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What is capitalism?
Decentralization of decision making
What is venture capitol?
When you finance another's business in exchange for that person's ownership in the business
What is limited liability?
GM stock bought --> bankrupt -->didn't have to pay for its problem, even if you bought stock
When and what are the five characteristics of fuedalism?
- 900 -1450 AD
- 1. Primarily agricultural: farming manors
- 2. Political/Econ. power are centralized: Lord=leg, exec, jud
- 3. Exchange terms are set by custem and tradition
- 4. Food=#1 priority
- 5. Stagnant system
What are the 4 excuses for why the West was rich?
- 1. Science
- 2. Natural Resources
- 3. Luck-no-systematic
- Colonial exploitation- must be wealthy to be able to colonize others
Why did feudalism change/disappear?
- 1. Diffusion of power among the lords: Kings only have as much power as the lords give him
- 2. Rejected idea of absolute power in the state: Why Magna Carta was written
- 3. Disruption of labor force: due to plague/famine
What were the 2 most influential technological innovations?
- 1. Steam and water power: in factories and transportation
- 2. Iron and steel: more production and to move things more quickly
- Larger and sturdier factories and machines
- Led to expansion of urbanization
- Created workplace for displaced farmers
What did trading (mercantialism) cities do with feudal systems?
- They outcompeted the fuedal system b/c it made a mroe efficient way of making and selling goods
What happens when wealth rises?
- 1. There's an increase in population
- 2. Political vaccuum: merchant class fills this and is in charge
- 3. Not restrained by custom
- 4. Used to individual liberty--> urbanization
What is the Rule of 72?
- 6% rate of growth=things double in 12 years
- 1% rate of growth=72 years
- Even if something is at one percent, that is still have a fast paced compared to the medieval period
What did the ability to navigate oceans do?
- 1. Restrained ability for govt to enfore regulation
- 2. Movement to grant monopoly: East india trading company
What must institutions have in order to develop?
- 1. Legal system designed to give predictable results
- 2. Institution of credit and banking
- 3. Institution of insurance-risk sharing
- 4. Predictable system of taxation
- 5. Firms separate from the individual
- 6. System of accounting- Double entry book keeping
- 7. Legal system of property rights
- 8. Rising sense of individual responsibility
What happens when you only export goods and do not import them?
- You get gold, but you can't live on gold
- Adam Smith said you become wealthy by becoming productive
What happens if you sell monopoly over a certain trade to a new firm?
- 1. Get accumulation of power within a country
- 2. BUT there will be competition among countries
What did the factory system do to the Industrial Revolution?
- Created organizational innovation
- Reduced marginal cost of production by increasing supply, which drives the price down
- (Textiles-first factory-made more existing items- later innovation starts
How did the organization of production change?
- Went from artisan-craftsman to employess-owner
- Written about in books
- Adam Smith said if you're just working in a factory, you lack intellectual development
What other revolutions happened besides the Industrial Revolution?
- 1. Agricultural productivity had to increase
- 2. Develop raq materials industry
- 3. Develop transportation network
- 4. Develop whole sale and retail trade (Walmart)
- 5. Further development of insurance and banking
What is the positive feedback loop?
Inventing transportation and technology-->expand markets-->increases incentive to innovate-->inventing transportation and technology
How does our opp. cost differ from Africa's?
- Nike factories paid $2/day: they think what a good deal! Our opp. cost is different and higher than Africa's
- Otherwise African workers would not have any money
Is the feudal system innovative?
No because the feudal system is based on tradition
What is China doing right now?
They are taking the same steps that we took in the manufacturing society
For a caveman to make an ax...
- he must consider opp. cost of time
- needs a system of property rights
- needs an institutional mechanism for the exchange of goods and services
How is a system of trade and specialization of labor interrelated?
Because it takes a lot of people to make a pencil...increases trade because there is more specialized labor needed to make things
What is the key to human progress?
What are the two basics of human progress?
- 1. Property rights
- 2. Belief in the individual's:
- a. importance
- b. unit of account (not a tribe)
- c. Individual can make a difference
What must the tribe/state's goal be?
To better the individual
Feudalism declined b/c
- 1. Military technology (crossbow)
- 2. Plagues, droughts: stressed the labor market b/c ppl. were tied to the land
- 3. Trading cities outcompeted the feudal system
When and what is the era of Trade?
- Rise of themerchant class: lords lost power
- Technological innovation: primarily focused on trade: the beneficial cycle
When and what was the Period of the factory system
- use of iron/steel and water/ steam power
- Reduced marginal cost by shifting supply curve to the right- cheaper goods
- Made more existing goods, not innovative yet
- Solution for displaced agricultural workers
- Led to more urbanization
When and what is the Era of Corporation
- limited liability w/ tradeable stock
- Manufacturing surpasses agricultural
- With bigger firms, the marginal cost will be prolonged until a later point- needs financing-->corporation
When and what was Rise of the Fed. govt.
- Institutional changes: Allows the govt. to get bigger
- 1. income tax: allows govt. to get bigger
- 2. Federal Reserve: decides how much money it is worth
- 3. 17th amendment: direct election of senators
- Changes that changed people's attitude:
- 1. WWI
- 2. WWII
- 3. Great Depression
- 4. 9/11
- 5. The Great Recession
What changes the Aggregate demand curve?
- 1. Consumption: lower taxes increase income
- 2. Investment demand: Fed. res. buying bonds
- 3. Govt. spending