada, at an average speed of about 7 miles (11 km) perhour. From Fort Churchill, it was transmitted to California by telegraph.

One year after Lincoln’s death, a transatlantic cable cut the time to amatter of minutes for news to travel between New York and London.

1.4 THE CAPITALIST REVOLUTIONWe’ve mentioned that South Africa is a capitalist country, as are Singapore,Liberia, Norway, and almost all the other countries in the skyscraper figure.What do we mean when we say this? In economics, ‘capitalism’ is a way oforganizing society that began at around the time of the Industrial Revolu-tion. In many ways, lives have been changed for the better. But capitalismhas also been associated with extraordinary inequalities, and threats to thequality of the natural environment.

Defining capitalismCapitalism is an economic system characterized by a particular combina-tion of institutions.

1.4 THE CAPITALIST REVOLUTION

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private property The right andexpectation that one can enjoyone’s possessions in ways of one’sown choosing, exclude others fromtheir use, and dispose of them bygift or sale to others who thenbecome their owners.market A way of connectingpeople who may mutually benefitby exchanging goods or servicesthrough a process of buying andselling.firm A business organization whichpays wages and salaries to employpeople, and purchases inputs, toproduce and market goods andservices with the intention ofmaking a profit.

capital goods The equipment,buildings, and other durable inputsused in producing goods andservices, including whereapplicable any patents or otherintellectual property that is used.Raw materials used in productionare referred to as intermediateinputs.

• An economic system is a way of organizing the production and distribu-tion of goods and services in an entire economy.

• Institutions are the different sets of laws and social customs regulatingproduction and distribution in different ways in families, private busi-nesses, markets and government bodies.

In economics, we define a capitalist economy as any one that combinesthree particular institutions:

• private property• markets• firms

‘Capitalism’ can be contrasted with ‘centrally planned’ economies where thegovernment is the key institution controlling production, and deciding howand to whom goods should be distributed. Central planning was the eco-nomic system in the Soviet Union, East Germany and many other easternEuropean countries prior to the end of Communist Party rule in the early1990s. Today, there is a centrally planned economic system in theDemocratic People’s Republic of Korea (North Korea).

How private property, markets, and firms combine with each other, withfamilies, governments, and other institutions, differs greatly across coun-tries. China and the US are both capitalist economies, but they differ in theextent to which the government influences economic affairs (as well as inmany other ways).

Private propertyOver history, the extent of private property has varied. In some societies,such as the hunters and gatherers who are our distant ancestors, almostnothing except personal ornaments and clothing was owned by indi-viduals. In others, crops and animals were private property, but land wasnot. In other economic systems, some human beings—slaves—wereprivate property.

In a capitalist economy, an important type of private property is theequipment, buildings, raw materials, and other inputs used in producinggoods and services. These are called capital goods. In a planned economy,the capital goods are owned by the government.

Private property may be owned by an individual, a family, a business, orsome entity other than the government. And some things that we value arenot private property, for example, the air we breathe and most of theknowledge we use cannot be owned or bought and sold.

QUESTION 1.5 CHOOSE THE CORRECT ANSWER(S)CHOOSE THE CORRECT ANSWER(S)Which of the following are examples of private property?

computers belonging to your collegea farmer’s land in the Soviet Union (under Communist Party rule)shares in a companya worker’s skills


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MarketsOne of the changes that was underway during Adam Smith’s life, but hasgreatly accelerated since, is specialization in the production of goods andservices. As Smith explained, we become better at producing things whenwe each focus on a limited range of activities. This is true because of:

• Learning by doing: We acquire skills as we produce things.• Difference in ability: For reasons of skill, or natural surroundings such as

the quality of the soil, some people are better at producing some thingsthan others.

But people will not specialize unless they have a way to acquire the othergoods they need.

Markets are a means of transferring goods or services from one personto another:

• They are reciprocated: Unlike gifts and theft, one person’s transfer of agood or service to another is directly reciprocated by a transfer in theother direction (either of another good or service as in barter exchange,or money, or a promise of a later transfer when one buys on credit).

• They are voluntary: Both transfers—by the buyer and the seller—arevoluntary because the things being exchanged are private property. Thefact that the exchange takes place means that it must be beneficial in theopinion of both parties. In this, markets differ from theft, and also fromthe transfers of goods and services in a centrally planned economy.

• In most markets there is competition: A seller charging a high price, forexample, will find that buyers prefer to buy from other competingsellers.

Markets are competitive, but also cooperative. Each of us, pursuing ourprivate objectives, can work together, producing and distributing goods andservices in a way that, while far from perfect, is in many cases better thanthe alternatives.

EXERCISE 1.5 THE POOREST MAN’S COTTAGE‘The poorest man may in his cottage bid defiance to all the forces of theCrown. It may be frail, its roof may shake; the wind may blow through it;the storms may enter, the rain may enter—but the King of England cannotenter; all his forces dare not cross the threshold of the ruined tenement.’ –William Pitt, 1st Earl of Chatham, speech in the British Parliament (1763).

1. What does this tell us about the meaning of private property?2. Does it apply to people’s homes in your country?

EXERCISE 1.6 MARKETS AND SOCIAL NETWORKSThink about a social networking site that you use, for example Facebook(http://tinyco.re/5641601). Now look at our definition of a market.

What are the similarities and differences between the socialnetworking site and a market?


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share A part of the assets of a firmthat may be traded. It gives theholder a right to receive aproportion of a firm’s profit and tobenefit when the firm’s assetsbecome more valuable. Also knownas: common stock.

QUESTION 1.6 CHOOSE THE CORRECT ANSWER(S)CHOOSE THE CORRECT ANSWER(S)Which of the following are examples of markets?

wartime food rationingauction websites such as eBaytouts selling tickets outside concert hallssale of illegal arms

FirmsPrivate property and markets predate capitalism. In a capitalist economy,firms became the predominant organizations for the production of goodsand services. Firms are created to make a profit and are owned by privateindividuals who pay others to work there.

These are some examples of what economists call firms: restaurants,banks, large farms that pay others to work there, industrial establishments,supermarkets, and internet service providers.

These are productive (and important), but are not firms: businesses inwhich most or all of the people working are unpaid family members, non-profit organizations, employee-owned cooperatives, and government-owned entities (such as railways and power or water companies).

Continuous changeFor working people, capitalism has increased the pace of change. Onereason is that a successful firm can grow in a few years from just a fewemployees to a global company with hundreds of thousands of customersand employing thousands of people. They can do this because they are ableto hire additional employees on another type of market: the labour market.They can borrow money or sell shares in the firm to finance the purchaseof the capital goods they need to expand production.

Firms can die in a few years too. This is because a firm that does notmake profits will not have enough money (and will not be able to borrowmoney) to continue employing and producing. The firm shrinks, and someof the people who work there lose their jobs.

