Madam I am Adam: Sid Harth
(too old to reply)
2010-02-25 15:44:30 UTC
History of Palindromes

Palindromes as a form of wordplay have been created for many
centuries. For example, the ancient Greeks are known to have often
inscribed the following onto their fountains:

Nipson anomemata me monan opsin.

It translates as wash the sin as well as the face. Sharp-eyed readers
will notice that the above it not actually a palindrome. This is
because we have written it using letters of the English alphabet; when
Greek characters are used it is a palindrome because ps is a single
letter in Greek (Y).

The Romans were also admirers of palindromes, and produced such
sentences as:

In girum imus nocte et consumimur igni.

It means we enter the circle after dark and are consumed by fire and
is said to describe the movement of moths.

List of Palindromes
Our Top 30 Best Palindrome List:

Don't nod
Dogma: I am God
Never odd or even
Too bad – I hid a boot
Rats live on no evil star
No trace; not one carton
Was it Eliot's toilet I saw?
Murder for a jar of red rum
May a moody baby doom a yam?
Go hang a salami; I'm a lasagna hog!
Satan, oscillate my metallic sonatas!
A Toyota! Race fast... safe car: a Toyota
Straw? No, too stupid a fad; I put soot on warts
Are we not drawn onward, we few, drawn onward to new era?
Doc Note: I dissent. A fast never prevents a fatness. I diet on cod
No, it never propagates if I set a gap or prevention
Anne, I vote more cars race Rome to Vienna
Sums are not set as a test on Erasmus
Kay, a red nude, peeped under a yak
Some men interpret nine memos
Campus Motto: Bottoms up, Mac
Go deliver a dare, vile dog!
Madam, in Eden I'm Adam
Oozy rat in a sanitary zoo
Ah, Satan sees Natasha
Lisa Bonet ate no basil
Do geese see God?
God saw I was dog
Dennis sinned


Reference »
Wikipedia Articles

This article is about the Scottish moral philosopher. For other
persons of the same name, see Adam Smith (disambiguation).

Adam Smith

Full name Adam Smith
Born 16 June 1723
(OS: 5 June 1723)
Kirkcaldy, Fife, Scotland
Died 17 July 1790 (aged 67)
Edinburgh, Scotland

Adam Smith (baptised 16 June 1723 – 17 July 1790 [OS: 5 June 1723 – 17
July 1790]) was a Scottish moral philosopher and a pioneer of
political economics. One of the key figures of the Scottish
Enlightenment, Smith is the author of The Theory of Moral Sentiments
and An Inquiry into the Nature and Causes of the Wealth of Nations.
The latter, usually abbreviated as The Wealth of Nations, is
considered his magnum opus and the first modern work of economics.
Smith is widely cited as the father of modern economics.

Smith studied moral philosophy at the University of Glasgow and Oxford
University. After graduating, he delivered a successful series of
public lectures at Edinburgh, leading him to collaborate with David
Hume during the Scottish Enlightenment. Smith obtained a professorship
at Glasgow teaching moral philosophy, and during this time he wrote
and published The Theory of Moral Sentiments. In his later life, he
took a tutoring position that allowed him to travel throughout Europe,
where he met other intellectual leaders of his day. Smith returned
home and spent the next ten years writing The Wealth of Nations,
publishing it in 1776. He died in 1790.


Early life

Smith was born to Margaret Douglas at Kirkcaldy, Fife, Scotland. His
father, also named Adam Smith, was a lawyer, civil servant, and
widower who married Margaret Douglas in 1720 and died six months
before Smith was born.[1] Although the exact date of Smith's birth is
unknown, his baptism was recorded on 16 June 1723 at Kirkcaldy.[2]
Though few events in Smith's early childhood are known, Scottish
journalist and Smith's biographer John Rae recorded that the man was
abducted by gypsies at the age of four and eventually released when
others went to rescue him.[N 1] Smith was close to his mother, who
likely encouraged him to pursue his scholarly ambitions.[4] He
attended the Burgh School of Kirkcaldy—characterised by Rae as "one of
the best secondary schools of Scotland at that period"—from 1729 to
1737.[3] While there, he studied Latin, mathematics, history, and

A commemorative plaque for Smith is located at Smith's home town of
Formal education

Smith entered the University of Glasgow when he was fourteen and
studied moral philosophy under Francis Hutcheson.[4] Here he developed
his passion for liberty, reason, and free speech. In 1740, Smith was
awarded the Snell exhibition and left the University of Glasgow to
attend Balliol College, Oxford.[5]

Smith considered the teaching at Glasgow to be far superior to that at
Oxford, and found his experience at the latter to be intellectually
stifling.[6] In Book V, Chapter II of The Wealth of Nations, Smith
wrote: "In the University of Oxford, the greater part of the public
professors have, for these many years, given up altogether even the
pretence of teaching." Smith is also reported to have complained to
friends that Oxford officials once discovered him reading a copy of
David Hume's Treatise on Human Nature, and they subsequently
confiscated his book and punished him severely for reading it.[3][7]
[8] According to William Robert Scott, "The Oxford of [Smith's] time
gave little if any help towards what was to be his lifework."[9]
Nevertheless, Smith took the opportunity while at Oxford to teach
himself several subjects by reading many books from the shelves of the
large Oxford library.[10] When Smith was not studying on his own, his
time at Oxford was not a happy one, according to his letters.[11] Near
the end of his time at Oxford, Smith began suffering from shaking
fits, probably the symptoms of a nervous breakdown.[12] He left Oxford
University in 1746, before his scholarship ended.[12][13]

In Book V of The Wealth of Nations, Smith comments on the low quality
of instruction and the meager intellectual activity at English
universities, when compared to their Scottish counterparts. He
attributes this both to the rich endowments of the colleges at Oxford
and Cambridge, which made the income of professors independent of
their ability to attract students, and to the fact that distinguished
men of letters could make an even more comfortable living as ministers
of the Church of England. Smith had originally intended to study
theology and enter the clergy, but his subsequent learning, especially
from the skeptical writings of David Hume, persuaded him to take a
different route.[8]

Teaching career

Smith began delivering public lectures in 1748 at Edinburgh under the
patronage of Lord Kames.[14] His lecture topics included rhetoric and
belles-lettres, and later the subject of "the progress of opulence".
On this latter topic he first expounded his economic philosophy of
"the obvious and simple system of natural liberty". While Smith was
not adept at public speaking, his lectures met with success.[15]

David Hume was a friend and contemporary of Smith.In 1750, he met the
philosopher David Hume, who was his senior by more than a decade. The
alignments of opinion that can be found within their writings covering
history, politics, philosophy, economics, and religion indicate that
they shared a closer intellectual alliance and friendship than with
the others who were to play important roles during the emergence of
what has come to be known as the Scottish Enlightenment.[16]

In 1751, Smith earned a professorship at Glasgow University teaching
logic courses. When the Chair of Moral Philosophy died the next year,
Smith took over the position.[15] He would continue academic
production for the next thirteen years, which he characterized as "by
far the most useful and therefore by far the happiest and most
honourable period [of his life]".[17]

Smith published The Theory of Moral Sentiments in 1759, embodying some
of his Glasgow lectures. This work was concerned with how human
morality depends on sympathy between agent and spectator, or the
individual and other members of society. He bases his explanation not
on a special "moral sense", as the third Lord Shaftesbury and
Hutcheson had done, nor on utility as Hume did, but on sympathy.
Smith's popularity greatly increased due to the The Theory of Moral
Sentiments, and as a result, many wealthy students left their schools
in other countries to enroll at Glasgow to learn under Smith.[18]

After the publication of The Theory of Moral Sentiments, Smith began
to give more attention to jurisprudence and economics in his lectures
and less to his theories of morals. The development of his ideas on
political economy can be observed from the lecture notes taken down by
a student in 1763, and from what William Robert Scott described as an
early version of part of The Wealth of Nations.[19] For example, Smith
lectured that labor—rather than the nation's quantity of gold or silver
—is the cause of increase in national wealth.[18]

François Quesnay, one of the leaders of the Physiocratic school of
thoughtIn 1762, the academic senate of the University of Glasgow
conferred on Smith the title of Doctor of Laws (LL.D.). At the end of
1763, he obtained a lucrative offer from Charles Townshend (who had
been introduced to Smith by David Hume) to tutor his stepson, Henry
Scott, the young Duke of Buccleuch. Smith subsequently resigned from
his professorship to take the tutoring position. Because he resigned
in the middle of the term, Smith attempted to return the fees he had
collected from his students, but they refused.[20]

Tutoring and travels

Smith's tutoring job entailed touring Europe with Henry Scott while
teaching him subjects including proper Polish.[20] Smith was paid £300
per year plus expenses along with £300 per year pension, which was
roughly twice his former income as a teacher.[20] Smith first traveled
as a tutor to Toulouse, France, where he stayed for a year and a half.
[20] According to accounts, Smith found Toulouse to be very boring,
and he wrote to Hume that he "had begun to write a book in order to
pass away the time".[20] After touring the south of France, the group
moved to Geneva. While in Geneva, Smith met with the philosopher

After staying in Geneva, the party went to Paris, where Smith came to
know intellectual leaders such as Benjamin Franklin,[22] Turgot, Jean
D'Alembert, André Morellet, Helvétius and, in particular, Francois
Quesnay, the head of the Physiocratic school, whose academic products
he respected greatly.[23] The physiocrats believed that wealth came
from production and not from the attainment of precious metals, which
was adverse to mercantilist thought. They also believed that
agriculture tended to produce wealth and that merchants and
manufacturers did not.[22] While Smith did not embrace all of the
physiocrats' ideas, he did say that physiocracy was "with all its
imperfections [perhaps] the nearest approximation to the truth that
has yet been published upon the subject of political economy".[24]

Later years

In 1766, Henry Scott's younger brother died in Paris, and Smith's tour
as a tutor ended shortly thereafter.[24] Smith returned home that year
to Kirkcaldy, and he devoted much of the next ten years to his magnum
opus.[25] There he befriended Henry Moyes, a young blind man who
showed precocious aptitude. As well as teaching Moyes himself, Smith
secured the patronage of David Hume and Thomas Reid in the young man's
education.[26] In May 1773, Smith was elected fellow of the Royal
Society of London,[27] and was elected a member of the Literary Club
in 1775.[28] The Wealth of Nations was published in 1776 and was an
instant success, selling out the first edition in only six months.[29]

In 1778, Smith was appointed to a post as commissioner of customs in
Scotland and went to live with his mother in Panmure House in
Edinburgh's Canongate.[30] Five years later, he became one of the
founding members of the Royal Society of Edinburgh,[31] and from 1787
to 1789 he occupied the honorary position of Lord Rector of the
University of Glasgow.[32] He died in the northern wing of Panmure
House in Edinburgh on 17 July 1790 after a painful illness and was
buried in the Canongate Kirkyard.[33] On his death bed, Smith
expressed disappointment that he had not achieved more.[34]

Smith's literary executors were two friends from the Scottish academic
world: the physicist and chemist Joseph Black, and the pioneering
geologist James Hutton.[35] Smith left behind many notes and some
unpublished material, but gave instructions to destroy anything that
was not fit for publication.[36] He mentioned an early unpublished
History of Astronomy as probably suitable, and it duly appeared in
1795, along with other material such as Essays on Philosophical

Personality and beliefs


James Tassie's enamel paste medallion of Smith provided the model for
many engravings and portraits which remain today.[37]Not much is known
about Smith's personal views beyond what can be deduced from his
published articles. His personal papers were destroyed after his
death, at his own request.[36] He never married[38] and seems to have
maintained a close relationship with his mother, with whom he lived
after his return from France and who died six years before his own

Contemporary accounts describe Smith as an eccentric but benevolent
intellectual, comically absent minded, with peculiar habits of speech
and gait and a smile of "inexpressible benignity".[40] He was known to
talk to himself, and had occasional spells of imaginary illness.[34]
Smith is often described as a prototypical absent-minded professor.
[41] He is reported to have had books and papers stacked up in his
study, with a habit he developed during childhood of speaking to
himself and smiling in rapt conversation with invisible companions.

Various anecdotes have discussed his absentminded nature. In one
story, Smith took Charles Townshend on a tour of a tanning factory and
while discussing free trade, Smith walked into a huge tanning pit from
which he had to be removed.[42] Another episode records that he put
bread and butter into a teapot, drank the concoction, and declared it
to be the worst cup of tea he ever had. In another example, Smith went
out walking and daydreaming in his nightgown and ended up 15 miles (24
km) outside town before nearby church bells brought him back to

Portrait of Smith by John Kay, 1790Smith is reported to have been an
odd-looking fellow. One author stated that Smith "had a large nose,
bulging eyes, a protruding lower lip, a nervous twitch, and a speech
impediment".[8] Smith is reported to have acknowledged his looks at
one point saying, "I am a beau in nothing but my books."[8] Smith
"never" sat for portraits [43], so depictions of him created during
his lifetime were drawn from memory, with rare exceptions. The most
famous examples were a profile by James Tassie and two etchings by
John Kay.[44] The line engravings produced for the covers of 19th
century reprints of The Wealth of Nations were based largely on
Tassie's medallion.[45]

Religious views

There has been considerable scholarly debate about the nature of
Smith's religious views. Smith's father had a strong interest in
Christianity and belonged to the moderate wing of the Church of
Scotland.[46] In addition to the fact that he received the Snell
Exhibition, Smith may have also moved to England with the intention of
pursuing a career in the Church of England. At Oxford, Smith rejected
Christianity and it is generally believed that he returned to Scotland
as a deist.[47]

Economist Ronald Coase has challenged the view that Smith was a deist,
[48] stating that while Smith may have referred to the "Great
Architect of the Universe", other scholars have "very much exaggerated
the extent to which Adam Smith was committed to a belief in a personal
God".[49] He based this on analysis of a remark in The Wealth of
Nations where Smith writes that the curiosity of mankind about the
"great phenomena of nature" such as "the generation, the life, growth
and dissolution of plants and animals" has led men to "enquire into
their causes". Coase notes Smith's observation that "[s]uperstition
first attempted to satisfy this curiosity, by referring all those
wonderful appearances to the immediate agency of the gods". Smith's
distant friend and colleague David Hume, with whom he agreed on most
matters, was described by contemporaries as an atheist, although there
is some debate about the exact nature of his views among modern

In a letter to William Strahan, Smith's account of Hume's courage and
tranquility in the face of death aroused violent public controversy,
[51] since it contradicted the assumption, widespread among orthodox
believers, that an untroubled death was impossible without the
consolation of religious belief.[52]

Published works

The Theory of Moral Sentiments

Main article: The Theory of Moral Sentiments

In 1759, Smith published his first work, The Theory of Moral
Sentiments. He continued to revise the work throughout his life,
making extensive revisions to the final (6th) edition shortly before
his death in 1790.[N 2] Although The Wealth of Nations is widely
regarded as Smith's most influential work, it has been reported that
Smith himself "always considered his Theory of Moral Sentiments a much
superior work to his Wealth of Nations".[54] P. J. O'Rourke, author of
the commentary On The Wealth of Nations (2007), has agreed, calling
The Theory of Moral Sentiments "the better book".[55] It was in this
work that Smith first referred to the "invisible hand" to describe the
apparent benefits to society of people behaving in their own interests.

In The Theory of Moral Sentiments, Smith critically examined the moral
thinking of the time and suggested that conscience arises from social
relationships.[57] His aim in the work is to explain the source of
mankind's ability to form moral judgements, in spite of man's natural
inclinations toward self-interest. Smith proposes a theory of sympathy
in which the act of observing others makes people aware of themselves
and the morality of their own behavior. Haakonssen writes that in
Smith's theory, "Society is ... the mirror in which one catches sight
of oneself, morally speaking."[58]

Because The Theory of Moral Sentiments emphasizes sympathy for others
while The Wealth of Nations famously emphasizes the role of self
interest, some scholars have perceived a conflict between these works.
As one economic historian observed: "Many writers, including the
present author at an early stage of his study of Smith, have found
these two works in some measure basically inconsistent."[59] In recent
years, however, most scholars of Smith's work have argued that no
contradiction exists. In The Theory of Moral Sentiments, Smith
develops a theory of psychology in which individuals seek the approval
of the "impartial spectator" as a result of a natural desire to have
outside observers sympathize with them. Rather than viewing The Wealth
of Nations and The Theory of Moral Sentiments as presenting
incompatible views of human nature, most Smith scholars regard the
works as emphasizing different aspects of human nature that vary
depending on the situation. The Wealth of Nations draws on situations
where man's morality is likely to play a smaller role—such as the
laborer involved in pin-making—whereas The Theory of Moral Sentiments
focuses on situations where man's morality is likely to play a
dominant role among more personal exchanges.

The Wealth of Nations
Main article: The Wealth of Nations

The site where Smith wrote The Wealth of NationsAn Inquiry into the
Nature and Causes of the Wealth of Nations expounds that the free
market, while appearing chaotic and unrestrained, is actually guided
to produce the right amount and variety of goods by a so-called
"invisible hand".[56] Smith opposed any form of economic concentration
because it distorts the market's natural ability to establish a price
that provides a fair return on land, labor, and capital. He advanced
the idea that a market economy would produce a satisfactory outcome
for both buyers and sellers, and would optimally allocate society's
resources.[60] The image of the invisible hand was previously employed
by Smith in The Theory of Moral Sentiments, but it has its original
use in his essay, "The History of Astronomy". Smith believed that when
an individual pursues his self-interest, he indirectly promotes the
good of society: "by pursuing his own interest, [the individual]
frequently promotes that of the society more effectually than when he
intends to promote it."[61] Self-interested competition in the free
market, he argued, would tend to benefit society as a whole by keeping
prices low, while still building in an incentive for a wide variety of
goods and services. Nevertheless, he was wary of businessmen and
argued against the formation of monopolies.

The first page of The Wealth of Nations, 1776 London editionAn often-
quoted passage from The Wealth of Nations is: "It is not from the
benevolence of the butcher, the brewer, or the baker that we expect
our dinner, but from their regard to their own self-interest. We
address ourselves, not to their humanity but to their self-love, and
never talk to them of our own necessities but of their
advantages."[62] Value theory was important in classical theory. Smith
wrote that the "real price of every thing ... is the toil and trouble
of acquiring it" as influenced by its scarcity. Smith maintained that,
with rent and profit, other costs besides wages also enter the price
of a commodity.[63] Other classical economists presented variations on
Smith, termed the "labour theory of value". Classical economics
focused on the tendency of markets to move to long-run equilibrium.

Smith's advocacy of self-interest based economic exchange did not,
however, preclude for him issues of fairness and justice. In Asia,
Europeans "by different arts of oppression..have reduced the
population of several of the Moluccas,"[64] he wrote, while "the
savage injustice of the Europeans" arriving in America, "rendered an
event, which ought to have been beneficial to all, ruinous and
destructive to several of those unfortunate countries."[65] The Native
Americans, "far from having ever injured the people of Europe, had
received the first adventurers with every mark of kindness and
hospitality." However, "superiority of force" was "so great on the
side of the Europeans, that they were enabled to commit with impunity
every sort of injustice in those remote countries."[66]

Smith also believed that a division of labour would effect a great
increase in production. One example he used was the making of pins.
One worker could probably make only twenty pins per day. However, if
ten people divided up the eighteen steps required to make a pin, they
could make a combined amount of 48,000 pins in one day. However,
Smith's views on division of labour are not unambiguously positive,
and are typically mis-characterized.[67] On labor relations, Smith
noted "severity" of laws against worker actions, and contrasted the
masters' "clamour" against workers associations, with associations and
collusions of the masters which "are never heard by the people" though
such actions are "always" and "everywhere" taking place.[68]

Other works

Smith's burial place in Canongate KirkyardShortly before his death,
Smith had nearly all his manuscripts destroyed. In his last years, he
seemed to have been planning two major treatises, one on the theory
and history of law and one on the sciences and arts. The posthumously
published Essays on Philosophical Subjects, a history of astronomy
down to Smith's own era, plus some thoughts on ancient physics and
metaphysics, probably contain parts of what would have been the latter
treatise. Lectures on Jurisprudence were notes taken from Smith's
early lectures, plus an early draft of The Wealth of Nations,
published as part of the 1976 Glasgow Edition of the works and
correspondence of Smith. Other works, including some published
posthumously, include Lectures on Justice, Police, Revenue, and Arms
(1763) (first published in 1896); A Treatise on Public Opulence (1764)
(first published in 1937); and Essays on Philosophical Subjects


A statue of Smith on Edinburgh's Royal Mile built through private
donations and organised by the Adam Smith InstituteThe Wealth of
Nations, one of the earliest attempts to study the rise of industry
and commercial development in Europe, was a precursor to the modern
academic discipline of economics. In this and other works, Smith
expounded how rational self-interest and competition can lead to
economic prosperity and well-being. It also provided one of the best-
known intellectual rationales for free trade and capitalism, greatly
influencing the writings of later economists. Smith is often cited as
the father of modern economics.[69][70][71] Smith was controversial in
his own day and his general approach and writing style was often
satirized by Tory writers in the moralizing tradition of Hogarth and
Swift, as a discussion at the University of Winchester suggests.[72]

George Stigler attributes to Smith the central proposition of
mainstream economic theory, namely that an individual will invest a
resource, for example, land or labour, so as to earn the highest
possible return on it. Consequently, all uses of the resource should
yield a risk-adjusted equal rate of return; otherwise resource
reallocation would result.

On the other hand, Joseph Schumpeter dismissed Smith's contributions
as unoriginal, saying "His very limitation made for success. Had he
been more brilliant, he would not have been taken so seriously. Had he
dug more deeply, had he unearthed more recondite truth, had he used
more difficult and ingenious methods, he would not have been
understood. But he had no such ambitions; in fact he disliked whatever
went beyond plain common sense. He never moved above the heads of even
the dullest readers. He led them on gently, encouraging them by
trivialities and homely observations, making them feel comfortable all
along.” (Schumpeter History of Economic Analysis. New York: Oxford
University Press, p 185)

Classical economists presented variations on Smith, termed the "labour
theory of value", later Marxian economics descends from classical
economics also using Smith's labour theories in part. The first volume
of Karl Marx's major work, Capital, was published in German in 1867.
In it, Marx focused on the labour theory of value and what he
considered to be the exploitation of labour by capital.[73][74] The
labour theory of value held that the value of a thing was determined
by the labor that went into its production. This contrasts with the
modern understanding of mainstream economics, that the value of a
thing is determined by what one is willing to give up to obtain the
thing. Smith is often cited not only as the conceptual builder of free
markets in capitalism but also as a main contributor to communist
theory, via his influence on Marx.

The Adam Smith Theatre in KirkcaldyA body of theory later termed
"neoclassical economics" or "marginalism" formed from about 1870 to
1910. The term "economics" was popularized by such neoclassical
economists as Alfred Marshall as a concise synonym for "economic
science" and a substitute for the earlier, broader term "political
economy" used by Smith.[75][76] This corresponded to the influence on
the subject of mathematical methods used in the natural sciences.[77]
Neoclassical economics systematized supply and demand as joint
determinants of price and quantity in market equilibrium, affecting
both the allocation of output and the distribution of income. It
dispensed with the labour theory of value of which Smith was most
famously identified with in classical economics, in favour of a
marginal utility theory of value on the demand side and a more general
theory of costs on the supply side.[78]

The bicentennial anniversary of the publication of The Wealth of
Nations was celebrated in 1976, resulting in increased interest for
The Theory of Moral Sentiments and his other works throughout
academia. After 1976, Smith was more likely to be represented as the
author of both The Wealth of Nations and The Theory of Moral
Sentiments, and thereby as the founder of a moral philosophy and the
science of economics. His homo economicus or "economic man" was also
more often represented as a moral person. Additionally, his opposition
to slavery, colonialism, and empire was emphasised, as were his
statements about high wages for the poor, and his views that a common
street porter was not intellectually inferior to a philosopher.[79]

This £20 note was issued by the Bank of England and features Smith.
Portraits, monuments, and banknotes

Smith has been commemorated in the UK on banknotes printed by two
different banks; his portrait has appeared since 1981 on the £50 notes
issued by the Clydesdale Bank in Scotland,[80][81] and in March 2007
Smith's image also appeared on the new series of £20 notes issued by
the Bank of England, making him the first Scotsman to feature on an
English banknote.[82]

A large-scale memorial of Smith was unveiled on 4 July 2008 in
Edinburgh. It is a 10 feet (3.0 m)-tall bronze sculpture and it stands
above the Royal Mile outside St Giles' Cathedral in Parliament Square,
near the Mercat cross.[83] 20th century sculptor Jim Sanborn (best
known for creating the Kryptos sculpture at the United States Central
Intelligence Agency) has created multiple pieces which feature Smith's
work. At Central Connecticut State University is Circulating Capital,
a tall cylinder which features an extract from The Wealth of Nations
on the lower half, and on the upper half, some of the same text but
represented in binary code.[84] At the University of North Carolina at
Charlotte, outside the Belk College of Business Administration, is
Adam Smith's Spinning Top.[85][86] Another Smith sculpture is at
Cleveland State University.[87]

As a symbol of free market economics

Adam Smith's Spinning Top, sculpture by American artist Jim Sanborn at
Cleveland State UniversitySmith has been celebrated by advocates of
free market policies as the founder of free market economics, a view
reflected in the naming of bodies such as the Adam Smith Institute,
Adam Smith Society[88] and the Australian Adam Smith Club,[89] and in
terms such as the Adam Smith necktie.[90]

Alan Greenspan argues that, while Smith did not coin the term laissez-
faire, "it was left to Adam Smith to identify the more-general set of
principles that brought conceptual clarity to the seeming chaos of
market transactions". Greenspan continues that The Wealth of Nations
was "one of the great achievements in human intellectual history".[91]
P. J. O'Rourke describes Smith as the "founder of free market

However, other writers have argued that Smith's support for laissez-
faire (which in French means leave alone) has been overstated. Herbert
Stein wrote that the people who "wear an Adam Smith necktie" do it to
"make a statement of their devotion to the idea of free markets and
limited government", and that this misrepresents Smith's ideas. Stein
writes that Smith "was not pure or doctrinaire about this idea. He
viewed government intervention in the market with great skepticism ...
yet he was prepared to accept or propose qualifications to that policy
in the specific cases where he judged that their net effect would be
beneficial and would not undermine the basically free character of the
system. He did not wear the Adam Smith necktie." In Stein's reading,
The Wealth of Nations could justify the Food and Drug Administration,
the Consumer Product Safety Commission, mandatory employer health
benefits, environmentalism, and "discriminatory taxation to deter
improper or luxurious behavior".[93]

Similarly, Vivienne Brown stated in The Economic Journal that in the
20th century United States, Reaganomics supporters, The Wall Street
Journal, and other similar sources have spread among the general
public a partial and misleading vision of Smith, portraying him as an
"extreme dogmatic defender of laissez-faire capitalism and supply-side
economics".[94] In fact, The Wealth of Nations includes the following
statement on the payment of taxes: "The subjects of every state ought
to contribute towards the support of the government, as nearly as
possible, in proportion to their respective abilities; that is, in
proportion to the revenue which they respectively enjoy under the
protection of the state."[95]

Smith even specifically named taxes that he thought should be required
by the state among them luxury goods taxes and tax on rent. He
believed that tax laws should be as transparent as possible and that
each individual should pay a "certain amount, and not arbitrary," in
addition to paying this tax at the time "most likely to be convenient
for the contributor to pay it".[96]

Additionally, Smith outlined the proper expenses of the government in
The Wealth of Nations, Book V, Ch. I. Included in his requirements of
a government is to enforce contracts and provide justice system, grant
patents and copy writes, provide public goods such as infrastructure,
provide national defense and regulate banking. It was the role of the
government to provide goods "of such a nature that the profit could
never repay the expense to any individual" such as roads, bridges,
canals, and harbours. He also encouraged invention and new ideas
through his patent enforcement and support of infant industry
monopolies. he supported public education and religious institutions
as providing general benefit to the society. Finally he outlined how
the government should support the dignity of the monarch or chief
magistrate, such that they are equal or above the public in fashion.
He even states that monarchs should be provided for in a greater
fashion than magistrates of a republic because "we naturally expect
more splendor in the court of a king than in the mansion-house of a
doge."[97] In addition, he was in favor of retaliatory tariffs and
believed that they would eventually bring down the price of goods. He
even stated in Wealth of Nations, "The recovery of a great foreign
market will generally more than compensate the transitory
inconvenience of paying dearer during a short time for some sorts of

Noam Chomsky has argued[N 3] that several aspects of Smith's thought
have been misrepresented and falsified by contemporary ideology,
including Smith’s reasons for supporting markets and Smith’s views on
corporations. Chomsky argues that Smith supported markets in the
belief that they would lead to equality, and that Smith opposed wage
labor and corporations.[99] Economic historians such as Jacob Viner
regard Smith as a strong advocate of free markets and limited
government (what Smith called "natural liberty") but not as a dogmatic
supporter of laissez-faire.[100]

Economist Daniel Klein believes using the term "free market economics"
or "free market economist" to identify the ideas of Smith is too
general and slightly misleading. Klein offers six characteristics
central to the identity of Smith's economic thought and argues that a
new name is needed to give a more accurate depiction of the "Smithian"
identity.[101][102] Economist David Ricardo set straight some of the
misunderstandings about Smith’s thoughts on free market. Most people
still fall victim to the thinking that Smith was a free market
economist without exception, though he was not. Ricardo pointed out
that Smith was in support of helping infant industries. Smith believed
that the government should subsidise newly formed industry, but he did
fear that when the infant industry grew into adulthood it would be
unwilling to surrender the government help.[103] Smith also supported
tariffs on imported goods to counteract an internal tax on the same
good. Smith also fell to pressure in supporting some tariffs in
support for national defense.[103]


↑ In Life of Adam Smith, Rae writes, "In his fourth year, while on a
visit to his grandfather's house at Strathendry on the banks of the
Leven, [Smith] was stolen by a passing band of gypsies, and for a time
could not be found. But presently a gentleman arrived who had met a
gypsy woman a few miles down the road carrying a child that was crying
piteously. Scouts were immediately dispatched in the direction
indicated, and they came upon the woman in Leslie wood. As soon as she
saw them she threw her burden down and escaped, and the child was
brought back to his mother. [Smith] would have made, I fear, a poor

↑ The 6 editions of The Theory of Moral Sentiments were published in
1759, 1761, 1767, 1774, 1781, and 1790 respectively.[53]

↑ See chapters 2, 5, 6, and 10 of his Understanding Power, New Press
(February 2002), along with his Year 501: The Conquest Continues,
primarily chapter 1, South End Press, 1993.


↑ Bussing-Burks 2003, pp. 38–39
↑ Buchan 2006, p. 12
↑ 3.0 3.1 3.2 Rae 1895, p. 5
↑ 4.0 4.1 4.2 Bussing-Burks 2003, p. 39
↑ Buchan 2006, p. 22
↑ Bussing-Burks 2003, p. 41
↑ Rae 1895, p. 24
↑ 8.0 8.1 8.2 8.3 Buchholz 1999, p. 12
↑ Introductory Economics. New Age Publishers. p. 4. ISBN 8122418309.
↑ Rae 1895, p. 22
↑ Rae 1895, pp. 24–25
↑ 12.0 12.1 Bussing-Burks 2003, p. 42
↑ Buchan 2006, p. 29
↑ Rae 1895, p. 30
↑ 15.0 15.1 Bussing-Burks 2003, p. 43

↑ Winch, Donald (September 2004). "Smith, Adam (bap. 1723, d. 1790)".
Dictionary of National Biography. Oxford University Press.

↑ Rae 1895, p. 42
↑ 18.0 18.1 Buchholz 1999, p. 15
↑ Buchan 2006, p. 67
↑ 20.0 20.1 20.2 20.3 20.4 Buchholz 1999, p. 16
↑ Buchholz 1999, pp. 16–17
↑ 22.0 22.1 Buchholz 1999, p. 17
↑ Buchan 2006, p. 80
↑ 24.0 24.1 Buchholz 1999, p. 18
↑ Buchan 2006, p. 90
↑ Dr James Currie to Thomas Creevey, 24 February 1793, Lpool RO,
Currie MS 920 CUR

↑ Buchan 2006, p. 89

↑ "First Visit to London". Library of Economics and Liberty.

http://econlib.org/library/YPDBooks/Rae/raeLS10.html. Retrieved

↑ Buchholz 1999, p. 19
↑ Buchan 2006, p. 128
↑ Buchan 2006, p. 133
↑ Buchan 2006, p. 137
↑ Buchan 2006, p. 145
↑ 34.0 34.1 Bussing-Burks 2003, p. 53
↑ 35.0 35.1 Buchan 2006, p. 25
↑ 36.0 36.1 Buchan 2006, p. 88
↑ Bonar 1895, pp. xx–xxiv
↑ Buchan 2006, p. 11
↑ Buchan 2006, p. 134
↑ Rae 1895, p. 262
↑ 41.0 41.1 41.2 Skousen 2001, p. 32

↑ 42.0 42.1 Buchholz 1999, p. 14

↑ Stewart, Dugald (1853). The Works of Adam Smith: With An Account of
His Life and Writings. London: Henry G. Bohn. lxix. OCLC 3226570.


↑ Rae 1895, pp. 376–377
↑ Bonar 1895, p. xxi
↑ Ross 1995, p. 15

↑ [Expression error: Missing operand for > "Times obituary of Adam
Smith"]. The Times. 1790-07-24.

↑ Coase 1976, pp. 529–546

↑ Coase 1976, p. 538

↑ "Hume on Religion". Stanford Encyclopedia of Philosophy.

http://plato.stanford.edu/entries/hume-religion/. Retrieved

↑ "Letter From Adam Smith, LL.D. TO William Strahan, Esq. - Essays
Moral, Political, Literary (LF ed.)". Online Library of Liberty.


Retrieved 2008-05-26.

↑ Rae 1895, p. 311

↑ "Adam Smith, Glasgow Edition of the Works and Correspondence Vol. 1
The Theory of Moral Sentiments [1759"]. The Online Library of


Retrieved 2010-01-31.
↑ Rae 1895

↑ O'Rourke, P. J. (2007-01-08). "P.J. O'Rourke Takes On 'The Wealth of
Nations'". NPR.

Retrieved 2008-06-10.

↑ 56.0 56.1 Minowitz, Peter (December 2004). "Adam Smith's Invisible
Hands". Econ Journal Watch 1 (3): 381–412.

↑ Falkner, Robert (1997). "Biography of Smith". Liberal Democrat
History Group.

Retrieved 2008-05-14.

↑ Smith 2002, p. xv

↑ Viner 1991, p. 250

↑ "The Betrayal of Adam Smith". The People-Centered Development

http://www.pcdf.org/corprule/betrayal.htm. Retrieved 2010-01-31.

↑ Smith 1977, bk. IV, ch. 2
↑ Smith 1977, p. 18
↑ Smith 1977, bk. 1, ch. 5–6
↑ Smith 1977, bk. IV, ch. 7
↑ Smith 1977, bk. IV, ch. 1
↑ Smith 1977, bk. IV, ch. 7
↑ Smith 1977, bk. V, ch. 1
↑ Smith 1977, bk. I, ch. 8

↑ Pressman, Steven (1999). Fifty Major Economists. Routledge. p. 20.
ISBN 0415134811.

↑ Hoaas, David J.; Madigan, Lauren J. (1999). [Expression error:
Missing operand for > "A citation analysis of economists in principles
of economics textbooks"]. The Social Science Journal 36 (3): 525–532.
↑ Rae 1895, p. 292

↑ "Adam Smith - Jonathan Swift". University of Winchester.

http://journalism.winchester.ac.uk/?page=343. Retrieved 2010-02-11.

↑ Roemer, J.E. (1987). "Marxian Value Analysis". The New Palgrave: A
Dictionary of Economics, v. 3, 383.

↑ Mandel, Ernest (1987). "Marx, Karl Heinrich", The New Palgrave: A
Dictionary of Economicsv. 3, pp. 372, 376.

↑ Marshall, Alfred; Marshall, Mary Paley (1879). The Economics of
Industry. p. 2.


↑ Jevons, W. Stanley (1879). The Theory of Political Economy (2nd
ed.). p. xiv.


↑ Clark, B. (1998). Political-economy: A comparative approach, 2nd
ed., Westport, CT: Preagerp. p. 32..

