HISTORY OF
ECONOMIC THOUGHT
DR. PETROS KOSMAS
LECTURER, CASA COLLEGE
ACADEMIC YEAR 2010 - 2011
LECTURE 6
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Was there a Need for Reform?
 During the 19th century, the Industrial Revolution not
only revolutionized the way things were made, but
also created many problems.
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Tensions Created By the
Industrial Revolution
 The gap between the rich and poor widened
 Business owners/leaders argued that the government
should stay out of economic affairs.
 Reformers argued the government needed to play an
active role to improve the conditions for the poor.
 Workers demanded better wages, more rights, and
protection.
 Workers form labor unions increase their influence,
often times clashing with business owners
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The Philosophers of Industrialization & their
Economic Philosophies
Philosopher
Economic Philosophy
Adam Smith
laissez-faire
Thomas Malthus
laissez-faire capitalism
David Ricardo
laissez-faire capitalism
Jeremy Bentham
utilitarianism
John Stuart Mill
utilitarianism
Robert Owen
utopian socialism
Karl Marx
Marxism/communism
Friedrich Engels
Marxism/communism
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Laissez-faire
 Term is French in origin— “let people do as they please.”
 Economic policy stemmed from the French economic
philosophers of the Enlightenment.
 The Enlightened Philosophers argued:
 against government intervention in the economy and the
use of placing heavy tariffs on foreign goods.
 that government regulations only interfered with
production and wealth.
 if government allowed free trade, the economy would
prosper
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Laissez-faire
 Definition of laissez-faire: The idea that the
government should not interfere with or regulate
industries and business.


An economic policy of letting owners and business set working
condition without interference.
This policy favors a free market unregulated by the
government.
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Capitalism
 Definition of capitalism: an economic system based
on private ownership and on the investment of
money in business ventures in order to make a profit
 These ideas helped bring about the Industrial
Revolution and supporters of capitalism believed
its success was due in part by the fact that the
government did not meddle in economics.
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The Philosophers of Capitalism
Thomas Malthus
(1766-1834)
David Ricardo
(1772-1823)
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Thomas Malthus
 Supported the basic
ideas of Adam Smith
and that natural laws
governed economic
life
 His ideas, (along with
David Ricardo’s,) were
the foundations of
laissez-faire
capitalism.
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Thomas Malthus
(1766-1834)
Thomas Malthus
 He urged people to have less
children to avoid
overpopulation and the
chance of large families
becoming poor and to avoid
suffering.
 Predictions became a reality
during the 1840s, though
the food supply eventually
increased, living conditions
improved, and people began
to have less children.
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Thomas Malthus
(1766-1834)
Thomas Malthus
 In his essay, An Essay on
the Principle of Population
(1798), he argued that
population tended to
increase more rapidly than
the food supply.
 Argued that without wars,
famine, or epidemics to
control the population,
most people would be poor
would suffer.
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Thomas Malthus
(1766-1834)
David Ricardo
 A wealthy stockbroker
 Believed the poor had too many
children.
 Elaborated on Malthus’s theory
of economics in his book
Principles of Political Economy
& Taxation (1817):
 Believed a permanent
underclass would always be
poor
 Many workers + abundant
natural resources = cheap
labor & resources.
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David Ricardo
(1772-1823)
David Ricardo
 Principles of Political
Economy & Taxation
(1817) continued:
 Few workers + scarce
natural resources =
expensive labor &
resources.
 Believed as the
population increased,
wages would decrease
(workers paid less)
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David Ricardo
(1772-1823)
Laissez faire thinkers, such as Adam Smith, Thomas
Malthus, and David Ricardo all:
Opposed government intervention in the economy,
which included government efforts to help poor
workers.
Believed people should be left to improve their lot
through thrift, hard work, and limiting the size of
their families.
Argued creating a minimum wage and better
working conditions would:



1.
2.
3.
Upset the free market system
Lower profits
Undermine the production of wealth in society
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Discussion: Laissez-faire Capitalism and
the Philosophers
 How were “workers” viewed by people like Smith,




Malthus, and Ricardo?
How did they view the poor? Was their view favorable
or unfavorable? Explain your answer.
According to Malthus and Ricardo, what affect did
population growth have upon society?
What flaws (if any) can you find with laissez-faire
capitalism?
Could a society have a capitalist economy in which a
government could impose restrictions? Explain your
answer. (Hint: Think about the U.S. economy.)
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Socialism
 Grew out of the Enlightenment faith in progress, its belief in
the goodness of human nature, and its concern with social
justice.
 Supporters of socialism believed:




Governments should intervene in business
Wealthy people or governments had an obligation to take action to
make peoples lives better (i.e. better wages, working/living
conditions, distribute wealth/power equitably)
Condemned the evils of industrial capitalism, which they argued,
created the huge gap between the rich and the poor.
In a society in which would operate for the benefit of all its members,
not just for the wealthy.
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Socialism
 Definition of socialism: an economic system in which
the factors of production are owned by the public and
operate for the welfare of all.
 Under socialism, people as a whole would own and
operate the means of production—the farms,
factories, railways, mines, and other large businesses
that produced and distributed goods.
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Utilitarianism
 A form of socialism
 Definition of utilitarianism: the theory, proposed by
Jeremy Bentham in the late 1700s, that government
actions are useful only if they promote the greatest
good for the greatest number of people.