Contrast this with a family farm, which is not a firm. If the farm issuccessful, the family will be better off than its neighbours, but expansionwill be limited. If, instead, the family is not very good at farming, it willsimply be less well off than its neighbours, but as long as the family can feeditself, it will not ‘go out of business’ in the way that a failing firm might.Government bodies also tend to be more limited in their capacity to expandif successful, and are usually protected from failure if they perform poorly.

Capitalism as an economic systemFigure 1.13 shows that the three parts of the definition of a capitalist eco-nomic system are nested concepts. The left-hand circle describes aneconomy of isolated families who own their capital goods and the goodsthey produce, but have little or no exchange with others.


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Figure 1.13 Capitalism: Private property, markets and firms.

Historically, economies like the left-hand circle have existed, but have beenmuch less important than a system in which markets and private propertyare combined (the middle circle). Private property is an essential conditionfor the operation of markets: buyers will not want to pay for goods unlessthey can have the right to own them. In the middle circle, most productionis done either by individuals (shoemakers or blacksmiths, for example) or infamilies (for example, on a farm). Before 1600, many of the economies ofthe world were like this.

Furthermore, capitalism is an economic system that can combinecentralization with decentralization. On the one hand, it concentratespower in the hands of owners and managers of firms who are then able tosecure the cooperation of large numbers of employees in the productionprocess. On the other, it limits the power of those owners and other indi-viduals, because they face competition to buy and sell in markets.

So, when the owner of a firm interacts with an employee, he or she is‘the boss’. But when the same owner interacts with a potential customer, heor she is simply another person trying to make a sale, in competition withother firms. It is this unusual combination of competition among firms, andconcentration of power and cooperation within them, that accounts forcapitalism’s success as an economic system.

EXERCISE 1.7 FIRM OR NOT?Using our definition, explain whether each of the following entities is afirm by investigating if it satisfies the characteristics that define a firm.Research the entity online if you are stuck.

1. John Lewis Partnership (UK)2. a family farm in Vietnam3. your current family doctor’s office or practice4. Walmart (US)5. an eighteenth-century pirate ship6. Google (US)7. Manchester United plc (UK)8. Wikipedia

Paul Seabright. 2010. The Com-pany of Strangers: A NaturalHistory of Economic Life (RevisedEdition). Princeton, NJ: PrincetonUniversity Press.


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Joseph A. Schumpeter.1949. ‘Science and Ideology’(https://tinyco.re/4561610). TheAmerican Economic Review 39(March): pp. 345–59.

entrepreneur A person who createsor is an early adopter of new tech-nologies, organizational forms, andother opportunities.

creative destruction JosephSchumpeter’s name for the processby which old technologies and thefirms that do not adapt are sweptaway by the new, because theycannot compete in the market. Inhis view, the failure of unprofitablefirms is creative because it releaseslabour and capital goods for use innew combinations.

Capitalism and creative destructionThe first adopter of a new technology in a capitalist economy is called anentrepreneur. When we describe a person or firm as entrepreneurial, itrefers to a willingness to try out new technologies and to start newbusinesses.

Joseph Schumpeter was an economist who argued that the dynamism ofcapitalism was due to the creation of technological improvements byentrepreneurs. The profits made by the first firm to produce a product at alower cost, for example, or to bring a new product to the market will notlast forever. Other firms, noticing that entrepreneurs are making moreprofits, will eventually adopt the new technology. They will also reducetheir costs and their profits will increase.

As more firms introduce the new technology—say, for producingcloth—the supply of cloth to the market increases and the price will startto fall. This process will continue until everyone is using the new tech-nology, at which stage prices will have declined to the point where noone is earning higher profits than in other lines of business. The firmsthat stuck to the old technology will be unable to cover their costs at thenew lower price for cloth, and they will go bankrupt. Schumpeter calledthis creative destruction.

GREAT ECONOMISTS

Joseph SchumpeterJoseph Schumpeter (1883–1950)developed one of the most import-ant concepts of moderneconomics: creative destruction.

Schumpeter brought toeconomics the idea of theentrepreneur as the central actorin the capitalist economic system.For Schumpeter, creativedestruction was the essential factabout capitalism: old technologiesand the firms that do not adapt areswept away by the new, becausethey cannot compete in the market by selling goods at a price that coversthe cost of production. The failure of unprofitable firms releases labourand capital goods for use in new combinations.

This decentralized process generates a continued improvement inproductivity, which leads to growth, so Schumpeter argued it is virtuous.


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Joseph A. Schumpeter. 1997. TenGreat Economists. London:Routledge.

Joseph A. Schumpeter.1962. Capitalism, Socialism, andDemocracy. New York: Harper &Brother.

Robert Skidelsky. 2012. ‘RobertSkidelsky-portrait: JosephSchumpeter’ (https://tinyco.re/8488199).

natural experiment An empiricalstudy exploiting naturally occurringstatistical controls in whichresearchers do not have the abilityto assign participants to treatmentand control groups, as is the case inconventional experiments. Instead,differences in law, policy, weather,or other events can offer theopportunity to analyse populationsas if they had been part of anexperiment. The validity of suchstudies depends on the premisethat the assignment of subjects tothe naturally occurring treatmentand control groups can beplausibly argued to be random.

1.5 CAPITALISM AND GROWTH: CAUSE AND EFFECT?We have seen that the institutions associated with capitalism have thepotential to make people better off, through opportunities for bothspecialization and the introduction of new technologies. We have also seenthat the permanent technological revolution coincided with (was associatedwith) the emergence of capitalism. But can we conclude that capitalismactually caused the upward kink in the hockey stick?

We should be sceptical when anyone claims that something complex(capitalism) ‘causes’ something else (increased living standards, technolo-gical improvement, a networked world, or environmental challenges).

But we do want to make causal statements in economics if possible—to understand why things happen, or to devise ways of changingsomething so that the economy works better. We would like to be able tosay that policy X is likely to cause change Y. For example, an economistmight claim that: ‘If the central bank lowers the interest rate, morepeople will buy homes and cars’.

In science, we support the statement that X causes Y by understandingthe relationship between cause (X) and effect (Y), and we performexperiments to gather evidence that measure changes in X and in Y. But aneconomy is made up of the interactions of millions of people. We cannotmeasure and understand them all, and it is rarely possible to gatherevidence by conducting experiments (though in Units 2 and 3, we will giveexamples of the use of conventional experiments in one area of economics).So how can economists explore cause and effect? Sometimes, the things wesimply observe in the world—so-called ‘natural experiments’—can helpus investigate.

Natural experiments to identify cause and effectWe can observe that capitalism emerged at the same time as, or just before,both the Industrial Revolution and the upward turn in our hockey sticks.This might suggest that capitalist institutions were among the causes of theera of continuous productivity growth. Putting this in scientific language,the observation would be consistent with the hypothesis (or theory) thatthey were. But the emergence of a free-thinking cultural environmentknown as The Enlightenment (http://tinyco.re/2577267) also predated orcoincided with the upturn in the hockey sticks.