↑ Campos, Antonietta (1987). "Marginalist Economics", The New
Palgrave: A Dictionary of Economics, v. 3, p. 320

↑ Smith 1977, §Book I, Chapter 2

↑ "Clydesdale 50 Pounds, 1981". Ron Wise's Banknoteworld.

Loading Image....
Retrieved 2008-10-15.

↑ "Current Banknotes : Clydesdale Bank". The Committee of Scottish
Clearing Bankers.

Retrieved 2008-10-15.
↑ "Smith replaces Elgar on £20 note". BBC. 2006-10-29.

http://news.bbc.co.uk/1/hi/business/6096938.stm. Retrieved

↑ Blackley, Michael (2007-09-26). "Adam Smith sculpture to tower over
Royal Mile". Edinburgh Evening News.

↑ Fillo, Maryellen (2001-03-13). "CCSU welcomes a new kid on the
block". The Hartford Courant.

↑ Kelley, Pam (1997-05-20). "Piece at UNCC is a puzzle for Charlotte,
artist says". Charlotte Observer.

↑ Shaw-Eagle, Joanna (1997-06-01). "Artist sheds new light on
sculpture". The Washington Times.

↑ "Adam Smith's Spinning Top". Ohio Outdoor Sculpture Inventory.
Archived from the original on 2005-02-05.

Retrieved 2008-05-24.

↑ "The Adam Smith Society". The Adam Smith Society. Archived from the
original on 2007-07-21.


http://www.adamsmith.it/presentazione.html. Retrieved 2008-05-24.

↑ "The Australian Adam Smith Club". Adam Smith Club. http://www.adamsmithclub.org/.
Retrieved 2008-10-12.

↑ Levy, David (June 1992). "Interview with Milton Friedman". Federal
Reserve Bank of Minneapolis.

Retrieved 2008-09-01.

↑ "FRB: Speech, Greenspan—Adam Smith—6 February 2005".

Retrieved 2008-05-31.
↑ "Adam Smith: Web Junkie - Forbes.com".

http://www.forbes.com/free_forbes/2007/0507/086.html. Retrieved

↑ Stein, Herbert (1994-04-06). [Expression error: Missing operand for
"Board of Contributors: Remembering Adam Smith"]. The Wall Street
Journal Asia: A14.

↑ Brown, Vivienne; Pack, Spencer J.; Werhane, Patricia H. (January
1993). [Expression error: Missing operand for > "Untitled review of
'Capitalism as a Moral System: Adam Smith's Critique of the Free
Market Economy' and 'Adam Smith and his Legacy for Modern
Capitalism'"]. The Economic Journal 103 (416): 230–232. doi:

↑ Smith 1977, bk. V, ch. 2
↑ Smith 1977, bk. V, ch. 2
↑ Smith 1977, bk. V
↑ Smith 1977, bk. IV, ch. 2
↑ Chomsky 2002, ch. 6

↑ Viner, Jacob; Pack, Spencer J.; Werhane, Patricia H. (April 1927).
[Expression error: Missing operand for > "Adam Smith and Laissez-
faire"]. The Journal of Political Economy 35 (2): 198–232. doi:

↑ Klein, Daniel B. (2008). "Toward a Public and Professional Identity
for Our Economics". Econ Journal Watch 5 (3): 358–372.

↑ Klein, Daniel B. (2009). "Desperately Seeking Smithians: Responses
to the Questionnaire about Building an Identity". Econ Journal Watch 6
(1): 113–180.


↑ 103.0 103.1 Buchholz, Todd (December 1990). pp. 38–39.


Bonar, James (1895). A Catalogue of the Library of Adam Smith. London:
Macmillan. OCLC 2320634. http://books.google.com/books?id=pUmfjlAfM3kC.

Buchan, James (2006). The Authentic Adam Smith: His Life and Ideas. W.
W. Norton & Company. ISBN 0393061213.

Buchholz, Todd (1999). New ideas from Dead Economists: An introduction
to modern economic thought. Penguin Books. ISBN 0140283137.

Bussing-Burks, Marie (2003). Influential Economists. Minneapolis: The
Oliver Press. ISBN 1-881508-72-2.

Campbell, R. H.; Skinner, Andrew S. (1985). Adam Smith. Routledge.
ISBN 0709934734.

Chomsky, Noam (2002). Understanding power: the indispensable Chomsky.
Scribe Publications. ISBN 9780908011728.

Coase, R.H. (October 1976). [Expression error: Missing operand for >
"Adam Smith's View of Man"]. The Journal of Law and Economics 19 (3):
529–546. doi:10.1086/466886.

Rae, John (1895). Life of Adam Smith. New York City: Macmillan
Publishers. ISBN 0722226586.

Ross, Ian Simpson (December 14, 1995). The Life of Adam Smith. Oxford
University Press. ISBN 0198288212.

Skousen, Mark (2001). The Making of Modern Economics: The Lives and
Ideas of Great Thinkers. M.E. Sharpe. ISBN 0765604809.


Smith, Adam (1977) [1776]. An Inquiry into the Nature and Causes of
the Wealth of Nations. University Of Chicago Press. ISBN 0226763749.

Smith, Adam (1982) [1759]. The Theory of Moral Sentiments, ed. D.D.
Raphael and A.L. Macfie, vol. I of the Glasgow Edition of the Works
and Correspondence of Adam Smith. Liberty Fund. ISBN 0865970122.


Smith, Adam (2002) [1759]. Knud Haakonssen. ed. The Theory of Moral
Sentiments. Cambridge University Press. ISBN 0521598478.


Smith, Vernon L. (July 1998). [Expression error: Missing operand for >
"The Two Faces of Adam Smith"]. Southern Economic Journal 65 (1): 2–

Tribe, Keith; Mizuta, Hiroshi (2002) (Hardcover). A Critical
Bibliography of Adam Smith. Pickering & Chatto. ISBN 9781851967414.

Viner, Jacob (1991). Douglas A. Irvin. ed. Essays on the Intellectual
History of Economics. Princeton, New Jersey: Princeton University
Press. ISBN 0691042667.

This article incorporates public domain text from the entry Smith,
Adam in: Cousin, John William (1910). A Short Biographical Dictionary
of English Literature. London, J. M. Dent & Sons; New York, E. P.

Further reading

Butler, Eamonn (March 2007). Adam Smith - A Primer. Institute of
Economic Affairs. ISBN 0255366086. http://www.iea.org.uk/record.jsp?type=book&ID=414.

Copley, Stephen (March 1995). Adam Smith's Wealth of Nations: New
Interdisciplinary Essays. Manchester University Press. ISBN

Glahe, F. (June 1977). Adam Smith and the Wealth of Nations: 1776–
1976. University Press of Colorado. ISBN 0870810820.

Haakonssen, Knud (2006-03-06). The Cambridge Companion to Adam Smith.
Cambridge University Press. ISBN 0521779243.

Hollander, Samuel (June 1973). Economics of Adam Smith. University of
Toronto Press. ISBN 0802063020. http://www.amazon.com/Economics-Adam-Smith-Samuel-Hollander/dp/0802063020.

Iain McLean (2006). Adam Smith, Radical and Egalitarian: An
Interpretation for the 21st Century. Edinburgh University Press. ISBN


Muller, Jerry Z. (1995-07-03). Adam Smith in His Time and Ours.
Princeton University Press. ISBN 0691001618.

O'Rourke, P. J. (2006-12-04). On The Wealth of Nations. Grove/Atlantic
Inc.. ISBN 0871139499. http://www.amazon.com/Wealth-Nations-Books-Changed-World/dp/0871139499.

External links

Works related to Adam Smith at Wikisource
Quotations related to Adam Smith at Wikiquote
Adam Smith at the Concise Encyclopedia of Economics
Adam Smith at the Adam Smith Institute

Academic offices

Preceded by
Robert Cunninghame-Grahame of Gartmore Rector of the University of

Succeeded by
Walter Campbell of Shawfield


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Reference »
Wikipedia Articles



Social philosophy
Political philosophy







Social and political philosophers

Portal v • [[|d]] • e

Ethics (also known as moral philosophy) is a branch of philosophy
which seeks to address questions about morality; that is, about
concepts such as good and bad, right and wrong, justice, and virtue.

Major branches of ethics include:

meta-ethics, about the theoretical meaning and reference of moral
propositions and how their truth-values (if any) may be determined;
normative ethics, about the practical means of determining a moral
course of action; applied ethics, about how moral outcomes can be
achieved in specific situations;
moral psychology, about how moral capacity or moral agency develops
and what its nature is; and descriptive ethics, about what moral
values people actually abide by.

Within each of these branches are many different schools of thought
and still further sub-fields of study.


Main article: Meta-ethics

Meta-ethics is concerned primarily with the meaning of ethical
judgments and/or prescriptions and with the notion of which
properties, if any, are responsible for the truth or validity thereof.
Meta-ethics as a discipline gained attention with G.E. Moore's famous
work Principia Ethica from 1903 in which Moore first addressed what he
referred to as the naturalistic fallacy. Moore's rebuttal of
naturalistic ethics, his Open Question Argument sparked an interest
within the analytic branch of western philosophy to concern oneself
with second order questions about ethics; specifically the semantics,
epistemology and ontology of ethics.

The semantics of ethics divides naturally into descriptivism and non-
descriptivism. Descriptivism holds that ethical language (including
ethical commands and duties) is a subdivision of descriptive language
and has meaning in virtue of the same kind of properties as
descriptive propositions. Non-descriptivism contends that ethical
propositions are irreducible in the sense that their meaning cannot be
explicated sufficiently in terms of descriptive truth-conditions.

Correspondingly, the epistemology of ethics divides into cognitivism
and non-cognitivism; a distinction that is often perceived as
equivalent to that between descriptivists and non-descriptivists. Non-
cognitivism may be understood as the claim that ethical claims reach
beyond the scope of human cognition or as the (weaker) claim that
ethics is concerned with action rather than with knowledge.
Cognitivism can then be seen as the claim that ethics is essentially
concerned with judgments of the same kind as knowledge judgments;
namely about matters of fact.

The ontology of ethics is concerned with the idea of value-bearing
properties, i.e. the kind of things or stuffs that would correspond to
or be referred to by ethical propositions. Non-descriptivists and non-
cognitivists will generally tend to argue that ethics do not require a
specific ontology, since ethical propositions do not refer to objects
in the same way that descriptive propositions do. Such a position may
sometimes be called anti-realist. Realists on the other hand are left
with having to explain what kind of entities, properties or states are
relevant for ethics, and why they have the normative status
characteristic of ethics.

Normative ethics

Main article: Normative ethics

Traditionally, normative ethics (also known as moral theory) was the
study of what makes actions right and wrong. These theories offered an
overarching moral principle to which one could appeal in resolving
difficult moral decisions.

At the turn of the 20th century, moral theories became more complex
and are no longer concerned solely with rightness and wrongness, but
are interested in many different kinds of moral status. During the
middle of the century, the study of normative ethics declined as meta-
ethics grew in prominence. This focus on meta-ethics was in part
caused by an intense linguistic focus in analytic philosophy and by
the popularity of logical positivism.

In 1971, John Rawls published A Theory of Justice, noteworthy in its
pursuit of moral arguments and eschewing of meta-ethics. This
publication set the trend for renewed interest in normative ethics.

Greek philosophy


Socrates (469 BC – 399 BC) was one of the first Greek philosophers to
encourage both scholars and the common citizen to turn their attention
from the outside world to the condition of humankind. In this view,
Knowledge having a bearing on human life was placed highest, all other
knowledge being secondary. Self-knowledge was considered necessary for
success and inherently an essential good. A self-aware person will act
completely within their capabilities to their pinnacle, while an
ignorant person will flounder and encounter difficulty. To Socrates, a
person must become aware of every fact (and its context) relevant to
his existence, if he wishes to attain self-knowledge. He posited that
people will naturally do what is good, if they know what is right.
Evil or bad actions, are the result of ignorance. If a criminal were
truly aware of the mental and spiritual consequences of his actions,
he would neither commit nor even consider committing those actions.
Any person who knows what is truly right will automatically do it,
according to Socrates. While he correlated knowledge with virtue, he
similarly equated virtue with happiness. The truly wise man will know
what is right, do what is good, and therefore be happy.[1]


Aristotle (384 BC – 322 BC) posited an ethical system that may be
termed "self-realizationism." In Aristotle's view, when a person acts
in accordance with his nature and realizes his full potential, he will
do good and be content. At birth, a baby is not a person, but a
potential person. In order to become a "real" person, the child's
inherent potential must be realized. Unhappiness and frustration are
caused by the unrealized potential of a person, leading to failed
goals and a poor life. Aristotle said, "Nature does nothing in vain."
Therefore, it is imperative for persons to act in accordance with
their nature and develop their latent talents, in order to be content
and complete. Happiness was held to be the ultimate goal. All other
things, such as civic life or wealth, are merely means to the end.
Self-realization, the awareness of one's nature and the development of
one's talents, is the surest path to happiness.[2]

Aristotle asserted that man had three natures: vegetable (physical),
animal (emotional) and rational (mental). Physical nature can be
assuaged through exercise and care, emotional nature through
indulgence of instinct and urges, and mental through human reason and
developed potential. Rational development was considered the most
important, as essential to philosophical self-awareness and as
uniquely human. Moderation was encouraged, with the extremes seen as
degraded and immoral. For example, courage is the moderate virtue
between the extremes of cowardice and recklessness. Man should not
simply live, but live well with conduct governed by moderate virtue.
This is regarded as difficult, as virtue denotes doing the right
thing, to the right person, at the right time, to the proper extent,
in the correct fashion, for the right reason.[3]


Hedonism posits that the principle ethic is maximizing pleasure and
minimizing pain. There are several schools of Hedonist thought ranging
from those advocating the indulgence of even momentary desires to
those teaching a pursuit of spiritual bliss. In their consideration of
consequences, they range from those advocating self-gratification
regardless of the pain and expense to others, to those stating that
the most ethical pursuit maximizes pleasure and happiness for the most

Cyrenaic hedonism

Founded by Aristippus of Cyrene, Cyrenaics supported immediate
gratification. "Eat, drink and be merry, for tomorrow we die." Even
fleeting desires should be indulged, for fear the opportunity should
be forever lost. There was little to no concern with the future, the
present dominating in the pursuit for immediate pleasure. Cyrenaic
hedonism encouraged the pursuit of enjoyment and indulgence without
hesitation, believing pleasure to be the only good.[4]


Epicurus rejected the extremism of the Cyrenaics, believing some
pleasures and indulgences to be detrimental to human beings.
Epicureans observed that indiscriminate indulgence sometimes resulted
in negative consequences. Some experiences were therefore rejected out
of hand, and some unpleasant experiences endured in the present to
ensure a better life in the future. The summum bonum, or greatest
good, to Epicurus was prudence, exercised through moderation and
caution. Excessive indulgence can be destructive to pleasure and can
even lead to pain. For example, eating one food too often will cause a
person to lose taste for it. Eating too much food at once will lead to
discomfort and ill-health. Pain and fear were to be avoided. Living
was essentially good, barring pain and illness. Death was not to be
feared. Fear was considered the source of most unhappiness. Conquering
the fear of death would naturally lead to a happier life. Epicurus
reasoned if there was an afterlife and immortality, the fear of death
was irrational. If there was no life after death, then the person
would not be alive to suffer, fear or worry; he would be non-existent
in death. It is irrational to fret over circumstances that do not
exist, such as one's state in death in the absence of an afterlife.[5]

Christian Hedonism

Christian Hedonism is a controversial Christian doctrine current in
some evangelical circles, particularly those of the Reformed
tradition. The term was coined by Reformed Baptist pastor John Piper
in his 1986 book Desiring God. Piper summarizes this philosophy of the
Christian life as "God is most glorified in us when we are most
satisfied in Him."[6]


The Stoic philosopher Epictetus posited that the greatest good was
contentment and serenity. Peace of mind, or Apatheia, was of the
highest value; self-mastery over one's desires and emotions leads to
spiritual peace. The "unconquerable will" is central to this
philosophy. The individual will should be independent and inviolate.
Allowing a person to disturb the mental equilibrium is in essence
offering yourself in slavery. If a person is free to anger you at
will, you have no control over your internal world, and therefore no
freedom. Freedom from material attachments is also necessary. If a
thing breaks, the person should not be upset, but realize it was a
thing that could break. Similarly, if someone should die, those close
to them should hold to their serenity because the loved one was made
of flesh and blood destined to death. Stoic philosophy says to accept
things that cannot be changed, resigning oneself to existence and
enduring in a rational fashion. Death is not feared. People do not
"lose" their life, but instead "return", for they are returning to God
(who initially gave what the person is as a person). Epictetus said
difficult problems in life should not be avoided, but rather embraced.
They are spiritual exercises needed for the health of the spirit, just
as physical exercise is required for the health of the body. He also
stated that sex and sexual desire are to be avoided as the greatest
threat to the integrity and equilibrium of a man's mind. Abstinence is
highly desirable. Epictetus said remaining abstinent in the face of
temptation was a victory for which a man could be proud.[7]

Modern ethics

In the modern era, ethical theories were generally divided between
consequentialist theories of philosophers such as Jeremy Bentham and
John Stuart Mill, and deontological ethics as epitomized by the work
of Immanuel Kant.


Main article: Consequentialism

Consequentialism refers to those moral theories which hold that the
consequences of a particular action form the basis for any valid moral
judgment about that action (or create a structure for judgment, see
rule consequentialism). Thus, from a consequentialist standpoint, a
morally right action is one that produces a good outcome, or
consequence. This view is often expressed as the aphorism "The ends
justify the means".

The term "consequentialism" was coined by G.E.M. Anscombe in her essay
"Modern Moral Philosophy" in 1958, to describe what she saw as the
central error of certain moral theories, such as those propounded by
Mill and Sidgwick.[8] Since then, the term has become common in
English-language ethical theory.

The defining feature of consequentialist moral theories is the weight
given to the consequences in evaluating the rightness and wrongness of
actions.[9] In consequentialist theories, the consequences of an
action or rule generally outweigh other considerations. Apart from
this basic outline, there is little else that can be unequivocally
said about consequentialism as such. However, there are some questions
that many consequentialist theories address:

What sort of consequences count as good consequences?

Who is the primary beneficiary of moral action?

How are the consequences judged and who judges them?

One way to divide various consequentialisms is by the types of
consequences that are taken to matter most, that is, which
consequences count as good states of affairs. According to hedonistic
utilitarianism, a good action is one that results in an increase in
pleasure, and the best action is one that results in the most pleasure
for the greatest number. Closely related is eudaimonic
consequentialism, according to which a full, flourishing life, which
may or may not be the same as enjoying a great deal of pleasure, is
the ultimate aim. Similarly, one might adopt an aesthetic
consequentialism, in which the ultimate aim is to produce beauty.
However, one might fix on non-psychological goods as the relevant
effect. Thus, one might pursue an increase in material equality or
political liberty instead of something like the more ephemeral
"pleasure". Other theories adopt a package of several goods, all to be
promoted equally. Whether a particular consequentialist theory focuses
on a single good or many, conflicts and tensions between different
good states of affairs are to be expected and must be adjudicated.


Main article: Deontological Ethics

Deontological ethics or deontology (from Greek δέον, deon,
"obligation, duty"; and -λογία, -logia) is an approach to ethics that
determines goodness or rightness from examining acts, rather than
third-party consequences of the act as in consequentialism, or the
intentions of the person doing the act as in virtue ethics.
Deontologists look at rules and duties.[10] For example, the act may
be considered the right thing to do even if it produces a bad
consequence[11], if it follows the rule that “one should do unto
others as they would have done unto them”[10], and even if the person
who does the act lacks virtue and had a bad intention in doing the
act[citation needed]. We have a duty to act in a way that does those
things that are inherently good as acts ("truth-telling" for example),
or follow an objectively obligatory rule (as in rule utilitarianism).
For deontologists, the ends or consequences of our actions are not
important in and of themselves, and our intentions are not important
in and of themselves.

Immanuel Kant's theory of ethics is considered deontological for
several different reasons.[12][13] First, Kant argues that to act in
the morally right way, people must act from duty (deon).[14] Second,
Kant argued that it was not the consequences of actions that make them
right or wrong but the motives of the person who carries out the

Immanuel KantKant's argument that to act in the morally right way, one
must act from duty, begins with an argument that the highest good must
be both good in itself, and good without qualification.[15] Something
is 'good in itself' when it is intrinsically good, and 'good without
qualification' when the addition of that thing never makes a situation
ethically worse. Kant then argues that those things that are usually
thought to be good, such as intelligence, perseverance and pleasure,
fail to be either intrinsically good or good without qualification.
Pleasure, for example, appears to not be good without qualification,
because when people take pleasure in watching someone suffering, this
seems to make the situation ethically worse. He concludes that there
is only one thing that is truly good:

Nothing in the world—indeed nothing even beyond the world—can possibly
be conceived which could be called good without qualification except a
good will.[15]

Postmodern ethics

This article or section may contain previously unpublished synthesis
of published material that conveys ideas not attributable to the
original sources. See the talk page for details. (July 2009)

The 20th century saw a remarkable expansion of critical theory and its
evolution. The earlier Marxist Theory created a paradigm for
understanding the individual, society and their interaction. The
Renaissance Enlightened Man had persisted up until the Industrial
Revolution when the romantic vision of noble action began to fade.

Modernism, exemplified in the literary works of Virginia Woolf and
James Joyce, wrote out God, then antihumanists such as Louis Althusser
and Michel Foucault and structuralists such as Roland Barthes presided
over the death of the author and man himself[clarification needed]. As
critical theory developed in the later 20th century, post-
structuralism queried the existence of reality. Jacques Derrida argued
reality was in the linguistic realm, stating ‘There is nothing outside
the text’, while Jean Baudrillard theorised that signs and symbols or
simulacra had usurped reality, particularly in the consumer world.

Post-structuralism and postmodernism are both heavily theoretical and
follow a fragmented, anti-authoritarian course which is absorbed in
narcissistic and near nihilistic activities.[citation needed] 2010}}
Normative issues are generally ignored. This has led to some opponents
of these later movements echoing the critic Jürgen Habermas who fears
‘that the postmodern mood represents a turning away from both
political responsibilities and a concern for suffering’(cited in Lyon,
1999, p. 103).

David Couzens Hoy says that Emmanuel Levinas’ writings on the face of
the Other and Derrida’s mediations on the relevance of death to ethics
are signs of the ‘ethical turn’ in Continental philosophy that occurs
in the 1980’s and 1990’s. Hoy clarifies post-critique ethics as the
‘obligations that present themselves as necessarily to be fulfilled
but are neither forced on one or are enforceable’ (2004, p. 103).

This aligns with Australian philosopher Peter Singer’s thoughts on
what ethics is not. He firstly claims it is not a moral code
particular to a sectional group. For example it has nothing to do with
a set of prohibitions concerned with sex laid down by a religious
order. Neither is ethics a ‘system that is noble in theory but no good
in practice’ (2000, p. 7). For him, a theory is good only if it is
practical. He agrees that ethics is in some sense universal but in a
utilitarian way it affords the ‘best consequences’ and furthers the
interests of those affected (2000, p. 15).

Hoy in his post-critique model uses the term ethical resistance.
Examples of this would be an individual’s resistance to consumerism in
a retreat to a simpler but perhaps harder lifestyle, or an
individual’s resistance to a terminal illness. Hoy describes these
examples in his book Critical Resistance as an individual’s engagement
in social or political resistance. He provides Levinas’s account as
‘not the attempt to use power against itself, or to mobilize sectors
of the population to exert their political power; the ethical
resistance is instead the resistance of the powerless’(2004, p. 8).

Hoy concludes that

"The ethical resistance of the powerless others to our capacity to
exert power over them is therefore what imposes unenforceable
obligations on us. The obligations are unenforceable precisely because
of the other’s lack of power. That actions are at once obligatory and
at the same time unenforceable is what put them in the category of the
ethical. Obligations that were enforced would, by the virtue of the
force behind them, not be freely undertaken and would not be in the
realm of the ethical" (2004, p.184).

In present day terms the powerless may include the unborn, the
terminally sick, the aged, the insane, and animals. It is in these
areas that ethical action will be evident. Until legislation or state
apparatus enforces a moral order that addresses the causes of
resistance these issues will remain in the ethical realm. For example,
should animal experimentation become illegal in a society, it will no
longer be an ethical issue. Likewise one hundred and fifty years ago,
not having a black slave in America may have been an ethical choice.
This later issue has been absorbed into the fabric of a more
utilitarian social order and is no longer an ethical issue but does of
course constitute a moral concern. Ethics are exercised by those who
possess no power and those who support them, through personal

Applied ethics

Main article: Applied ethics

Applied ethics is a discipline of philosophy that attempts to apply
ethical theory to real-life situations. The discipline has many
specialized fields, such as bioethics and business ethics.

Specific questions

This section needs additional citations for verification.

Please help improve this article by adding reliable references.
Unsourced material may be challenged and removed. (May 2009)

Applied ethics is used in some aspects of determining public policy.
The sort of questions addressed by applied ethics include: "Is getting
an abortion immoral?" "Is euthanasia immoral?" "Is affirmative action
right or wrong?" "What are human rights, and how do we determine
them?" and "Do animals have rights as well?"

A more specific question could be: "If someone else can make better
out of his/her life than I can, is it then moral to sacrifice myself
for them if needed?" Without these questions there is no clear fulcrum
on which to balance law, politics, and the practice of arbitration —
in fact, no common assumptions of all participants—so the ability to
formulate the questions are prior to rights balancing. But not all
questions studied in applied ethics concern public policy. For
example, making ethical judgments regarding questions such as, "Is
lying always wrong?" and, "If not, when is it permissible?" is prior
to any etiquette.

People in-general are more comfortable with dichotomies (two choices).
However, in ethics the issues are most often multifaceted and the best
proposed actions address many different areas concurrently. In ethical
decisions the answer is almost never a "yes or no", "right or wrong"
statement. Many buttons are pushed so that the overall condition is
improved and not to the benefit of any particular faction.

Particular fields of application

Relational ethics

Relational ethics are related to an ethics of care.[16] They are used
in qualitative research, especially ethnography and authoethnography.
Researchers who employ relational ethics value and respect the
connection between themselves and the people they study, and "between
researchers and the communities in which they live and work" (Ellis,
2007, p. 4).[17] Relational ethics also help researchers understand
difficult issues such as conducting research on intimate others that
have died and developing friendships with their participants.[18][19]

Military ethics

This section does not cite any references or sources.

Please help improve this article by adding citations to reliable
sources. Unsourced material may be challenged and removed. (March

See also: Nuremberg Principles and Geneva Conventions

Military ethics is a set of practices and philosophy to guide members
of the armed forces to act in a manner consistent with the values and
standards as established by military tradition, and to actively
clarify and enforce these conditions rigorously in its administrative
structure. Military ethics is evolutionary and the administrative
structure is modified as new ethical perspectives consistent with
national interests evolve.

Some ethical issues involving a country's military establishment, such

justification for using force
race (loss of capability due to race bias or abuse)

gender equality (loss of capability due to gender bias or abuse)

age discrimination (authority based upon age instead of accomplishment
or productivity)

nepotism (unfair control by family members; also known as "empire

political influence (military members having a political position or
political influence)

And others.

Moral psychology

Main article: Moral psychology

Moral psychology is a field of study in both philosophy and
psychology. Some use the term "moral psychology" relatively narrowly
to refer to the study of moral development.[20] However, others tend
to use the term more broadly to include any topics at the intersection
of ethics and psychology (and philosophy of mind).[21] Such topics are
ones that involve the mind and are relevant to moral issues. Some of
the main topics of the field are moral responsibility, moral
development, moral character (especially as related to virtue ethics),
altruism, psychological egoism, moral luck, and moral disagreement.

Evolutionary ethics

See also: Evolutionary ethics and Evolution of morality

Evolutionary ethics concerns approaches to ethics (morality) based on
the role of evolution in shaping human psychology and behavior. Such
approaches may be based in scientific fields such as evolutionary
psychology or sociobiology, with a focus on understanding and
explaining observed ethical preferences and choices.[23]

Descriptive ethics

Main article: Descriptive ethics

Descriptive ethics is a value-free approach to ethics which examines
ethics not from a top-down a priori perspective but rather
observations of actual choices made by moral agents in practice. Some
philosophers rely on descriptive ethics and choices made and
unchallenged by a society or culture to derive categories, which
typically vary by context. This can lead to situational ethics and
situated ethics. These philosophers often view aesthetics, etiquette,
and arbitration as more fundamental, percolating "bottom up" to imply
the existence of, rather than explicitly prescribe, theories of value
or of conduct. The study of descriptive ethics may include
examinations of the following:

Ethical codes applied by various groups. Some consider aesthetics
itself the basis of ethics– and a personal moral core developed
through art and storytelling as very influential in one's later
ethical choices.

Informal theories of etiquette which tend to be less rigorous and more
situational. Some consider etiquette a simple negative ethics, i.e.
where can one evade an uncomfortable truth without doing wrong? One
notable advocate of this view is Judith Martin ("Miss Manners").
According to this view, ethics is more a summary of common sense
social decisions.

Practices in arbitration and law, e.g. the claim that ethics itself is
a matter of balancing "right versus right," i.e. putting priorities on
two things that are both right, but which must be traded off carefully
in each situation.

Observed choices made by ordinary people, without expert aid or
advice, who vote, buy, and decide what is worth valuing. This is a
major concern of sociology, political science, and economics.

See also

The length of this "see also" section may adversely affect
readability. Please ensure that the "see also" links are not mentioned
elsewhere in the article, are not red links, are as few in number and
as relevant as possible.

Philosophy portal

Altruism (ethics)

Buddhist Ethics (discipline)
Business ethics
Deontological ethics
Engineering ethics
Ethical egoism
Ethical relativism
Ethical skepticism
Ethical subjectivism
Ethics in religion
Foucault/Habermas debate
Journalism ethics
Legal ethics

List of ethics topics

Medical ethics
Moral absolutism
Moral nihilism
Moral syncretism
Normative ethics


↑ Sahakian, William S. & Sahakian, Mabel Lewis. Ideas of the Great
Philosophers. pp 32-33. Barnes & Noble Books (1993). ISBN

↑ Sahakian, William S. & Sahakian, Mabel Lewis. Ideas of the Great
Philosophers. pp 33-35. Barnes & Noble Books (1993). ISBN

↑ Sahakian, William S. & Sahakian, Mabel Lewis. Ideas of the Great
Philosophers. pp 35-37. Barnes & Noble Books (1993). ISBN

↑ 4.0 4.1 Sahakian, William S. & Sahakian, Mabel Lewis. Ideas of the
Great Philosophers. pg 37. Barnes & Noble Books (1993). ISBN

↑ Sahakian, William S. & Sahakian, Mabel Lewis. Ideas of the Great
Philosophers. pp 37-38. Barnes & Noble Books (1993). ISBN
↑ http://www.desiringgod.org/ResourceLibrary/TopicIndex/85_Christian_Hedonism/1538_Christian_Hedonism/

↑ Sahakian, William S. & Sahakian, Mabel Lewis. Ideas of the Great
Philosophers. pp 38-41. Barnes & Noble Books (1993). ISBN

↑ Anscombe, G. E. M. (1958). "Modern Moral Philosophy". Philosophy 33:
1–19. doi:10.1017/S0031819100037943.


↑ Mackie, J. L. (1990). Ethics: Inventing Right and Wrong. London:
Penguin. ISBN 0-14-013558-8.

↑ 10.0 10.1 [1]

↑ Olson, Robert G. 1967. 'Deontological Ethics'. In Paul Edwards (ed.)
The Encyclopedia of Philosophy. London: Collier Macmillan: 343.

↑ Orend, Brian. 2000. War and International Justice: A Kantian
Perspective. West Waterloo, Ontario:Wilfrid Laurier University Press:

↑ Kelly, Eugene. 2006. The Basics of Western Philosophy. Greenwood
Press: 160.

↑ Kant, Immanuel. 1780. 'Preface'. In The Metaphysical Elements of
Ethics. Translated by Thomas Kingsmill Abbott

↑ 15.0 15.1 Kant, Immanuel. 1785. 'First Section: Transition from the
Common Rational Knowledge of Morals to the Philosophical', Groundwork
of the Metaphysic of Morals.

↑ Gilligan, C. (1982). In a different Voice: Pscychological theory and
women's development. Cambridge, MA: Harvard University Press.

↑ Ellis, C. (2007). Telling secrets, revealing lives: Relational
ethics in research with intimate others. Qualitative Inquiry, 13,

↑ Ellis, C. (1986). Fisher folk. Two communities on Chesapeake Bay.
Lexington: University Press of Kentucky.

↑ Ellis, C. (1995).Final negotiations: A story of love, loss, and
chronic illness. Philadelphia: Temple University Press.

↑ See, for example, Lapsley (2006) and "moral psychology" (2007).

↑ See, for example, Doris & Stich (2008) and Wallace (2007). Wallace
writes: "Moral psychology is the study of morality in its
psychological dimensions" (p. 86).
↑ See Doris & Stich (2008), §1.

↑ Doris Schroeder. "Evolutionary Ethics". http://www.iep.utm.edu/evol-eth/.
Retrieved 2010-01-05.


Hoy, D 2004, Critical resistance from poststructuralism to
postcritique, Massachusetts Institute of Technology, Massachusetts.

Lyon, D 1999, Postmodernity, 2nd ed, Open University Press,
Singer, P 2000, Writings on an ethical life, Harper Collins
Publishers, London.

Further reading

The London Philosophy Study Guide offers many suggestions on what to
read, depending on the student's familiarity with the subject: Ethics
Perle, Stephen. "Morality and Ethics: An Introduction".


Retrieved 2007-02-13. , Butchvarov, Panayot. Skepticism in Ethics

Encyclopedia of Ethics. Lawrence C. Becker and Charlotte B. Becker,
editors. Second edition in three volumes. New York: Routledge, 2002. A
scholarly encyclopedia with over 500 signed, peer-reviewed articles,
mostly on topics and figures of, or of special interest in, Western

De La Torre, Miguel A., "Doing Christian Ethics from the Margins,"
Orbis Books, 2004.

Derrida, J 1995, The Gift of Death, translated by David Wills,
University of Chicago Press, Chicago.

Levinas, E 1969, Totality and infinity, an essay on exteriority,
translated by Alphonso Lingis, Duquesne University Press, Pittsburgh.

External links

Look up ethics in Wiktionary, the free dictionary.

Wikiversity has learning materials about Ethics

Wikisource has the text of the 1911 Encyclopædia Britannica article

An Introduction to Ethics by Paul Newall, aimed at beginners.

"Ethics" article in the Stanford Encyclopedia of Philosophy
Ethics, 2d ed., 1973. by William Frankena

Ethics Bites Open University podcast series podcast exploring ethical
dilemmas in everyday life.

'The Right and the Good (1930) by W. D. Ross
University of San Diego - Ethics glossary Useful terms in ethics

The Hastings Center An independent, nonpartisan, and nonprofit
bioethics research institute founded in 1969 to address fundamental
ethical issues in the areas of health, medicine, and the environment

National Reference Center for Bioethics Literature World's largest
library for ethical issues in medicine and biomedical research

Ethics and Democracy

Ethics entry in Encyclopædia Britannica by Peter Singer

The Philosophy of Ethics on Philosophy Archive


...and I am Sid Harth
2010-02-25 16:09:22 UTC
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Political economy

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Political economy
Not to be confused with Economic policy.

This article is part of the

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Politics portal

v • [[|d]] • e

Political economy originally was the term for studying production,
buying and selling, and their relations with law, custom, and
government. Political economy originated in moral philosophy. It
developed in the 18th century as the study of the economies of states—
polities, hence political economy.

In late nineteenth century, the term "political economy" was generally
replaced by the term economics, used by those seeking to place the
study of economy upon mathematical and axiomatic bases, rather than
the structural relationships of production and consumption (cf.
marginalism, William Stanley Jevons, Alfred Marshall).

History of the term

Originally, political economy meant the study of the conditions under
which production or consumption within limited parameters was
organized in the nation-states. The phrase économie politique
(translated in English as political economy) first appeared in France
in 1615 with the well known book by Antoine de Montchrétien: Traité de
l’economie politique. French physiocrats, Adam Smith, David Ricardo
and Karl Marx were some of the exponents of political economy. In
1805, Thomas Malthus became England's first professor of political
economy, at the East India Company College, Haileybury, Hertfordshire.
The world's first professorship in political economy was established
in 1763 at the University of Vienna, Austria; Joseph von Sonnenfels
was the first tenured professor.