Idea that the goal of society should be to bring about the
greatest happiness for the greatest number of people.
This theory provided that the government intervene in
business and the economy to bring about economic and social
equality, fair working conditions, and improved living
conditions.
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The Philosophers of Utilitarianism
Jeremy Bentham
(1748-1832)
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John Stuart Mill
(1806-1873)
Jeremy Bentham
 Modified the ideas of Adam Smith
 Introduced utilitarianism in the late 1700s
 He strongly supported individual freedom,
which he believed guaranteed the greatest
happiness.
 Believed people should:
 Judge ideas, institutions, and actions on
the basis of their utility, or usefulness
 Be free to pursue his/her own advantage
without interference from the state
(government.)
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Jeremy Bentham
Bentham’s thoughts about
the government:





The government should try to promote
the greatest good for the greatest
amount of people.
Government policy was only useful if it
promoted this goal.
Laws or actions should be judged by
their “utility.”
Did they [laws] provide more pleasure
(happiness) than pain?
Believed the government needed to be
involved in the economy in certain
circumstances.
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John Stuart Mill
 Philosopher & economist, led
the utilitarianism in the 1800s
 Questioned unregulated
capitalism
 Believed it was wrong that
workers led deprived lives and
often meant starving to death
 Wished to help ordinary
through governmental policies
that would create an equal
division of profits
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John Stuart Mill
 While he believed in individual
freedom, he argued the
government needed to improve the
harsh life of the working class.
 Like other utilitarian’s, Mill
worked for reforms in many areas
affecting workers, the poor, child
labor, and public health.
 Favored cooperative systems of
agriculture
 Supported women’s rights
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John Stuart Mill
 Suffrage: argued workers and
women should have the right to
vote

These groups could then use their
political power to win reforms.
 Pushed for governmental reforms
in the following areas:



the legal system, including prison
systems
education reform
Class system: he wished the
government would abolish the great
disparity between the rich and the
poor.
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Utopia
 Definition of utopia: an ideal society;
an imaginary land described by Sir
Thomas More in his book Utopia—
hence, an ideal place.
 In Greek, utopia means “no place.”
 In More’s book, greed, corruption,
and war had been weeded out.
Because there was no greed in
Utopia, there was no need for
money.
 Influenced the political and
economic philosophy of utopian
socialism
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Sir Thomas More
(1478-1535)
Utopian Socialism
 Early socialists were called utopians.
 Early socialists tried to build self-sufficient
communities. In this community:


all work and all property was owned in common.
They believed that no difference between rich & poor = no
fighting between people.
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Robert Owen
 Born a poor Welsh boy—later
became a successful mill owner.
 He refused to use child labor.
 Lobbied the government to pass
laws limiting child labor and
encouraged the organization of
labor unions.
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Robert Owen
(1771-1858)
Robert Owen
 Owen’s vision of ‘Utopia’



Built a factory and a model village
in New Lanark, Scotland.
Built homes for workers, opened a
school for children.
Workers were generally treated
well, illustrating an employer
could offer decent living and
working conditions while still
running a profitable business.
 By the 1820s, people visited New
Lanark to study Owen’s reforms
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Robert Owen
(1771-1858)
The Philosophers of Marxism
 Definition of Marxism: A radical type of socialism
introduced by Karl Marx, a German journalist
Karl Marx
(1818-1883)
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Friedrich Engels
(1820-1895)
Karl Marx
 A German journalist
 Agitated for reform as a young man.
 A socialist who despised capitalism,
which he argued, created prosperity
for a few and poverty for many.
 Forced to leave his homeland
because of his radical ideas.
 First lived in Paris and then settled
in London, where he met Friedrich
Engels.
 Along with Engels, they outlined
their economic ideas in a 23-page
pamphlet called the Communist
Manifesto
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Friedrich Engels
 A German socialist residing in
London, England
 His father owned a textile mill
in Manchester, England.
 Teamed up with Karl Marx, to
outline their economic ideas in a
23-page pamphlet called the
Communist Manifesto
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Friedrich Engels
(1820-1895)
Marx & Engels:
The Communist Manifesto
 Marx and Engels argued that human societies have always
been divided into two warring classes:

The middle class, “haves” or employers, called the
bourgeoisie
 The wealthy controlled the means of producing goods

The working class, “have-nots” or employees
called the proletariat
 The poor performed backbreaking labor under terrible
conditions.
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Marx & Engels:
The Communist Manifesto
 The Industrial Revolution enriched the wealthy and
impoverished the poor.
 Marx and Engels Predicted that the workers would
overthrow the owners:

“the proletarians have nothing to lose but their chains. They
have a world to win. Workingmen of all countries unite.”
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The Future According to Marx
 Marx argued the capitalist system would destroy
itself in the following ways:

Factories will drive small artisans out of business

Small number of manufacturers will control the wealth,
causing a huge gap between classes

The large proletariat will revolt, seize factories & mills from
capitalists
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