Both the destruction of old firms and the creation of new ones taketime. The slowness of this process creates upswings and downswings inthe economy. Read Schumpeter’s ideas and opinions in his own wordsand an online essay about his work by Robert Skidelsky, a historian ofeconomic thought.

Schumpeter was born in Austro–Hungary, but migrated to the USafter the Nazis won the election in 1932 that led to the formation of theThird Reich in 1933. As a young professor in Austria, he had fought andwon a duel with the university librarian to ensure that students hadaccess to books. He also claimed that, as a young man, he had threeambitions in life: to become the world’s greatest economist, the world’sgreatest lover, and the world’s greatest horseman. He added that only thedecline of the cavalry had stopped him from succeeding in all three.

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So, was it institutions, culture, both, or some other set of causes? Onemethod for investigating a question like this is called a natural experiment.We can use this method when something changes in real life in such a waythat there is a change to one group (the ‘treatment’ group), but anothersimilar group stays the same (the ‘control’ group). We can then comparewhat happened to the two groups. Natural experiments are used to testhypotheses in many fields of study, including the one that began the scienceof epidemiology (https://tinyco.re/8757564).

There is a natural experiment that has allowed us to evaluate whethercapitalist institutions were indeed a cause of rapid economic growth. Thesetting for the natural experiment is the coexistence of two different eco-nomic systems in the west and east of Germany after the end of theSecond World War.

At the beginning of Unit 3, we consider a second natural experiment,assessing the hypothesis that when women gain political power, publicpolicy changes in ways that improve the health of children.

Capitalism and central planningAt the end of the Second World War, Germany was divided into twoseparate countries with different economic systems—centrally planned inthe east, capitalist in the west.

The introduction of centralized planning in East Germany underCommunist Party rule saw private property, markets and firms virtuallydisappear. Decisions about what to produce, how much and in whichplants, offices, mines and farms were taken not by private individuals, butby government officials. The officials managing these economicorganizations did not need to follow the principle of capitalism andproduce goods and services that customers would buy at a price above theircost of manufacture.

A political boundary, the ‘Iron Curtain’, as Winston Churchill, the BritishPrime Minister, described it in 1946, divided Germany. It separated twopopulations that until then had shared the same language, culture, andcapitalist economy.

In 1936, before the Second World War, living standards in what laterbecame East and West Germany were the same, and firms in the EastGerman provinces of Saxony and Thuringia were world leaders inautomobile and aircraft production, chemicals, optical equipment andprecision engineering.

Because of the imposition of different economic systems on these twoparts of what had been the same country, this is a suitable setting for usingthe natural experiment method. West Germany is the control group andEast Germany the treatment group. The hypothesis is that imposing aplanned economic system on East Germany would affect its performancerelative to that of West Germany.

The validity of this comparison as a natural experiment depends on theidea that the two Germanys differed in just one way that might affect theireconomic growth, namely their economic institutions.

Figure 1.14 shows the different paths taken by these and two other eco-nomies from 1950. It uses the ratio scale. By the time the Berlin Wall fell in1989 and East Germany abandoned central planning, its GDP per capitawas less than half of that of capitalist West Germany.

Economists and historians disagreeon the causes of the IndustrialRevolution. You can find out whythey disagree by reading adiscussion (https://tinyco.re/1164122) about why the IndustrialRevolution happened first in theeighteenth century, and why ithappened on an island off thecoast of Europe.

Because we cannot change thepast, even if it were practical toconduct experiments on entirepopulations, we rely on naturalexperiments. In an interview(https://tinyco.re/8903951), JaredDiamond, a biologist, and JamesRobinson, a professor of govern-ment, explain.


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Figure 1.14 The two Germanies: Planning and capitalism (1950–89). West GermanGDP grew faster than East German GDP between 1950 and 1989.

Conference Board, The. 2015. Total Eco-nomy Database (http://tinyco.re/1587851). Angus Maddison. 2001. ‘TheWorld Economy: A MillennialPerspective’. Development CentreStudies. Paris: OECD.

The East German Communist Party forecast in 1958 that materialwellbeing would exceed the level of West Germany by 1961. The failure ofthis prediction was one of the reasons that the Berlin Wall separating Eastfrom West Germany was built in 1961. Neither did East Germany’s plannedeconomy catch up to West Germany over the decades that followed.

Notice from Figure 1.14 that West Germany started from a morefavourable position than East Germany in 1950. Yet in 1936, before the warbegan, the two parts of Germany had virtually identical living standards.Both regions had achieved successful industrialization. East Germany’srelative weakness in 1950 was not mainly because of differences in theamount of capital equipment or skills available per head of the population,but because the structure of industries in East Germany was moredisrupted by splitting the country than was the case in West Germany.

From Figure 1.14, we can see that some capitalist economies that hadeven lower per capita income than East Germany in 1950 fared far better.By 1989, Spain had closed part of the gap and the Japanese economy (whichhad also suffered war damage) had, with its own particular combination ofprivate property, markets, and firms, along with a strong governmentcoordinating role, actually caught up to West Germany.

We cannot conclude from the German natural experiment thatcapitalism always promotes rapid economic growth, while central planningis a recipe for relative stagnation. Indeed, the Soviet Union’s centrallyplanned economy grew considerably faster between 1928 (when centralplanning was introduced there) and 1980 than the economies of somecapitalist countries at similar levels of development (you will be able to seethis in Figure 1.15). We can infer that during the second half of thetwentieth century, the divergence of economic institutions mattered for thelivelihoods of the German people.

Hartmut Berghoff and Uta AndreaBalbier. 2013. ‘From CentrallyPlanned Economy to CapitalistAvant-Garde? The Creation,Collapse, and Transformation of aSocialist Economy’. In The EastGerman Economy, 1945–2010:Falling behind or CatchingUp? Cambridge: Cambridge Uni-versity Press.

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developmental state A govern-ment that takes a leading role inpromoting the process of economicdevelopment through its publicinvestments, subsidies of particularindustries, education and otherpublic policies.

QUESTION 1.7 CHOOSE THE CORRECT ANSWER(S)CHOOSE THE CORRECT ANSWER(S)Look again at Figure 1.14, which shows a graph of GDP per capita forWest and East Germany, Japan and Spain between 1950 and 1990.Which of the following statements is correct?

Having a much lower starting point in 1950 was the main reason forEast Germany’s poor performance compared to West Germany.The fact that Japan and West Germany have the highest GDP percapita in 1990 implies that they found the optimal economicsystem.Spain was able to grow at a higher growth rate than Germanybetween 1950 and 1990.The difference in East and West Germany’s performance proves thatcapitalism always promotes rapid economic growth, while centralplanning is a recipe for stagnation.

1.6 VARIETIES OF CAPITALISM: INSTITUTIONS ANDGROWTHNot every capitalist country is the kind of economic success storyexemplified in Figure 1.3 by Britain, later Japan, and the other countriesthat caught up, or in the post-Second World War catch-up shown in Figure1.14. This explains why the left-hand end of the skyscraper diagram (Figure1.2) is so much poorer than the right-hand end.