In the United States, political economy first was taught at the
College of William and Mary; in 1784 Adam Smith's Wealth of Nations
was a required textbook.[1]

Glasgow University, where Smith was Professor of Logic and Moral
Philosophy, changed the name of its Department of Political Economy to
the Department of Economics (ostensibly to avoid confusing prospective
undergraduates) in academic year 1997–1998, making the class of 1998
the last to be graduated with a Scottish Master of Arts degree in
Political Economy.

Current approaches

In its contemporary meaning, political economy refers to different,
but related, approaches to studying economic and political behaviours,
ranging from the combining of economics with other fields, to the
using of different, fundamental assumptions that challenge orthodox
economic assumptions:

Political economy most commonly refers to interdisciplinary studies
drawing upon economics, law, and political science in explaining how
political institutions, the political environment, and the economic
system—capitalist, socialist, mixed—influence each other. When
narrowly construed, it refers to applied topics in economics
implicating public policy, such as monopoly, market protection,
government fiscal policy,[2] and rent seeking.[3]

Historians have employed political economy to explore the ways in the
past that persons and groups with common economic interests have used
politics to effect changes beneficial to their interests.[4]

"International political economy" (IPE) is an interdisciplinary field
comprising approaches to international trade and finance, and state
policies affecting international trade, i.e. monetary and fiscal
policies. In the U.S., these approaches are associated with the
journal International Organization, which, in the 1970s, became the
leading journal of international political economy under the
editorship of Robert Keohane, Peter J. Katzenstein, and Stephen
Krasner. They are also associated with the journal The Review of
International Political Economy. There also is a more critical school
of IPE, inspired by Karl Polanyi's work; two major figures are Susan
Strange and Robert W. Cox.[5]

Economists and political scientists often associate the term with
approaches using rational choice assumptions, especially game theory,
in explaining phenomena beyond economics' standard remit, in which
context the term "positive political economy" is common.[6]

Anthropologists, sociologists, and geographers, use political economy
in referring to the neo-Marxian approaches to development and
underdevelopment postulated by André Gunder Frank and Immanuel

New political economy students treat economic ideologies as the
phenomenon to explain, per the traditions of Marxian political
economy. Thus, Charles S. Maier suggests that a political economy
approach: interrogates economic doctrines to disclose their
sociological and political premises....in sum, [it] regards economic
ideas and behavior not as frameworks for analysis, but as beliefs and
actions that must themselves be explained.[7] This approach informs
Andrew Gamble's The Free Economy and the Strong State (Palgrave
Macmillan, 1988), and Colin Hay's The Political Economy of New Labour
(Manchester University Press, 1999). It also informs much work
published in New Political Economy an international journal founded by
Sheffield University scholars in 1996.[8]

Related disciplines

Because political economy is not a unified discipline, there are
studies using the term that overlap in subject matter, but have
radically different perspectives:

Sociology studies the effects of persons' involvement in society as
members of groups, and how that changes their ability to function.
Many sociologists start from a perspective of production-determining
relation from Karl Marx.

Political Science focuses on the interaction between institutions and
human behavior, the way in which the former shapes choices and how the
latter change institutional frameworks. Along with economics, it has
made the best works in the field by authors like Shepsle, Ostrom,
Ordeshook, among others.

Anthropology studies political economy by studying the relationship
between the world capitalist system and local cultures.

Psychology is the fulcrum on which political economy exerts its force
in studying decision-making (not only in prices), but as the field of
study whose assumptions model political economy.

History documents change, using it to argue political economy;
historical works have political economy as the narrative's frame.

Economics focuses on markets by leaving the political—governments,
states, legal frameworks—as givens. Economics dropped the adjective
political in the 19th century, but works backwards, by describing "The
Ideal Market", urging governments to formulate policy and law to
approach said ideal. Economists and political economists often
disagree on what is preeminent in developing production, market, and
political structure theories.

Law concerns the creation of policy and its mediation via political
actions that have specific results, it deals with political economy as
political capital and as social infrastructure—and the sociological
results of one society upon another.
Human Geography is concerned with politico-economic processes,
emphasizing space and environment.

Ecology deals with political economy, because human activity has the
greatest effect upon the environment, its central concern being the
environment's suitability for human activity. The ecological effects
of economic activity spur research upon changing market economy

International Relations often uses political economy to study
political and economic development.

Cultural Studies studies social class, production, labor, race,
gender, and sex.
Communications examines the institutional aspects of media and
telecommuncation systems, with particular attention to the historical
relationships between owners, labor, consumers, advertisers, and the

See also

Economic study of collective action
Public Choice
Economic system
Economic ideology
Institutional economics
Important publications in political economy
Social Capital


↑ Image of "Priorities of the College of William and Mary"

↑ Groenwegen (1987, p.906).

↑ Anne O. Krueger, "The Political Economy of the Rent-Seeking
Society," American Economic Review, 64(3), June 1974, pp.291–303

↑ McCoy, Drew R. "The Elusive Republic: Political Ecocomy in
Jeffersonian America", Chapel Hill, University of North Carolina,

↑ Cohen, Benjamin J. (2007), ‘The transatlantic divide: Why are
American and British IPE so different?’, Review of International
Political Economy, Vol. 14, No. 2, May 2007

↑ Alt, James E. and Kenneth Shepsle (eds.) (1990), Perspectives on
Positive Political Economy (Cambridge [UK]; New York: Cambridge
University Press).

↑ Charles S. Mayer "In search of Stability: Explorations in Historical
Political Economy", Cambridge University Press, Cambridge, 1987, pp.3–

↑ cf: David Baker, "The political economy of fascism: Myth or reality,
or myth and reality?" New Political Economy, Volume 11, Issue 2 June
2006, pp.227–250.


Groenwegen, Peter (1987). "'political economy' and 'economics'", The
New Palgrave: A Dictionary of Economics, v. 3, pp. 904–07.

Pressman, Steven, Encyclopedia of Political Economy Routledge, 1999

Pressman, Steven, Interactions in Political Economy: Malvern After Ten
Years Routledge, 1996

Winch, Donald, Riches and poverty : an intellectual history of
political economy in Britain, 1750–1834 Cambridge [etc.]: Cambridge
U.P., 1996.

Winch, Donald, "The emergence of Economics as a Science 1750–1870".
In: The Fontana Economic History of Europe, Vol. 3. London: Collins/
Fontana, 1973.

External links

Wikibooks has a book on the topic of
Political Economy

National System of Political Economy—Major work on political economy
by Friedrich List.

Harmony of Interests—Work contrasting American System and British
System of political economy by Henry C. Carey

International Political Economy at Jacobs University Bremen
Centre for Global Political Economy at the University of Sussex, UK

Political economy


...and I am Sid Harth
2010-02-25 16:21:50 UTC
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Scottish Enlightenment

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History of Scotland

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Chronological Eras

Prehistoric Scotland

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Scotland in the Early Middle Ages
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Scottish Enlightenment
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House of Alpin (843–878) & (889–1040)
House of Moray (1040–1058)
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v • d • e
The Scottish Enlightenment was the period in 18th century Scotland
characterised by an outpouring of intellectual and scientific
accomplishments. By 1750, Scots were among the most literate citizens
of Europe, with an estimated 75% level of literacy.[1]

Sharing the humanist and rationalist outlook of the European
Enlightenment of the same time period, the thinkers of the Scottish
Enlightenment asserted the fundamental importance of human reason
combined with a rejection of any authority which could not be
justified by reason. They held to an optimistic belief in the ability
of man to effect changes for the better in society and nature, guided
only by reason.

It was this latter feature which gave the Scottish Enlightenment its
special flavour, distinguishing it from its continental European
counterpart. In Scotland, the Enlightenment was characterised by a
thoroughgoing empiricism and practicality where the chief virtues were
held to be improvement, virtue, and practical benefit for both the
individual and society as a whole.

Among the advances of the period were achievements in philosophy,
political economy, engineering, architecture, medicine, geology,
archaeology, law, agriculture, chemistry, and sociology. Among the
outstanding Scottish thinkers and scientists of the period were
Francis Hutcheson, Alexander Campbell, David Hume, Adam Smith, Thomas
Reid, Robert Burns, Adam Ferguson, John Playfair, Joseph Black and
James Hutton.

The Scottish Enlightenment had effects far beyond Scotland itself, not
only because of the esteem in which Scottish achievements were held in
Europe and elsewhere, but also because its ideas and attitudes were
carried across the Atlantic as part of the Scottish diaspora which had
its beginnings in that same era. As a result, a significant proportion
of technological and social development in the United States and
Canada in the 18th and 19th centuries were accomplished through Scots-

After the Act of Union 1707

In the period following the Act of Union 1707[citation needed],
Scotland's place in the world was altered radically. Following the
Reformation, many Scottish academics were teaching in great cities of
mainland Europe but with the birth and rapid expansion of the new
British Empire came a revival of philosophical thought in Scotland and
a prodigious diversity of thinkers.

Arguably the poorest[2] country in Western Europe in 1707, Scotland
was then able to turn its attentions to the wider world without the
opposition of England. Scotland reaped the economic benefits of free
trade within the British Empire together with the intellectual
benefits of having established Europe's first public education system
since classical times. Under these twin stimuli, Scottish thinkers
began questioning assumptions previously taken for granted; and with
Scotland's traditional connections to France, then in the throes of
the Enlightenment, the Scots began developing a uniquely practical
branch of humanism to the extent that Voltaire said "We look to
Scotland for all our ideas of civilisation"[3][4].

Empiricism and inductive reasoning

The first major philosopher of the Scottish Enlightenment was Francis
Hutcheson,[5] who held the Chair of Philosophy at the University of
Glasgow from 1729 to 1746. A moral philosopher with alternatives to
the ideas of Thomas Hobbes, one of his major contributions to world
thought was the utilitarian and consequentialist principle that virtue
is that which provides, in his words, "the greatest happiness for the
greatest numbers".

Much of what is incorporated in the scientific method (the nature of
knowledge, evidence, experience, and causation) and some modern
attitudes towards the relationship between science and religion were
developed by David Hume. "Like many of the learned Scots, he revered
the new science of Copernicus, Bacon, Galileo, Kepler, Boyle, and
Newton; he believed in the experimental method and loathed
superstition"[5]. Hume stands out from the mainstream enlightenment
due to his deep pessimism which is largely not shared by other
humanist thinkers[citation needed].

Adam Smith developed and published The Wealth of Nations, the first
work in modern economics. This famous study, which had an immediate
impact on British economic policy, still frames 21st century
discussions on globalisation and tariffs[6].

Scottish Enlightenment thinkers developed what Hume called a 'science
of man'[7] which was expressed historically in works by such as James
Burnett, Adam Ferguson, John Millar, and William Robertson, all of
whom merged a scientific study of how humans behave in ancient and
primitive cultures with a strong awareness of the determining forces
of modernity. Gathering places in Edinburgh such as The Select Society
and, later, The Poker Club, were among the crucibles from which many
of the ideas which distinguish the Scottish Enlightenment emerged.

The focus of the Scottish Enlightenment ranged from intellectual and
economic matters to the specifically scientific as in the work of
William Cullen, physician and chemist, James Anderson, a lawyer and
agronomist, Joseph Black, physicist and chemist, and James Hutton, the
first modern geologist[5][8].

While the Scottish Enlightenment is traditionally considered to have
concluded toward the end of the 18th century[7], it is worth noting
that disproportionately large Scottish contributions to British
science and letters continued for another fifty years or more, thanks
to such figures as James Hutton, James Watt, William Murdoch, James
Clerk Maxwell, Lord Kelvin and Sir Walter Scott.

An English visitor to Edinburgh during the heyday of the Scottish
Enlightenment remarked: "Here I stand at what is called the Cross of
Edinburgh, and can, in a few minutes, take 50 men of genius and
learning by the hand". It is a striking summation of the outburst of
pioneering intellectual activity that occurred in Scotland in the
second half of the 18th century.

They were a closely knit group: most knew one another; many were close
friends; some were related by marriage. All were politically
conservative but intellectually radical (Unionists and progressives to
a man), courteous, friendly and accessible. They were stimulated by
enormous curiosity, optimism about human progress and a
dissatisfaction with age-old theological disputes. Together they
created a cultural golden age.

– Magnus Magnusson, New Statesman[7]

Key figures in the Scottish Enlightenment

Robert Adam (1728-1792) architect

James Anderson (1739-1808) agronomist, lawyer, amateur scientist

Joseph Black (1728-1799) physicist and chemist, first to isolate
carbon dioxide
Hugh Blair (1718-1800) minister, author

James Boswell (1740-1795) lawyer, author of Life of Johnson

Thomas Brown (1778–1820), Scottish moral philosopher and philosopher
of mind; jointly held the Chair of Moral Philosophy at Edinburgh
University with Dugald Stewart

James Burnett, Lord Monboddo (1714-1799) philosopher, judge, founder
of modern comparative historical linguistics

Robert Burns[9] (1759-1796) poet

Alexander Campbell (1788-1866) founder of the Restoration Movement

George Campbell (1719-1796) philosopher of language, theology, and

Sir John Clerk of Eldin (1728-1812) prolific artist, author of An
Essay on Naval Tactics; great-uncle of James Clerk Maxwell

William Cullen (1710-1790) physician, chemist, early medical

Adam Ferguson (1723-1816) considered the founder of sociology

Robert Fergusson (1750-1774), poet.

Andrew Fletcher (1653-1716) a forerunner of the Scottish Enlightenment,
[10] writer, patriot, commissioner of Parliament of Scotland

James Hall, 4th Baronet (1761-1832) geologist, geophysicist

Henry Home, Lord Kames (1696-1782) philosopher, judge, historian

David Hume (1711-1776) philosopher, historian, essayist

Francis Hutcheson (1694-1746) philosopher of metaphysics, logic, and
James Hutton[8][9] (1726–1797) founder of modern geology

Sir John Leslie (1766-1832) mathematician, physicist, investigator of
heat (thermodynamics)

James Mill (1773-1836) late in the period - Father of John Stuart

John Millar (1735-1801) philosopher, historian, historiographer

John Playfair (1748-1819) mathematician, author of Illustrations of
the Huttonian Theory of the Earth

Allan Ramsay[11] (1686 - 1758) poet

Henry Raeburn[7] (1756-1823) portrait painter

Thomas Reid (1710-1796) philosopher, founder of the Scottish School of
Common Sense

William Robertson (1721-1793) one of the founders of modern historical
Sir Walter Scott (1771-1832) lawyer, novelist, poet

John Sinclair (1754 - 1835) politician, writer, the first person to
use the word statistics in the English language

William Smellie (1740-1795) editor of the first edition of
Encyclopædia Britannica
Adam Smith (1723-1790) whose The Wealth of Nations was the first
modern treatise on economics

Dugald Stewart (1753-1828) moral philosopher

George Turnbull (1698-1748), theologian, philosopher and writer on
John Walker (naturalist) (1730-1803) professor of natural history

James Watt (1736-1819) student of Joseph Black; engineer, inventor
(see Watt steam engine)

Plus two who visited and corresponded with Edinburgh scholars[8]:

Erasmus Darwin (1731-1802) physician, botanist, philosopher,
grandfather of Charles Darwin

Benjamin Franklin (1706-1790) polymath, one of the Founding Fathers of
the United States

The learned Scots were remarkably unlike the French philosophes;
indeed, they were unlike any other group of philosophers that ever
existed. In a gigantic study, “The Sociology of Philosophies,”
published in 1998, Randall Collins assembled structural portraits of
the seminal moments in philosophy, both Western and Eastern.
Typically, the most important figures in a given cluster of thinkers
(perhaps three or four men) would jockey for centrality while
cultivating alliances with other thinkers or students on the margins.

In the Scottish group, however, there was little of the bristling,
charged, and exclusionary fervour of the Diderot-d’Alembert circle; or
of the ruthless atmosphere found in Germany in the group that included
Fichte, the Schelling brothers, and Hegel; or of the conscious glamour
of the existentialists in postwar Paris. The Scots vigorously
disagreed with one another, but they lacked the temperament for the
high moral drama of quarrels, renunciations, and reconciliation.
Hutcheson, Hume and Smith, along with Adam Ferguson and Thomas Reid,
were all widely known, but none of them were remotely cult figures in
the style of Hegel, Marx, Emerson, Wittgenstein, Sartre, or Foucault.

To an astonishing degree, the men supported one another’s projects and
publications, which they may have debated at a club that included
amateurs (say, poetry-writing doctors, or lawyers with an interest in
science) or in the fumy back room of some dark Edinburgh tavern. In
all, the group seems rather like an erudite version of Dickens’s
chattering and benevolent Pickwick Club.

– David Denby, The New Yorker[5]

See also

Midlands Enlightenment
American Enlightenment


↑ Herman, Arthur (2003). The Scottish Enlightenment: The Scots'
Invention of the Modern World. 4th Estate, Limited. ISBN 1841152765.

↑ Herman, Arthur (2001). How the Scots Invented the Modern World: The
True Story of How Western Europe's Poorest Nation Created Our World &
Everything in It (Hardcover: ISBN 978-0609606353, Paperback: ISBN
978-0609809990 ed.). Crown Publishing Group.

↑ José Manuel Barroso, 11th President of the European Commission (28
November 2006). "The Scottish enlightenment and the challenges for
Europe in the 21st century; climate change and energy" (html).
Enlightenment Lecture Series, Edinburgh University.

"I will try to show why Voltaire was right when he said: 'Nous nous
tournons vers l’Écosse pour trouver toutes nos idées sur la
civilisation' [we look to Scotland for all our ideas on

↑ "Visiting The Royal Society of Edinburgh…" (html). Royal Society of
Edinburgh. First published in The Scotsman Saturday 4 June 2005.


"Scotland has a proud heritage of science, research, invention and
innovation, and can lay claim to some of the greatest minds and
greatest discoveries since Voltaire wrote those words 250 years ago."

↑ 5.0 5.1 5.2 5.3 David Denby (11 October 2004). "Northern Lights: How
modern life emerged from eighteenth-century Edinburgh" (html). The New
Yorker. Review of James Buchan's Crowded With Genius: Edinburgh's
Moment of the Mind (Capital of the Mind: Edinburgh in the UK)
HarperCollins, 2003. Hardcover: ISBN 0-06-055888-1, ISBN


"The fountainhead was Francis Hutcheson, a kind of pan-Enlightenment
figure who, from 1729 until his death in 1746, held the chair in moral
philosophy at the University of Glasgow, where he broke with tradition
by lecturing in English in addition to the common lecturing language
of the time, Latin. Hutcheson, a frequent visitor to Edinburgh, was
Adam Smith’s teacher and he encouraged Hume’s early efforts. He was
suspicious of metaphysics or any claims not based on observation or
experience. Empiricism and the inductive method was the clarion call
of the Scottish Enlightenment.

The intellectual break with the past was drastic and seemingly
irreversible. In recent years, scholars have traced the rudiments of
modern psychology, anthropology, the earth sciences, and theories of
civil society and liberal education to eighteenth-century Scotland."

↑ Fry, Michael (1992). Adam Smith's Legacy: His Place in the
Development of Modern Economics. Paul Samuelson, Lawrence Klein,
Franco Modigliani, James M. Buchanan, Maurice Allais, Theodore
Schultz, Richard Stone, James Tobin, Wassily Leontief, Jan Tinbergen.
Routledge. ISBN 978-0415061643. "Adam Smith's Legacy brings together
ten Nobel Laureates in Economics, the greatest number since the prize
was instituted in 1969. They explore themes as diverse as Smith's use
of data, his attitude towards human capital, and his views on economic
policy. Heirs to Smith and leaders of the discipline, the contributors
also reflect upon the current state of economics, assessing the extent
to which it measures up to the benchmark established by its founder."

↑ 7.0 7.1 7.2 7.3 Magnus Magnusson (10 November 2003). "Northern
lights" (html). New Statesman. Review of James Buchan's Capital of the
Mind: Edinburgh (Crowded With Genius: Edinburgh's Moment of the Mind
in the U.S.) London: John Murray ISBN 0719554462. http://www.newstatesman.com/200311100040.

↑ 8.0 8.1 8.2 Repcheck, Jack (2003). "Chapter 7: The Athens of the
North" (in English). The Man Who Found Time: James Hutton and the
Discovery of the Earth's Antiquity. Cambridge, Massachusetts: Basic
Books, The Perseus Books Group. pp. 117–143. ISBN 0-7382-0692-X. "Onto
the list should also be added two men who never lived in Edinburgh but
who visited and maintained an active correspondence with the scholars
there: Ben Franklin (1706-1790), the statesman and talented polymath
who discovered electricity; and Erasmus Darwin (1731-1802), Charles
Darwin's grandfather and the author of a precursor theory of

↑ 9.0 9.1 Phillip Manning (28 December 2003). "A Toast To Times
Past" (html). Chapel Hill News.


"Burns penned the song [Auld Lang Syne] in 1788 during the
intellectual flowering known as the Scottish Enlightenment. Burns was
part of a convivial group in Edinburgh whose writing and thinking
produced the Enlightenment. One of the most original thinkers in that
group, the man whose work would stimulate Charles Darwin’s ideas about
evolution, was a well-to-do gentleman farmer named James Hutton. He
discovered the immensity of our past, the days gone by that Burns
wrote about so eloquently."

↑ Cambridge University Press. "Andrew Fletcher: Political Works".


↑ Dr David Allan. "A Hotbed of Genius: Culture and Society in the
Scottish Enlightenment" (html). University of St Andrews.

Further reading

Darwin in Scotland: Edinburgh, Evolution and Enlightenment. JF Derry.
· Whittles Publishing, 2009. Paperback: ISBN 1904445578.

A Hotbed of Genius: The Scottish Enlightenment 1731-1790. David
Daiches, Peter Jones, Jean Jones (eds).

· Edinburgh University Press, 1986. Hardcover: ISBN 0 85224 537 8.

· Saltire Society 1996. Paperback: ISBN 0-85411-069-0.

Crowded With Genius: Edinburgh's Moment of the Mind. James Buchan
· Harper Perennial 2004. Paperback: ISBN 006055889X, ISBN

The Scottish Nation: A History 1700-2000. Thomas Devine.

· Viking, 1999. Hardcover: ISBN 0670888117, ISBN 978-0670888

· Penguin, 2001. Paperback: ISBN 0141002344, ISBN 978-0141002347.

The Scottish Enlightenment: The Historical Age of the Historical
Nation. Alexander Broadie.

· Birlinn 2002. Paperback: ISBN 1-84158-151-8, ISBN 978-1841581514.

America's Founding Secret: What the Scottish Enlightenment Taught Our
Founding Fathers. Robert W. Galvin.

· Rowman & Littlefield, 2002. Hardcover: ISBN 0-7425-2280-6, ISBN
The Cambridge Companion to the Scottish Enlightenment. (Cambridge
Companions to Philosophy) Alexander Broadie, ed.

· Cambridge University Press, 2003. Hardcover: ISBN 0521802733, ISBN
9780521802734. Paperback: ISBN 0521003237, ISBN 978-0521003230.

The Mark of the Scots: Their Astonishing Contributions to History,
Science, Democracy, Literature, and the Arts. Duncan A. Bruce.

· (Publisher?) 1996. Hardcover: ISBN 1559723564, ISBN 978-1559723565.

· Citadel, Kensington Books, 2000. Paperback: ISBN 0-8065-2060-4, ISBN

How the Scots Made America. Michael Fry.

· Thomas Dunne Books, St. Martin's Press, 2004. Hardcover: ISBN
0-312-33876-7, ISBN 978-0312338763.

Scotland: A New History. Michael Lynch.

· Pimlico, Random House, 1992 (new edition). Paperback: ISBN
0-7126-9893-0, ISBN 978-0712698931.

Virtue, Learning and the Scottish Enlightenment: Ideas of Scholarship
in Early Modern History. David Allan.

· Edinburgh University Press, 1993. ISBN 978-0748604388.

External links

Northern Lights: How modern life emerged from eighteenth-century
Scottish Enlightenment - an introduction.

living philosophy - Philosophical play readings of the legacy of David
Hume, Adam Smith and Robert Burns


...and I am Sid Harth
2010-02-25 18:03:50 UTC
Reference »
Wikipedia Articles

The Theory of Moral SentimentsThe Theory of Moral Sentiments

Author Adam Smith
Publication date 1759

The Theory of Moral Sentiments was written by Adam Smith in 1759. It
provided the ethical, philosophical, psychological and methodological
underpinnings to Smith's later works, including The Wealth of Nations
(1776), A Treatise on Public Opulence (1764) (first published in
1937), Essays on Philosophical Subjects (1795), and Lectures on
Justice, Police, Revenue, and Arms (1763) (first published in 1896).


Broadly speaking, Smith followed the views of his mentor, Francis
Hutcheson of the University of Glasgow, who divided moral philosophy
into four parts: Ethics and Virtue; Private rights and Natural
liberty; Familial rights (called Economics); and State and Individual
rights (called Politics).

More specifically, Smith divided moral systems into:

Categories of the nature of morality. These included Propriety,
Prudence, and Benevolence.

Categories of the motive of morality. These included Self-love,
Reason, and Sentiment.

Hutcheson had abandoned the psychological view of moral philosophy,
claiming that motives were too fickle to be used as a basis for a
philosophical system. Instead, he hypothesised a dedicated "sixth
sense" to explain morality. This idea, to be taken up by David Hume
(see Hume's A Treatise of Human Nature), claimed that man is pleased
by utility.

Smith rejected his teacher's reliance on this special sense. Starting
in about 1741, Smith set on the task of using Hume's experimental
method (appealing to human experience) to replace the specific moral
sense with a pluralistic approach to morality based on a multitude of
psychological motives. The Theory of Moral Sentiments begins with the
following assertion:

How selfish soever man may be supposed, there are evidently some
principles in his nature, which interest him in the fortunes of
others, and render their happiness necessary to him, though he derives
nothing from it, except the pleasure of seeing it. Of this kind is
pity or compassion, the emotion we feel for the misery of others, when
we either see it, or are made to conceive it in a very lively manner.
That we often derive sorrow from the sorrows of others, is a matter of
fact too obvious to require any instances to prove it; for this
sentiment, like all the other original passions of human nature, is by
no means confined to the virtuous or the humane, though they perhaps
may feel it with the most exquisite sensibility. The greatest ruffian,
the most hardened violator of the laws of society, is not altogether
without it.

Smith departed from the "moral sense" tradition of Shaftesbury,
Hutcheson, and Hume, as the principle of sympathy takes the place of
that organ. "Sympathy" was the term Smith used for the feeling of
these moral sentiments. It was the feeling with the passions of
others. It operated through a logic of mirroring, in which a spectator
imaginatively reconstructed the experience of the person he watches:

As we have no immediate experience of what other men feel, we can form
no idea of the manner in which they are affected, but by conceiving
what we ourselves should feel in the like situation. Though our
brother is on the rack, as long as we ourselves are at our ease, our
senses will never inform us of what he suffers. They never did, and
never can, carry us beyond our own person, and it is by the
imagination only that we can form any conception of what are his
sensations. Neither can that faculty help us to this any other way,
than by representing to us what would be our own, if we were in his
case. It is the impressions of our own senses only, not those of his,
which our imaginations copy. By the imagination, we place ourselves in
his situation.

Sympathy arose from an innate desire to identify with the emotions of
others. It could lead people to strive to maintain good relations with
their fellow human beings and provide the basis both for specific
benevolent acts and for the general social order. Thus was formed
within the beast the psychological basis for the desire to obey
natural laws. The Theory of Moral Sentiments culminated in man as self-
interested and self-commanded. Individual freedom, according to Smith,
was rooted in self-reliance, the ability of an individual to pursue
his self-interest while commanding himself based on the principles of
natural law.

However, Smith rejected the idea that Man was capable of forming moral
judgements beyond a limited sphere of activity, again centered around
his own self-interest:

The administration of the great system of the universe ... the care of
the universal happiness of all rational and sensible beings, is the
business of God and not of man. To man is allotted a much humbler
department, but one much more suitable to the weakness of his powers,
and to the narrowness of his comprehension: the care of his own
happiness, of that of his family, his friends, his country.... But
though we are ... endowed with a very strong desire of those ends, it
has been entrusted to the slow and uncertain determinations of our
reason to find out the proper means of bringing them about. Nature has
directed us to the greater part of these by original and immediate
instincts. Hunger, thirst, the passion which unites the two sexes, and
the dread of pain, prompt us to apply those means for their own sakes,
and without any consideration of their tendency to those beneficent
ends which the great Director of nature intended to produce by them.

It was in the TMS that Smith first referred to the "invisible hand" to
describe the apparent benefits to society of people behaving in their
own interests. Smith writes (6th ed. p. 350):

... In spite of their natural selfishness and rapacity, though they
mean only their own conveniency, though the sole end which they
propose ... be the gratification of their own vain and insatiable
desires, they divide with the poor the produce of all their
improvements. They are led by an invisible hand to make nearly the
same distribution of the necessaries of life, which would have been
made, had the earth been divided into equal portions among all its
inhabitants, and thus without intending it, without knowing it,
advance the interest of the society.
In a published lecture, Vernon L. Smith further argued that Theory of
Moral Sentiments and Wealth of Nations together encompassed:

"one behavioral axiom, 'the propensity to truck, barter, and exchange
one thing for another,' where the objects of trade I will interpret to
include not only goods, but also gifts, assistance, and favors out of
sympathy ... whether it is goods or favors that are exchanged, they
bestow gains from trade that humans seek relentlessly in all social
transactions. Thus, Adam Smith's single axiom, broadly interpreted ...
is sufficient to characterize a major portion of the human social and
cultural enterprise. It explains why human nature appears to be
simultaneously self-regarding and other-regarding."[1]

The Theory of Moral Sentiments: The Fourth Edition
Consists of 6 parts:

Part I: Of the propriety of action

Part II: Of merit and demerit; or of the objects of reward and

Part III: Of the foundations of our judgments concerning our own
sentiments and conduct, and of the sense of duty.

Part IV: Of the effect of utility upon the sentiments of approbation.

Part V: Of the influence of custom and fashion upon the sentiments of
moral approbation and disapprobation.

Part VI: Of systems of moral philosophy

Part I: Of the propriety of action

Part one of the Theory of Moral Sentiments consists of three sections:

Section 1: Of the sense of propriety

Section 2: Of the degrees of which different passions are consistent
with propriety
Section 3: Of the effects of propriety and adversity upon the judgment
of mankind with regard to the propriety of action; and why it is more
easy to obtain their approbation in the one state than the other

Part I, Section I: Of the Sense of Propriety

Section 1 consists of 5 chapters:

Chapter 1: Of sympathy
Chapter 2: Of the pleasure of mutual sympathy
Chapter 3: Of the manner in which we judge of the propriety or
impropriety of the affections of other men by their concord or
dissonance with our own
Chapter 4: The same subject continued
Chapter 5: Of the amiable and respectable virtues

Part I, Section I, Chapter I: Of Sympathy

According to Smith humans have a natural tendency to care about the
well-being of others for no other reason than the pleasure one gets
from seeing them happy. He calls this sympathy, defining it "our
fellow-feeling with any passion whatsoever" (p. 5). He argues that
this occurs under either of two conditions:

We see firsthand the fortune or misfortune of another person
The fortune or misfortune is vividly depicted to us

Although this is apparently true, he follows to argue that this
tendency lies even in "the greatest ruffian, the most hardened
violator of the laws of society" (p.2).

Smith also proposes several variables that can moderate the extent of
sympathy, noting that the situation that is the cause of the passion
is the large determinant of our response:

The vividness of the account of the condition of another person

An important point put forth by Smith is that the degree to which we
sympathize, or "tremble and shudder at the thought of what he feels",
is proportional to the degree of vividness in our observation or the
description of the event.

Knowledge of the causes of the emotions

When observing the anger of another person, for example, we are
unlikely to sympathize with this person because we "are unacquainted
with his provocation" and as a result cannot imagine what it is like
to feel what he feels. Further, since we can see the "fear and
resentment" of those who are the targets of the person's anger we are
likely to sympathize and take side with them. Thus, sympathetic
responses are often conditional on or their magnitude is determined by
the causes of the emotion in the person being sympathized with.

Whether other people are involved in the emotion

Specifically, emotions such as joy and grief tell us about the "good
or bad fortune" of the person we are observing them in, whereas anger
tells us about the bad fortune with respect to another person. It is
the difference between intrapersonal emotions, such as joy and grief,
and interpersonal emotions, such as anger, that causes the difference
in sympathy, according to Smith. That is, intrapersonal emotions
trigger at least some sympathy without the need for context whereas
interpersonal emotions are dependent on context.

He also proposes a natural 'motor' response to seeing the actions of
others: If we see a knife hacking off a person's leg we wince away, if
we see someone dance we move in the same ways, we feel the injuries of
others as if we had them ourselves.

Smith makes clear that we sympathize not only with the misery of
others but also the joy; he states that observing an emotional state
through the "looks and gestures" in another person is enough to
initiate that emotional state in ourselves. Furthermore, we are
generally insensitive to the real situation of the other person, but
instead to how we would feel ourselves if we were in the situation of
the other person. For example, a mother with a suffering baby feels
"the most complete image of misery and distress" while the child
merely feels "the uneasiness of the present instant" (p. 8).

Part I, Section I, Chapter II: Of Pleasure and mutual sympathy

Smith continues by arguing that people feel pleasure from the presence
of others with the same emotions as one's self, and displeasure in the
presence of those with "contrary" emotions. Smith argues that this
pleasure is not the result of self-interest: that others are more
likely to assist oneself if they are in a similar emotional state.
Smith also makes the case that pleasure from mutual sympathy is not
derived merely from a heightening of the original felt emotion
amplified by the other person. Smith further notes that people get
more pleasure from the mutual sympathy of negative emotions than
positive emotions, but people feel "more anxious to communicate to our
friends" (p. 13) negative than positive emotions.

Smith proposes that mutual sympathy heightens the original emotion and
"disburdens" the person of sorrow. This is a 'relief' model of mutual
sympathy, where mutual sympathy heightens the sorrow but also produces
pleasure from relief "because the sweetness of his sympathy more than
compensates the bitterness of that sorrow" (p. 14). In contrast,
mocking or joking about their sorrow is the "cruelest insult" one can
inflict on another person:

To seem to not be affected by the joy of our companions is but want of
politeness; but to not wear a serious countentance when they tell us
their afflictions, is real and gross inhumanity (p. 14).

He makes clear that mutual sympathy of negative emotions is a
necessary condition for friendship, whereas mutual sympathy of
positive emotions is desirable but not required. This is due to the
"healing consolation of mutual sympathy" that a friend is 'required'
to provide in response to "grief and resentment", as if not doing so
would be akin to a failure to help the physically wounded.

Not only do we get pleasure from the sympathy of others, but we also
obtain pleasure from being able to successfully sympathize with
others, and discomfort from failing to do so. Sympathizing is
pleasurable, failing to sympathize is aversive. Smith also makes the
case that failing to sympathize with another person may not be
aversive to ourselves but we may find the emotion of the other person
unfounded and blame them, as when another person experiences great
happiness or sadness in response to an event that we think should not
warrant such a response.

Part I, Section I, Chapter III: Of the manner in which we judge of the
propriety or impropriety of the affections of other men by their
concord or dissonance with our own
Smith presents the argument that approval or disapproval of the
feelings of others is completely determined by whether we sympathize
or fail to sympathize with their emotions. Specifically, if we
sympathize with the feelings of another we judge that their feelings
are just, and if we do not sympathize we judge that their feelings are

This holds in matters of opinion also, as Smith flatly states that we
judge the opinions of others as correct or incorrect merely by
determining whether they agree with our own opinions. Smith also cites
a few examples where our judgment is not in line with our emotions and
sympathy, as when we judge the sorrow of a stranger who has lost her
mother as being justified even though we know nothing about the
stranger and do not sympathize ourselves. However, according to Smith
these non-emotional judgments are not independent from sympathy in
that although we do not feel sympathy we do recognize that sympathy
would be appropriate and lead us to this judgment and thus deem the
judgment as correct.

Next, Smith puts forth that not only are the consequences of one's
actions judged and used to determine whether one is just or unjust in
committing them, but also whether one's sentiments justified the
action that brought about the consequences. Thus, sympathy plays a
role in determining judgments of the actions of others in that if we
sympathize with the affections that brought about the action we are
more likely to judge the action as just, and vice versa:

If upon bringing the case home to our own breast we find that the
sentiments which it gives occasion to, coincide and tally with our
own, we necessarily approve of them as proportioned and suitable to
their objects; if otherwise, we necessarily disapprove of them, as
extravagant and out of proportion (p. 20).