An example: in 1950, GDP per capita in South Korea was the same as inNigeria. Both were capitalist countries. By 2013, South Korea was ten timesricher by this measure.

Many of the economies at the left-hand end of Figure 1.2 have beencapitalist for many years, but remain poor. Why might this be?

Again, there are many causes. One of the most important is that thereare many varieties, and qualities, of capitalism. Figure 1.15 tracks thefortunes of a selection of countries across the world during the twentiethcentury on a linear scale. It shows, for example, that in Africa, the success ofBotswana in achieving sustained growth contrasts sharply with Nigeria’srelative failure. Both are rich in natural resources (diamonds in Botswana,oil in Nigeria), but differences in the quality of their institutions—theextent of corruption and misdirection of government funds, for example—may help explain their contrasting trajectories.

South Korea’s take-off occurred under institutions and policies sharplydifferent from those prevailing in Britain in the eighteenth and nineteenthcenturies. The most important difference is that the government of SouthKorea (along with a few very large corporations) played a leading role indirecting the process of development, explicitly promoting some industries,requiring firms to compete in foreign markets and also providing highquality education for its workforce. The term developmental state hasbeen applied to the leading role of the South Korean government in its eco-nomic take-off, and now refers to any government playing this part in theeconomy. Japan and China are other examples of developmental states.

From Figure 1.15 we also see that, in 1928, when the Soviet Union’s firstfive-year economic plan was introduced, GDP per capita was one-quarterof the level in Argentina, similar to Brazil, and higher than in South Korea.Central planning in the Soviet Union produced steady but unspectaculargrowth for nearly 50 years, such that GDP per capita in the Soviet Union

World Bank, The. 1993. The EastAsian miracle: Economic growthand public policy (https://tinyco.re/3040506). New York, NY: OxfordUniversity Press.


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outstripped Brazil by a wide margin and even overtook Argentina brieflyjust before Communist Party rule there ended in 1990.

The contrast between West and East Germany demonstrates that onereason central planning was abandoned as an economic system was itsfailure, in the last quarter of the twentieth century, to deliver theimprovements in living standards achieved by some capitalist economies.Yet the varieties of capitalism that replaced central planning in the coun-tries that had once made up the Soviet Union did not work so well either.This is evident from the pronounced dip in GDP per capita for the formerSoviet Union after 1990.

QUESTION 1.8 CHOOSE THE CORRECT ANSWER(S)CHOOSE THE CORRECT ANSWER(S)Look again at Figure 1.15. Which of these conclusions is suggested bythe graph?

The Communist Party rule in the former Soviet Union before 1990was a complete failure.The contrasting performances of Botswana and Nigeria illustratethat rich natural resources alone do not guarantee higher economicgrowth, but that higher quality institutions (government, markets,and firms) may also be necessary.The impressive performance of South Korea’s economy implies thatother countries should copy their economic system.The evidence from the Russian Federation and the former SovietUnion after 1990 shows that the replacement of central planning bycapitalism led to immediate economic growth.

Some researchers question thevalidity (https://tinyco.re/2173358)of historical GDP estimates such asthis outside of Europe, because theeconomies of these countries wereso different in structure.

Figure 1.15 Divergence of GDP per capita among latecomers to the capitalistrevolution (1928–2015). Between 1928 and 2015, the GDP of South Korea grewmuch more than that of Argentina, Russia (the former Soviet Union), Brazil,Botswana and Nigeria.

Jutta Bolt, and Jan Juiten van Zanden.2013. ‘The First Update of the MaddisonProject Re-Estimating Growth Before1820’ (http://tinyco.re/4974590).Maddison-Project Working Paper WP-4(January).

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capitalist revolution Rapidimprovements in technologycombined with the emergence of anew economic system.

1.7 VARIETIES OF CAPITALISM: GROWTH ANDSTAGNATIONThe lagging performances of some of the economies in Figure 1.15demonstrates that the existence of capitalist institutions is not enough, initself, to create a dynamic economy—that is, an economy bringing sustainedgrowth in living standards. Two sets of conditions contribute to thedynamism of the capitalist economic system: economic conditions andpolitical conditions (government and the way it functions).

Economic conditions for capitalist dynamismWhere capitalism is less dynamic, the explanation might be that:

• Private property is not secure: There is weak enforcement of the rule oflaw and contracts, or expropriation either by criminal elements or bygovernment bodies.

• Markets are not competitive: They fail to offer the carrots and wield thesticks that make a capitalist economy dynamic through creativedestruction.

• Firms are owned and managed by people who survive because of theirconnections to government or their privileged birth: They did not becomeowners or managers because they were good at delivering high-qualitygoods and services at a competitive price. This is more likely to occurwhen the other two failures above are also in place.

Combinations of failures of the three basic institutions of capitalism meanthat individuals and groups often have more to gain by spending time andresources in lobbying, criminal activity, and other ways of shifting the dis-tribution of income in their favour. They have less to gain from the directcreation of economic value.

Capitalism is the first economic system in human history in whichmembership of the elite often depends on a high level of economicperformance. As a firm owner, if you fail, you are no longer part of the club.Nobody kicks you out, because that is not necessary; you simply gobankrupt. Market competition provides a mechanism for weeding out thosewho underperform.

Of course, if they are initially very wealthy or very well connected polit-ically, owners and managers of capitalist firms survive and firms may stayin business despite their failures, sometimes for long periods or even overgenerations. Losers sometimes survive. But there are no guarantees; stayingahead of the competition means constantly innovating.

Political conditions for capitalist dynamismGovernment is also important. We have seen that in South Korea, forexample, governments have played a leading role in the capitalist revolu-tion. And in virtually every modern capitalist economy, governments are alarge part of the economy, accounting in some for more than half of GDP.But even where government’s role is more limited, as in Britain at the timeof the Industrial Revolution, governments still establish, enforce andchange the laws and regulations that influence how the economy works.Markets, private property and firms are all regulated by laws and policies.

For innovators to take the risk of introducing a new product or pro-duction process, their ownership of the resulting profits must beprotected from theft by a well-functioning legal system. Governments

Daron Acemoglu and James A.Robinson. 2012. Why Nations Fail:The Origins of Power, Prosperity,and Poverty. New York, NY: CrownPublishing Group.


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too big to fail Said to be acharacteristic of large banks,whose central importance in theeconomy ensures they will besaved by the government if theyare in financial difficulty. The bankthus does not bear all the costs ofits activities and is therefore likelyto take bigger risks. See also: moralhazard.

also adjudicate disputes over ownership and enforce the property rightsnecessary for markets to work.

Competition law and policy is also important. As Adam Smith warned,by creating or allowing monopolies such as the East India Company, gov-ernments may also dull the spur of competition. If a large firm is able toestablish a monopoly by excluding all competitors, or if a group of firms isable to collude to keep the price high, the incentives for innovation and thediscipline of prospective failure will be reduced. This is still true today.Some banks are considered to be too big to fail and are bailed out by gov-ernments when they might otherwise have failed, as was the case for banksin the global financial crisis of 2008–2009.