Part I, Section I, Chapter IV: The same subject continued

Smith delineates two conditions under which we judge the "propriety or
impropriety of the sentiments of another person":

1 When the objects of the sentiments are considered alone

2 When the objects of the sentiments are considered in relation to the
person or other persons

When one's sentiments coincide with another person's when the object
is considered alone, then we judge that their sentiment is justified.
Smith lists objects that are in one of two domains: science and taste.
Smith argues that sympathy does not play a role in judgments of these
objects; differences in judgment arise only due to difference in
attention or mental acuity between people. When the judgment of
another person agrees with us on these types of objects it is not
notable; however, when another person's judgment differs from us, we
assume that they have some special ability to discern characteristics
of the object we have not already noticed, and thus view their
judgment with special approbation called admiration.

Smith continues by noting that we assign value to judgments not based
on usefulness (utility) but on similarity to our own judgment, and we
attribute to those judgments which are in line with our own the
qualities of correctness or truth in science, and justness or
delicateness in taste. Thus, the utility of a judgment is "plainly an
afterthought" and "not what first recommends them to our
approbation" (p. 24).

Of objects that fall into the second category, such as the misfortune
of oneself or another person, Smith argues that there is no common
starting point for judgment but are vastly more important in
maintaining social relations. Judgments of the first kind are
irrelevant as long as one is able to share a sympathetic sentiment
with another person; people may converse in total disagreement about
objects of the first kind as long as each person appreciates the
sentiments of the other to a reasonable degree. However, people become
intolerable to each other when they have no or sympathy for the
misfortunes or resentment of each other: "You are confounded at my
violence and passion, and I am enraged at your cold insensibility and
want of feelings" (p. 26).

Another important point Smith makes is that our sympathy will never
reach the degree or "violence" of the person who experiences it, as
our own "safety" and comfort as well as separation from the offending
object constantly "intrude" on our efforts to induce a sympathetic
state in ourselves. Thus, sympathy is never enough, as the "sole
consolation" for the sufferer is " to see the emotions of their
hearts, in every respect, beat time to his own, in the violent and
disagreeable passions" (p. 28). Therefore, the original sufferer is
likely to dampen her feelings to be in "concord" with the degree of
sentiment expressible by the other person, who feels only due to the
ability of one's imagination. It is this which is "sufficient for the
harmony of society" (p. 28). Not only does the person dampen her
expression of suffering for the purpose of sympathizing, but she also
takes the perspective of the other person who is not suffering, thus
slowly changing her perspective and allowing the calmness of the other
person and reduction of violence of the sentiment to improve her

As a friend is likely to engage in more sympathy than a stranger, a
friend actually slows the reduction in our sorrows because we do not
temper our feelings out of sympathizing with the perspective of the
friend to the degree that we reduce our sentiments in the presence of
acquaintances or a group of acquaintances. This gradual tempering of
our sorrows from repeated perspective taking of someone in a more calm
state make "society and conversation...the most powerful remedies for
restoring the mind to its tranquility" (p. 29).

Part I, Section I, Chapter V: Of the amiable and respectable virtues
Smith starts to use an important new distinction in this section and
late in the previous section:

The "person principally concerned": The person who has had emotions
aroused by an object

The spectator: The person observing and sympathizing with the
emotionally aroused "person principally concerned"

These two people have two different sets of virtues. The person
principally concerned, in "bring[ing] down emotions to what the
spectator can go along with" (p. 30), demonstrates "self-denial" and
"self-government" whereas the spectator displays "the candid
condescension and indulgent humanity" of "enter[ing]into the
sentiments of the person principally concerned."

Smith returns to anger and how we find "detestable...the insolence and
brutality" of the person principally concerned but "admire...the
indignation which they naturally call forth in that of the impartial
spectator" (p. 32). Smith concludes that the "perfection" of human
nature is this mutual sympathy, or "love our neighbor as we love
ourself" by "feeling much for others and little for ourself" and to
indulge in "benevolent affections" (p. 32). Smith makes clear that it
is this ability to "self-command" our "ungovernable passions" through
sympathizing with others that is virtuous.

Smith further distinguishes between virtue and propriety:

Part I, Section II: Of the degrees of which different passions are
consistent with propriety

Chapter 1: Of the passions which take their origins from the body

Chapter 2: Of the passions which take their origins from a particular
turn or habit of the imagination

Chapter 3: Of the unsocial passions

Chapter 4: Of the social passions

Chapter 5: Of the selfish passions

Smith starts off by noting that the spectator can sympathize only with
passions of medium "pitch". However, this medium level at which the
spectator can sympathize depends on what "passion" or emotion is being
expressed; with some emotions even the most justified expression of
cannot be tolerated at a high level of fervor, at others sympathy in
the spectator is not bounded by magnitude of expression even though
the emotion is not as well justified. Again, Smith emphasizes that
specific passions will be considered appropriate or inappropriate to
varying degrees depending on the degree to which the spectator is able
to sympathize, and that it is the purpose of this section to specify
which passions evoke sympathy and which do not and therefore which are
deemed appropriate and not appropriate.

Part I, Section II, Chapter I: Of the passions which take their
origins from the body

Since it is not possible to sympathize with bodily states or
"appetites which take their origin in the body" it is improper to
display them to others, according to Smith. One example is "eating
voraciously" when hungry, as the impartial spectator can sympathize a
little bit if there is a vivid description and good cause for this
hunger, but not to a great extent as hunger itself cannot be induced
from mere description. Smith also includes sex as a passion of the
body that is considered indecent in the expression of others, although
he does make note that to fail to treat a woman with more "gaiety,
pleasantry, and attention" would also be improper of a man (p. 39). To
express pain is also considered unbecoming.

Smith believes the cause of lack of sympathy for these bodily passions
is that "we cannot enter into them" ourselves (p. 40). Temperance, by
Smith's account, is to have control over bodily passions.

On the contrary, passions of the imagination, such as loss of love or
ambition, are easy to sympathize with because our imagination can
conform to the shape of the sufferer, whereas our body cannot do such
a thing to the body of the sufferer. Pain is fleeting and the harm
only lasts as long as the violence is inflicted, whereas an insult
lasts to harm for longer duration because our imagination keeps
mulling it over. Likewise, bodily pain that induces fear, such as a
cut, wound or fracture, evoke sympathy because of the danger that they
imply for ourselves; that is, sympathy is activated chiefly through
imagining what it would be like for us.

Part I, Section II, Chapter II: Of the passions which take their
origins from a particular turn or habit of the imagination Passions
which "take their origins from a particular turn or habit of the
imagination" are "little sympathized with". These include love, as we
are unlikely to enter into our own feeling of love in response to that
of another person and thus unlikely to sympathize. He further states
that love is "always laughed at, because we cannot enter into it"

Instead of inspiring love in ourselves, and thus sympathy, love makes
the impartial spectator sensitive to the situation and emotions that
may arise from the gain or loss of love. Again this is because it is
easy to imagine hoping for love or dreading loss of love but not the
actual experience of it, and that the "happy passion, upon this
account, interests us much less than the fearful and the melancholy"
of losing happiness (p. 49). Thus, love inspires sympathy for not for
love itself but for the anticipation of emotions from gaining or
losing it.

Smith, however, finds love "ridiculous" but "not naturally odious" (p.
50). Thus, we sympathize with the "humaneness, generosity, kindness,
friendship, and esteem" (p. 50) of love. However, as these secondary
emotions are excessive in love, one should not express them but in
moderate tones according to Smith, as:

All these are objects which we cannot expect should interest our
companions in the same degree in which they interest us.

Failing to do so makes bad company, and therefore those with specific
interests and "love" of hobbies should keep their passions to those
with kindred spirits ("A philosopher is company to a philosopher
only" (p. 51)) or to themselves.

Part I, Section II, Chapter III: Of the unsocial passions

Smith talks of hatred and resentment next, as "unsocial passions."
According to Smith these are passions of imagination, but sympathy is
only likely to be evoked in the impartial spectator when they are
expressed in moderate tones. Because these passions regard two people,
namely the offended (resentful or angry person) and the offender, our
sympathies are naturally drawn between these two. Specifically,
although we sympathize with the offended person, we fear that the
offended person may do harm to the offender, and thus also fear for
and sympathize with the danger that faces the offender.

The impartial spectator sympathizes with the offended person in a
manner, as emphasized previously, such that the greatest sympathy
occurs when the offended person expresses anger or resentment in a
temperate manner. Specifically, if the offended person seems just and
temperate in coping with the offense, then this magnifies the misdeed
done to the offended in the mind of the spectator, increasing
sympathy. Although excess anger does not beget sympathy, neither does
too little anger, as this may signal fear or uncaring on the part of
the offended. This lack of response is just as despicable to the
impartial spectator as is the excesses of anger.

However, in general, any expression of anger is improper in the
presence of others. This is because the "immediate effects [of anger]
are disagreeable" just as the knives of surgery are disagreeable for
art, as the immediate effect of surgery is unpleasant even though long-
term effect is justified. Likewise, even when anger is justly
provoked, it is disagreeable. According to Smith, this explains why we
reserve sympathy until we know the cause of the anger or resentment,
as if the emotion is not justified by the action of another person,
than the immediate disagreeableness and threat to the other person
(and by sympathy to ourselves) overwhelm any sympathy that the
spectator may have for the offended. In response to expressions of
anger, hatred, or resentment, it is likely that the impartial
spectator will not feel anger in sympathy with the offended but
instead anger toward the offended for expressing such an aversive.
Smith believes that there is some form of natural optimality to the
aversiveness of these emotions, as it reduces the propagation of ill
will among people, and thus increases the probability of functional

Smith also puts forth that anger, hatred, and resentment are
disagreeable to the offended mostly because of the idea of being
offended rather than the actual offense itself. He remarks that we are
likely able to do without what was taken from us, but it is the
imagination which angers us at the thought of having something taken.
Smith closes this section by remarking that the impartial spectator
will not sympathize with us unless we are willing to endure harms,
with the goal of maintaining positive social relations and humanity,
with equanimity, as long as it does not put us in a situation of being
"exposed to perpetual insults" (p. 59). It is only "with reluctance,
from necessity, and in consequence of great and repeated
provocations" (p. 60) that we should take revenge on others. Smith
makes clear that we should take very good care to not act on the
passions of anger, hatred, resentment, for purely social reasons, and
instead imagine what the impartial spectator would deem appropriate,
and base our action solely on a cold calculation.

Part I, Section II, Chapter IV: Of the social passions

The social emotions such as "generosity, humanity, kindness,
compassion, mutual friendship and esteem" are considered
overwhelmingly with approbation by the impartial spectator. The
agreeableness of the "benevolent" sentiments leads to full sympathy on
the part of the spectator with both the person concerned and the
object of these emotions and are not felt as aversive to the spectator
if they are in excess.

Part I, Section II, Chapter V: Of the selfish passions

The final set of passions, or "selfish passions", are grief and joy,
which Smith considers to be not so aversive as the unsocial passions
of anger and resentment, but not so benevolent as the social passions
such as generosity and humanity. Smith makes clear in this passage
that the impartial spectator is unsympathetic to the unsocial emotions
because they put the offended and the offender in opposition to each
other, sympathetic to the social emotions because they join the lover
and beloved in unison, and feels somewhere in between with the selfish
passions as they are either good or bad for only one person and are
not disagreeable but not so magnificent as the social emotions.

Of grief and joy, Smith notes that small joys and great grief are
assured to be returned with sympathy from the impartial spectator, but
not other degrees of these emotions. Great joy is likely to be met
with envy, so modesty is prudent for someone who has come upon great
fortune or else suffer the consequences of envy and disapprobation.
This is appropriate as the spectator appreciates the lucky
individual's "sympathy with our envy and aversion to his happiness"
especially because this shows concern for the inability of the
spectator to reciprocate the sympathy toward the happiness of the
lucky individual. According to Smith, this modesty wears on the
sympathy of both the lucky individual and the old friends of the lucky
individual and they soon part ways; likewise, the lucky individual may
acquire new friends of higher ranks who he must also be modest to,
apologizing for the "mortification" of now becoming their equal:

He generally grows weary too soon, and is provoked, by the sullen and
suspicious pride of the one, and by the saucy contempt of the other,
to treat the first with neglect, and the second with petulance, till
at last he grows habitually insolent, and forfeits the esteem of them
all...those sudden changes of fortune seldom contribute much to
happiness (p. 66).

The solution is to ascend social rank by gradual steps, with the path
cleared for one by approbation before one takes the next step, giving
people time to adjust, and thus avoiding any "jealousy in those he
overtakes, or any envy in those he leaves behind" (p. 66).

Small joys of every day life are met with sympathy and approbation
according to Smith. These "frivolous nothings which fill up the void
of human life" (p. 67) divert attention and help us forget problems,
reconciling us as with a lost friend.

The opposite is true for grief, with small grief triggering no
sympathy in the impartial spectator, but large grief with much
sympathy. Small griefs are likely, and appropriately, turned into joke
and mockery by the sufferer, as the sufferer knows how complaining
about small grievances to the impartial spectator will evoke ridicule
in the heart of the spectator, and thus the sufferer sympathizes with
this, mocking himself to some degree.

Part I, Section III

Of the effects of propriety and adversity upon the judgment of mankind
with regard to the propriety of action; and why it is more easy to
obtain their approbation in the one state than in the other

Part V, Section V, Chapter I: Of the influence of Custom and Fashion
upon the Sentiments of Approbation and Disapprobation Smith argues
that two principles, custom and fashion, pervasively influence
judgment. These are based on the modern psychological concept of
associativity: Stimuli presented closely in time or space become
mentally linked over time and repeated exposure. In Smith's own words:

When two objects have frequently been seen together, the imagination
requires a habit of passing easily from one to the other. If the first
is to appear, we lay our account that the second is to follow. Of
their own accord they put us in mind of one another, and the attention
glides easily along them. (p. 1)

Regarding custom, Smith argues that approbation occurs when stimuli
are presented according to how one is accustomed to viewing them and
disapprobation occurs when they are presented in a way that one is not
accustomed to. Thus, Smith argues for social relativity of judgment
meaning that beauty and correctness are determined more by what one
has previously been exposed to rather than an absolute principle.
Although Smith places greater weight on this social determination he
does not discount absolute principles completely, instead he argues
that that evaluations are rarely inconsistent with custom, therefore
giving greater weight to customs than absolutes:

I cannot, however, be induced to believe that our sense of external
beauty is founded altogether on custom...But though I cannot admit
that custom is the sole principle of beauty, yet I can so far allow
the truth of this ingenious system as to grant, that there is scarce
any one external form to please, if quite contrary to custom...(p.

Smith continues by arguing that fashion is a particular "species" of
custom. Fashion is specifically the association of stimuli with people
of high rank, for example, a certain type of clothes with a notable
person such as a king or a renowned artist. This is because the
"graceful, easy, and commanding manners of the great" (p.3) person are
frequently associated with the other aspects of the person of high
rank (e.g., clothes, manners), thus bestowing upon the other aspects
the "graceful" quality of the person. In this way objects become
fashionable. Smith includes not only clothes and furniture in the
sphere of fashion, but also taste, music, poetry, architecture, and
physical beauty.

Smith also points out that people should be relatively reluctant to
change styles from what they are accustomed to even if a new style is
equal to or slightly better than current fashion: "A man would be
ridiculous who should appear in public with a suit of clothes quite
different from those which are commonly worn, though the new dress be
ever so graceful or convenient" (p. 7).

Physical beauty, according to Smith, is also determined by the
principle of custom. He argues that each "class" of things has a
"peculiar conformation which is approved of" and that the beauty of
each member of a class is determined by the extent to which it has the
most "usual" manifestation of that "conformation":

Thus, in the human form, the beauty of each feature lies in a certain
middle, equally removed from a variety of other forms that are ugly.
(p. 10-11).

Part V, Section V, Chapter II: Of the influence of Custom and Fashion
upon Moral Sentiments
Smith argues that the influence of custom is reduced in the sphere of
moral judgment. Specifically, he argues that there are bad things that
no custom can bring approbation to:

But the characters and conduct of a Nero, or a Claudius, are what no
custom will ever reconcile us to, what no fashion will ever render
agreeable; but the one will always be the object of dread and hatred;
the other of scorn and derision. (p. 15-16).

Smith further argues for a "natural" right and wrong, and that custom
amplifies the moral sentiments when one's customs are consistent with
nature, but dampens moral sentiments when one's customs are
inconsistent with nature.

Fashion also has an effect on moral sentiment. The vices of people of
high rank, such as the licentiousness of Charles VIII, are associated
with the "freedom and independency, with frankness, generosity,
humanity, and politeness" of the "superiors" and thus the vices are
endued with these characteristics.

See also

History of economic thought


↑ Smith (1998) p. 3.


Bonar, J. (1926) The Theory of Moral Sentiments by Adam Smith, Journal
of Philosophical Studies, vol. 1, 1926, pp. 333-353.

Doomen, J. (2005) Smith’s Analysis of Human Actions, ***@. An
International Journal for Moral Philosophy vol. 4, no. 2, pp 111-122.

Morrow, G. R. (1923) The Ethical and Economic Theories of Adam Smith:
A study in the social philosophy of the 18th century, Cornell Studies
in Philosophy, no. 13, 1923, pp 91-107.

Morrow, G. R. (1923) The Significance of the Doctrine of Sympathy in
Hume and Adam Smith, Philosophical Review, vol. XXXII, 1923, pp

Schneider, H.W. editor (1948) Adam Smith's Moral and Political
Philosophy, Harper Torchbook edition 1970, New York.

Smith, Vernon L. (1998), [Expression error: Missing operand for > The
Two Faces of Adam Smith], Southern Economic Journal

External links

Wikisource has original text related to this article:

The Theory of Moral Sentiments
The Wealth of Nations at MetaLibri Digital Library
The Theory of Moral Sentiments at MetaLibri Digital Library
The Theory of Moral Sentiments at the Library of Economics and
Liberty. Fully searchable, free online.

Works and Correspondence of Adam Smith. Glasgow edition, 7 volumes at
the Online Library of Liberty. Definitive, free online. Includes The
Theory of Moral Sentiments.

Biography of Adam Smith, at the "Concise Encyclopedia of Economics"

Life of Adam Smith, by John Rae, at the Library of Economics and

1759 books| Ethics books| Books about public opinion| Books by Adam


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Reference »
Wikipedia Articles
The Wealth of NationsThe Wealth of Nations

In this article: Locations Images From the web: Images Videos The
Wealth of Nations
The Wealth of Nations

Author Adam Smith
Country United Kingdom
Genre(s) Economics
Publisher W. Strahan and T. Cadell, London
Publication date 1776
An Inquiry into the Nature and Causes of the Wealth of Nations
(generally referred to by the short title The Wealth of Nations) is
the magnum opus written by Scottish economist and moral philosopher
Adam Smith and was first published in 1776. It is an account of
economics at the dawn of the Industrial Revolution, as well as a
rhetorical piece written for the generally educated individual of the
18th century - advocating a free market economy as more productive and
more beneficial to society.

One of the book's main themes is the concept of an invisible hand that
naturally guides a society through self-interest.

In The Wealth of Nations, Smith writes:

"By preferring the support of domestic to that of foreign industry, he
intends only his own security; and by directing that industry in such
a manner as its produce may be of the greatest value, he intends only
his own gain, and he is in this, as in many other cases, led by an
invisible hand to promote an end which was no part of his intention."

This phrase, often quoted and alluded to, was written in the context
of the rise and dominance of eighteenth century chartered corporations
such as Muscovy Company and the English East India Company both
controlled by the powers of the state. These early multinational
government controlled corporations were chartered exclusively by
seventeenth and eighteenth century monarchs in a manner similar to
modern no-bid contracts. These monarchs would also enact laws
favorable to the enterprise of these early corporations but less
favorable to the local workforces that they employed. In the American
colonies for instance, colonists were permitted to grow cotton but not
to make clothing from it. It had to be shipped to England for
manufacture, then purchased back in its finished form. Smith felt that
if these laws were removed that it would be advantageous to both the
state and the individual, thus "promoting an end which was no part his

Where free markets are concerned, Smith felt that if capital was able
to flow naturally on its own accord that it would, without the
assistance of government, flow to the most productive hands; as the
individual simply strives to better his own condition.


The Wealth of Nations was first published on March 9, 1776, during the
British Agricultural Revolution. It influenced not only authors and
economists, but governments and organizations. For example, Alexander
Hamilton was influenced in part by The Wealth of Nations to write his
Report on Manufactures, in which he argued against many of Smith's
policies. Interestingly, Hamilton based much of this report on the
ideas of Jean-Baptiste Colbert, and it was, in part, to Colbert's
ideas that Smith wished to respond with The Wealth of Nations.

Many other authors were influenced by the book and used it as a
starting point in their own work, including Jean-Baptiste Say, David
Ricardo, Thomas Malthus and, later, Karl Marx and Ludwig von Mises.
The Russian national poet Aleksandr Pushkin refers to The Wealth of
Nations in his 1833 verse-novel Eugene Onegin.

Irrespective of historical influence, however, The Wealth of Nations
represented a clear leap forward in the field of economics, similar to
Sir Isaac Newton's Principia Mathematica for physics or Antoine
Lavoisier's Traité Élémentaire de Chimie for chemistry.

Publishing history

Five editions of The Wealth of Nations were published during Smith's
lifetime: in 1776, 1778, 1784, 1786, and 1789. Numerous editions
appeared after Smith's death in 1790. To better understand the
evolution of the work under Smith's hand, a team led by Edwin Cannan
collated the first five editions. The differences were published along
with an edited fifth edition in 1904.[1] They found minor but numerous
differences (including the addition of many footnotes) between the
first and the second editions, both of which were published in two
volumes. The differences between the second and third editions,
however, are major: In 1784, Smith annexed these first two editions
with the publication of Additions and Corrections to the First and
Second Editions of Dr. Adam Smith’s Inquiry into the Nature and Causes
of the Wealth of Nations, and he also had published the now three
volume third edition of the Wealth of Nations, which incorporated
Additions and Corrections and, for the first time, an index. Among
other things, the Additions and Corrections included entirely new
sections. The fourth edition published in 1786 had only slight
differences with the third edition, and Smith himself says in the
Advertisement at the beginning of the book, "I have made no
alterations of any kind." Finally, Cannan notes only trivial
differences between the fourth and fifth editions — a set of misprints
being removed from the fourth, and a different set of misprints being

Anachronisms and terminology

Some commentary on the work suffers from anachronism - imposition of
modern context and political contests on a two hundred and fifty year
old work.

The book is written in the English of the late 1700s, so there are
some points to consider:

The term economics was not yet in use.
The term capitalism was not yet in use.
Smith talks about a "system of perfect liberty" or "system of natural

To a certain extent, some form of feudalism was still dominant in
parts of Europe.
The term corporation, as in feudal corporations, referred to a body
that regulated and, in Smith's portrayal, limited participation in a
skilled trade.


This article's plot summary may be too long or overly detailed.
Please help improve it by removing unnecessary details and making it
more concise. (October 2009)

Book I: Of the Causes of Improvement...

Of the Division of Labour: Smith states that "the greatest improvement
in the productive powers of labour, and the greater part of the skill,
dexterity, and judgment with which it is anywhere directed, or
applied, seem to have been the effects of the division of labour." To
illustrate this, he describes the extensive division of labour within
the "trifling" industry of pin manufacture, along with the astounding
resultant productivity, and labourers' dexterity; then levers this as
an introductory microcosm of the greater, yet less obvious division of
labour in the broader economy. The advantages of this division were
likely the driving force behind diversification of the trades and
industry, and this diversification was greatest for nations with more
industry and improvement. Agriculture is differentiated from industry
for its comparative lack of division of labour, and the attendant lack
of improved productivity; hence, while poor nations could not compete
with rich nations in manufactures, they could compete in agriculture.

Smith lists three causes, arising from division, of improved

the labourer's dexterity - due to specializing, year-round, in a
specific task
time not wasted passing from one task to the next - as in agriculture
- as well as the more consistent and focused effort when working in
just one area
the machines and tools that have evolved in conjunction with
increasingly specialized labour.
Of the Principle which gives Occasion to the Division of Labour:
Chapter 2 illustrates the growth in division of labour. Smith
hypothesizes that early societies benefited from specialization in a
natural and spontaneous way - that one person may focus on hunting
while another concentrates on bow-making.

That the Division of Labour is Limited by the Extent of the Market:
Chapter 3 deals with limitations on division of labour. Smith
illustrates with real world examples of how the extent of market
determines the level of division of labour and the resulting
productivity improvements; it is the extent of the market that
determines the degree to which division of labour can survive - in a
limited market, the liability of specialization out weigh the benefits
of greater productivity.

Of the Origin and Use of Money: When money was first invented, it was
not well regulated, which made agriculture and trade in commodities
very difficult between individual owners.

Of the Real and Nominal Price of Commodities, or of their Price in
Labour, and their Price in Money: Smith begins by setting out the
source of a commodity's value. He states,

"Every man is rich or poor according to the degree in which he can
afford to enjoy the necessaries, conveniencies, and amusements of
human life. But after the division of labour has once thoroughly taken
place, it is but a very small part of these with which a man's own
labour can supply him. The far greater part of them he must derive
from the labour of other people, and he must be rich or poor according
to the quantity of that labour which he can command, or which he can
afford to purchase. The value of any commodity, therefore, to the
person who possesses it, and who means not to use or consume it
himself, but to exchange it for other commodities, is equal to the
quantity of labour which it enables him to purchase or command.
Labour, therefore, is the real measure of the exchangeable value of
all commodities. The real price of every thing, what every thing
really costs to the man who wants to acquire it, is the toil and
trouble of acquiring it."[2]
This is known as the labour theory of value, a defining feature of
classical political economy. Smith then distinguishes between the
nominal value of a commodity (in money denomination) and its real
value in the labour required to purchase it. According to Smith, while
the nominal value of a commodity is subject to fluctuation, this does
not change its real value, because the amount of labour required to
produce it and bring it to the market remains constant.

For example, the price of a commodity redeemable in silver may be 1:1,
as the amount of labour required to produce that commodity is the same
as the amount of labour required to retrieve one piece of silver.
However, with the discovery of new silver mines in North America, a
surge in the supply of silver in the economy may bring the nominal
price of the commodity in silver to 1:2. Yet this does not affect the
commodity's real value, because the abundance of silver in the newly
discovered mines does not suppose a lesser degree of labour required
to retrieve them, but simply a greater availability of silver in the
market. It is this greater availability that accounts for the
deflation of the price; while the commodity is worth just as much
labour now as it was before, it will not command as much power in the
economy as before. However, if the price were to rise to 1:2 as a
result of technological improvements in the manufacture or transport
of the commodity, this would constitute a decline in its real value,
because less labour is necessary to produce and market it.

Of the Component Parts of the Price of Commodities: Smith argues that
the price of any product reflects wages, rent of land and "profit of
stock," which compensates the capitalist for risking his resources.

Of the Natural and Market Price of Commodities:

"When the quantity of any commodity which is brought to market falls
short of the effectual demand, all those who are willing to pay...
cannot be supplied with the quantity which they want... Some of them
will be willing to give more. A competition will begin among them, and
the market price will rise... When the quantity brought to market
exceeds the effectual demand, it cannot be all sold to those who are
willing to pay the whole value of the rent, wages and profit, which
must be paid in order to bring it thither... The market price will
To paraphrase Smith, and the first part of this Chapter, when demand
exceeds supply, the price goes up. When the supply exceeds demand, the
price goes down.

He then goes on to comment on the different avenues that people can
take to generate a larger profit than normal. Some of those include:
finding a commodity that few others have that allows for a high
profit, and being able to keep that secret; Finding a way to produce a
unique commodity (The dyer who discovers a unique dye). He also states
that the former usually has a short lifespan of high profitability,
and the latter has a longer. He also notes that a monopoly is
essentially the same as the dyers trade secret, and can thus lead to
high profitability for a long time by keeping the supply below the
effectual demand.

"A monopoly granted either to an individual or to a trading company
has the same effect as a secret in trade or manufactures. The
monopolists, by keeping the market constantly understocked, by never
fully supplying the effectual demand, sell their commodities much
above the natural price, and raise their emoluments, whether they
consist in wages or profit, greatly above their natural rate. The
price of monopoly is upon every occasion the highest which can be got.
The natural price, or the price of free competition, on the contrary,
is the lowest which can be taken, not upon every occasion, indeed, but
for any considerable time together. The one is upon every occasion the
highest which can be squeezed out of the buyers, or which, it is
supposed, they will consent to give: the other is the lowest which the
sellers can commonly afford to take, and at the same time continue
their business."[4]

Of the Wages of Labour: In this section, Smith describes how the wages
of labour are dictated primarily by the competition among labourers
and masters. When labourers bid against one another for limited
opportunities for employment, the wages of labour collectively fall,
whereas when employers compete against one another for limited
supplies of labour, the wages of labour collectively rise. However,
this process of competition is often circumvented by combinations
among labourers and among masters. When labourers combine and no
longer bid against one another, their wages rise, whereas when masters
combine, wages fall. In Smith's day, it should be noted, organized
labour was dealt with very harshly by the law.

Smith himself wrote about the "severity" of such laws against worker
actions, and made a point to contrast the "clamour" of the "masters"
against workers associations, while associations and collusions of the
masters "are never heard by the people" though such actions are
"always" and "everywhere" taking place:

"We rarely hear, it has been said, of the combinations of masters,
though frequently of those of workmen. But whoever imagines, upon this
account, that masters rarely combine, is as ignorant of the world as
of the subject. Masters are always and everywhere in a sort of tacit,
but constant and uniform, combination, not to raise the wages of
labour above their actual rate...Masters, too, sometimes enter into
particular combinations to sink the wages of labour even below this
rate. These are always conducted with the utmost silence and secrecy
till the moment of execution; and when the workmen yield, as they
sometimes do without resistance, though severely felt by them, they
are never heard of by other people" In contrast, when workers combine,
"the masters..never cease to call aloud for the assistance of the
civil magistrate, and the rigorous execution of those laws which have
been enacted with so much severity against the combination of
servants, labourers, and journeymen."[5]

In societies where the amount of labour exceeds the amount of revenue
available for waged labour, competition among workers is greater than
the competition among employers, and wages fall. Inversely, where
revenue is abundant, labour wages rise. Smith argues that, therefore,
labour wages only rise as a result of greater revenue disposed to pay
for labour. Smith thought labour the same as any other commodity in
this respect:

"the demand for men, like that for any other commodity, necessarily
regulates the production of men; quickens it when it goes on too
slowly, and stops it when it advances too fast. It is this demand
which regulates and determines the state of propagation in all the
different countries of the world, in North America, in Europe, and in
China; which renders it rapidly progressive in the first, slow and
gradual in the second, and altogether stationary in the last."[6]

However, the amount of revenue must increase constantly in proportion
to the amount of labour for wages to remain high. Smith illustrates
this by juxtaposing England with the North American colonies. In
England, there is more revenue than in the colonies, but wages are
lower, because more workers flock to new employment opportunities
caused by the large amount of revenue— so workers eventually compete
against each other as much as they did before. By contrast, as capital
continues to flow to the colonial economies at least at the same rate
that population increases to "fill out" this excess capital, wages
there stay higher than in England.

Smith was highly concerned about the problems of poverty. He writes,

"poverty, though it does not prevent the generation, is extremely
unfavourable to the rearing of children... It is not uncommon... in
the Highlands of Scotland for a mother who has borne twenty children
not to have two alive... In some places one half the children born die
before they are four years of age; in many places before they are
seven; and in almost all places before they are nine or ten. This
great mortality, however, will every where be found chiefly among the
children of the common people, who cannot afford to tend them with the
same care as those of better station."[7]

The only way to determine whether a man is rich or poor is to examine
the amount of labour he can afford to purchase. "Labour is the real
exchange for commodities".

Smith also describes the relation of cheap years and the production of
manufactures versus the production in dear years. He argues that while
some examples such as the linen production in France shows a
correlation, another example in Scotland shows the opposite. He
concludes that there are too many variables to make any statement
about this.

Of the Profits of Stock: In this chapter, Smith uses interest rates as
an indicator of the profits of stock. This is because interest can
only be paid with the profits of stock, and so creditors will be able
to raise rates in proportion to the increase or decrease of the
profits of their debtors.

Smith argues that the profits of stock are inversely proportional to
the wages of labor, because as more money is spent compensating labor,
there is less remaining for personal profit. It follows that, in
societies where competition among laborers is greatest relative to
competition among employers, profits will be much higher. Smith
illustrates this by comparing interest rates in England and Scotland.
In England, government laws against usury had kept maximum interest
rates very low, but even the maximum rate was believed to be higher
than the rate at which money was usually loaned. In Scotland, however,
interest rates are much higher. This is the result of a greater
proportion of capitalists in England, which offsets some competition
among laborers and raises wages.

However, Smith notes that, curiously, interest rates in the colonies
are also remarkably high (recall that, in the previous chapter, Smith
described how wages in the colonies are higher than in England). Smith
attributes this to the fact that, when an empire takes control of a
colony, prices for a huge abundance of land and resources are
extremely cheap. This allows capitalists to increase his profit, but
simultaneously draws many capitalists to the colonies, increasing the
wages of labor. As this is done, however, the profits of stock in the
mother country rise (or at least cease to fall), as much of it has
already flocked offshore.

Of Wages and Profit in the Different Employments of Labour and Stock:
Smith repeatedly attacks groups of politically aligned individuals who
attempt to use their collective influence to manipulate the government
into doing their bidding. At the time, these were referred to as
"factions," but are now more commonly called "special interests," a
term that can comprise international bankers, corporate
conglomerations, outright oligopolies, trade unions and other groups.
Indeed, Smith had a particular distrust of the tradesman class. He
felt that the members of this class, especially acting together within
the guilds they want to form, could constitute a power block and
manipulate the state into regulating for special interests against the
general interest:

"People of the same trade seldom meet together, even for merriment and
diversion, but the conversation ends in a conspiracy against the
public, or in some contrivance to raise prices. It is impossible
indeed to prevent such meetings, by any law which either could be
executed, or would be consistent with liberty and justice. But though
the law cannot hinder people of the same trade from sometimes
assembling together, it ought to do nothing to facilitate such
assemblies; much less to render them necessary."[8]

Smith also argues against government subsidies of certain trades,
because this will draw many more people to the trade than what would
otherwise be normal, collectively lowering their wages.

Chapter 10, part ii, motivates an understanding of the idea of

Of the Rent of the Land: Rent, considered as the price paid for the
use of land, is naturally the highest the tenant can afford in the
actual circumstances of the land. In adjusting lease terms, the
landlord endeavours to leave him no greater share of the produce than
what is sufficient to keep up the stock from which he furnishes the
seed, pays the labour, and purchases and maintains the cattle and
other instruments of husbandry, together with the ordinary profits of
farming stock in the neighbourhood. This is evidently the smallest
share with which the tenant can content himself without being a loser,
and the landlord seldom means to leave him any more. Whatever part of
the produce, or, what is the same thing, whatever part of its price,
is over and above this share, he naturally endeavours to reserve to
himself as the rent of his land, which is evidently the highest the
tenant can afford to pay in the actual circumstances of the land.
Sometimes, indeed, the liberality, more frequently the ignorance, of
the landlord, makes him accept of somewhat less than this portion; and
sometimes too, though more rarely, the ignorance of the tenant makes
him undertake to pay somewhat more, or to content himself with
somewhat less, than the ordinary profits of farming stock in the
neighbourhood. This portion, however, may still be considered as the
natural rent of land, or the rent for which it is naturally meant that
land should for the most part be let.

Book II: Of the Nature, Accumulation, and Employment of Stock

Of the Division of Stock: When the stock which a man possesses is no
more than sufficient to maintain him for a few days or a few weeks, he
seldom thinks of deriving any revenue from it. He consumes it as
sparingly as he can, and endeavours by his labour to acquire something
which may supply its place before it be consumed altogether. His
revenue is, in this case, derived from his labour only. This is the
state of the greater part of the labouring poor in all countries.


But when he possesses stock sufficient to maintain him for months or
years, he naturally endeavours to derive a revenue from the greater
part of it; reserving only so much for his immediate consumption as
may maintain him till this revenue begins to come in. His whole stock,
therefore, is distinguished into two parts. That part which, he
expects, is to afford him this revenue, is called his capital.

Of Money Considered as a particular Branch of the General Stock of the
Society...: From references of the first book, that the price of the
greater part of commodities resolves itself into three parts, of which
one pays the wages of the labour, another the profits of the stock,
and a third the rent of the land which had been employed in producing
and bringing them to market: that there are, indeed, some commodities
of which the price is made up of two of those parts only, the wages of
labour, and the profits of stock: and a very few in which it consists
altogether in one, the wages of labour: but that the price of every
commodity necessarily resolves itself into some one, or other, or all
of these three parts; every part of it which goes neither to rent nor
to wages, being necessarily profit to somebody.

Of the Accumulation of Capital, or of Productive and Unproductive
Labour: One sort of labour adds to the value of the subject upon which
it is bestowed: there is another which has no such effect. The former,
as it produces a value, may be called productive; the latter,
unproductive labour. Thus the labour of a manufacturer adds,
generally, to the value of the materials which he works upon, that of
his own maintenance, and of his master's profit. The labour of a
menial servant, on the contrary, adds to the value of nothing.

Of Stock Lent at Interest: The stock which is lent at interest is
always considered as a capital by the lender. He expects that in due
time it is to be restored to him, and that in the meantime the
borrower is to pay him a certain annual rent for the use of it. The
borrower may use it either as a capital, or as a stock reserved for
immediate consumption. If he uses it as a capital, he employs it in
the maintenance of productive labourers, who reproduce the value with
a profit. He can, in this case, both restore the capital and pay the
interest without alienating or encroaching upon any other source of
revenue. If he uses it as a stock reserved for immediate consumption,
he acts the part of a prodigal, and dissipates in the maintenance of
the idle what was destined for the support of the industrious. He can,
in this case, neither restore the capital nor pay the interest without
either alienating or encroaching upon some other source of revenue,
such as the property or the rent of land.

The stock which is lent at interest is, no doubt, occasionally
employed in both these ways, but in the former much more frequently
than in the latter.

Book III: Of the different Progress of Opulence in different Nations

Of the Natural Progress of Opulence: The great commerce of every
civilized society is that carried on between the inhabitants of the
town and those of the country. It consists in the exchange of crude
for manufactured produce, either immediately, or by the intervention
of money, or of some sort of paper which represents money. The country
supplies the town with the means of subsistence and the materials of
manufacture. The town repays this supply by sending back a part of the
manufactured produce to the inhabitants of the country. The town, in
which there neither is nor can be any reproduction of substances, may
very properly be said to gain its whole wealth and subsistence from
the country. We must not, however, upon this account, imagine that the
gain of the town is the loss of the country. The gains of both are
mutual and reciprocal, and the division of labour is in this, as in
all other cases, advantageous to all the different persons employed in
the various occupations into which it is subdivided.

Of the Discouragement of Agriculture...: Chapter 2's long title is "Of
the Discouragement of Agriculture in the Ancient State of Europe after
the Fall of the Roman Empire". When the German and Scythian nations
overran the western provinces of the Roman empire, the confusions
which followed so great a revolution lasted for several centuries. The
rapine and violence which the barbarians exercised against the ancient
inhabitants interrupted the commerce between the towns and the
country. The towns were deserted, and the country was left
uncultivated, and the western provinces of Europe, which had enjoyed a
considerable degree of opulence under the Roman empire, sunk into the
lowest state of poverty and barbarism. During the continuance of those
confusions, the chiefs and principal leaders of those nations acquired
or usurped to themselves the greater part of the lands of those
countries. A great part of them was uncultivated; but no part of them,
whether cultivated or uncultivated, was left without a proprietor. All
of them were engrossed, and the greater part by a few great

This original engrossing of uncultivated lands, though a great, might
have been but a transitory evil. They might soon have been divided
again, and broke into small parcels either by succession or by
alienation. The law of primogeniture hindered them from being divided
by succession: the introduction of entails prevented their being broke
into small parcels by alienation.

Of the Rise and Progress of Cities and Towns, after the Fall of the
Roman Empire: The inhabitants of cities and towns were, after the fall
of the Roman empire, not more favoured than those of the country. They
consisted, indeed, of a very different order of people from the first
inhabitants of the ancient republics of Greece and Italy. These last
were composed chiefly of the proprietors of lands, among whom the
public territory was originally divided, and who found it convenient
to build their houses in the neighbourhood of one another, and to
surround them with a wall, for the sake of common defence. After the
fall of the Roman empire, on the contrary, the proprietors of land
seem generally to have lived in fortified castles on their own
estates, and in the midst of their own tenants and dependants. The
towns were chiefly inhabited by tradesmen and mechanics, who seem in
those days to have been of servile, or very nearly of servile
condition. The privileges which we find granted by ancient charters to
the inhabitants of some of the principal towns in Europe sufficiently
show what they were before those grants. The people to whom it is
granted as a privilege that they might give away their own daughters
in marriage without the consent of their lord, that upon their death
their own children, and not their lord, should succeed to their goods,
and that they might dispose of their own effects by will, must, before
those grants, have been either altogether or very nearly in the same
state of villanage with the occupiers of land in the country

How the Commerce of the Towns Contributed to the Improvement of the
Country: Smith often harshly criticised those who act purely out of
self-interest and greed, and warns that, "[a]ll for ourselves, and
nothing for other people, seems, in every age of the world, to have
been the vile maxim of the masters of mankind." (Book 3, Chapter 4)

Book IV: Of Systems of political Economy

Smith vigorously attacked the antiquated government restrictions which
he thought were hindering industrial expansion. In fact, he attacked
most forms of government interference in the economic process,
including tariffs, arguing that this creates inefficiency and high
prices in the long run. It is believed that this theory influenced
government legislation in later years, especially during the 19th
century. (However this was not an anarchistic opposition to
government. Smith advocated a Government that was active in sectors
other than the economy: he advocated public education of poor adults;
institutional systems that were not profitable for private industries;
a judiciary; and a standing army.)

Of the Principle of the Commercial or Mercantile System: The book has
sometimes been described as a critique of mercantilism and a synthesis
of the emerging economic thinking of Smith's time. Specifically, The
Wealth of Nations attacks, inter alia, two major tenets of

The idea that protectionist tariffs serve the economic interests of a
nation (or indeed any purpose whatsoever) and
The idea that large reserves of gold bullion or other precious metals
are necessary for a country's economic success. This critique of
mercantilism was later used by David Ricardo when he laid out his
Theory of Comparative Advantage.

Of Restraints upon the Importation...: Chapter 2's full title is "Of
Restraints upon the Importation from Foreign Countries of such Goods
as can be Produced at Home". The "Invisible Hand" is a frequently
referenced theme from the book, although it is specifically mentioned
only once.

"As every individual, therefore, endeavors as much as he can both to
employ his capital in the support of domestic industry, and so to
direct that industry that its produce may be of the greatest value;
every individual necessarily labours to render the annual revenue of
the society as great as he can. He generally, indeed, neither intends
to promote the public interest, nor knows how much he is promoting it.
By preferring the support of domestic to that of foreign industry, he
intends only his own security; and by directing that industry in such
a manner as its produce may be of the greatest value, he intends only
his own gain, and he is in this, as in many other cases, led by an
invisible hand to promote an end which was no part of his intention.
Nor is it always the worse for the society that it was no part of it.
By pursuing his own interest he frequently promotes that of the
society more effectually than when he really intends to promote
it." (Book 4, Chapter 2)
Of the extraordinary Restraints...: Chapter 3's long title is "Of the
extraordinary Restraints upon the Importation of Goods of almost all
Kinds, from those Countries with which the Balance is supposed to be

Of Drawbacks: Merchants and manufacturers are not contented with the
monopoly of the home market, but desire likewise the most extensive
foreign sale for their goods. Their country has no jurisdiction in
foreign nations, and therefore can seldom procure them any monopoly
there. They are generally obliged, therefore, to content themselves
with petitioning for certain encouragements to exportation.

Of these encouragements what are called Drawbacks seem to be the most
reasonable. To allow the merchant to draw back upon exportation,
either the whole or a part of whatever excise or inland duty is
imposed upon domestic industry, can never occasion the exportation of
a greater quantity of goods than what would have been exported had no
duty been imposed. Such encouragements do not tend to turn towards any
particular employment a greater share of the capital of the country
than what would go to that employment of its own accord, but only to
hinder the duty from driving away any part of that shares to other

Of Bounties: Bounties upon exportation are, in Great Britain,
frequently petitioned for, and sometimes granted to the produce of
particular branches of domestic industry. By means of them our
merchants and manufacturers, it is pretended, will be enabled to sell
their goods as cheap, or cheaper than their rivals in the foreign
market. A greater quantity, it is said, will thus be exported, and the
balance of trade consequently turned more in favour of our own
country. We cannot give our workmen a monopoly in the foreign as we
have done in the home market. We cannot force foreigners to buy their
goods as we have done our own countrymen. The next best expedient, it
has been thought, therefore, is to pay them for buying. It is in this
manner that the mercantile system proposes to enrich the whole
country, and to put money into all our pockets by means of the balance
of trade

Of Treaties of Commerce: When a nation binds itself by treaty either
to permit the entry of certain goods from one foreign country which it
prohibits from all others, or to exempt the goods of one country from
duties to which it subjects those of all others, the country, or at
least the merchants and manufacturers of the country, whose commerce
is so favoured, must necessarily derive great advantage from the
treaty. Those merchants and manufacturers enjoy a sort of monopoly in
the country which is so indulgent to them. That country becomes a
market both more extensive and more advantageous for their goods: more
extensive, because the goods of other nations being either excluded or
subjected to heavier duties, it takes off a greater quantity of
theirs: more advantageous, because the merchants of the favoured
country, enjoying a sort of monopoly there, will often sell their
goods for a better price than if exposed to the free competition of
all other nations.

Such treaties, however, though they may be advantageous to the
merchants and manufacturers of the favoured, are necessarily
disadvantageous to those of the favouring country. A monopoly is thus
granted against them to a foreign nation; and they must frequently buy
the foreign goods they have occasion for dearer than if the free
competition of other nations was admitted.

Of Colonies:

Of the Motives for establishing new Colonies: The interest which
occasioned the first settlement of the different European colonies in
America and the West Indies was not altogether so plain and distinct
as that which directed the establishment of those of ancient Greece
and Rome.

All the different states of ancient Greece possessed, each of them,
but a very small territory, and when the people in any one of them
multiplied beyond what that territory could easily maintain, a part of
them were sent in quest of a new habitation in some remote and distant
part of the world; warlike neighbours surrounded them on all sides,
rendering it difficult for any of them to enlarge their territory at
home. The colonies of the Dorians resorted chiefly to Italy and
Sicily, which, in the times preceding the foundation of Rome, were
inhabited by barbarous and uncivilised nations: those of the Ionians
and Eolians, the two other great tribes of the Greeks, to Asia Minor
and the islands of the Egean Sea, of which the inhabitants seem at
that time to have been pretty much in the same state as those of
Sicily and Italy. The mother city, though she considered the colony as
a child, at all times entitled to great favour and assistance, and
owing in return much gratitude and respect, yet considered it as an
emancipated child over whom she pretended to claim no direct authority
or jurisdiction. The colony settled its own form of government,
enacted its own laws, elected its own magistrates, and made peace or
war with its neighbours as an independent state, which had no occasion
to wait for the approbation or consent of the mother city. Nothing can
be more plain and distinct than the interest which directed every such

Causes of Prosperity of new Colonies: The colony of a civilised nation
which takes possession either of a waste country, or of one so thinly
inhabited that the natives easily give place to the new settlers,
advances more rapidly to wealth and greatness than any other human

The colonists carry out with them a knowledge of agriculture and of
other useful arts superior to what can grow up of its own accord in
the course of many centuries among savage and barbarous nations. They
carry out with them, too, the habit of subordination, some notion of
the regular government which takes place in their own country, of the
system of laws which supports it, and of a regular administration of
justice; and they naturally establish something of the same kind in
the new settlement.

Of the Advantages which Europe has derived from the Discovery of
America, and from that of a Passage to the East Indies by the Cape of
Good Hope: Such are the advantages which the colonies of America have
derived from the policy of Europe.

What are those which Europe has derived from the discovery and
colonization of America?

Those advantages may be divided, first, into the general advantages
which Europe, considered as one great country, has derived from those
great events; and, secondly, into the particular advantages which each
colonizing country has derived from the colonies which particularly
belong to it, in consequence of the authority or dominion which it
exercises over them.

The general advantages which Europe, considered as one great country,
has derived from the discovery and colonization of America, consist,
first, in the increase of its enjoyments; and, secondly, in the
augmentation of its industry.

The surplus produce of America, imported into Europe, furnishes the
inhabitants of this great continent with a variety of commodities
which they could not otherwise have possessed; some for conveniency
and use, some for pleasure, and some for ornament, and thereby
contributes to increase their enjoyments.

Conclusion of the Mercantile System: Smith's argument about the
international political economy opposed the idea of Mercantilism.
While the Mercantile System encouraged each country to horde gold,
while trying to grasp hegemony, Smith argued that free trade would
eventually make all actors better off. This argument is the modern
'Free Trade' argument.

Of the Agricultural Systems...: Chapter 9's long title is "Of the
Agricultural Systems, or of those Systems of Political Economy, which
Represent the Produce of Land, as either the Sole or the Principal,
Source of the Revenue and Wealth of Every Country".

That system which represents the produce of land as the sole source of
the revenue and wealth of every country has, so far as by that time,
never been adopted by any nation, and it at present exists only in the
speculations of a few men of great learning and ingenuity in France.
It would not, surely, be worth while to examine at great length the
errors of a system which never has done, and probably never will do,
any harm in any part of the world.

Book V: Of the Revenue of the Sovereign or Commonwealth

Smith postulated four "maxims" of taxation: proportionality,
transparency, convenience, and efficiency. Some economists interpret
Smith's opposition to taxes on transfers of money, such as the Stamp
Act, as opposition to capital gains taxes, which did not exist in the
eighteenth century.[9] Other economists credit Smith as one of the
first to advocate a progressive tax.[10][11] Smith wrote, "It is not
very unreasonable that the rich should contribute to the public
expense, not only in proportion to their revenue, but something more
in proportion."

Of the Expenses of the Sovereign or Commonwealth: Smith uses this
chapter to comment on the concept of taxation and expenditure by the
state. On taxation Smith wrote,

"The subjects of every state ought to contribute towards the support
of the government, as nearly as possible, in proportion to their
respective abilities; that is, in proportion to the revenue which they
respectively enjoy under the protection of the state. The expense of
government to the individuals of a great nation is like the expense of
management to the joint tenants of a great estate, who are all obliged
to contribute in proportion to their respective interests in the
estate. In the observation or neglect of this maxim consists what is
called the equality or inequality of taxation."

Smith advocates a tax naturally attached to the "abilities" and habits
of each echelon of society.

For the lower echelon, Smith recognized the intellectually erosive
effect that the otherwise beneficial division of labour can have on
workers, what Marx, though he mainly opposes Smith, later named
"alienation,"; therefore, Smith warns of the consequence of government
failing to fulfill its proper role, which is to preserve against the
innate tendency of human society to fall apart.

..."the understandings of the greater part of men are necessarily
formed by their ordinary employments. The man whose whole life is
spent in performing a few simple operations, of which the effects are
perhaps always the same, or very nearly the same, has no occasion to
exert his understanding or to exercise his invention in finding out
expedients for removing difficulties which never occur. He naturally
loses, therefore, the habit of such exertion, and generally becomes as
stupid and ignorant as it is possible for a human creature to become.
The torpor of his mind renders him not only incapable of relishing or
bearing a part in any rational conversation, but of conceiving any
generous, noble, or tender sentiment, and consequently of forming any
just judgment concerning many even of the ordinary duties of private
life... But in every improved and civilized society this is the state
into which the laboring poor, that is, the great body of the people,
must necessarily fall, unless government takes some pains to prevent
"Under Smith's model, government involvement in any area other than
those stated above would have a negative impact on economic growth.
This is because economic growth is determined by the needs of a free
market and the entrepreneurial nature of private persons. If there is
a shortage of a product its price will rise, and so stimulate
producers to produce more, while at the same time attracting new
persons into that line of production. If there is an excess supply of
a product (more of the product than people are willing to buy), prices
will fall and producers will focus their energy and money in other
areas where there is a shortage or where there is a need which no one
has yet satisfied (thereby creating a new market)."[13]

Of the Sources of the General or Public Revenue of the Society: In his
discussion of taxes in Book Five, Smith wrote:

"The necessaries of life occasion the great expense of the poor. They
find it difficult to get food, and the greater part of their little
revenue is spent in getting it. The luxuries and vanities of life
occasion the principal expense of the rich, and a magnificent house
embellishes and sets off to the best advantage all the other luxuries
and vanities which they possess. A tax upon house-rents, therefore,
would in general fall heaviest upon the rich; and in this sort of
inequality there would not, perhaps, be anything very unreasonable. It
is not very unreasonable that the rich should contribute to the public
expense, not only in proportion to their revenue, but something more
than in that proportion." [14]
Proponents of progressive taxation cite Smith[citation needed] to
justify the modern implementation of this idea, the disproportionate
taxation of income.

Smith is absolutely against any form of income or capital gains tax,
as it punishes productivity. It is clear that Smith's statement
demonstrates that the means of the rich can greatly benefit society,
especially when taxes on their luxuries are used to offset the
hardships of the poor; however, in context with other of his
statements and his treatise as a whole, citing this statement as
evidence that Smith supports a tax on income, the prevailing mode of
modern, progressive taxation, is unreasonable. Smith's statement
suggests not a tax on income, the incentive and reward for the further
production and generation of wealth, but rather a tax on expenditure.
Naturally, the rich, having by their superior revenue greater means to
possess magnificent houses, luxuries and vanities, would pay, in a tax
on this expenditure, disproportionally more than would the poor.

Of War and Public Debts:

"...when war comes [politicians] are both unwilling and unable to
increase their [tax] revenue in proportion to the increase of their
expense. They are unwilling for fear of offending the people, who, by
so great and so sudden an increase of taxes, would soon be disgusted
with the war... The facility of borrowing delivers them from the
embarrassment... By means of borrowing they are enabled, with a very
moderate increase of taxes, to raise, from year to year, money
sufficient for carrying on the war, and by the practice of perpetually
funding they are enabled, with the smallest possible increase of taxes
[to pay the interest on the debt], to raise annually the largest
possible sum of money [to fund the war].

...The return of peace, indeed, seldom relieves them from the greater
part of the taxes imposed during the war. These are mortgaged for the
interest of the debt contracted in order to carry it on.[15]"

Smith then goes on to say that even if money was set aside from future
revenues to pay for the debts of war, it seldom actually gets used to
pay down the debt. Politicians are inclined to spend the money on some
other scheme that will win the favor of their constituents. Hence,
interest payments rise and war debts continue to grow larger, well
beyond the end of the war.

Summing up, if governments can borrow without check, then they are
more likely to wage war without check, and the costs of the war
spending will burden future generations, since war debts are almost
never repaid by the generations that incurred them.

Reception and impact
This section requires expansion.

Further reading

An Inquiry into the Nature and Causes of the Wealth of Nations: A
Selected Edition Adam Smith (Author), Kathryn Sutherland (Editor),
2008, Oxford Paperbacks, Oxford, UK; ISBN 978-0-199535-92-7

Adam Smith's The Wealth of Nations: A modern-day interpretation of an
economic classic. Karen McCreadie, 2009, Infinite Ideas, Oxford, UK;
ISBN 978-1-906821-03-6

See also

Free Trade

American School of Economics
Austrian School of Economics Free Trade and Capitalism
Classical economics
Neoclassical economics
Political economy
The Theory of Moral Sentiments (1759), Adam Smith's other classic
Wealth (economics)
The Invisible Hand


↑ An Inquiry into the Nature and Causes of the Wealth of Nations, by
Adam Smith. London: Methuen and Co., Ltd., ed. Edwin Cannan, 1904.
Fifth edition.

↑ Smith (1776) Book I, Chapter 5, para 1
↑ Smith (1776) Book I, Chapter 7, para 9
↑ Smith (1776) Book I, Chapter 7, para 26
↑ Wealth of Nations, Book I. Chap. viii
↑ Smith (1776) I, 8, para 39
↑ Smith (1776) I, 8, para 37
↑ Smith (1776) Book I, Chapter 10, para 82

↑ Bartlett, Bruce (2001-01-24). "Adam Smith On Taxes". National Center
for Policy Analysis.

http://www.ncpa.org/oped/bartlett/jan2401.html. Retrieved 2008-05-14.

↑ Reich, Robert B. (1987-04-26). "Do Americans Still Believe In
Sharing The Burden?". The Washington Post. p. d.01.

Retrieved 2008-05-14.

↑ Stein, Herbert (1994-04-06). "Board of Contributors: Remembering
Adam Smith". Wall Street Journal (Eastern Edition).

↑ Smith (1776) V, 1, para 178

↑ R. Conteras, "How the Concept of Development Got Started" University
of Iowa Center for International Finance and Development E-Book[1]

↑ Adam Smith, An Inquiry into the Nature And Causes of the Wealth of
Nations (1776). Book V, Chapter 2, Article I: Taxes upon the Rent of

↑ Adam Smith, An Inquiry into the Nature And Causes of the Wealth of
Nations (1776). Book V, Chapter 3, Article III: Of Public Debts.[3]

External links

Wikisource has original text related to this article:

The Wealth of Nations

The Wealth of Nations at MetaLibri Digital Library

The Theory of Moral Sentiments at MetaLibri Digital Library

An Inquiry into the Nature and Causes of the Wealth of Nations at
Project Gutenberg

An Inquiry into the Nature and Causes of the Wealth of Nations, 1776
(accessible by table of contents chapter titles) AdamSmith.org ISBN

Life of Adam Smith, by John Rae, at the Library of Economics and

An Inquiry into the Nature and Causes of the Wealth of Nations
Google's scan of the book

Introduction by Ludwig von Mises to the 1952 edition of The Wealth of
Wealth of Nations Reading Notes

An Inquiry into the Nature and Causes of the Wealth of Nations
Facsimile of the original two volumes: Volume 1 (2nd edition/ 1778) &
Volume 2 (1st edition/ 1776)


...and I am Sid Harth
2010-02-25 18:16:34 UTC
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Wikipedia Articles
Invisible hand

In this article: Locations Images From the web: Images Videos
Invisible hand
For other uses, see Invisible hand (disambiguation).

It contains too many quotations for an encyclopedic entry. Tagged
since March 2008.

In economics, the invisible hand, also known as the invisible hand of
the market, the term economists use to describe the self-regulating
nature of the marketplace,[1] is a metaphor first coined by the
economist Adam Smith in The Theory of Moral Sentiments. For Smith, the
invisible hand was created by the conjunction of the forces of self-
interest, competition, and supply and demand, which he noted as being
capable of allocating resources in society.[2] This is the founding
justification for the laissez-faire economic philosophy.[3]

The Wealth of Nations

Adam Smith uses the metaphor in Book IV of The Wealth of Nations,
arguing that people in any society will employ their capital in
foreign trading only if the profits available by that method far
exceed those available locally. In such a case, Smith argues, it is
better for society as a whole if they so do.

“ By preferring the support of domestic to that of foreign industry,
he intends only his own security; and by directing that industry in
such a manner as its produce may be of the greatest value, he intends
only his own gain, and he is in this, as in many other cases, led by
an invisible hand to promote an end which was no part of his
intention. Nor is it always the worse for the society that it was not
part of it. By pursuing his own interest he frequently promotes that
of the society more effectually than when he really intends to promote
it. I have never known much good done by those who affected to trade
for the public good. It is an affectation, indeed, not very common
among merchants, and very few words need be employed in dissuading
them from it. ”

Economists' interpretation of the "invisible hand" quotation
The concept of the "invisible hand" is nearly always generalized
beyond Smith's original discussion of domestic versus foreign trade.
Smith himself participated in such generalization, as is already
evident in his allusion to "many other cases" quoted above.

Milton Friedman, a Nobel Prize winner in economics, called Smith's
Invisible Hand "the possibility of cooperation without coercion."[4]

Notice that the Invisible Hand is here considered a "natural
inclination", not yet a social mechanism as it was later classified by
Leon Walras and Vilfredo Pareto.

The theory of the Invisible Hand states that if each consumer is
allowed to choose freely what to buy and each producer is allowed to
choose freely what to sell and how to produce it, the market will
settle on a product distribution and prices that are beneficial to all
the individual members of a community, and hence to the community as a
whole. The reason for this is that self-interest drives actors to
beneficial behavior. Efficient methods of production are adopted to
maximize profits. Low prices are charged to maximize revenue through
gain in market share by undercutting competitors. Investors invest in
those industries most urgently needed to maximize returns, and
withdraw capital from those less efficient in creating value. Students
prepare for the most needed (and therefore most remunerative) careers.
All these effects take place dynamically and automatically.

It also works as a balancing mechanism. For example, the inhabitants
of a poor country will be willing to work very cheaply, so
entrepreneurs can make great profits by building factories in poor
countries. Because they increase the demand for labor, they will
increase its price; further, because the new producers also become
consumers, local businesses must hire more people to provide the
things they want to consume. As this process continues, the labor
prices eventually rise to the point where there is no advantage for
the foreign countries doing business in the formerly poor country.
Overall, this mechanism causes the local economy to function on its

In The Wealth of Nations, Smith provides an example that illustrates
the principle:

“ It is not from the benevolence of the butcher, the brewer or the
baker, that we expect our dinner, but from their regard to their own
self interest. We address ourselves, not to their humanity but to
their self-love, and never talk to them of our own necessities but of
their advantages.[5] ”

Some economists question the integrity of how the term "invisible
hand" is currently used. Gavin Kennedy, Professor Emeritus at Heriot-
Watt University in Edinburgh, Scotland, argues that its current use in
modern economic thinking as a symbol of free market capitalism is not
reconcilable with the rather modest and indeterminate manner in which
it was employed by Smith.[6] In response to Kennedy, Professor Daniel
Klein argues that reconciliation is legitimate. Moreover, even if
Smith did not intend the term "invisible hand" to be used in the
current manner, it's serviceability as such should not be rendered
ineffective.[7] In conclusion of their exchange, Kennedy insists that
Smith's intentions are of utmost importance to the current debate,
which is one of Smith's association with the term "invisible hand". If
the term is to be used as a symbol of liberty and economic
coordination as it has been in the modern era, Kennedy argues that it
should exist as a construct completely separate from Adam Smith since
there is little evidence that Smith imputed any significance onto the
term, much less the meanings given it at present.[8]

Understood as a metaphor

Smith uses the metaphor in the context of an argument against
protectionism and government regulation of markets, but it is based on
very broad principles developed by Bernard Mandeville, Bishop Butler,
Lord Shaftesbury, and Francis Hutcheson. In general, the term
“invisible hand” can apply to any individual action that has
unplanned, unintended consequences, particularly those that arise from
actions not orchestrated by a central command, and that have an
observable, patterned effect on the community.

Bernard Mandeville argued that private vices are actually public
benefits. In The Fable of the Bees (1714), he laments that the “bees
of social virtue are buzzing in Man’s bonnet”: that civilized man has
stigmatized his private appetites and the result is the retardation of
the common good.

Bishop Butler argued that pursuing the public good was the best way of
advancing one’s own good since the two were necessarily identical.

Lord Shaftesbury turned the convergence of public and private good
around, claiming that acting in accordance with one’s self-interest
produces socially beneficial results. An underlying unifying force
that Shaftesbury called the “Will of Nature” maintains equilibrium,
congruency, and harmony. This force, to operate freely, requires the
individual pursuit of rational self-interest, and the preservation and
advancement of the self.

Francis Hutcheson also accepted this convergence between public and
private interest, but he attributed the mechanism, not to rational
self-interest, but to personal intuition, which he called a “moral
sense.” Smith developed his own version of this general principle in
which six psychological motives combine in each individual to produce
the common good. In The Theory of Moral Sentiments, vol. II, page 316,
he says, “By acting according to the dictates of our moral faculties,
we necessarily pursue the most effective means for promoting the
happiness of mankind.”

Contrary to common misconceptions, Smith did not assert that all self-
interested labour necessarily benefits society, or that all public
goods are produced through self-interested labour. His proposal is
merely that in a free market, people usually tend to produce goods
desired by their neighbours. The tragedy of the commons is an example
where self-interest tends to bring an unwanted result.

Moreover, a free market arguably provides numerous opportunities for
maximizing one’s own profit at the expense (rather than for the
benefit) of others. The tobacco industry is often cited as an example
of this: the sale of cigarettes and other tobacco products certainly
brings a very good revenue, but the industry’s critics deny that the
social benefits (the pleasures associated with smoking, the
camaraderie, the feeling of doing something “cool”) can possibly
outbalance the social costs.[citation needed]

Examples and arguments

Since Smith’s time, the principle of the invisible hand has been
further incorporated into economic theory. Leon Walras developed a
four-equation general equilibrium model that concludes that individual
self-interest operating in a competitive market place produces the
unique conditions under which a society’s total utility is maximized.
Vilfredo Pareto used an edgeworth box contact line to illustrate a
similar social optimality.

Ludwig von Mises, in Human Action (see note 3 at the bottom), claims
that Smith believed that the invisible hand was that of God. He did
not mean this as a criticism, since he held that secular reasoning
leads to similar conclusions.

The invisible hand is traditionally understood as a concept in
economics, but Robert Nozick argues in Anarchy, State and Utopia that
substantively the same concept exists in a number of other areas of
academic discourse under different names, notably Darwinian natural
selection. In turn, Daniel Dennett argues in Darwin’s Dangerous Idea
that this represents a “universal acid” that may be applied to a
number of seemingly disparate areas of philosophical inquiry
(consciousness and free will in particular). See also Social

Tawney's interpretation

Christian socialist R. H. Tawney saw Smith as putting a name on an
older idea:

“ If preachers have not yet overtly identified themselves with the
view of the natural man, expressed by an eighteenth-century writer in
the words, trade is one thing and religion is another, they imply a
not very different conclusion by their silence as to the possibility
of collisions between them. The characteristic doctrine was one, in
fact, which left little room for religious teaching as to economic
morality, because it anticipated the theory, later epitomized by Adam
Smith in his famous reference to the invisible hand, which saw in
economic self-interest the operation of a providential plan... The
existing order, except insofar as the short-sighted enactments of
Governments interfered with it, was the natural order, and the order
established by nature was the order established by God. Most educated
men, in the middle of the [eighteenth] century, would have found their
philosophy expressed in the lines of Pope:

Thus God and Nature formed the general frame,

And bade self-love and social be the same.

Naturally, again, such an attitude precluded a critical examination of
institutions, and left as the sphere of Christian charity only those
parts of life that could be reserved for philanthropy, precisely
because they fell outside that larger area of normal human relations,
in which the promptings of self-interest provided an all-sufficient
motive and rule of conduct. (Religion and the Rise of Capitalism, page
195.) ”

Other uses of the phrase by Smith

Adam Smith used the phrase two other times in his writings, once
published and once unpublished. The unpublished reference simply says
that practitioners of Polytheistic religions did not attribute gravity
or fire to the invisible hand of Jupiter, and the idea clearly has no
relation to the invisible hand of the market. However, this particular
reference should be observed for a complete picture of what Smith
intends to portray by the term "Invisible Hand."[9]

In Theory of Moral Sentiments, Smith uses the invisible hand to
explain the distribution of wealth (1759, p. 350):

“ The rich ... consume little more than the poor, and in spite of
their natural selfishness ... They are led by an invisible hand to
make nearly the same distribution of the necessaries of life, which
would have been made, had the earth been divided into equal portions
among all its inhabitants, and ... advance the interest of the
society, and afford means to the multiplication of the species. ”

This was written before Smith visited France and the
"Économistes" (Physiocrats) who gave him and classical economics the
"circular flow" vision of the economy. See the emphasis of "annually"
in Smith's Introduction. In a "circular flow" output that does not
become input in the next circle is "unproductive labour" produced by a
"classe stérile" (Économistes).


↑ Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles
in action. Upper Saddle River, New Jersey 07458: Pearson Prentice
Hall. p. 32. ISBN 0-13-063085-3.


↑ Olsen, James Stewart. Encyclopedia of the Industrial Revolution.
Greenwood Publishing Group, 2002. pp. 153-154

↑ Ibid

↑ Friedman's Introduction to I, Pencil

↑ Smith, Adam. "2". Wealth of Nations.

Retrieved 2007-12-08.

↑ Kennedy, Gavin. 2009. Adam Smith and the Invisible Hand: From
Metaphor to Myth. Econ Journal Watch 6(2): 239-263.[1]

↑ Klein, Daniel B. 2009. In Adam Smith’s Invisible Hands: Comment on
Gavin Kennedy. Econ Journal Watch 6(2): 264-279.[2]

↑ Kennedy, Gavin. "A Reply to Daniel Klein on Adam Smith and the
Invisible Hand". Econ Journal Watch 6(3): 374-388.[3]

↑ Minowitz, Peter. "Adam Smith's Invisible Hands" (December 2004).

External links

The Theory of Moral Sentiments (full text)

The Wealth of Nations (full text) or

The History of Astronomy, in Essays on Philosophical Subjects (full
I, Pencil (full text)

The National Gain (full text)


Reference »
Wikipedia Articles


In this article: Locations Images From the web: Images Videos

"Selfish" redirects here. For other uses, see Selfish
Look up selfishness in Wiktionary, the free dictionary.

This article needs additional citations for verification.

Please help improve this article by adding reliable references.
Unsourced material may be challenged and removed. (October 2009)

Selfishness denotes the precedence given in thought or deed to the
self, i.e., self interest or self concern. It is the act of placing
one's own needs or desires above the needs or desires of others.

Psychologist and primatologist Frans de Waal takes issue with those
who equate "selfishness" with "self-serving." He argues that
"Selfishness implies the intention to serve oneself, hence knowledge
of what one stands to gain from a particular behavior".[1] (2009, 13).

Selfishness is the opposite of altruism (selflessness).

The implications of selfishness have inspired divergent views within
religious, philosophical, psychological, economic and evolutionary


↑ de Waal, Frans (2009). Primates and Philosophers: How Morality
Evolved. Princeton University Press. pp. 13. ISBN 978-0-691-14129-9.


See also

Enlightened self-interest
Ethic of reciprocity (the "Golden Rule")
Indirect self-interest
Little Miss Selfish

A Theory of Justice (by John Rawls)

Further reading

Twilight of the Idols, Friedrich Nietzsche Penguin Classics; Reissue
edition (February 15, 1990), ISBN 0140445145

The Evolution of Cooperation, Robert Axelrod, Basic Books, ISBN

The Selfish Gene, Richard Dawkins (1990), second edition—includes two
chapters about the evolution of cooperation, ISBN 0-19-286092-5

The Virtue of Selfishness, Ayn Rand, ISBN 0451163931


Reference »
Wikipedia Articles

Competition (economics)Competition (economics)

In this article: Locations Images From the web: Images Videos
Competition (economics)

Competition in economics is a term that encompasses the notion of
individuals and firms striving for a greater share of a market to sell
or buy goods and services. Merriam-Webster defines competition in
business as "the effort of two or more parties acting independently to
secure the business of a third party by offering the most favorable
terms."[1] It was described by Adam Smith in The Wealth of Nations
(1776) and later economists as allocating productive resources to
their most highly-valued uses.[2] and encouraging efficiency. Later
microeconomic theory distinguished between perfect competition and
imperfect competition, concluding that with the no system of resource
allocation is more efficient than perfect competition. Competition,
according to the theory, causes commercial firms to develop new
products, services and technologies, which would give consumers
greater selection and better products. The greater selection typically
causes lower prices for the products, compared to what the price would
be if there was no competition (monopoly) or little competition

Competition in practice

Competition is seen as a state which produces gains for the whole
economy, through promoting consumer sovereignty. It may also lead to
wasted (duplicated) effort and to increased costs (and prices) in some
circumstances. In a small number of goods and services the cost
structure means that competition may be inefficient. These situations
are known as natural monopoly and are usually publicly provided or
tightly regulated. The most common example is water supplies.