As well as supporting the institutions of the capitalist economicsystem, the government provides essential goods and services, such asphysical infrastructure, education and national defence. In subsequentunits, we investigate why government policies may also make good eco-nomic sense in areas such as sustaining competition, taxing andsubsidizing to protect the environment, influencing the distribution ofincome, and the creation of wealth.

These are the conditions that together make possible a successfulcapitalist revolution that, first in Britain and then in some other economies,transformed the way that people interact with each other and with naturein producing their livelihoods.

In a nutshell, capitalism can be a dynamic economic system when itcombines:

• Private incentives for cost-reducing innovation: These are derived frommarket competition and secure private property.

• Firms led by those with proven ability: These firms can produce goods atlow cost.

• Public policy supporting these conditions: Governments enforce laws andpriovide regulation.

• Public policy that supplies essential goods and services: These may not beprovided in sufficuent quantities by private firms, and include educationand basic research.

QUESTION 1.9 CHOOSE THE CORRECT ANSWER(S)CHOOSE THE CORRECT ANSWER(S)Capitalism as an economic system can be dynamic and successful if:

it allows failing firms to go bankrupt.it allows successful firms to gain market power.profits are claimed by the capitalists.the government is absent.

1.8 CAPITALISM, INEQUALITY, AND DEMOCRACY

Capitalism and inequalityDynamic capitalism is a system of winners and losers. The creativedestruction of the permanent technological revolution rewards successfulinnovators with wealth unknown even to royalty in the past. Those withwealth—whether acquired by inheritance, exploiting the tradingopportunities of the new global trading system, or as the rewards for


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50-02-glossary.html#glossary-moral-hazard

50-02-glossary.html#glossary-moral-hazard

economic inequality Differencesamong members of a society insome economic attribute such aswealth, income, or wages.

Thomas Piketty: The long-run eco-nomics of wealth inequalityhttp://tinyco.re/8537633

successful innovation—are in a position to hire labour to make a profit,thereby perpetuating and even enhancing their wealth before passing it on.

The result is that, in many countries for which data is available,capitalism ushered in an era of increasing inequality of wealth. We knowhow rich the very rich were at this time, because even centuries ago theyneeded to pay taxes, so someone recorded their incomes and wealth.

Figure 1.16 shows the fraction of all wealth held by the richest 1% for allcountries on which long-run data is available. In most of the countries inFigure 1.16, you can see that wealth inequality increased until around theFirst World War.

In all the countries shown in Figure 1.16, the advent of democracy earlyin the last century—when first males without property and then womengained the right to vote—was followed by a significant decline in theinequality of wealth (shown by the reduction in the wealth share of therichest 1%).

In our ‘Economist in action’ video, Thomas Piketty, an economist andauthor of the bestseller Capital in the Twenty-First Century, examines eco-nomic inequality from the French Revolution until today, and explainswhy careful study of the facts is essential.

QUESTION 1.10 CHOOSE THE CORRECT ANSWER(S)CHOOSE THE CORRECT ANSWER(S)In the ‘Economist in action’ video, which of the following were NOTamong the reasons that Piketty gave for the fall in the incomes of thevery rich during the twentieth century?

the First World Warthe Great Depressionthe Russian Revolutionthe Second World War

Inequality and democracyFaced with increasing inequality, farmers, industrial workers, and the poorsought a way to protect their standards of living. They engaged in strikes(often brutally suppressed) and some wrecked the machines that had putthem out of work. In 1848, there were attempted revolutions against themonarchy in Sicily, France, Germany, Italy, and the Austrian Empire. At thesame time, Karl Marx was writing The Communist Manifesto, advocatingrevolution by workers to end the capitalist economic system.

Many demanded the right to vote as a means of gaining more influenceover the government that, at the time, for the most part protected the eco-nomic interests of the well off. A greater share of political power, theyreasoned, would allow them to claim a larger share of the output and wealthof the rapidly growing economies.

One of the leaders of the movement to extend voting and other politicalrights to workers and the other less well off, James Bronterre O’Brien, toldthe people:

‘Knaves will tell you that it is because you have no property, you areunrepresented. I tell you on the contrary, it is because you areunrepresented that you have no property …’

In the late nineteenth and early twentieth centuries, the wealthy inmany countries concluded that extending democracy might be prudent,

Facundo Alvaredo, Anthony B.Atkinson, Thomas Piketty,Emmanuel Saez, and GabrielZucman. 2016. ‘The World Wealthand Income Database (WID)’(https://tinyco.re/5262390).

Anthony B. Atkinson and ThomasPiketty, eds. 2007. Top IncomesOver the Twentieth Century: AContrast between ContinentalEuropean and English-SpeakingCountries. Oxford: Oxford Univer-sity Press.

Thomas Piketty. 2014. Capital inthe Twenty-First Century.Cambridge, MA: Harvard UniversityPress.

Alfred Plummer. 1971. Bronterre: APolitical Biography of BronterreO’Brien, 1804–1864. Toronto: Uni-versity of Toronto Press.


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much as the leaders of the South African government were to conclude acentury later.

Democracy is a political system, that ideally:

• Gives equal political power to all citizens: This power is defined by indi-vidual rights such as freedom of speech, assembly, and the press.

• Selects political leaders by means of elections: In these elections, virtually alladults are eligible to vote, and the governing party leaves office if it loses.

In many societies throughout human history, the rich have electedrepresentatives to govern them. This is not considered democracy becausethe less well-off were typically excluded. This happened in ancient Athens,for example, where there were also many slaves.

Capitalism emerged in Britain, the Netherlands, and in most of today’shigh-income countries long before democracy. In no country were mostadults eligible to vote prior to the end of the nineteenth century (NewZealand was the first).

Even in the recent past, capitalism has coexisted with undemocraticgovernments, as in South Africa before 1994, Chile from 1973 to 1990, inBrazil from 1964 to 1985, and in Japan until 1945. The economies ofcontemporary China and Vietnam are variants of the capitalist economicsystem—and very successful ones at that—but their systems of govern-ment are based neither on the individual political rights nor the inclusiveand fair elections that define democracy. In many countries today, how-ever, capitalism and democracy coexist, each system influencing how theother works.

Figure 1.16 Share of total wealth held by the richest 1% (1740–2011).

Adapted from Figure 19 of DanielWaldenström and Jesper Roine. 2014.‘Long Run Trends in the Distribution ofIncome and Wealth’ (http://tinyco.re/8651400). In Handbook of Income Distri-bution: Volume 2a, edited by AnthonyAtkinson and Francois Bourguignon.Amsterdam: North-Holland. Gainingpolitical power, according to O’Brien,was the route to gaining a larger slice ofthe economic pie, not the other wayaround.


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Figure 1.17 shows that democracy, as defined by all three of thecharacteristics (rule of law, civil liberties, and inclusive fair elections), is arecent arrival in human history.