Three levels of economic competition have been classified:

The most narrow form is direct competition (also called category
competition or brand competition), where products that perform the
same function compete against each other. For example, a brand of pick-
up trucks competes with several different brands of pick-up trucks.
Sometimes two companies are rivals and one adds new products to their
line so that each company distributes the same thing and they

The next form is substitute competition, where products that are close
substitutes for one another compete. For example, butter competes with
margarine, mayonnaise, and other various sauces and spreads.

The broadest form of competition is typically called budget
competition. Included in this category is anything that the consumer
might want to spend their available money (the so-called discretionary
income) on. For example, a family that has $20,000 available may
choose to spend it on many different items, which can all be seen as
competing with each other for the family's available money.
Competition does not necessarily have to be between companies. For
example, business writers sometimes refer to "internal competition".
This is competition within companies. The idea was first introduced by
Alfred Sloan at General Motors in the 1920s. Sloan deliberately
created areas of overlap between divisions of the company so that each
division would be competing with the other divisions. For example, the
Chevy division would compete with the Pontiac division for some market
segments. Also, in 1931, Procter & Gamble initiated a deliberate
system of internal brand versus brand rivalry. The company was
organized around different brands, with each brand allocated
resources, including a dedicated group of employees willing to
champion the brand. Each brand manager was given responsibility for
the success or failure of the brand and was compensated accordingly.
This form of competition thus pitted a brand against another brand.
Finally, most businesses also encourage competition between individual
employees. An example of this is a contest between sales
representatives. The sales representative with the highest sales (or
the best improvement in sales) over a period of time would gain
benefits from the employer.

It should also be noted that business and economic competition in most
countries is often limited or restricted. Competition often is subject
to legal restrictions. For example, competition may be legally
prohibited as in the case with a government monopoly or a government-
granted monopoly. Tariffs, subsidies or other protectionist measures
may also be instituted by government in order to prevent or reduce
competition. Depending on the respective economic policy, the pure
competition is to a greater or lesser extent regulated by competition
policy and competition law. Competition between countries is quite
subtle to detect, but is quite evident in the World economy, where
countries like the US, Japan, the European Union, China and the East
Asian Tigers each try to outdo the other in the quest for economic
supremacy in the global market, harkening to the concept of Kiasuism.
Such competition is evident by the policies undertaken by these
countries to educate the future workforce. For example, East Asian
economies like Singapore, Japan and South Korea tend to emphasize
education by allocating a large portion of the budget to this sector,
and by implementing programmes such as gifted education, which some
detractors criticise as indicative of academic elitism.

Anti-competitive practices

A practice is anti-competitive if it is deemed to unfairly distort
free and effective competition in the marketplace. Examples include
cartels, restrictive trading agreements, predatory pricing and abuse
of a dominant position.

Further information: Anti-competitive practices

See also

Competition law


↑ Merriam-Webster Online
↑ George J. Stigler ([1987] 2008). "competition," The New Palgrave
Dictionary of Economics. Abstract.


External links

Competition in Utility Markets from the Body of Knowledge on
Infrastructure Regulation


...and I am Sid Harth
2010-02-25 18:24:48 UTC
Reference »
Wikipedia Articles
Supply and demand

In this article: Locations Images From the web: Images Videos Supply
and demand
For other uses, see Supply and demand (disambiguation).

The price P of a product is determined by a balance between production
at each price (supply S) and the desires of those with purchasing
power at each price (demand D). The diagram shows a positive shift in
demand from D1 to D2, resulting in an increase in price (P) and
quantity sold (Q) of the product.Supply and demand is an economic
model of price determination in a market. It concludes that in a
competitive market, price will function to equalize the quantity
demanded by consumers, and the quantity supplied by producers,
resulting in an economic equilibrium of price and quantity.

The graphical representation of supply and demand

The supply-demand model is a partial equilibrium model representing
the determination of the price of a particular good and the quantity
of that good which is traded. Although it is normal to regard the
quantity demanded and the quantity supplied as functions of the price
of the good, the standard graphical representation, usually attributed
to Alfred Marshall, has price on the vertical axis and quantity on the
horizontal axis, the opposite of the standard convention for the
representation of a mathematical function.

Determinants of supply and demand other than the price of the good in
question, such as consumers' income, input prices and so on, are not
explicitly represented in the supply-demand diagram. Changes in the
values of these variables are represented by shifts in the supply and
demand curves. By contrast, responses to changes in the price of the
good are represented as movements along unchanged supply and demand

Supply schedule

The supply schedule, depicted graphically as the supply curve,
represents the amount of some good that producers are willing and able
to sell at various prices, assuming ceteris paribus, that is all
determinants of supply other than the price of the good in question,
such as technology and the prices of factors of production, remaining
the same.

Under the assumption of perfect competition, supply is determined by
marginal cost. Firms will produce additional output as long as the
cost of producing an extra unit of output is less than the price they
will receive.

Demand schedule

The demand schedule, depicted graphically as the demand curve,
represents the amount of some good that buyers are willing and able to
purchase at various prices, assuming all determinants of demand other
than the price of the good in question, such as income, personal
tastes, the price of substitute goods, and the price of complementary
goods, remain the same. Following the law of demand, the demand curve
is almost always represented as downward-sloping, meaning that as
price decreases, consumers will buy more of the good.[1]

Just as the supply curves reflect marginal cost curves, demand curves
are determined by marginal utility curves.[2] Consumers will be
willing to buy a given quantity of a good, at a given price, if the
marginal utility of additional consumption is equal to the opportunity
cost determined by the price, that is, the marginal utility of
alternative consumption choices. The demand schedule is defined as the
willingness and ability of a consumer to purchase a given product in a
given frame of time.

As described above, the demand curve is generally downward-sloping.
There may be rare examples of goods that have upward-sloping demand
curves. Two different hypothetical types of goods with upward-sloping
demand curves are Giffen goods (an inferior but staple good) and
Veblen goods (goods made more fashionable by a higher price).

Micro Economics


Equilibrium is defined to the price-quantity pair where the quantity
demanded is equal to the quantity supplied, represented by the
intersection of the demand is rest.

Changes in market equilibrium

Practical uses of supply and demand analysis often center on the
different variables that change equilibrium price and quantity,
represented as shifts in the respective curves. Comparative statics of
such a shift traces the effects from the initial equilibrium to the
new equilibrium.

Demand curve shifts
Main article: Demand curve

An out-ward or right-ward shift in demand increases both equilibrium
price and quantityWhen consumers increase the quantity demanded at a
given price, it is referred to as an increase in demand. Increased
demand can be represented on the graph as the curve being shifted to
the right. At each price point, a greater quantity is demanded, as
from the initial curve D1 to the new curve D2. In the diagram, this
raises the equilibrium price from P1 to the higher P2. This raises the
equilibrium quantity from Q1 to the higher Q2. A movement along the
curve is described as a "change in the quantity demanded" to
distinguish it from a "change in demand," that is, a shift of the
curve. In the example above, there has been an increase in demand
which has caused an increase in (equilibrium) quantity. The increase
in demand could also come from changing tastes and fashions, incomes,
price changes in complementary and substitute goods, market
expectations, and number of buyers. This would cause the entire demand
curve to shift changing the equilibrium price and quantity.

If the demand decreases, then the opposite happens: a shift of the
curve to the left. If the demand starts at D2, and decreases to D1,
the price will decrease, and the quantity will decrease. This is an
effect of demand changing. The quantity supplied at each price is the
same as before the demand shift (at both Q1 and Q2). The equilibrium
quantity, price and demand are different. At each point, a greater
amount is demanded (when there is a shift from D1 to D2).

The demand curve "shifts" because a non-price determinant of demand
has changed. Graphically the shift is due to a change in the x-
intercept. A shift in the demand curve due to a change in a non-price
determinant of demand will result in the market's being in a non-
equilibrium state. If the demand curve shifts out the result will be a
shortage — at the new market price quantity demanded will exceed
quantity supplied. If the demand curve shifts in, there will be a
surplus — at the new market price quantity supplied will exceed
quantity demanded. The process by which a new equilibrium is
established is not the province of comparative statics — the answers
to issues concerning when, whether and how a new equilibrium will be
established are issues that are addressed by stochastic models —
economic dynamics.

Supply curve shifts

Main article: Supply (economics)

An out-ward or right-ward shift in supply reduces equilibrium price
but increases quantityWhen the suppliers' costs change for a given
output, the supply curve shifts in the same direction. For example,
assume that someone invents a better way of growing wheat so that the
cost of growing a given quantity of wheat decreases. Otherwise stated,
producers will be willing to supply more wheat at every price and this
shifts the supply curve S1 outward, to S2—an increase in supply. This
increase in supply causes the equilibrium price to decrease from P1 to
P2. The equilibrium quantity increases from Q1 to Q2 as the quantity
demanded extends at the new lower prices. In a supply curve shift, the
price and the quantity move in opposite directions.

If the quantity supplied decreases at a given price, the opposite
happens. If the supply curve starts at S2, and shifts inward to S1,
demand contracts, the equilibrium price will increase, and the
equilibrium quantity will decrease. This is an effect of supply
changing. The quantity demanded at each price is the same as before
the supply shift (at both Q1 and Q2). The equilibrium quantity, price
and supply changed.

When there is a change in supply or demand, there are four possible
movements. The demand curve can move inward or outward. The supply
curve can also move inward or outward.


Main article: Elasticity (economics)

Elasticity is a central concept in the theory of supply and demand. In
this context, elasticity refers to how supply and demand respond to
various factors, including price as well as other stochastic
principles. One way to define elasticity is the percentage change in
one variable divided by the percentage change in another variable
(known as arc elasticity, which calculates the elasticity over a range
of values, in contrast with point elasticity, which uses differential
calculus to determine the elasticity at a specific point). It is a
measure of relative changes.

Often, it is useful to know how the quantity demanded or supplied will
change when the price changes. This is known as the price elasticity
of demand and the price elasticity of supply. If a monopolist decides
to increase the price of their product, how will this affect their
sales revenue? Will the increased unit price offset the likely
decrease in sales volume? If a government imposes a tax on a good,
thereby increasing the effective price, how will this affect the
quantity demanded?

Elasticity corresponds to the slope of the line and is often expressed
as a percentage. In other words, the units of measure (such as gallons
vs. quarts, say for the response of quantity demanded of milk to a
change in price) do not matter, only the slope. Since supply and
demand can be curves as well as simple lines the slope, and hence the
elasticity, can be different at different points on the line.

Elasticity is calculated as the percentage change in quantity over the
associated percentage change in price. For example, if the price moves
from $1.00 to $1.05, and the quantity supplied goes from 100 pens to
102 pens, the slope is 2/0.05 or 40 pens per dollar. Since the
elasticity depends on the percentages, the quantity of pens increased
by 2%, and the price increased by 5%, so the price elasticity of
supply is 2/5 or 0.4.

Since the changes are in percentages, changing the unit of measurement
or the currency will not affect the elasticity. If the quantity
demanded or supplied changes a lot when the price changes a little, it
is said to be elastic. If the quantity changes little when the prices
changes a lot, it is said to be inelastic. An example of perfectly
inelastic supply, or zero elasticity, is represented as a vertical
supply curve. (See that section below)

Elasticity in relation to variables other than price can also be
considered. One of the most common to consider is income. How would
the demand for a good change if income increased or decreased? This is
known as the income elasticity of demand. For example, how much would
the demand for a luxury car increase if average income increased by
10%? If it is positive, this increase in demand would be represented
on a graph by a positive shift in the demand curve. At all price
levels, more luxury cars would be demanded.

Another elasticity sometimes considered is the cross elasticity of
demand, which measures the responsiveness of the quantity demanded of
a good to a change in the price of another good. This is often
considered when looking at the relative changes in demand when
studying complement and substitute goods. Complement goods are goods
that are typically utilized together, where if one is consumed,
usually the other is also. Substitute goods are those where one can be
substituted for the other, and if the price of one good rises, one may
purchase less of it and instead purchase its substitute.

Cross elasticity of demand is measured as the percentage change in
demand for the first good that occurs in response to a percentage
change in price of the second good. For an example with a complement
good, if, in response to a 10% increase in the price of fuel, the
quantity of new cars demanded decreased by 20%, the cross elasticity
of demand would be -2.0.

In a perfect economy, any market should be able to move to the
equilibrium position instantly without travelling along the curve. Any
change in market conditions would cause a jump from one equilibrium
position to another at once. So the perfect economy is actually
analogous to the quantum economy. Unfortunately in real economic
systems, markets don't behave in this way, and both producers and
consumers spend some time travelling along the curve before they reach
equilibrium position. This is due to asymmetric, or at least
imperfect, information, where no one economic agent could ever be
expected to know every relevant condition in every market. Ultimately
both producers and consumers must rely on trial and error as well as
prediction and calculation to find an the true equilibrium of a

Vertical supply curve (perfectly inelastic supply)

When demand D1 is in effect, the price will be P1. When D2 is
occurring, the price will be P2. The quantity is always Q, any shifts
in demand will only affect price.If the quantity supplied is fixed no
matter what the price, the supply curve is a vertical line, and supply
is called perfectly inelastic. In practice, vertical supply curves
rarely exist.

As a hypothetical example, consider the supply curve of the land.
Suppose that no matter how much someone would be willing to pay for an
additional piece, more land cannot be created. Also, even if no one
wanted all the land, it still would exist. In such a case, land would
have a vertical supply curve, with zero elasticity.

Other markets

The model of supply and demand also applies to various specialty

The model is commonly applied to wages, in the market for labor. The
typical roles of supplier and consumer are reversed. The suppliers are
individuals, who try to sell their labor for the highest price. The
consumers of labors are businesses, which try to buy the type of labor
they need at the lowest price. The equilibrium price for a certain
type of labor is the wage.[3]

A number of economists (for example Pierangelo Garegnani[4], Robert L.
Vienneau[5], and Arrigo Opocher & Ian Steedman[6]), building on the
work of Piero Sraffa, argue that that this model of the labor market,
even given all its assumptions, is logically incoherent. Michael
Anyadike-Danes and Wyne Godley [7] argue, based on simulation results,
that little of the empirical work done with the textbook model
constitutes a potentially falsifying test, and, consequently,
empirical evidence hardly exists for that model. Graham White [8]
argues, partially on the basis of Sraffianism, that the policy of
increased labor market flexibility, including the reduction of minimum
wages, does not have an "intellectually coherent" argument in economic

This criticism of the application of the model of supply and demand
generalizes, particularly to all markets for factors of production. It
also has implications for monetary theory[9] not drawn out here.

In both classical and Keynesian economics, the money market is
analyzed as a supply-and-demand system with interest rates being the
price. The money supply may be a vertical supply curve, which the
central bank of a country can influence through monetary policy. Some
economists[10] argue that the money supply curve should be drawn as a
horizontal line. The demand for money intersects with the money supply
to determine the interest rate.[11]

Empirical estimation

Demand and supply relations in a market can be statistically estimated
from price, quantity, and other data with sufficient information in
the model. This can be done with simultaneous-equation methods of
estimation in econometrics. Such methods allow solving for the model-
relevant "structural coefficients," the estimated algebraic
counterparts of the theory. The Parameter identification problem is a
common issue in "structural estimation." Typically, data on exogenous
variables (that is, variables other than price and quantity, both of
which are endogenous variables) are needed to perform such an
estimation. An alternative to "structural estimation" is reduced-form
estimation, which regresses each of the endogenous variables on the
respective exogenous variables.

Macroeconomic uses of demand and supply

Demand and supply have also been generalized to explain macroeconomic
variables in a market economy, including the quantity of total output
and the general price level. The Aggregate Demand-Aggregate Supply
model may be the most direct application of supply and demand to
macroeconomics, but other macroeconomic models also use supply and
demand. Compared to microeconomic uses of demand and supply, different
(and more controversial) theoretical considerations apply to such
macroeconomic counterparts as aggregate demand and aggregate supply.
Demand and supply may also be used in macroeconomic theory to relate
money supply to demand and interest rates.

Demand shortfalls

A demand shortfall results from the actual demand for a given product
being lower than the projected, or estimated, demand for that product.
Demand shortfalls are caused by demand overestimation in the planning
of new products. Demand overestimation is caused by optimism bias and/
or strategic misrepresentation.


The power of supply and demand was understood to some extent by
several early Muslim economists, such as Ibn Taymiyyah who

"If desire for goods increases while its availability decreases, its
price rises. On the other hand, if availability of the good increases
and the desire for it decreases, the price comes down."[12]
The phrase "supply and demand" was first used by James Denham-Steuart
in his Inquiry into the Principles of Political Economy, published in
1767. Adam Smith used the phrase in his 1776 book The Wealth of
Nations, and David Ricardo titled one chapter of his 1817 work
Principles of Political Economy and Taxation "On the Influence of
Demand and Supply on Price".[13]

In The Wealth of Nations, Smith generally assumed that the supply
price was fixed but that its "merit" (value) would decrease as its
"scarcity" increased, in effect what was later called the law of
demand. Ricardo, in Principles of Political Economy and Taxation, more
rigorously laid down the idea of the assumptions that were used to
build his ideas of supply and demand. Antoine Augustin Cournot first
developed a mathematical model of supply and demand in his 1838
Researches on the Mathematical Principles of the Theory of Wealth.

During the late 19th century the marginalist school of thought
emerged. This field mainly was started by Stanley Jevons, Carl Menger,
and Léon Walras. The key idea was that the price was set by the most
expensive price, that is, the price at the margin. This was a
substantial change from Adam Smith's thoughts on determining the
supply price.

In his 1870 essay "On the Graphical Representation of Supply and
Demand", Fleeming Jenkin drew for the first time the popular graphic
of supply and demand which, through Marshall, eventually would turn
into the most famous graphic in economics.

The model was further developed and popularized by Alfred Marshall in
the 1890 textbook Principles of Economics.[13] Along with Léon Walras,
Marshall looked at the equilibrium point where the two curves crossed.
They also began looking at the effect of markets on each other.


At least two assumptions are necessary for the validity of the
standard model: first, that supply and demand are independent; and
second, that supply is "constrained by a fixed resource"; If these
conditions do not hold, then the Marshallian model cannot be
sustained. Sraffa's critique focused on the inconsistency (except in
implausible circumstances) of partial equilibrium analysis and the
rationale for the upward-slope of the supply curve in a market for a
produced consumption good[14]. The notability of Sraffa's critique is
also demonstrated by Paul A. Samuelson's comments and engagements with
it over many years, for example:

"What a cleaned-up version of Sraffa (1926) establishes is how nearly
empty are all of Marshall's partial equilibrium boxes. To a logical
purist of Wittgenstein and Sraffa class, the Marshallian partial
equilibrium box of constant cost is even more empty than the box of
increasing cost."[15].

Aggregate excess demand in a market is the difference between the
quantity demanded and the quantity supplied as a function of price. In
the model with an upward-sloping supply curve and downward-sloping
demand curve, the aggregate excess demand function only intersects the
axis at one point, namely, at the point where the supply and demand
curves intersect. The Sonnenschein-Mantel-Debreu theorem shows that
the standard model cannot be rigorously derived in general from the
theory of general equilibrium[16].

The model of prices being determined by supply and demand assume
perfect competition. But:

"economists have no adequate model of how individuals and firms adjust
prices in a competitive model. If all participants are price-takers by
definition, then the actor who adjusts prices to eliminate excess
demand is not specified"[17].

See also

Look up supply or demand in Wiktionary, the free dictionary.

Aggregate demand
Aggregate supply
Alpha consumer
Artificial demand
Barriers to entry
Consumer theory
Deadweight loss
Demand Forecasting
Demand shortfall
Economic surplus
Effect of taxes and subsidies on price
Foundations of Economic Analysis by Paul A. Samuelson
History of economic thought
Induced demand
"invisible hand"
Inverse demand function
Labor shortage
Neoclassical economics
Producer's surplus
Real prices and ideal prices
Say's Law
Supply shock

An Inquiry into the Nature and Causes of the Wealth of Nations by Adam


↑ Note that unlike most graphs, supply & demand curves are plotted
with the independent variable (price) on the vertical axis and the
dependent variable (quantity supplied or demanded) on the horizontal

↑ "Marginal Utility and Demand".

Retrieved 2007-02-09.

↑ Kibbe, Matthew B.. "The Minimum Wage: Washington's Perennial Myth".
Cato Institute. http://www.cato.org/pubs/pas/pa106.html. Retrieved

↑ P. Garegnani, "Heterogeneous Capital, the Production Function and
the Theory of Distribution", Review of Economic Studies, V. 37, N. 3
(Jul. 1970): 407-436

↑ Robert L. Vienneau, "On Labour Demand and Equilibria of the Firm",
Manchester School, V. 73, N. 5 (Sep. 2005): 612-619

↑ Arrigo Opocher and Ian Steedman, "Input Price-Input Quantity
Relations and the Numeraire", Cambridge Journal of Economics, V. 3
(2009): 937-948

↑ Michael Anyadike-Danes and Wyne Godley, "Real Wages and Employment:
A Sceptical View of Some Recent Empirical Work", Machester School, V.
62, N. 2 (Jun. 1989): 172-187

↑ Graham White, "The Poverty of Conventional Economic Wisdom and the
Search for Alternative Economic and Social Policies", The Drawing
Board: An Australian Review of Public Affairs, V. 2, N. 2 (Nov. 2001):

↑ Colin Rogers, Money, Interest and Capital: A Study in the
Foundations of Monetary Theory, Cambridge University Press, 1989

↑ Basij J. Moore, Horizontalists and Verticalists: The Macroeconomics
of Credit Money, Cambridge University Press, 1988

↑ Ritter, Lawrence S.authorlink1 = Lawrence S. Ritter; Silber, William
L.; Udell, Gregory F. (2000). Principles of Money, Banking, and
Financial Markets (10th edition ed.). Addison-Wesley, Menlo Park C.
pp. 431-438,465-476. ISBN 0-321-37557-2.

↑ Hosseini, Hamid S. (2003). "Contributions of Medieval Muslim
Scholars to the History of Economics and their Impact: A Refutation of
the Schumpeterian Great Gap". in Biddle, Jeff E.; Davis, Jon B.;
Samuels, Warren J.. A Companion to the History of Economic Thought.
Malden, MA: Blackwell. pp. 28–45 [28 & 38]. doi:
10.1002/9780470999059.ch3. ISBN 0631225730.

↑ 13.0 13.1 Humphrey, Thomas M. (March/April 1992). "Marshallian Cross
Diagrams and Their Uses before Alfred Marshall: The Origins of Supply
and Demand Geometry" ([dead link] – Scholar search). Economic Review.


Federal Reserve Bank of Richmond.

↑ Avi J. Cohen, "'The Laws of Returns Under Competitive Conditions':
Progress in Microeconomics Since Sraffa (1926)?", Eastern Economic
Journal, V. 9, N. 3 (Jul.-Sep.): 1983)

↑ Paul A. Samuelson, "Reply" in Critical Essays on Piero Sraffa's
Legacy in Economics (edited by H. D. Kurz) Cambridge University Press,

↑ Alan Kirman, "The Intrinsic Limits of Modern Economic Theory: The
Emperor has No Clothes", The Economic Journal, V. 99, N. 395,
Supplement: Conference Papers (1989): pp. 126-139

↑ Alan P. Kirman, "Whom or What Does the Representative Individual
Represent?" Journal of Economic Perspectives, V. 6, N. 2 (Spring
1992): pp. 117-136

External links

Nobel Prize Winner Prof. William Vickrey: 15 fatal fallacies of
financial fundamentalism - A Disquisition on Demand Side Economics

"Marshallian Cross Diagrams and Their Uses before Alfred Marshall: The
Origins of Supply and Demand Geometry" by Thomas Humphrey (via the
Richmond Fed)

Supply and Demand book by Hubert D. Henderson at Project Gutenberg.

Price Theory and Applications by Steven E. Landsburg ISBN

An Inquiry into the Nature and Causes of the Wealth of Nations, Adam
Smith, 1776 [1]

By what is the price of a commodity determined?, a brief statement of
Karl Marx's rival account [2]

The Economic Motivation of Open Source Software: Stakeholder
Perspectives, Dirk Riehle, 2007 [3]

Supply and Demand by Fiona Maclachlan and Basic Supply and Demand by
Mark Gillis, Wolfram Demonstrations Project.


Reference »
Wikipedia Articles

Economic equilibrium

In this article: Locations Images From the web: Images Videos
Economic equilibrium

Price of market balance:

P - price
Q - quantity of good
S - supply
D - demand
P0 - price of market balance
A - surplus of demand - when P<P0
B - surplus of supply - when P>P0

In economics, economic equilibrium is simply a state of the world
where economic forces are balanced and in the absence of external
influences the (equilibrium) values of economic variables will not
change. It is the point at which quantity demanded and quantity
supplied are equal.[1] Market equilibrium, for example, refers to a
condition where a market price is established through competition such
that the amount of goods or services sought by buyers is equal to the
amount of goods or services produced by sellers. This price is often
called the equilibrium price or market clearing price and will tend
not to change unless demand or supply change.

Properties of equilibrium

When the price is above the equilibrium point there is a surplus of
supply; where the price is below the equilibrium point there is a
shortage in supply. Different supply curves and different demand
curves have different points of economic equilibrium. In most simple
microeconomic stories of supply and demand in a market a static
equilibrium is observed in a market; however, economic equilibrium can
exist in non-market relationships and can be dynamic. Equilibrium may
also be multi-market or general, as opposed to the partial equilibrium
of a single market.

In economics, the term equilibrium is used to suggest a state of
"balance" between supply forces and demand forces. For example, an
increase in supply will disrupt the equilibrium, leading to lower
prices. Eventually, a new equilibrium will be attained in most
markets. Then, there will be no change in price or the amount of
output bought and sold — until there is an exogenous shift in supply
or demand (such as changes in technology or tastes). That is, there
are no endogenous forces leading to the price or the quantity.

Not all economic equilibria are stable. For an equilibrium to be
stable, a small deviation from equilibrium leads to economic forces
that returns an economic sub-system toward the original equilibrium.
For example, if a movement out of supply/demand equilibrium leads to
an excess supply (glut) that induces price declines which return the
market to a situation where the quantity demanded equals the quantity
supplied. If supply and demand curves intersect more than once, then
both stable and unstable equilibria are found.

Most economists (e.g. Samuelson 1947, Chapter 3, p. 52) caution
against attaching a normative meaning (value judgement) to the
equilibrium price. For example, food markets may be in equilibrium at
the same time that people are starving (because they cannot afford to
pay the high equilibrium price).


In most interpretations, classical economists such as Adam Smith
maintained that the free market would tend towards economic
equilibrium through the price mechanism. That is, any excess supply
(market surplus or glut) would lead to price cuts, which decrease the
quantity supplied (by reducing the incentive to produce and sell the
product) and increase the quantity demanded (by offering consumers
bargains), automatically abolishing the glut. Similarly, in an
unfettered market, any excess demand (or shortage) would lead to price
increases, reducing the quantity demanded (as customers are priced out
of the market) and increasing in the quantity supplied (as the
incentive to produce and sell a product rises). As before, the
disequilibrium (here, the shortage) disappears. This automatic
abolition of non-market-clearing situations distinguishes markets from
central planning schemes, which often have a difficult time getting
prices right and suffer from persistent shortages of goods and
services[citation needed].

This view came under attack from at least two viewpoints. Modern
mainstream economics points to cases where equilibrium does not
correspond to market clearing (but instead to unemployment), as with
the efficiency wage hypothesis in labor economics. In some ways
parallel is the phenomenon of credit rationing, in which banks hold
interest rates low to create an excess demand for loans, so they can
pick and choose whom to lend to. Further, economic equilibrium can
correspond with monopoly, where the monopolistic firm maintains an
artificial shortage to prop up prices and to maximize profits.
Finally, Keynesian macroeconomics points to underemployment
equilibrium, where a surplus of labor (i.e., cyclical unemployment) co-
exists for a long time with a shortage of aggregate demand.

On the other hand, the Austrian School and Joseph Schumpeter
maintained that in the short term equilibrium is never attained as
everyone was always trying to take advantage of the pricing system and
so there was always some dynamism in the system. The free market's
strength was not creating a static or a general equilibrium but
instead in organising resources to meet individual desires and
discovering the best methods to carry the economy forward.

Solving for equilibrium price

To solve for the equilibrium price, one must either plot the supply
and demand curves, or solve for their equations being equal.

An example may be:

In the diagram, depicting simple set of supply and demand curves, the
quantity demanded and supplied at price P are equal.

At any price above P supply exceeds demand, while at a price below P
the quantity demanded exceeds that supplied. In other words, prices
where demand and supply are out of balance are termed points of
disequilibrium, creating shortages and oversupply. Changes in the
conditions of demand or supply will shift the demand or supply curves.
This will cause changes in the equilibrium price and quantity in the

Consider the following demand and supply schedule:

Price ($) Demand Supply
8.00 6,000 18,000
7.00 8,000 16,000
6.00 10,000 14,000
5.00 12,000 12,000
4.00 14,000 10,000
3.00 16,000 8,000
2.00 18,000 6,000
1.00 20,000 4,000

The equilibrium price in the market is $5.00 where demand and supply
are equal at 12,000 units

If the current market price was $3.00 – there would be excess demand
for 8,000 units, creating a shortage.

If the current market price was $8.00 – there would be excess supply
of 12,000 units.

When there is a shortage in the market we see that, to correct this
disequilibrium, the price of the good will be increased back to a
price of $5.00, thus lessening the quantity demanded and increasing
the quantity supplied thus that the market is in balance.

When there is an oversupply of a good, such as when price is above
$6.00, then we see that producers will decrease the price to increase
the quantity demanded for the good, thus eliminating the excess and
taking the market back to equilibrium.

Influences changing price

A change in equilibrium price may occur through a change in either the
supply or demand schedules. For instance, an increase in demand
through an increase level of disposable income may produce a new
demand and supply schedule, such as the following:

Price ($) Demand Supply
8.00 10,000 18,000
7.00 12,000 16,000
6.00 14,000 14,000
5.00 16,000 12,000
4.00 18,000 10,000
3.00 20,000 8,000
2.00 22,000 6,000
1.00 24,000 4,000

Here we see that an increase in disposable income would increase the
quantity demanded of the good by 4,000 units at each price. This has
the effect of changing the price at which quantity supplied equals
quantity demanded. In this case we see that the two equal each other
at an increased price of $6.00. This increase in demand would have the
effect of shifting the demand curve rightward. Note that a decrease in
disposable income would have the exact opposite effect on the
equilibrium market.

We will also see similar behaviour in price when there is a change in
the supply schedule, occurring through technological changes, or
through changes in business costs. An increase in technology or
decrease in costs would have the effect of increasing the quantity
supplied at each price, thus reducing the equilibrium price. On the
other hand, a decrease in technology or increase in business costs
will decrease the quantity supplied at each price, thus increasing
equilibrium price.

See also

Competitive equilibrium
Dynamic equilibrium
Equilibrium (disambiguation page)
General equilibrium theory
Partial equilibrium
Nash equilibrium
Labor theory of value
Exchange value
Supply and demand
Real prices and ideal prices
Prices of production
Law of value


↑ Sullivan, arthur; Steven M. Sheffrin (2003). Economics: Principles
in action. Upper Saddle River, New Jersey 07458: Pearson Prentice
Hall. pp. 125. ISBN 0-13-063085-3.


Paul A. Samuelson (1947; Expanded ed. 1983), Foundations of Economic
Analysis. Harvard University Press. ISBN 0-674-31301-1


...and I am Sid Harth
2010-02-25 18:36:42 UTC
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A free market is a market without economic intervention and regulation
by government except to regulate against force or fraud. This is the
contemporary use of the terminology used by economists and in popular
culture; the term has had other uses historically. A free market
requires protection of property rights, but no regulation, no
subsidization, no single monetary system, and no governmental
monopolies. It is the opposite of a controlled market, where the
government regulates prices or how property is used.

The theory holds that within the ideal free market, property rights
are voluntarily exchanged at a price arranged solely by the mutual
consent of sellers and buyers. By definition, buyers and sellers do
not coerce each other, in the sense that they obtain each other's
property rights without the use of physical force, threat of physical
force, or fraud, nor are they coerced by a third party (such as by
government via transfer payments) [1] and they engage in trade simply
because they both consent and believe that what they are getting is
worth more than or as much as what they give up. Price is the result
of buying and selling decisions en masse as described by the theory of
supply and demand.

Free markets contrast sharply with controlled markets or regulated
markets, in which governments directly or indirectly regulate prices
or supplies, which according to free market theory causes markets to
be less efficient.[2] Where government intervention exists, the market
is a mixed economy.

In the marketplace the price of a good or service helps communicate
consumer demand to producers and thus directs the allocation of
resources toward consumer, as well as investor, satisfaction. In a
free market, price is a result of a plethora of voluntary
transactions, rather than political decree as in a controlled market.
Through free competition between vendors for the provision of products
and services, prices tend to decrease, and quality tends to increase.
A free market is not to be confused with a perfect market where
individuals have perfect information and there is perfect competition.

Free market economics is closely associated with laissez-faire
economic philosophy, which advocates approximating this condition in
the real world by mostly confining government intervention in economic
matters to regulating against force and fraud among market
participants. Some free market advocates oppose taxation as well,
claiming that the market is more efficient at providing all valuable
services of which defense and law are no exception, that such services
can be provided without direct taxation and that consent would be the
basis of political legitimacy making it a morally consistent system.
Anarcho-capitalists, for example, would substitute arbitration
agencies and private defense agencies.

In social philosophy, a free market economy is a system for allocating
goods within a society: purchasing power mediated by supply and demand
within the market determines who gets what and what is produced,
rather than the state. Early proponents of a free-market economy in
18th century Europe contrasted it with the medieval, early modern, and
mercantilist economies which preceded it.

Supply and demand

Main article: Supply and demand

Supply and demand are always equal as they are the two sides of the
same set of transactions, and discussions of "imbalances" are a
muddled and indirect way of referring to price.[3] However, in an
unmeasurable qualitative sense, demand for an item (such as goods or
services) refers to the market pressure from people trying to buy it.
They will "bid" money for the item, while sellers offer the item for
money. When the bid matches the offer, a transaction can easily occur
(even automatically, as in a typical stock market). In reality, most
shops and markets do not resemble the stock market, and there are
significant costs and barriers to "shopping around" (comparison

When demand exceeds supply, suppliers can raise the price, but when
supply exceeds demand, suppliers will have to decrease the price in
order to make sales. Consumers who can afford the higher prices may
still buy, but others may forgo the purchase altogether, demand a
better price, buy a similar item, or shop elsewhere. As the price
rises, suppliers may also choose to increase production. Or more
suppliers may enter the business.

Gourmet coffee and electronics as examples of market forces in
For example, the gourmet coffee business, pioneered in the US by
Starbucks, revealed a demand for high quality fresh coffee. Further,
the Starbucks sales growth showed that consumers would pay
significantly more for this type of coffee. Other food service
retailers, such as McDonald's, Sonic, and Burger King, began offering
such coffee to help satisfy the demand.

Increased supply can indirectly result in lower prices, particularly
with computers and other electronic devices. Mass production
techniques have been steadily reducing prices 20 to 30% per year since
the 1960s.[citation needed] The functions of a multi-million dollar
mainframe computer in the 1960s could be performed by a $100 computer
in the 2000s.

Spontaneous order or "Invisible hand"

Main articles: Invisible hand and Spontaneous order

Friedrich Hayek argues for the classical liberal view that market
economies allow spontaneous order; that is, "a more efficient
allocation of societal resources than any design could achieve."[4]
According to this view, in market economies sophisticated business
networks are formed which produce and distribute goods and services
throughout the economy. This network was not designed, but emerged as
a result of decentralized individual economic decisions. Supporters of
the idea of spontaneous order trace their views to the concept of the
invisible hand proposed by Adam Smith in The Wealth of Nations who
said that the individual who:

"intends only his own gain is led by an invisible hand to promote an
end which was no part of his intention. Nor is it always the worse for
society that it was no part of it. By pursuing his own interest [an
individual] frequently promotes that of the society more effectually
than when he really intends to promote it. I have never known much
good done by those who affected to trade for the [common]
good." (Wealth of Nations)

Smith pointed out that one does not get one's dinner by appealing to
the brother-love of the butcher, the farmer or the baker. Rather one
appeals to their self interest, and pays them for their labour.

“ It is not from the benevolence of the butcher, the brewer or the
baker, that we expect our dinner, but from their regard to their own
self interest. We address ourselves, not to their humanity but to
their self-love, and never talk to them of our own necessities but of
their advantages."[5] ”

Supporters of this view claim that spontaneous order is superior to
any order that does not allow individuals to make their own choices of
what to produce, what to buy, what to sell, and at what prices, due to
the number and complexity of the factors involved. They further
believe that any attempt to implement central planning will result in
more disorder, or a less efficient production and distribution of
goods and services.

Economic equilibrium

Main article: Economic equilibrium

General equilibrium theory has demonstrated, with varying degrees of
mathematical rigor over time, that under certain conditions of
competition, the law of Supply and Demand predominates in this ideal
free and competitive market, influencing prices toward an equilibrium
that balances the demands for the products against the supplies.[6][7]
At these equilibrium prices, the market distributes the products to
the purchasers according to each purchaser's preference (or utility)
for each product and within the relative limits of each buyer's
purchasing power. This result is described as market efficiency, or
more specifically a Pareto optimum.

This equilibrating behavior of free markets requires certain
assumptions about their agents, collectively known as Perfect
Competition, which therefore cannot be results of the market that they
create. Among these assumptions are complete information,
interchangeable goods and services, and lack of market power, that
obviously cannot be fully achieved. The question then is what
approximations of these conditions guarantee approximations of market
efficiency, and which failures in competition generate overall market
failures. Several Nobel Prizes in Economics have been awarded for
analyses of market failures due to asymmetric information.

Some models in econophysics[8] have shown that when agents are allowed
to interact locally in a free market (ie. their decisions depend not
only on utility and purchasing power, but also on their peers'
decisions), prices can become unstable and diverge from the
equilibrium, often in an abrupt manner.The behavior of the free market
is thus said to be non-linear (a pair of agents bargaining for a
purchase will agree on a different price than 100 identical pairs of
agents doing the identical purchase). Speculation bubbles and the type
of herd behavior often observed in stock markets are quoted as real
life examples of non-equilibrium price trends. Laissez-faire free-
market advocates, especially Austrian school followers, often dismiss
this endogenous theory, and blame external influences, such as
weather, commodity prices, technological developments, and government
meddling for non-equilibrium prices.

Distribution of wealth

Main article: Distribution of wealth

The distribution of purchasing power in an economy depends to a large
extent on the nature of government intervention, social class, labor
and financial markets, but also on other, lesser factors such as
family relationships, inheritance, gifts and so on. Many theories
describing the operation of a free market focus primarily on the
markets for consumer products, and their description of the labor
market or financial markets tends to be more complicated and
controversial. The free market can be seen as facilitating a form of
decision-making through what is known as dollar voting, where a
purchase of a product is tantamount to casting a vote for a producer
to continue producing that product.

The effect of economic freedom on society's and individuals' wealth
remains a subject of controversy. Kenneth Arrow and Gerard Debreu have
shown that under certain idealized conditions, a system of free trade
leads to Pareto efficiency, but the traditional Arrow-Debreu paradigm
within economics is now being challenged by the new Greenwald-Stiglitz
paradigm (1986)[9]. Many advocates of free markets, most notably
Milton Friedman, have also argued that there is a direct relationship
between economic growth and economic freedom, though this assertion is
much harder to prove empirically, as the continuous debates among
scholars on methodological issues in empirical studies of the
connection between economic freedom and economic growth clearly
indicate:[10][11][12]. "there were a few attempts to study
relationship between growth and economic freedom prior to the very
recent availability of the Fraser data. These were useful but had to
use incomplete and subjective variables"[13]. Joshua Epstein and
Robert Axtell have attempted to predict the properties of free markets
empirically in the agent-based computer simulation "Sugarscape". They
came to the conclusion that, again under idealized conditions, free
markets lead to a Pareto distribution of wealth[8] .

On the other hand more recent research, especially the one led by
Joseph Stiglitz seems to contradict Friedman's conclusions. According
to Boettke:

Once incomplete and imperfect information are introduced, Chicago-
school defenders of the market system cannot sustain descriptive
claims of the Pareto efficiency of the real world. Thus, Stiglitz's
use of rational-expectations equilibrium assumptions to achieve a more
realistic understanding of capitalism than is usual among rational-
expectations theorists leads, paradoxically, to the conclusion that
capitalism deviates from the model in a way that justifies state
action--socialism--as a remedy.[14]

Laissez-faire economics

Main article: Laissez-faire economics

The necessary components for the functioning of an idealized free
market include the complete absence of artificial price pressures from
taxes, subsidies, tariffs, or government regulation (other than
protection from coercion and theft, and no government-granted
monopolies (usually classified as coercive monopoly by free market
advocates) like the United States Post Office, Amtrak, arguably
patents, etc.


Main article: Deregulation

In an absolutely free-market economy, all capital, goods, services,
and money flow transfers are unregulated by the government except to
stop collusion or fraud that may take place among market participants.
[citation needed] As this protection must be funded, such a government
taxes only to the extent necessary to perform this function, if at
all. This state of affairs is also known as laissez-faire.
Internationally, free markets are advocated by proponents of economic
liberalism; in Europe this is usually simply called liberalism. In the
United States, support for free market is associated most with
libertarianism. Since the 1970s, promotion of a global free-market
economy, deregulation and privatization, is often described as
neoliberalism. The term free market economy is sometimes used to
describe some economies that exist today (such as Hong Kong), but pro-
market groups would only accept that description if the government
practices laissez-faire policies, rather than state intervention in
the economy.[specify] An economy that contains significant economic
interventionism by government, while still retaining some
characteristics found in a free market is often called a mixed

Low barriers to entry

A free market does not require the existence of competition, however
it does require that there are no barriers to new market entrants.
Hence, in the lack of coercive barriers it is generally understood
that competition flourishes in a free market environment. It often
suggests the presence of the profit motive, although neither a profit
motive or profit itself are necessary for a free market. All modern
free markets are understood to include entrepreneurs, both individuals
and businesses. Typically, a modern free market economy would include
other features, such as a stock exchange and a financial services
sector, but they do not define it.

Legal tender and taxes

In a truly free market economy, money would not be monopolized by
legal tender laws or by a central bank, in order to receive taxes from
the transactions or to be able to issue loans.[citation needed]
Minarchists (advocates of minimal government) contend that the so
called "coercion" of taxes is essential for the market's survival, and
a market free from taxes may lead to no market at all. By definition,
there is no market without private property, and private property can
only exist while there is an entity that defines and defends it.
Traditionally, the State defends private property and defines it by
issuing ownership titles, and also nominates the central authority to
print or mint currency. "Free market anarchists" disagree with the
above assessment – they maintain that private property and free
markets can be protected by voluntarily-funded services under the
concept of individualist anarchism and anarcho-capitalism[15][16]. A
free market could be defined alternatively as a tax-free market,
independent of any central authority, which uses as medium of exchange
such as money, even in the absence of the State. It is disputed,
however, whether this hypothetical stateless market could function.

Ethical justification

The ethical justification of free markets takes two forms. One appeals
to the intrinsic moral superiority of autonomy and freedom (in the
market), see deontology. The other is a form of consequentialism—a
belief that decentralised planning by a multitude of individuals
making free economic decisions produces better results in regard to a
more organized, efficient, and productive economy, than does a
centrally-planned economy where a central agency decides what is
produced, and allocates goods by non-price mechanisms. An older
version of this argument is the metaphor of the Invisible Hand,
familiar from the work of Adam Smith.

Modern theories of self-organization say the internal organization of
a system can increase automatically without being guided or managed by
an outside source. When applied to the market, as an ethical
justification, these theories appeal to its intrinsic value as a self-
organising entity. Other philosophies such as some forms of
Individualist anarchism (especially that of that 19th century) and
Mutualism (economic theory) anarchism believe that in a free market
competition would cause prices of goods and services to align with the
labor embodied in those things. This goes against the contemporary
mainstream view, which is held by most contemporary individualist
anarchists, that prices would accord to the marginal utility of these
things irrespective of the labor embodied in them.

Index of economic freedom

The Heritage Foundation, a conservative think tank, tried to identify
the key factors which allow to measure the degree of freedom of
economy of a particular country. In 1986 they introduced Index of
Economic Freedom, which is based on some fifty variables. This and
other similar indices do not define a free market, but measure the
degree to which a modern economy is free, meaning in most cases free
of state intervention. The variables are divided into the following
major groups:

Trade policy,
Fiscal burden of government,
Government intervention in the economy,
Monetary policy,
Capital flows and foreign investment,
Banking and finance,
Wages and prices,
Property rights,
Regulation, and Informal market activity.

Each group is assigned a numerical value between 1 and 5; IEF is the
arithmetical mean of the values, rounded to the hundredth. Initially,
countries which were traditionally considered capitalistic received
high ratings, but the method improved over time. Some economists, like
Milton Friedman and other Laissez-faire economists have argued that
there is a direct relationship between economic growth and economic
freedom, but this assertion has not been proven yet, both
theoretically and empirically. Continuous debates among scholars on
methodological issues in empirical studies of the connection between
economic freedom and economic growth still try to find out what is the
relationship, if any.[10][11][12].[13].

"In recent years a significant amount of work has been devoted to the
investigation of a possible connection between the political system
and economic growth. For a variety of reasons there is no consensus
about that relationship, especially not about the direction of
causality, if any." (AYAL & KARRAS, 1998, p.2)[13]

History and ideology

The meaning of "free" market has varied over time and between
economists, the ambiguous term "free" facilitating reuse. To
illustrate the ambiguity: classical economists such as Adam Smith
believed that an economy should be free of monopoly rents, while
proponents of laissez faire believe that people should be free to form
monopolies. In this article "free market" is largely identified with
laissez faire, though alternative senses are discussed in this section
and in criticism.

Some theorists might argue that a free market is a natural form of
social organization, and that a free market will arise in any society
where it is not obstructed (ie Ludwig von Mises, Hayek). The consensus
among economic historians is that the free market economy is a
specific historic phenomenon, and that it emerged in late medieval and
early-modern Europe.[citation needed] Other economic historians see
elements of the free market in the economic systems of Classical
Antiquity,[citation needed] and in some non-western societies.
[citation needed] By the 19th century the market certainly had
organized political support, in the form of laissez-faire liberalism.
However, it is not clear if the support preceded the emergence of the
market or followed it. Some historians see it as the result of the
success of early liberal ideology, combined with the specific
interests of the entrepreneur.

Support for the free market as an ordering principle of society is
above all associated with liberalism, especially during the 19th
century. (In Europe, the term 'liberalism' retains its connotation as
the ideology of the free market, but in American and Canadian usage it
came to be associated with government intervention, and acquired a
pejorative meaning for supporters of the free market.) Later
ideological developments, such as minarchism, libertarianism and
Objectivism also support the free market, and insist on its pure form.
Although the Western world shares a generally similar form of economy,
usage in the United States and Canada is to refer to this as
capitalism, while in Europe 'free market' is the preferred neutral
term. Modern liberalism (American and Canadian usage), and in Europe
social democracy, seek only to mitigate the problems of an
unrestrained free market, and accept its existence as such.

Classical economics

In the classical economics of such figures as Adam Smith and David
Ricardo, "free markets" meant "free of unnecessary charges"[17] and a
"market free from monopoly power, business fraud, political insider
dealing and special privileges for vested interests".[18] A "free
market" particularly meant one free of foreign debt;[19] as discussed
in The Wealth of Nations.[20] Alternatively, stated, it was a market
freed from Feudalism and serfdom, or more formally, one free of
economic rent, in the formulation by David Ricardo of the Law of Rent.


In Marxist theory, the idea of the free market simply expresses the
underlying long-term transition from feudalism to capitalism. Note
that the views on this issue - emergence or implementation - do not
necessarily correspond to pro-market and anti-market positions.
Libertarians would dispute that the market was enforced through
government policy, since they believe it is a spontaneous order and
Marxists agree with them because they as well believe it is
evolutionary, although with a different end.


Support for the free market as an ordering principle of society is
above all associated with liberalism, especially during the 19th
century. (In Europe, the term 'liberalism' retains its connotation as
the ideology of the free market, but in American and Canadian usage it
came to be associated with government intervention, and acquired a
pejorative meaning for supporters of the free market.) Later
ideological developments, such as minarchism, libertarianism and
Objectivism also support the free market, and insist on its pure form.
Although the Western world shares a generally similar form of economy,
usage in the United States and Canada is to refer to this as
capitalism, while in Europe 'free market' is the preferred neutral
term. Modern liberalism (American and Canadian usage), and in Europe
social democracy, seek only to mitigate what they see as the problems
of an unrestrained free market, and accept its existence as such.

To most libertarians, there is simply no free market yet, given the
degree of state intervention in even the most 'capitalist' of
countries. From their perspective, those who say they favor a "free
market" are speaking in a relative, rather than an absolute, sense—
meaning (in libertarian terms) they wish that coercion be kept to the
minimum that is necessary to maximize economic freedom (such necessary
coercion would be taxation, for example) and to maximize market
efficiency by lowering trade barriers, making the tax system neutral
in its influence on important decisions such as how to raise capital,
e.g., eliminating the double tax on dividends so that equity financing
is not at a disadvantage vis-a-vis debt financing. However, there are
some such as anarcho-capitalists who would not even allow for taxation
and governments, instead preferring protectors of economic freedom in
the form of private contractors.


Critics dispute the claim that in practice free markets create perfect
competition, or even increase market competition over the long run.
Whether the marketplace should be or is free is disputed; many assert
that government intervention is necessary to remedy market failure
that is held to be an inevitable result of absolute adherence to free
market principles. These failures range from military services to
roads, and some would argue, to health care. This is the central
argument of those who argue for a mixed market, free at the base, but
with government oversight to control social problems.

Another criticism is definitional, in that far-ranging governmental
actions such as the creation of corporate personhood or more broadly,
the governmental actions behind the very creation of artificial legal
entities called corporations, are not considered "intervention" within
mainstream economic schools. This inherent definitional bias allows
many to advocate strong governmental actions that promote corporate
power, while advocating against government actions limiting it, while
putting these dual positions under the umbrella of "pro free markets"
or "anti-intervention."

Critics of laissez-faire since Adam Smith[21] variously see the
unregulated market as an impractical ideal or as a rhetorical device
that puts the concepts of freedom and anti-protectionism at the
service of vested wealthy interests, allowing them to attack labor
laws and other protections of the working classes.[22]

Because no national economy in existence fully manifests the ideal of
a free market as theorized by economists, some critics of the concept
consider it to be a fantasy - outside of the bounds of reality in a
complex system with opposing interests and different distributions of

These critics range from those who reject markets entirely, in favour
of a planned economy or a communal economy, such as that advocated by
Marxism, to those who merely wish to see market failures regulated to
various degrees or supplemented by certain government interventions.
For example, Keynesians recognize a role for government in providing
corrective measures, such as use of fiscal policy for economy
stimulus, when decisions in the private sector lead to suboptimal
economic outcomes, such as depression or recession, which manifest in
widespread hardship.


One practical objection is the claim that markets do not take into
account externalities (effects of transactions that affect third
parties), such as the negative effects of pollution or the positive
effects of education. What exactly constitutes an externality may be
up for debate, including the extent to which it changes based upon the
political climate.

Some proponents of market economies believe that governments should
not diminish market freedom because they disagree on what is a market
externality and what are government-created externalities, and
disagree over what the appropriate level of intervention is necessary
to solve market-created externalities. Others believe that government
should intervene to prevent market failure while preserving the
general character of a market economy. In the model of a social market
economy the state intervenes where the market does not meet political
demands. John Rawls was a prominent proponent of this idea.

Differing Ideas of the Free Market

Some advocates of free market ideologies have criticized mainstream
conceptions of the free market, arguing that a truly free market would
not resemble the modern-day capitalist economy. For example,
contemporary mutualist Kevin Carson argues in favor of "free market
anti-capitalism." Carson has stated that "From Smith to Ricardo and
Mill, classical liberalism was a revolutionary doctrine that attacked
the privileges of the great landlords and the mercantile interests.
Today, we see vulgar libertarians perverting "free market" rhetoric to
defend the contemporary institution that most closely resembles, in
terms of power and privilege, the landed oligarchies and mercantilists
of the Old Regime: the giant corporation." [23]

Carson believes that a true free market society would be "[a] world in
which... land and property [is] widely distributed, capital [is]
freely available to laborers through mutual banks, productive
technology [is] freely available in every country without patents, and
every people [is] free to develop locally without colonial

Martin J. Whitman

Not all advocates of capitalism consider free markets to be practical.
For example, Martin J. Whitman has written, in a discussion of Keynes,
Friedman and Hayek, that these "…great economists…missed a lot of
details that are part and parcel of every value investor's daily
life." While calling Hayek "100% right" in his critique of the pure
command economy, he writes "However, in no way does it follow, as many
Hayek disciples seem to believe, that government is per se bad and
unproductive while the private sector is, per se good and productive.
In well-run industrial economies, there is a marriage between
government and the private sector, each benefiting from the other." As
illustrations of this, he points at "Japan after World War II,
Singapore and the other Asian Tigers, Sweden and China. The notable
exception is Hong Kong which found prosperity on an extremely austere
free market concept.

He argues, in particular, for the value of government-provided credit
and of carefully crafted tax laws.[25] Further, Whitman argues
(explicitly against Hayek) that "a free market situation is probably
also doomed to failure if there exist control persons who are not
subject to external disciplines imposed by various forces over and
above competition." The lack of these disciplines, says Whitman, lead
to "1. Very exorbitant levels of executive compensation… 2. Poorly
financed businesses with strong prospects for money defaults on credit
instruments… 3. Speculative bubbles… 4. Tendency for industry
competition to evolve into monopolies and oligopolies… 5. Corruption."
For all of these he provides recent examples from the U.S. economy,
which he considers to be in some respects under-regulated,[25]
although in other respects over-regulated (he is generally opposed to

He believes that an apparently "free" relationship—that between a
corporation and its investors and creditors—is actually a blend of
"voluntary exchanges" and "coercion". For example, there are
"voluntary activities, where each individual makes his or her own
decision whether to buy, sell, or hold" but there are also what he
defines as "[c]oercive activities, where each individual security
holder is forced to go along…provided that a requisite majority of
other security holders so vote…" His examples of the latter include
proxy voting, most merger and acquisition transactions, certain cash
tender offers, and reorganization or liquidation in bankruptcy.[27]
Whitman also states that "Corporate America would not work at all
unless many activities continued to be coercive."[28]

"I am one with Professor Friedman that, other things being equal, it
is far preferable to conduct economic activities through voluntary
exchange relying on free markets rather than through coercion. But
Corporate America would not work at all unless many activities
continued to be coercive."[29]

See also

Adam Smith

An Austrian Perspective on the History of Economic Thought
Austrian School
Economic liberalism
Free-market anarchism
Free-market environmentalism
Free market healthcare
Free-market roads
Free Market Socialism
Free price system
Free trade
Friedrich Hayek
Game theory
History of theory of capitalism
Ludwig von Mises
Market economy
Milton Friedman
Murray Rothbard
Night watchman state
Non-profit organization
Nash equilibrium
Open Source Initiative
Political Economy
School of Salamanca
Transparency (market)
Underground economy


Freidrich Engels
Gift economy
Inclusive Democracy
Karl Marx
Libertarian socialism
Limited liability
Market abolitionism
Market socialism
Mixed economy
Participatory economy
Planned economy
Subsistence economy


↑ "Free Market." Rothbard, Murray. The Concise Encyclopedia of

↑ Dictionary of Finance and Investment Terms. Barrons, 1995

↑ http://www.donsheelen.org/page14.aspx

↑ Hayek cited. Petsoulas, Christian. Hayek's Liberalism and Its
Origins: His Idea of Spontaneous Order and the Scottish Enlightenment.
Routledge. 2001. p. 2
↑ Smith, Adam. "2". Wealth of Nations.

Retrieved 2007-12-08.

↑ , by Eugene Walras

↑ Theory of Value, by Gerard Debreu

↑ 8.0 8.1 Critical Mass - Ball, Philip, ISBN 0-09-945786-5

↑ GREENWALD, Bruce and STIGLITZ, Joseph E. 1986 Externalities in
Economies with Imperfect Information and Incomplete Markets, Quarterly
Journal of Economics, no. 90.

↑ 10.0 10.1 COLE, Julio H. and LAWSON, Robert A. Handling Economic
Freedom in Growth Regressions: Suggestions for Clarification. Econ
Journal Watch, Volume 4, Number 1, January 2007, pp 71–78.

↑ 11.0 11.1 DE HAAN, Jacob and STURM, Jan-Egbert. How to Handle
Economic Freedom: Reply to Lawson. Econ Journal Watch, Volume 3,
Number 3, September 2006, pp 407–411.

↑ 12.0 12.1 DE HAAN, Jacob and STURM, Jan-Egbert. Handling Economic
Freedom in Growth Regressions: A Reply to Cole and Lawson. Econ
Journal Watch, Volume 4, Number 1, January 2007, pp 79–82.

↑ 13.0 13.1 13.2 AYAL, Eliezer B. and KARRAS, Georgios. Components of
Economic Freedom and Growth. Journal of Developing Areas, Vol.32, No.
3, Spring 1998, 327-338. Publisher: Western Illinois University.

↑ BOETTKE, Peter J. What Went Wrong with Economics?, Critical Review
Vol. 11, No. 1, P. 35. p. 58

↑ Biography of Murray N. Rothbard (1926–1995)

↑ The Machinery of Freedom

↑ The Fictitious Economy, Part 1, An Interview With Dr. Michael
Hudson, by Bonnie Faulkner with Michael Hudson, 07/15/2008

↑ This interpretation is advanced in The Language of Looting, Michael

↑ The Financial War Against Iceland, Michael Hudson

↑ The Wealth of Nations, Adam Smith, Book V, Chapter 3: of Public

↑ "People of the same trade seldom meet together, even for merriment
and diversion, but the conversation ends in a conspiracy against the
public, or in some contrivance to raise prices."--Wealth of Nations,
I.x.c.27 (Part II)

↑ "Masters are always and everywhere in a sort of tacit, but constant
and uniform combination, not to raise the wages of labour above their
actual rate… [When workers combine,] masters… never cease to call
aloud for the assistance of the civil magistrate, and the rigorous
execution of those laws which have been enacted with so much severity
against the combinations of servants, labourers, and journeymen."--
Adam Smith, Wealth of Nations, I.viii.13

↑ Kevin Carson, Naomi Klein: The Shock Doctrine November 7, 2007

↑ Kevin Carson, The Iron Fist Behind the Invisible Hand: Corporate
Capitalism as a State-Guaranteed System of Privilege

↑ 25.0 25.1 Kevin Carson, The Iron Fist Behind the Invisible Hand:
Corporate Capitalism as a State-Guaranteed System of Privilege, p. 4

↑ Martin J. Whitman, Third Avenue Value Fund Letters to our
Shareholders July 31, 2004 (PDF), page 2.

↑ Martin J. Whitman, Third Avenue Value Fund Letters to our
Shareholders July 31, 2004 (PDF), page 5.

↑ Martin J. Whitman, Third Avenue Value Fund letter to shareholders
October 31, 2005. p.6.

↑ Martin J. Whitman, Third Avenue Value Fund letter to shareholders
October 31, 2005. p.5-6.


AYAL, Eliezer B. and KARRAS, Georgios. Components of Economic Freedom
and Growth.

Journal of Developing Areas, Vol.32, No.3, Spring 1998, 327-338.
Publisher: Western Illinois University.

BOETTKE, Peter J. What Went Wrong with Economics?, Critical Review
Vol. 11, No. 1, P. 35. p. 58

Stiglitz, Joseph. 1994. Whither Socialism? Cambridge, Mass.: MIT

External links

Free Market by Murray N. Rothbard

Mises.org is the official website of the Ludwig von Mises Institute
for Austrian economics and classical liberalism

Foundation for Economic Education one of the oldest organizations
promoting classical liberalism and free markets

Free Enterprise: The Economics of Cooperation Looks at how
communication, coordination and cooperation interact to make free
markets work

Fair versus Free by Milton Friedman

Freedom to Work, to Earn, & to Buy by Harry Browne

The Tradition of Spontaneous Order,


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v • [[|d]] • e

In economics, laissez-faire (English pronunciation: /ˌlɛseɪˈfɛər/
( listen), French: [lɛsefɛʁ] ( listen)) means allowing industry to be
free of government restriction, especially restrictions in the form of
tariffs and government monopolies. The phrase is French and literally
means "let do", though it broadly implies "let it be" or "leave it

Economic and political theory

Main article: Free market

The exact origins of the term laissez-faire as a slogan for economic
liberalism are uncertain. The first recorded use of the "laissez-
faire" maxim was by French minister René de Voyer, Marquis d'Argenson,
a champion of free trade, in his famous outburst:[1]

“ Laissez faire, telle devrait être la devise de toute puissance
publique, depuis que le monde est civilisé . . . Détestable principe
que celui de ne vouloir grandir que par l'abaissement de nos voisins!
Il n'y a que la méchanceté et la malignité du coeur de satisfaites
dans ce principe, et l’intérêt y est opposé. Laissez faire, morbleu!
Laissez faire!!

(Let it be, such should be the motto of every public power, ever since
the world is civilized . . . A detestable principle that we cannot
grow but by the lowering of our neighbors! There is nothing but
mischief and malignity of heart that are satisfied with that
principle, and interest is opposed to it. Let it be, damn it! Let it
be!!) ”

According to historical folklore, the phrase stems from a meeting c.
1680 between the powerful French finance minister Jean-Baptiste
Colbert and a group of French businessmen led by a certain M. Le
Gendre. When the eager mercantilist minister asked how the French
state could be of service to the merchants, Le Gendre replied simply
"Laissez-nous faire" ('Leave us be', lit. 'Let us do').[2]

The laissez faire slogan was popularised by Vincent de Gournay, a
French intendant of commerce in the 1750s. Gournay was an ardent
proponent of the removal of restrictions on trade and the deregulation
of industry and economic prosperity in France. Gournay was delighted
by the LeGendre anecdote, and forged it into a larger maxim all his
own: "Laissez faire et laissez passer" ('Let do and let pass'). His
motto has also been identified as the longer "Laissez faire et laissez
passer, le monde va de lui même!" ('Let do and let pass, the world
goes on by itself!'). Although Gournay left no written tracts on his
economic policy ideas, he had immense personal influence on the
thinking of his contemporaries, notably the physiocrats, who credit
both the 'laissez-faire' slogan and doctrine to Gournay.[3]

Prior to Gournay, P.S. de Boisguilbert, had enunciated the phrase "on
laisse faire la nature" ('let nature run its course').[4] Laissez-
faire was one of a number of French "free trade" and "non-
interference" slogans coined in the seventeenth century. D'Argenson,
during this time, was better known for the similar but less-celebrated
motto "Pas trop gouverner" ("Govern not too much").[5]

The first known English-language use of "laissez faire" was in 1774,
by George Whatley, in the book Principles of Trade, which was co-
authored with Benjamin Franklin. Notably, classical economists, such
as Thomas Malthus, Adam Smith[6] and David Ricardo, did not use the
term. Jeremy Bentham used the term, but only with the advent of the
Anti-Corn Law League did the term receive much of its (English)
meaning.[7] Nonetheless, it was probably James Mill's reference to the
"laissez-faire" maxim (together with "pas trop gouverner") in an 1824
entry for Encyclopedia Britannica that really brought the term into
wider English usage.

Adam Smith first used the metaphor of an "invisible hand" in his book
The Theory of Moral Sentiments to describe the unintentional effects
of economic self organization from economic self interest.[8] Some
have characterized this metaphor as one for laissez-faire,[9] but
Smith himself never used the term laissez-faire, and likely intended
something somewhat different.[6]

History of laissez-faire debate


During the Han, Tang, Song, and Ming dynasties, Chinese scholar-
officials would often debate about the interference the government
should have in the economy, such as setting monopolies in lucrative
industries and instating price controls. Such debates were often
heated. During the Han and Tang, emperors sometimes instated
government monopolies in times of war, and abolished them later when
the fiscal crisis had passed. Eventually, in the later Song and Ming
dynasties, state monopolies were abolished in every industry and were
never reinstated during the length of that dynasty. During the dynasty
of Qing, founded by an ethnic group in northern China, state
monopolies were reinstated.[10]


In Britain, in 1843, the newspaper The Economist was founded, and
became an influential voice for laissez-faire capitalism.[11] In
response to the Irish famine of 1846-1849, in which a million and a
half people died of starvation, they argued that for the government to
supply free food for the Irish would violate natural law. Clarendon,
the Lord Lieutenant of Ireland, wrote, "I don't think there is another
legislature in Europe that would disregard such suffering."[12] The
group calling itself the Manchester Liberals, to which Richard Cobden
and Richard Wright belonged, were staunch defenders of free trade, and
their work was carried on, after the death of Richard Cobden in 1866,
by the The Cobden Club.[13] In 1867, a free trade treaty was signed
between Britain and France, after which several of these treaties were
signed among other European countries.

British laissez-faire was not absolute. The United Kingdom company law,
[14] the Limited Liability Act 1855, and the Joint Stock Companies Act
1856 were exceptions.

Austrian scholars consider that laissez-faire was never the main
doctrine of any nation, and at the end of the 19th century, European
countries would find themselves taking up economic protectionism and
interventionism again. France for example, started cancelling its free
trade agreements with other European countries in 1890. Germany's
protectionism started (again) with a December 1878 letter from
Bismarck, resulting in the iron and rye tariff of 1879.

United States

The Federal reserve, headquarters in Eccles Building is criticized by
laissez-faireists as the cause of business cycles.Although the period
before the New Deal was notable for the limited extent of the federal
government, the Austrian School suggest that there was a considerable
degree of government intervention in the economy—particularly after
the 1860s. Notable examples of government intervention in the period
prior to the Civil War include the establishment of the First Bank of
the United States and Second Bank of the United States as well as
various protectionist measures (e.g., the tariff of 1828). Several of
these proposals met with serious opposition, and required a great deal
of horse trading to be enacted into law. For instance, the First
National Bank would not have reached the desk of President George
Washington in the absence of an agreement that was reached between
Alexander Hamilton and several southern members of Congress to locate
the capital in the District of Columbia. In contrast to Hamilton and
the Federalists was the opposing political party the Democratic-

Most of the early opponents of laissez-faire capitalism in the United
States subscribed to the American School (economics). This school of
thought was inspired by the ideas of Alexander Hamilton, who proposed
the creation of a government sponsored bank and increased tariffs to
favor northern industrial interests. Following Hamilton's death, the
more abiding protectionist influence in the antebellum period came
from Henry Clay and his American System.

In the mid-19th century, the United States followed the Whig tradition
of economic liberalism, which included increased state control,
regulation and macroeconomic development of infrastructure.[15] Public
works such as the provision and regulation transportation such as
railroads took effect. The Pacific Railway Acts provided the
development of the First Transcontinental Railroad.[15] In order to
help pay for its war effort in the American Civil War, the United
States government imposed its first personal income tax, on August 5,
1861, as part of the Revenue Act of 1861 (3% of all incomes over US
$800; rescinded in 1872).

Following the Civil War, the movement towards a mixed economy
accelerated with even more protectionism and government regulation. In
the 1880s and 1890s, significant tariff increases were enacted (see
the McKinley Tariff and Dingley Tariff). Moreover, with the enactment
of the Interstate Commerce Act of 1887, the Sherman Anti-trust Act,
the federal government began to assume an increasing role in
regulating and directing the country's economy.

The Progressive Era saw the enactment of even more controls on the
economy, as evidenced by the Wilson Administration's New Freedom

Following World War I and the Great Depression, Keynesian policies
turned the state into a mixed economy. The United States, in the
1980s, for example, sought to protect its automobile industry by
"voluntary" export restrictions from Japan.[16] Pietro S. Nivola wrote
in 1986:

“ By and large, the comparative strength of the dollar against major
foreign currencies has reflected high U.S. interest rates driven by
huge federal budget deficits. Hence, the source of much of the current
deterioration of trade is not the general state of the economy, but
rather the government's mix of fiscal and monetary policies– that is,
the problematic juxtaposition of bold tax reductions, relatively tight
monetary targets, generous military outlays, and only modest cuts in
major entitlement programs. Put simply, the roots of the trade problem
and of the resurgent protectionism it has fomented are fundamentally
political as well as economic.[17] ”

Ayn Rand, the author of Atlas Shrugged, which has been ranked by
Reader's Digest as the most influential book in America following the
Bible, was a self-identified radical for a "full, pure, uncontrolled,
unregulated laissez-faire capitalism—-with a separation of state and
economics, in the same way and for the same reasons as the separation
of state and church".

See also

Look up laissez faire in Wiktionary, the free dictionary.

Capitalism: The Unknown Ideal by Ayn Rand
Classical liberalism
Criticisms of capitalism
Economic liberalism
Free market
Market anarchism
Market fundamentalism


↑ From d'Argenson's 1736 Memoires (publ.1858), as quoted in J.M.
Keynes, 1927, "The End of Laissez Faire". A. Oncken (Die Maxime
Laissez faire et laissez passer, ihr Ursprung, ihr Werden, 1866)
indicates d'Argenson used the 'laissez-faire' term firstly in his 1736
Memoires and then in an article in the 1751 Journal Oeconomique (the
term's first known appearance in print).

↑ The anecdote on Le Gendre is briefly referenced in J. Turgot's
"Eloge de Vincent de Gournay," Mercure, August, 1759).

↑ Gournay was credited with the phrase by Jacques Turgot, the Marquis
de Mirabeau, the Comte d'Albon and DuPont de Nemours among others. J.
Turgot, op cit. V.R. Marquis Mirabeau, in Philosophie rurale 1763 and
Ephémérides du Citoyen, 1767. C.C. Comte d'Albon,"Éloge Historique de
M. Quesnay", Nouvelles Ephémérides Économiques, May, 1775, p.136-7.
P.S.DuPont de Nemours, in Ouevres de Jacques Turgot, 1808-11, Vol. I,
p.257 and p.259 (Daire ed.)

↑ "Tant, encore une fois, qu'on laisse faire la nature, on ne doit
rien craindre de pareil", P.S. de Boisguilbert, 1707, Dissertation de
la nature des richesses, de l'argent et des tributs.

↑ DuPont de Nemours, op cit, p.258. Oncken (op.cit) and Keynes
(op.cit.) also credit the Marquis d'Argenson with the phrase "Pour
gouverner mieux, il faudrait gouverner moins" ('"To govern better, one
needs to govern less"), possibly the source of the famous "That
government is best which governs least" motto popular in American
circles, attributed variously to Thomas Paine, Thomas Jefferson and
Henry Thoreau.

↑ 6.0 6.1 Roy C. Smith, Adam Smith and the Origins of American
Enterprise: How the Founding Fathers Turned to a Great Economist's
Writings and Created the American Economy, Macmillan, 2004, ISBN
0312325762, p. 13-14.

↑ Abbott P. Usher et al. (1931). [Expression error: Missing operand
for > "Economic History—The Decline of Laissez Faire"]. American
Economic Review 22 (1, Supplement): 3–10.

↑ Andres Marroquin, Invisible Hand: The Wealth of Adam Smith, The
Minerva Group, Inc., 2002, ISBN 1410202887, page 123.

↑ The mathematical century: the 30 greatest problems of the last 100
years (2006) Piergiorgio Odifreddi, Arturo Sangalli, Freeman J Dyson,
p. 122

↑ Li Bo and Zheng Yin, 5000 years of Chinese history, Inner Mongolian
People's publishing corp , ISBN 7-204-04420-7, 2001

↑ Scott Gordon (1955). [Expression error: Missing operand for > "The
London Economist and the High Tide of Laissez Faire"]. Journal of
Political Economy 63 (6): 461–488. doi:10.1086/257722.

↑ James L. Richardson, Contending Liberalisms in World Politics, 2001,
Lynne Rienner Publishers, ISBN 1555879152

↑ Antonia Taddei (1999). "London Clubs in the Late Nineteenth
Century" (PDF).


Retrieved 2008-12-30.

↑ Walker, S.P. (1996). [Expression error: Missing operand for >
"Laissez-faire, Collectivism And Companies Legislation In Nineteenth-
century Britain"]. The British Accounting Review (Elsevier) 28 (4):
305–324. doi:10.1006/bare.1996.0021.

↑ 15.0 15.1 Guelzo, Allen C. (1999), Abraham Lincoln: Redeemer
President, Grand Rapids, Mich.: W.B. Eerdmans Pub. Co, ISBN
0-8028-3872-3, http://www.questia.com/PM.qst?a=o&d=99466893

↑ Robert W. Crandall (1987). [Expression error: Missing operand for >
"The Effects of U.S. Trade Protection for Autos and Steel"]. Brookings
Papers on Economic Activity 1987 (1): 271–288. doi:10.2307/2534518.