Democracy appeared in just a few countries at the beginning of thetwentieth century, but has spread rapidly since then. In many cases, forexample in South Africa, it was the threat of popular unrest and evenrevolution that pushed the wealthy and powerful to extend political rightsand access to public services like education to all groups.

Like capitalism, democracy comes in many forms, and these vary in theextent to which the democratic ideal of political equality among all citizensis realized. In some democracies, there are strict limits on the ways in whichindividuals can influence elections or public policy through their financialcontributions; in others, private money has great influence throughcontributions to electoral campaigns, lobbying, and even illicitcontributions such as bribery.

These differences even among democracies are part of the explanationof why the government’s importance in the capitalist economy differs somuch among nations:

• Japan and South Korea: Governments play an important role in settingthe direction of their economies, but the amount collected in taxes andpaid by the government to the less well-off to reduce inequality isrelatively low.

• Denmark and Sweden: Payment of taxes (and benefits received from thegovernment) reduce the inequality in how much money people have tospend by half.

In all four of these countries—under quite different political conditions—the capitalist economy functions well over the very long term, delivering

Figure 1.17 The advance of democracy in the world.

Center for Systemic Peace. 2016. PolityIV annual time series (http://tinyco.re/3970843); Inter-parliamentary union.2016. ‘Women’s Suffrage’(http://tinyco.re/8725984). Initial periodsof democracy of less than five years arenot shown in the chart.


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Figure 1.18 The economy is part of society, which is part of the biosphere.

increasing living standards on average with modest levels of economicinequality.

1.9 CAPITALISM, GROWTH AND ENVIRONMENTALSUSTAINABILITYThe capitalist revolution has also challenged our environment.

To sustain our livelihoods, humans have always relied on the physicalenvironment and the biosphere, which provide essentials for life such as air,water and food. The environment and biosphere—the collection of all livingthings—provide the raw materials that we use in the production of othergoods, the air we breathe, our food—in short, the physical necessities of life.

Figure 1.18 shows that the economy is part of a larger social system,which is itself part of the biosphere. People interact with each other, andalso with nature, in producing their livelihood.

Through most of our history, humans have regarded natural resources asfreely available in unlimited quantities. But elements of the environmentsuch as air, water, soil, and climate have been radically altered by how wehave interacted with nature to produce our livelihoods.

Since the advent of capitalism, our impact on the environment hasrapidly grown as we extract more from it, and introduce more into it. Thishas occurred as a byproduct of capitalism’s success in raising material livingstandards, shown in the hockey sticks for GDP per capita. Also contributingto our increased impact on the environment has been the ability of thecapitalist economy to support vastly more people than inhabited the planetjust three centuries ago.

This accelerating impact has raised the question of whether our envir-onment can be sustained in the future. If this is not the case, then humanityis living on borrowed time, literally pursuing policies, living life styles andorganizing our economy in ways that, if continued, will undermine thenatural basis of our livelihoods.

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Figure 1.19 Northern hemisphere temperatures over the long run (1000–2006).

Michael E. Mann, Zhihua Zhang,Malcolm K. Hughes, Raymond S. Bradley,Sonya K. Miller, Scott Rutherford, andFenbiao Ni. 2008. ‘Proxy-basedreconstructions of hemispheric andglobal surface temperature variationsover the past two millennia’(http://tinyco.re/8992451). Proceedingsof the National Academy of Sciences 105(36): pp. 13252–13257.

Figure 1.20 Carbon dioxide in the atmosphere (1010–2010) and global carbonemissions from burning fossil fuels (1750–2010).

Years 1010–1975: David M. Etheridge, L.Paul Steele, Roger J. Francey, and Ray L.Langenfelds. 2012. ‘Historical Recordfrom the Law Dome DE08, DE08-2, andDSS Ice Cores’. Division of AtmosphericResearch, CSIRO, Aspendale, Victoria,Australia. Years 1976–2010: Data fromMauna Loa observatory. T. A. Boden, G.Marland, and Robert J. Andres. 2010.‘Global, Regional and National Fossil-Fuel CO2 Emissions’. Carbon DioxideInformation Analysis Center (CDIAC)Datasets.

This possibility raises the question of environmental sustainability. Wesay that something is sustainable if it can be continued indefinitely into thefuture. For example, we may say that a family’s financial position is notsustainable if they are spending more than they are taking in as income.Similarly, the environment may be unsustainable if the damage we aredoing to it is not offset by its own restorative capacity, aided by policies tosupport environmental recovery.

Climate changeThe most striking effect of our activity on the natural environment is climatechange. The authoritative source for research and data about climate change isthe Intergovernmental Panel on Climate Change (https://tinyco.re/8844088).Here, two graphs illustrate what has been happening.

We can see from Figure 1.19 that, while the average temperature of theearth fluctuates from decade to decade, there have been perceptible increasesin the northern hemisphere’s average temperatures from 1900 onwards.

The human causes and the reality of climate change are no longer widelydisputed in the scientific community. These have mostly resulted from theCO2 emissions associated with the burning of fossil fuels.

Figure 1.20 presents evidence of our increased use of fossil fuels—coal, oil,and natural gas—and of a profound change in the natural environment.Figure 1.20 also shows that CO2 emissions from fossil fuel consumptionhave risen dramatically since 1800.

The likely consequences of global warming are far-reaching—melting ofthe polar ice caps, rising sea levels that may put large coastal areas under


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Figure 1.21 Plotting line graphs of temperature over time.

EXERCISE 1.9 USING EXCEL: PLOTTING LINE GRAPHS OF TEMPERATUREOVER TIMEA downloadable spreadsheet (https://tinyco.re/4744778) contains thetemperature data used to make Figure 1.19. Using this data, recreateFigure 1.19. Follow the walk-through in Figure 1.21 below on how to drawthis graph in Excel.

1. The dataThis is what the temperature data looks like. Column A has time (in years),Column B has temperature deviations, and Column C contains the averagenorthern hemisphere temperature. We will be using Columns A and B to makethe line chart.

water, and potential changes in climate and rain patterns that may destroythe world’s food-growing areas.

EXERCISE 1.8 HOW MUCH DIFFERENCE DOES A COUPLE OF DEGREESMAKE?Between 1300 and 1850, there were a number of exceptionally coldperiods, as you can see from Figure 1.19. Research this so-called ‘little iceage’ in Europe and answer the following:

1. Describe the effects of these exceptionally cold periods on the eco-nomies of the affected countries.

2. Within a country or region, some groups of people were exceptionallyhard hit by the climate change, while others were less affected. Provideexamples.

3. How ‘extreme’ were these cold periods compared to the temperatureincreases since the mid-twentieth century and those projected for thefuture?


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2. Draw a line chartYour line chart will look similar to the chart shown above, with temperaturedeviation on the vertical axis and time on the horizontal axis. Notice that thenumbers for time are not correct (they should be years).

3. Change the horizontal axis variable to yearsTo change the horizontal axis labels to years, we need to add the values inColumn A to the line chart.


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4. Change the horizontal axis variable to yearsThe current horizontal axis labels are the numbers 1, 2, 3, and so on. To changethese labels to years, we need to edit the labels.

5. Change the horizontal axis variable to yearsAfter Step 10, the horizontal axis labels will be changed to the years 1000–2006.


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6. Move the horizontal axis to the bottom of the chartBy default, the horizontal axis is positioned at the vertical axis value of 0. Tomove it to the bottom of the chart (as in Figure 1.19), we have to change theaxis position. After Step 12, your chart will look similar to Figure 1.19.

7. Add axis titles and a chart titleLabel the horizontal and vertical axes as in Figure 1.19, and give your chart thesame title.

Technological progress can helpThe relationship between the economy and the environment shown inFigure 1.18 is two-way. We use natural resources in production, which mayin turn affect the environment we live in and its capacity to support futureproduction. But the permanent technological revolution, which broughtabout dependence on fossil fuels, may also be part of the solution to today’senvironmental problems.

Look back at Figure 1.10, which shows the productivity of labour inproducing light. The vast increases shown over the course of history andespecially since the mid-nineteenth century occurred largely because the


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amount of light that could be produced per unit of heat (for example from acampfire, candle, or light bulb) increased dramatically.

In lighting, the permanent technological revolution brought us morelight for less heat, which conserved natural resources—from firewood tofossil fuels—used in generating the heat. In today’s world, advances in tech-nology may allow us to produce more of our energy from less pollutingsources with a greater reliance on wind, solar and other renewable sources.

QUESTION 1.11 CHOOSE THE CORRECT ANSWER(S)CHOOSE THE CORRECT ANSWER(S)Which of the following variables have followed the so-called ‘hockey-stick’ trajectory—that is, little to no growth for most of historyfollowed by a sudden and sharp change to a positive growth rate?

GDP per capitalabour productivityinequalityatmospheric CO2

QUESTION 1.12 CHOOSE THE CORRECT ANSWER(S)CHOOSE THE CORRECT ANSWER(S)Figure 1.19 (reproduced below) shows the northern hemisphere’stemperature since year 1000, reported as the deviation from the1961–1990 mean temperature.

Figure 1.19 Deviation from the 1961–2000 mean temperatures.

Based on this information, which of the following statements iscorrect?

The 1961–1990 mean temperature was 0.2 to 0.6 degrees higherthan the temperatures between 1450 and 1900.The negative numbers on the graph indicate that the temperatureconsistently fell between 1100 and 1900.A consistent rise in temperature is only a post-1980 phenomenon.The consistent rise in temperature after 1980 suggests thattemperatures will continue to rise in every year following 2000.


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Democracy and the challenge of environmental sustainabilityIn many countries, the advent of democracy—and especially the extensionof the vote to those without property and to women—saw a reduction ineconomic inequality because it gave more political power to the less welloff. Organizations of the less well off—labour unions and political parties—used this power to alter laws and government policies so as to advance theirown economic interests.

The relationship between democracy and the challenge of environ-mental sustainability is not as simple as the one between democracy andaddressing the problem of growing inequality. This is true for two reasons:

• National costs and global benefits: Democracy is a form of government of anation, and while the citizens of a nation may adopt policies to protectthe environment of that particular nation—its lakes and streams, itsgreen spaces—they may have little incentive to protect the global envir-onment, particularly if they will bear the costs and a great many othersshare in the benefits.

• Effect on future generations: Democratic citizens today are makingdecisions affecting people who may not be born for hundreds of years.These future generations do not have a vote.

Both of these reasons why democracy may be limited in how it addressesthe challenge of environmental sustainability are examples of somethingyou will encounter throughout this course called external effects. Externaleffects arise when actions taken by a person have consequences—benefitsor costs—that are felt by others.

It is not surprising, therefore, that we cannot show you a figure similarto 1.13 in which environmental damages declined following the extensionof the vote to most adults in many countries. In fact, Figures 1.16a and1.16b show just the opposite.

Democracy is not powerless when addressing the environment. Manylong-standing democratic nations—many in northern Europe, forexample—are outstanding in the ways they have provided local environ-mental amenities and restricted carbon emissions. But it is also true thatdemocratic India performs less well on any environmental scorecard thanundemocratic China, a country that has become a global leader in greentechnology.

Taking account of its level of income, Australia—where most people gotthe vote very early—stands out for its protection of the local environment.This is something about which Australian voters have a direct interest andwhich parallels the reasons why democracy sometimes addresses theproblems of inequality. Democracy can empower those who will benefit ifinequality or local environmental damage is reduced. But Australia is farfrom exemplary in its CO2 emissions, whose effects on the environment areglobal not local. The Australian case highlights the limits of nationaldemocratic governments in achieving global environmental sustainability.


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1.10 CONCLUSIONBeginning with a look at economic inequality, both between and withincountries, we have analysed the ‘hockey stick’ trajectories for GDP percapita, labour productivity, connectivity, global climate change and itsprimary source, carbon emissions. The hockey stick kinks occur at differenttimes for different countries and are associated both with the emergence ofthe permanent technological revolution and the capitalist revolution.Affluence, global inequality, and environmental degradation have oftenaccompanied change in the economic system.

Capitalism is an economic system defined by three nestedcharacteristics: private property, markets, and firms. Firms and marketsmade the division of labour and specialization possible on anunprecedented scale. Further contributing to increases in the productivityof a day of labour, the process of creative destruction incentivizes cost-reducing innovation.

Capitalism is a system of winners and losers both within nations andacross the globe, and this, along with creative destruction, contributes toinequality.

The combination of centralization within firms and decentralization viacompetition in markets makes it a unique and dynamic system. Both eco-nomic and political conditions, including what the government does as aneconomic actor, contribute to a capitalist system’s dynamism. Importantconditions are the security of private property, the provision of basicresearch and education, and the leadership of firms determined by meritrather than inheritance.

The rising inequality at the time of the capitalist revolution is a factorthat contributed first to demands for and later to the spread of democracy,a political system characterized by the rule of law, civil liberties andinclusive fair elections. Various forms of capitalism exist—some dynamicand some not, some alongside democratic governments and others not.

We have added economic measures such as GDP per capita andpurchasing power parity (PPP). We have seen how the ratio scale isuseful for comparing growth rates in charts. To address the challenge ofknowing when something like capitalism may cause something like eco-nomic growth we have introduced a natural experiment, where treatmentand control groups occur naturally.

Capitalism and democracy continue to evolve, to change each other, torevolutionize the world and to affect your everyday life. Economics willhelp you understand these changes and show you ways that you—withothers—can participate in this constant process of change.

1.10 CONCLUSION

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economic inequality Differences among members of asociety in some economic attribute such as wealth, income,or wages.capitalist revolution Rapid improvements in technologycombined with the emergence of a new economic system.economic system The institutions that organize the produc-tion and distribution of goods and services in an entireeconomy.capitalism An economic system in which private property,markets, and firms play an important role.private property The right and expectation that one canenjoy one’s possessions in ways of one’s own choosing,exclude others from their use, and dispose of them by gift orsale to others who then become their owners.market A way of connecting people who may mutually bene-fit by exchanging goods or services through a process ofbuying and selling.firm A business organization which pays wages and salariesto employ people, and purchases inputs, to produce andmarket goods and services with the intention of making aprofit.division of labour The specialization of producers to carryout different tasks in the production process. Also known as:specialization.specialization This takes place when a country or some otherentity produces a more narrow range of goods and servicesthan it consumes, acquiring the goods and services that itdoes not produce by trade.creative destruction Joseph Schumpeter’s name for theprocess by which old technologies and the firms that do notadapt are swept away by the new, because they cannotcompete in the market. In his view, the failure of unprofitablefirms is creative because it releases labour and capital goodsfor use in new combinations.government Within a given territory, the only body that candictate what people must do or not do, and can legitimately

use force and restraints on an individual’s freedom to achievethat end. Also known as: state.democracy A political system, that ideally gives equal polit-ical power to all citizens, defined by individual rights such asfreedom of speech, assembly, and the press; fair elections inwhich virtually all adults are eligible to vote; and in whichthe government leaves office if it loses.political system A set of principles, laws, and procedures thatdetermine how governments will be selected, and how thosegovernments will make and implement decisions that affectall or most members of a population.gross domestic product (GDP) per capita A measure of themarket value of the output of the economy in a given period(GDP) divided by the population.purchasing power parity (PPP) A statistical correctionallowing comparisons of the amount of goods people canbuy in different countries that have different currencies. Seealso: constant prices.ratio scale A scale that uses ratios to represent distance. Forexample, the ratio between 3 and 6, and between 6 and 12, isthe same (the larger quantity is twice the smaller). Thiscontrasts with a linear scale, where the distance between 3and 6, and between 6 and 9, is the same (3). See also: linearscale.natural experiment An empirical study exploiting naturallyoccurring statistical controls in which researchers do nothave the ability to assign participants to treatment andcontrol groups, as is the case in conventional experiments.Instead, differences in law, policy, weather, or other eventscan offer the opportunity to analyse populations as if theyhad been part of an experiment. The validity of such studiesdepends on the premise that the assignment of subjects tothe naturally occurring treatment and control groups can beplausibly argued to be random.economics The study of how people interact with each otherand with their natural surroundings in providing theirlivelihoods, and how this changes over time.

1.11 DOING ECONOMICS: MEASURING CLIMATECHANGEIn this unit, we discussed climate change as one of the effects of the rapideconomic growth that happened in most countries since the IndustrialRevolution. Climate change is an important issue for policymaking, sincegovernments need to assess how serious the problem is and then decidehow to mitigate it.

Suppose you are a policy advisor for a small island nation. The govern-ment would like to know more about the extent of climate change and itspossible causes. They ask you the following questions:

1. How can we tell whether climate change is actually happening or not?2. If it is real, how can we measure the extent of climate change and

determine what is causing it?


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50-02-glossary.html#glossary-specialization




Go to Doing Economics Empirical Project 1 (http://tinyco.re/3159330) towork on this problem.

Learning objectivesIn this project you will:

• use charts and summary measures to discuss the extent of climatechange and its possible causes

• use line charts to describe the behaviour of real-world variables overtime

• summarize data in a frequency table, and visualize distributions withcolumn charts

• describe a distribution using mean and variance• use scatterplots and the correlation coefficient to assess the degree of

association between two variables• explain what correlation measures and the limitations of correlation.

1.12 REFERENCESAcemoglu, Daron and James A. Robinson. 2012. Why Nations Fail: The

Origins of Power, Prosperity, and Poverty. New York, NY: CrownPublishing Group.

Alvaredo, Facundo, Anthony B. Atkinson, Thomas Piketty, Emmanuel Saez,and Gabriel Zucman. 2016. ‘The World Wealth and Income Database(WID)’ (https://tinyco.re/5262390).

Atkinson, Anthony B., and Thomas Piketty, eds. 2007. Top Incomes Over theTwentieth Century: A Contrast between Continental European andEnglish-Speaking Countries. Oxford: Oxford University Press.

Augustine, Dolores. 2013. ‘Innovation and Ideology: Werner Hartmann andthe Failure of the East German Electronics Industry’. In The EastGerman Economy, 1945–2010: Falling behind or CatchingUp? Cambridge: Cambridge University Press.

Berghoff, Hartmut and Uta Andrea Balbier. 2013. ‘From Centrally PlannedEconomy to Capitalist Avant-Garde? The Creation, Collapse, andTransformation of a Socialist Economy’. In The East German Economy,1945–2010: Falling behind or Catching Up? Cambridge: CambridgeUniversity Press.

Churchill, Winston. 1946. ‘Iron Curtain’ speech (https://tinyco.re/6053919).

Drèze, Jean and Amartya Sen. 2013. An Uncertain Glory: India and itsContradictions. Princeton, NJ: Princeton University Press: p. 2.

Kornai, János. 2013. Dynamism, Rivalry, and the Surplus Economy: Two Essayson the Nature of Capitalism. Oxford: Oxford University Press.

Landes, David S. 2003. The Unbound Prometheus: Technological Change andIndustrial Development in Western Europe from 1750 to the Present.Cambridge: Cambridge University Press.

Piketty, Thomas. 2014. Capital in the Twenty-First Century. Cambridge, MA:Harvard University Press.

Plummer, Alfred. 1971. Bronterre: A Political Biography of Bronterre O’Brien,1804–1864. Toronto: University of Toronto Press.

Schumpeter, Joseph A. 1949. ‘Science and Ideology’ (https://tinyco.re/4561610). The American Economic Review 39 (March): pp. 345–59.

1.12 REFERENCES

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Schumpeter, Joseph A. 1962. Capitalism, Socialism, and Democracy. NewYork: Harper & Brothers.

Schumpeter, Joseph A. 1997. Ten Great Economists. London: Routledge.Seabright, Paul. 2010. The Company of Strangers: A Natural History of Eco-

nomic Life (Revised Edition). Princeton, NJ: Princeton UniversityPress.

Skidelsky, Robert. 2012. ‘Robert Skidelsky-portrait: Joseph Schumpeter’(https://tinyco.re/8488199).

Smith, Adam. 1759. The Theory of Moral Sentiments (https://tinyco.re/6582039). London: Printed for A. Millar, and A. Kincaid and J. Bell.

Smith, Adam. (1776) 2003. An Inquiry into the Nature and Causes of theWealth of Nations (https://tinyco.re/9804148). New York: NY:Random House Publishing Group.

World Bank, The. 1993. The East Asian miracle: Economic growth and publicpolicy (https://tinyco.re/3040506). New York, NY: Oxford UniversityPress.


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