↑ Pietro S. Nivola (1986). [Expression error: Missing operand for >
"The New Protectionism: U.S. Trade Policy in Historical Perspective"].
Political Science Quarterly 101 (4): 577–600. doi:10.2307/2150795.


Brebner, John Bartlet (1948). [Expression error: Missing operand for >
"Laissez Faire and State Intervention in Nineteenth-Century Britain"].
Journal of Economic History 8: 59–73.

Fisher, Irving (January 1907). [Expression error: Missing operand for
"Why has the Doctrine of Laissez Faire been Abandoned?"]. Science 25
(627): 18–27. doi:10.1126/science.25.627.18. PMID 17739703.

Taussig, Frank W. (1904). [Expression error: Missing operand for >
"The Present Position of the Doctrine of Free Trade"]. Publications of
the American Economic Association 6 (1): 29–65.

Further reading

Listen to this article (info/dl)

This audio file was created from a revision dated 2008-06-27, and does
not reflect subsequent edits to the article. (Audio help)

More spoken articles

Wu-Wei in Europe. A Study of Eurasian Economic ThoughtPDF (773 KB) by
Christian Gerlach, London School of Economics – March 2005

John Maynard Keynes, The end of laissez-faire (1926)

Working with Market Conditions to Increase Profits

Is this the End of Laissez-Faire Capitalism ? by Joseph Lazzaro, Daily
Finance, March 4 2009

le Laissez-Faire is Over A socio-economics blog: a provocative and
well documented view on a few externalities and a fairly shaky
invisible hand.


...and I am Sid Harth
2010-02-25 18:52:28 UTC
Reference »
Wikipedia Articles
Industrial Revolution

In this article: Locations Images From the web: Images Videos
Industrial Revolution

A Watt steam engine, the steam engine fuelled primarily by coal that
propelled the Industrial Revolution in Great Britain and the world.
[1]The Industrial Revolution was a period from the 18th to the 19th
century where major changes in agriculture, manufacturing, mining, and
transport had a profound effect on the socioeconomic and cultural
conditions starting in the United Kingdom, then subsequently spreading
throughout Europe, North America, and eventually the world. The onset
of the Industrial Revolution marked a major turning point in human
history; almost every aspect of daily life was eventually influenced
in some way.

Starting in the later part of the 18th century there began a
transition in parts of Great Britain's previously manual labour and
draft-animal–based economy towards machine-based manufacturing. It
started with the mechanisation of the textile industries, the
development of iron-making techniques and the increased use of refined
coal.[2] Trade expansion was enabled by the introduction of canals,
improved roads and railways. The introduction of steam power fuelled
primarily by coal, wider utilisation of water wheels and powered
machinery (mainly in textile manufacturing) underpinned the dramatic
increases in production capacity.[3] The development of all-metal
machine tools in the first two decades of the 19th century facilitated
the manufacture of more production machines for manufacturing in other
industries. The effects spread throughout Western Europe and North
America during the 19th century, eventually affecting most of the
world, a process that continues as industrialisation. The impact of
this change on society was enormous.[4]

The first Industrial Revolution, which began in the 18th century,
merged into the Second Industrial Revolution around 1850, when
technological and economic progress gained momentum with the
development of steam-powered ships, railways, and later in the 19th
century with the internal combustion engine and electrical power
generation. The period of time covered by the Industrial Revolution
varies with different historians. Eric Hobsbawm held that it 'broke
out' in Britain in the 1780s and was not fully felt until the 1830s or
1840s,[5] while T. S. Ashton held that it occurred roughly between
1760 and 1830.[6] Some twentieth century historians such as John
Clapham and Nicholas Crafts have argued that the process of economic
and social change took place gradually and the term revolution is not
a true description of what took place. This is still a subject of
debate among historians.[7][8] GDP per capita was broadly stable
before the Industrial Revolution and the emergence of the modern
capitalist economy.[9] The Industrial Revolution began an era of per-
capita economic growth in capitalist economies.[10] Historians agree
that the Industrial Revolution was one of the most important events in

Name history

Credit for popularising the term may be given to Arnold Toynbee, whose
lectures given in 1881 gave a detailed account of it.

The earliest use of the term "Industrial Revolution" yet located,
according to historian David Landes, was a letter of 6 July 1799 by
French envoy Louis-Guillaume Otto [3]. The term Industrial Revolution
applied to technological change was becoming more common by the late
1830s, as in Louis-Auguste Blanqui description in 1837 of la
révolution industrielle. Friedrich Engels in The Condition of the
Working Class in England in 1844 spoke of "an industrial revolution, a
revolution which at the same time changed the whole of civil society."
In his book Keywords: A Vocabulary of Culture and Society, Raymond
Williams states in the entry for Industry: The idea of a new social
order based on major industrial change was clear in Southey and Owen,
between 1811 and 1818, and was implicit as early as Blake in the early
1790s and Wordsworth at the turn of the century.


Regional GDP per capita changed very little for most of human history
before the Industrial Revolution. (The empty areas mean no data, not
very low levels. There is data for the years 1, 1000, 1500, 1600,
1700, 1820, 1900, and 2003)The causes of the Industrial Revolution
were complicated and remain a topic for debate, with some historians
believing the Revolution was an outgrowth of social and institutional
changes brought by the end of feudalism in Britain after the English
Civil War in the 17th century. As national border controls became more
effective, the spread of disease was lessened, thereby preventing the
epidemics common in previous times.[12] The percentage of children who
lived past infancy rose significantly, leading to a larger workforce.
The Enclosure movement and the British Agricultural Revolution made
food production more efficient and less labour-intensive, forcing the
surplus population who could no longer find employment in agriculture
into cottage industry, for example weaving, and in the longer term
into the cities and the newly developed factories.[13] The colonial
expansion of the 17th century with the accompanying development of
international trade, creation of financial markets and accumulation of
capital are also cited as factors, as is the scientific revolution of
the 17th century.[14]

Until the 1980s, it was universally believed by academic historians
that technological innovation was the heart of the Industrial
Revolution and the key enabling technology was the invention and
improvement of the steam engine.[15] However, recent research into the
Marketing Era has challenged the traditional, supply-oriented
interpretation of the Industrial Revolution.[16]

Lewis Mumford has proposed that the Industrial Revolution had its
origins in the Early Middle Ages, much earlier than most estimates.
[17] He explains that the model for standardised mass production was
the printing press and that "the archetypal model for the industrial
era was the clock". He also cites the monastic emphasis on order and
time-keeping, as well as the fact that medieval cities had at their
centre a church with bell ringing at regular intervals as being
necessary precursors to a greater synchronisation necessary for later,
more physical, manifestations such as the steam engine.

The presence of a large domestic market should also be considered an
important driver of the Industrial Revolution, particularly explaining
why it occurred in Britain. In other nations, such as France, markets
were split up by local regions, which often imposed tolls and tariffs
on goods traded amongst them.[18]

Governments' grant of limited monopolies to inventors under a
developing patent system (the Statute of Monopolies 1623) is
considered an influential factor. The effects of patents, both good
and ill, on the development of industrialisation are clearly
illustrated in the history of the steam engine, the key enabling
technology. In return for publicly revealing the workings of an
invention the patent system rewarded inventors such as James Watt by
allowing them to monopolise the production of the first steam engines,
thereby rewarding inventors and increasing the pace of technological
development. However monopolies bring with them their own
inefficiencies which may counterbalance, or even overbalance, the
beneficial effects of publicising ingenuity and rewarding inventors.
[19] Watt's monopoly may have prevented other inventors, such as
Richard Trevithick, William Murdoch or Jonathan Hornblower, from
introducing improved steam engines, thereby retarding the industrial
revolution by about 16 years.[20]

Causes for occurrence in Europe

A 1623 Dutch East India Company bond.

European 17th century colonial expansion, international trade, and
creation of financial markets produced a new legal and financial
environment, one which supported and enabled 18th century industrial
growth.One question of active interest to historians is why the
industrial revolution occurred in Europe and not in other parts of the
world in the 18th century, particularly China, India, and the Middle
East, or at other times like in Classical Antiquity[21] or the Middle
Ages.[22] Numerous factors have been suggested, including education,
technological changes[23] (see Scientific Revolution in Europe),
"modern" government, "modern" work attitudes, ecology, and culture.
[24] The Age of Enlightenment not only meant a larger educated
population but also more modern views on work. However, most
historians contest the assertion that Europe and China were roughly
equal because modern estimates of per capita income on Western Europe
in the late 18th century are of roughly 1,500 dollars in purchasing
power parity (and Britain had a per capita income of nearly 2,000
dollars[25]) whereas China, by comparison, had only 450 dollars. Also,
the average interest rate was about 5% in Britain and over 30% in
China, which illustrates how capital was much more abundant in Britain.
[citation needed]

Some historians such as David Landes[26] and Max Weber credit the
different belief systems in China and Europe with dictating where the
revolution occurred. The religion and beliefs of Europe were largely
products of Judaeo-Christianity, and Greek thought. Conversely,
Chinese society was founded on men like Confucius, Mencius, Han Feizi
(Legalism), Lao Tzu (Taoism), and Buddha (Buddhism). Whereas the
Europeans believed that the universe was governed by rational and
eternal laws, the East believed that the universe was in constant flux
and, for Buddhists and Taoists, not capable of being rationally
understood.[citation needed] Other factors include the fact that the
coal deposits in China, although very large, were found a considerable
distance from the cities; but the yellow river that connects these
deposits to the sea were not navigable by cargo vessels.[27]

Regarding India, the Marxist historian Rajani Palme Dutt said: "The
capital to finance the Industrial Revolution in India instead went
into financing the Industrial Revolution in England."[28] In contrast
to China, India was split up into many competing kingdoms, with the
three major ones being the Marathas, Sikhs and the Mughals. In
addition, the economy was highly dependent on two sectors—agriculture
of subsistence and cotton, and there appears to have been little
technical innovation. It is believed that the vast amounts of wealth
were largely stored away in palace treasuries by totalitarian monarchs
prior to the British take over. Absolutist dynasties in China, India,
and the Middle East failed to encourage manufacturing and exports, and
expressed little interest in the well-being of their subjects.[29]

Causes for occurrence in Britain

As the Industrial Revolution developed British manufactured output
surged ahead of other economiesThe debate about the start of the
Industrial Revolution also concerns the massive lead that Great
Britain had over other countries. Some have stressed the importance of
natural or financial resources that Britain received from its many
overseas colonies or that profits from the British slave trade between
Africa and the Caribbean helped fuel industrial investment. It has
been pointed out, however, that slave trade and West Indian
plantations provided only 5% of the British national income during the
years of the Industrial Revolution.[30]

Alternatively, the greater liberalisation of trade from a large
merchant base may have allowed Britain to produce and use emerging
scientific and technological developments more effectively than
countries with stronger monarchies, particularly China and Russia.
Britain emerged from the Napoleonic Wars as the only European nation
not ravaged by financial plunder and economic collapse, and possessing
the only merchant fleet of any useful size (European merchant fleets
having been destroyed during the war by the Royal Navy[31]). Britain's
extensive exporting cottage industries also ensured markets were
already available for many early forms of manufactured goods. The
conflict resulted in most British warfare being conducted overseas,
reducing the devastating effects of territorial conquest that affected
much of Europe. This was further aided by Britain's geographical
position—an island separated from the rest of mainland Europe.

Another theory is that Britain was able to succeed in the Industrial
Revolution due to the availability of key resources it possessed. It
had a dense population for its small geographical size. Enclosure of
common land and the related agricultural revolution made a supply of
this labour readily available. There was also a local coincidence of
natural resources in the North of England, the English Midlands, South
Wales and the Scottish Lowlands. Local supplies of coal, iron, lead,
copper, tin, limestone and water power, resulted in excellent
conditions for the development and expansion of industry. Also, the
damp, mild weather conditions of the North West of England provided
ideal conditions for the spinning of cotton, providing a natural
starting point for the birth of the textiles industry.

The stable political situation in Britain from around 1688, and
British society's greater receptiveness to change (compared with other
European countries) can also be said to be factors favouring the
Industrial Revolution. In large part due to the Enclosure movement,
the peasantry was destroyed as a significant source of resistance to
industrialisation, and the landed upper classes developed commercial
interests that made them pioneers in removing obstacles to the growth
of capitalism.[32] (This point is also made in Hilaire Belloc's The
Servile State.)

Protestant work ethic
Main article: Protestant work ethic
Another theory is that the British advance was due to the presence of
an entrepreneurial class which believed in progress, technology and
hard work.[33] The existence of this class is often linked to the
Protestant work ethic (see Max Weber) and the particular status of the
Baptists and the dissenting Protestant sects, such as the Quakers and
Presbyterians that had flourished with the English Civil War.
Reinforcement of confidence in the rule of law, which followed
establishment of the prototype of constitutional monarchy in Britain
in the Glorious Revolution of 1688, and the emergence of a stable
financial market there based on the management of the national debt by
the Bank of England, contributed to the capacity for, and interest in,
private financial investment in industrial ventures.

Dissenters found themselves barred or discouraged from almost all
public offices, as well as education at England's only two
universities at the time (although dissenters were still free to study
at Scotland's four universities). When the restoration of the monarchy
took place and membership in the official Anglican Church became
mandatory due to the Test Act, they thereupon became active in
banking, manufacturing and education. The Unitarians, in particular,
were very involved in education, by running Dissenting Academies,
where, in contrast to the universities of Oxford and Cambridge and
schools such as Eton and Harrow, much attention was given to
mathematics and the sciences—areas of scholarship vital to the
development of manufacturing technologies.

Historians sometimes consider this social factor to be extremely
important, along with the nature of the national economies involved.
While members of these sects were excluded from certain circles of the
government, they were considered fellow Protestants, to a limited
extent, by many in the middle class, such as traditional financiers or
other businessmen. Given this relative tolerance and the supply of
capital, the natural outlet for the more enterprising members of these
sects would be to seek new opportunities in the technologies created
in the wake of the scientific revolution of the 17th century.


The only surviving example of a Spinning Mule built by the inventor
Samuel CromptonThe commencement of the Industrial Revolution is
closely linked to a small number of innovations,[34] made in the
second half of the 18th century:

Textiles – Cotton spinning using Richard Arkwright's water frame,
James Hargreaves's Spinning Jenny, and Samuel Crompton's Spinning Mule
(a combination of the Spinning Jenny and the Water Frame). This was
patented in 1769 and so came out of patent in 1783. The end of the
patent was rapidly followed by the erection of many cotton mills.
Similar technology was subsequently applied to spinning worsted yarn
for various textiles and flax for linen.
Steam power – The improved steam engine invented by James Watt was
initially mainly used for pumping out mines, but from the 1780s was
applied to power machines. This enabled rapid development of efficient
semi-automated factories on a previously unimaginable scale in places
where waterpower was not available.

Iron founding – In the Iron industry, coke was finally applied to all
stages of iron smelting, replacing charcoal. This had been achieved
much earlier for lead and copper as well as for producing pig iron in
a blast furnace, but the second stage in the production of bar iron
depended on the use of potting and stamping (for which a patent
expired in 1786) or puddling (patented by Henry Cort in 1783 and
These represent three 'leading sectors', in which there were key
innovations, which allowed the economic take off by which the
Industrial Revolution is usually defined. This is not to belittle many
other inventions, particularly in the textile industry. Without some
earlier ones, such as the spinning jenny and flying shuttle in the
textile industry and the smelting of pig iron with coke, these
achievements might have been impossible. Later inventions such as the
power loom and Richard Trevithick's high pressure steam engine were
also important in the growing industrialisation of Britain. The
application of steam engines to powering cotton mills and ironworks
enabled these to be built in places that were most convenient because
other resources were available, rather than where there was water to
power a watermill.

In the textile sector, such mills became the model for the
organisation of human labour in factories, epitomised by Cottonopolis,
the name given to the vast collection of cotton mills, factories and
administration offices based in Manchester. The assembly line system
greatly improved efficiency, both in this and other industries. With a
series of men trained to do a single task on a product, then having it
moved along to the next worker, the number of finished goods also rose

Also important was the 1756 rediscovery of concrete (based on
hydraulic lime mortar) by the British engineer John Smeaton, which had
been lost for 13 centuries.[35]

Transfer of knowledge

A Philosopher Lecturing on the Orrery (ca. 1766)
Informal philosophical societies spread scientific advancesKnowledge
of new innovation was spread by several means. Workers who were
trained in the technique might move to another employer or might be
poached. A common method was for someone to make a study tour,
gathering information where he could. During the whole of the
Industrial Revolution and for the century before, all European
countries and America engaged in study-touring; some nations, like
Sweden and France, even trained civil servants or technicians to
undertake it as a matter of state policy. In other countries, notably
Britain and America, this practice was carried out by individual
manufacturers anxious to improve their own methods. Study tours were
common then, as now, as was the keeping of travel diaries. Records
made by industrialists and technicians of the period are an
incomparable source of information about their methods.

Another means for the spread of innovation was by the network of
informal philosophical societies, like the Lunar Society of
Birmingham, in which members met to discuss 'natural philosophy' (i.e.
science) and often its application to manufacturing. The Lunar Society
flourished from 1765 to 1809, and it has been said of them, "They
were, if you like, the revolutionary committee of that most far
reaching of all the eighteenth century revolutions, the Industrial
Revolution".[36] Other such societies published volumes of proceedings
and transactions. For example, the London-based Royal Society of Arts
published an illustrated volume of new inventions, as well as papers
about them in its annual Transactions.

There were publications describing technology. Encyclopaedias such as
Harris's Lexicon Technicum (1704) and Dr Abraham Rees's Cyclopaedia
(1802–1819) contain much of value. Cyclopaedia contains an enormous
amount of information about the science and technology of the first
half of the Industrial Revolution, very well illustrated by fine
engravings. Foreign printed sources such as the Descriptions des Arts
et Métiers and Diderot's Encyclopédie explained foreign methods with
fine engraved plates.

Periodical publications about manufacturing and technology began to
appear in the last decade of the 18th century, and many regularly
included notice of the latest patents. Foreign periodicals, such as
the Annales des Mines, published accounts of travels made by French
engineers who observed British methods on study tours.

Technological developments in Britain

Textile manufacture

Main article: Textile manufacture during the Industrial Revolution

Model of the spinning jenny in a museum in Wuppertal, Germany. The
spinning jenny was one of the innovations that started the
revolutionIn the early 18th century, British textile manufacture was
based on wool which was processed by individual artisans, doing the
spinning and weaving on their own premises. This system is called a
cottage industry. Flax and cotton were also used for fine materials,
but the processing was difficult because of the pre-processing needed,
and thus goods in these materials made only a small proportion of the

Use of the spinning wheel and hand loom restricted the production
capacity of the industry, but incremental advances increased
productivity to the extent that manufactured cotton goods became the
dominant British export by the early decades of the 19th century.
India was displaced as the premier supplier of cotton goods.

Lewis Paul patented the Roller Spinning machine and the flyer-and-
bobbin system for drawing wool to a more even thickness, developed
with the help of John Wyatt in Birmingham. Paul and Wyatt opened a
mill in Birmingham which used their new rolling machine powered by a
donkey. In 1743, a factory was opened in Northampton with fifty
spindles on each of five of Paul and Wyatt's machines. This operated
until about 1764. A similar mill was built by Daniel Bourn in
Leominster, but this burnt down. Both Lewis Paul and Daniel Bourn
patented carding machines in 1748. Using two sets of rollers that
travelled at different speeds, it was later used in the first cotton
spinning mill. Lewis's invention was later developed and improved by
Richard Arkwright in his water frame and Samuel Crompton in his
spinning mule.

Other inventors increased the efficiency of the individual steps of
spinning (carding, twisting and spinning, and rolling) so that the
supply of yarn increased greatly, which fed a weaving industry that
was advancing with improvements to shuttles and the loom or 'frame'.
The output of an individual labourer increased dramatically, with the
effect that the new machines were seen as a threat to employment, and
early innovators were attacked and their inventions destroyed.

To capitalise upon these advances, it took a class of entrepreneurs,
of which the most famous is Richard Arkwright. He is credited with a
list of inventions, but these were actually developed by people such
as Thomas Highs and John Kay; Arkwright nurtured the inventors,
patented the ideas, financed the initiatives, and protected the
machines. He created the cotton mill which brought the production
processes together in a factory, and he developed the use of power—
first horse power and then water power—which made cotton manufacture a
mechanised industry. Before long steam power was applied to drive
textile machinery.


Coalbrookdale by Night, 1801, Philipp Jakob Loutherbourg the Younger
Blast furnaces light the iron making town of Coalbrookdale

The Reverberatory Furnace could produce wrought iron using mined coal.
The burning coal remained separate from the iron ore and so did not
contaminate the iron with impurities like sulphur. This opened the way
to increased iron production.The major change in the metal industries
during the era of the Industrial Revolution was the replacement of
organic fuels based on wood with fossil fuel based on coal. Much of
this happened somewhat before the Industrial Revolution, based on
innovations by Sir Clement Clerke and others from 1678, using coal
reverberatory furnaces known as cupolas. These were operated by the
flames, which contained carbon monoxide, playing on the ore and
reducing the oxide to metal. This has the advantage that impurities
(such as sulphur) in the coal do not migrate into the metal. This
technology was applied to lead from 1678 and to copper from 1687. It
was also applied to iron foundry work in the 1690s, but in this case
the reverberatory furnace was known as an air furnace. The foundry
cupola is a different (and later) innovation.

This was followed by Abraham Darby, who made great strides using coke
to fuel his blast furnaces at Coalbrookdale in 1709. However, the coke
pig iron he made was used mostly for the production of cast iron goods
such as pots and kettles. He had the advantage over his rivals in that
his pots, cast by his patented process, were thinner and cheaper than
theirs. Coke pig iron was hardly used to produce bar iron in forges
until the mid 1750s, when his son Abraham Darby II built Horsehay and
Ketley furnaces (not far from Coalbrookdale). By then, coke pig iron
was cheaper than charcoal pig iron.

Bar iron for smiths to forge into consumer goods was still made in
finery forges, as it long had been. However, new processes were
adopted in the ensuing years. The first is referred to today as
potting and stamping, but this was superseded by Henry Cort's puddling
process. From 1785, perhaps because the improved version of potting
and stamping was about to come out of patent, a great expansion in the
output of the British iron industry began. The new processes did not
depend on the use of charcoal at all and were therefore not limited by
charcoal sources.

Up to that time, British iron manufacturers had used considerable
amounts of imported iron to supplement native supplies. This came
principally from Sweden from the mid 17th century and later also from
Russia from the end of the 1720s. However, from 1785, imports
decreased because of the new iron making technology, and Britain
became an exporter of bar iron as well as manufactured wrought iron
consumer goods.

Since iron was becoming cheaper and more plentiful, it also became a
major structural material following the building of the innovative The
Iron Bridge in 1778 by Abraham Darby III.

The Iron Bridge, Shropshire, EnglandAn improvement was made in the
production of steel, which was an expensive commodity and used only
where iron would not do, such as for the cutting edge of tools and for
springs. Benjamin Huntsman developed his crucible steel technique in
the 1740s. The raw material for this was blister steel, made by the
cementation process.

The supply of cheaper iron and steel aided the development of boilers
and steam engines, and eventually railways. Improvements in machine
tools allowed better working of iron and steel and further boosted the
industrial growth of Britain.


Men working their own coal mines. Early 1900s, USACoal mining in
Britain, particularly in South Wales started early. Before the steam
engine, pits were often shallow bell pits following a seam of coal
along the surface, which were abandoned as the coal was extracted. In
other cases, if the geology was favourable, the coal was mined by
means of an adit or drift mine driven into the side of a hill. Shaft
mining was done in some areas, but the limiting factor was the problem
of removing water. It could be done by hauling buckets of water up the
shaft or to a sough (a tunnel driven into a hill to drain a mine). In
either case, the water had to be discharged into a stream or ditch at
a level where it could flow away by gravity. The introduction of the
steam engine greatly facilitated the removal of water and enabled
shafts to be made deeper, enabling more coal to be extracted. These
were developments that had begun before the Industrial Revolution, but
the adoption of James Watt's more efficient steam engine from the
1770s reduced the fuel costs of engines, making mines more profitable.
Coal mining was very dangerous owing to the presence of firedamp in
many coal seams. Some degree of safety was provided by the safety lamp
which was invented in 1816 by Sir Humphry Davy and independently by
George Stephenson. However, the lamps proved a false dawn because they
became unsafe very quickly and provided a weak light. Firedamp
explosions continued, often setting off coal dust explosions, so
casualties grew during the entire nineteenth century. Conditions of
work were very poor, with a high casualty rate from rock falls.

Steam power

Main article: Steam power during the Industrial Revolution

The 1698 Savery Engine – the world's first engine built by Thomas
Savery as based on the designs of Denis Papin.The development of the
stationary steam engine was an essential early element of the
Industrial Revolution; however, for most of the period of the
Industrial Revolution, the majority of industries still relied on wind
and water power as well as horse and man-power for driving small

The first real attempt at industrial use of steam power was due to
Thomas Savery in 1698. He constructed and patented in London a low-
lift combined vacuum and pressure water pump, that generated about one
horsepower (hp) and was used as in numerous water works and tried in a
few mines (hence its "brand name", The miner's Friend), but it was not
a success since it was limited in pumping height and prone to boiler

Newcomen's steam powered atmospheric engine was the first practical
engine. Subsequent steam engines were to power the Industrial
RevolutionThe first safe and successful steam power plant was
introduced by Thomas Newcomen before 1712. Newcomen apparently
conceived the Newcomen steam engine quite independently of Savery, but
as the latter had taken out a very wide-ranging patent, Newcomen and
his associates were obliged to come to an arrangement with him,
marketing the engine until 1733 under a joint patent.[37][38]
Newcomen's engine appears to have been based on Papin's experiments
carried out 30 years earlier, and employed a piston and cylinder, one
end of which was open to the atmosphere above the piston. Steam just
above atmospheric pressure (all that the boiler could stand) was
introduced into the lower half of the cylinder beneath the piston
during the gravity-induced upstroke; the steam was then condensed by a
jet of cold water injected into the steam space to produce a partial
vacuum; the pressure differential between the atmosphere and the
vacuum on either side of the piston displaced it downwards into the
cylinder, raising the opposite end of a rocking beam to which was
attached a gang of gravity-actuated reciprocating force pumps housed
in the mineshaft. The engine's downward power stroke raised the pump,
priming it and preparing the pumping stroke. At first the phases were
controlled by hand, but within ten years an escapement mechanism had
been devised worked by a vertical plug tree suspended from the rocking
beam which rendered the engine self-acting.

A number of Newcomen engines were successfully put to use in Britain
for draining hitherto unworkable deep mines, with the engine on the
surface; these were large machines, requiring a lot of capital to
build, and produced about 5 hp (3.7 kW). They were extremely
inefficient by modern standards, but when located where coal was cheap
at pit heads, opened up a great expansion in coal mining by allowing
mines to go deeper. Despite their disadvantages, Newcomen engines were
reliable and easy to maintain and continued to be used in the
coalfields until the early decades of the nineteenth century. By 1729,
when Newcomen died, his engines had spread (first) to Hungary in
1722 ,Germany, Austria, and Sweden. A total of 110 are known to have
been built by 1733 when the joint patent expired, of which 14 were
abroad. In the 1770s, the engineer John Smeaton built some very large
examples and introduced a number of improvements. A total of 1,454
engines had been built by 1800.[39]

James WattA fundamental change in working principles was brought about
by James Watt. In close collaboration with Matthew Boulton, he had
succeeded by 1778 in perfecting his steam engine, which incorporated a
series of radical improvements, notably the closing off of the upper
part of the cylinder thereby making the low pressure steam drive the
top of the piston instead of the atmosphere, use of a steam jacket and
the celebrated separate steam condenser chamber. All this meant that a
more constant temperature could be maintained in the cylinder and that
engine efficiency no longer varied according to atmospheric
conditions. These improvements increased engine efficiency by a factor
of about five, saving 75% on coal costs.

Nor could the atmospheric engine be easily adapted to drive a rotating
wheel, although Wasborough and Pickard did succeed in doing so towards
1780. However by 1783 the more economical Watt steam engine had been
fully developed into a double-acting rotative type, which meant that
it could be used to directly drive the rotary machinery of a factory
or mill. Both of Watt's basic engine types were commercially very
successful, and by 1800, the firm Boulton & Watt had constructed 496
engines, with 164 driving reciprocating pumps, 24 serving blast
furnaces, and 308 powering mill machinery; most of the engines
generated from 5 to 10 hp (7.5 kW).

The development of machine tools, such as the lathe, planing and
shaping machines powered by these engines, enabled all the metal parts
of the engines to be easily and accurately cut and in turn made it
possible to build larger and more powerful engines.

Until about 1800, the most common pattern of steam engine was the beam
engine, built as an integral part of a stone or brick engine-house,
but soon various patterns of self-contained portative engines (readily
removable, but not on wheels) were developed, such as the table
engine. Towards the turn of the 19th century, the Cornish engineer
Richard Trevithick, and the American, Oliver Evans began to construct
higher pressure non-condensing steam engines, exhausting against the
atmosphere. This allowed an engine and boiler to be combined into a
single unit compact enough to be used on mobile road and rail
locomotives and steam boats.

In the early 19th century after the expiration of Watt's patent, the
steam engine underwent many improvements by a host of inventors and


The Thames Tunnel (opened 1843)

Cement was used in the world's first underwater tunnelThe large scale
production of chemicals was an important development during the
Industrial Revolution. The first of these was the production of
sulphuric acid by the lead chamber process invented by the Englishman
John Roebuck (James Watt's first partner) in 1746. He was able to
greatly increase the scale of the manufacture by replacing the
relatively expensive glass vessels formerly used with larger, less
expensive chambers made of riveted sheets of lead. Instead of making a
small amount each time, he was able to make around 100 pounds (50 kg)
in each of the chambers, at least a tenfold increase.

The production of an alkali on a large scale became an important goal
as well, and Nicolas Leblanc succeeded in 1791 in introducing a method
for the production of sodium carbonate. The Leblanc process was a
reaction of sulphuric acid with sodium chloride to give sodium
sulphate and hydrochloric acid. The sodium sulphate was heated with
limestone (calcium carbonate) and coal to give a mixture of sodium
carbonate and calcium sulphide. Adding water separated the soluble
sodium carbonate from the calcium sulphide. The process produced a
large amount of pollution (the hydrochloric acid was initially vented
to the air, and calcium sulphide was a useless waste product).
Nonetheless, this synthetic soda ash proved economical compared to
that from burning specific plants (barilla) or from kelp, which were
the previously dominant sources of soda ash,[40] and also to potash
(potassium carbonate) derived from hardwood ashes.

These two chemicals were very important because they enabled the
introduction of a host of other inventions, replacing many small-scale
operations with more cost-effective and controllable processes. Sodium
carbonate had many uses in the glass, textile, soap, and paper
industries. Early uses for sulphuric acid included pickling (removing
rust) iron and steel, and for bleaching cloth.

The development of bleaching powder (calcium hypochlorite) by Scottish
chemist Charles Tennant in about 1800, based on the discoveries of
French chemist Claude Louis Berthollet, revolutionised the bleaching
processes in the textile industry by dramatically reducing the time
required (from months to days) for the traditional process then in
use, which required repeated exposure to the sun in bleach fields
after soaking the textiles with alkali or sour milk. Tennant's factory
at St Rollox, North Glasgow, became the largest chemical plant in the

In 1824 Joseph Aspdin, a British bricklayer turned builder, patented a
chemical process for making portland cement which was an important
advance in the building trades. This process involves sintering a
mixture of clay and limestone to about 1400 °C, then grinding it into
a fine powder which is then mixed with water, sand and gravel to
produce concrete. Portland cement was used by the famous English
engineer Marc Isambard Brunel several years later when constructing
the Thames Tunnel.[41] Cement was used on a large scale in the
construction of the London sewerage system a generation later.

Machine tools

Sir Joseph WhitworthThe Industrial Revolution could not have developed
without machine tools, for they enabled manufacturing machines to be
made. They have their origins in the tools developed in the 18th
century by makers of clocks and watches and scientific instrument
makers to enable them to batch-produce small mechanisms. The
mechanical parts of early textile machines were sometimes called
'clock work' because of the metal spindles and gears they
incorporated. The manufacture of textile machines drew craftsmen from
these trades and is the origin of the modern engineering industry.

Machines were built by various craftsmen—carpenters made wooden
framings, and smiths and turners made metal parts. A good example of
how machine tools changed manufacturing took place in Birmingham,
England, in 1830. The invention of a new machine by Joseph Gillott,
William Mitchell and James Stephen Perry allowed mass manufacture of
robust, cheap steel pen nibs; the process had been laborious and
expensive. Because of the difficulty of manipulating metal and the
lack of machine tools, the use of metal was kept to a minimum. Wood
framing had the disadvantage of changing dimensions with temperature
and humidity, and the various joints tended to rack (work loose) over
time. As the Industrial Revolution progressed, machines with metal
frames became more common, but they required machine tools to make
them economically. Before the advent of machine tools, metal was
worked manually using the basic hand tools of hammers, files,
scrapers, saws and chisels. Small metal parts were readily made by
this means, but for large machine parts, production was very laborious
and costly.

A lathe from 1911, a machine tool able to make other machinesApart
from workshop lathes used by craftsmen, the first large machine tool
was the cylinder boring machine used for boring the large-diameter
cylinders on early steam engines. The planing machine, the slotting
machine and the shaping machine were developed in the first decades of
the 19th century. Although the milling machine was invented at this
time, it was not developed as a serious workshop tool until during the
Second Industrial Revolution.

Military production had a hand in the development of machine tools.
Henry Maudslay, who trained a school of machine tool makers early in
the 19th century, was employed at the Royal Arsenal, Woolwich, as a
young man where he would have seen the large horse-driven wooden
machines for cannon boring made and worked by the Verbruggans. He
later worked for Joseph Bramah on the production of metal locks, and
soon after he began working on his own. He was engaged to build the
machinery for making ships' pulley blocks for the Royal Navy in the
Portsmouth Block Mills. These were all metal and were the first
machines for mass production and making components with a degree of
interchangeability. The lessons Maudslay learned about the need for
stability and precision he adapted to the development of machine
tools, and in his workshops he trained a generation of men to build on
his work, such as Richard Roberts, Joseph Clement and Joseph

James Fox of Derby had a healthy export trade in machine tools for the
first third of the century, as did Matthew Murray of Leeds. Roberts
was a maker of high-quality machine tools and a pioneer of the use of
jigs and gauges for precision workshop measurement.

Gas lighting

Main article: Gas lighting

Another major industry of the later Industrial Revolution was gas
lighting. Though others made a similar innovation elsewhere, the large
scale introduction of this was the work of William Murdoch, an
employee of Boulton and Watt, the Birmingham steam engine pioneers.
The process consisted of the large scale gasification of coal in
furnaces, the purification of the gas (removal of sulphur, ammonia,
and heavy hydrocarbons), and its storage and distribution. The first
gas lighting utilities were established in London between 1812-20.
They soon became one of the major consumers of coal in the UK. Gas
lighting had an impact on social and industrial organisation because
it allowed factories and stores to remain open longer than with tallow
candles or oil. Its introduction allowed night life to flourish in
cities and towns as interiors and streets could be lighted on a larger
scale than before.

Glass making

The Crystal Palace held the Great Exhibition of 1851A new method of
producing glass, known as the cylinder process, was developed in
Europe during the early 19th century. In 1832, this process was used
by the Chance Brothers to create sheet glass. They became the leading
producers of window and plate glass. This advancement allowed for
larger panes of glass to be created without interruption, thus freeing
up the space planning in interiors as well as the fenestration of
buildings. The Crystal Palace is the supreme example of the use of
sheet glass in a new and innovative structure.

Effects on agriculture

The invention of machinery played a big part in driving forward the
British Agricultural Revolution. Agricultural improvement began in the
centuries before the Industrial revolution got going and it may have
played a part in freeing up labour from the land to work in the new
industrial mills of the eighteenth century. As the revolution in
industry progressed a succession of machines became available which
increased food production with ever fewer labourers.

Jethro Tull's seed drill invented in 1731 was a mechanical seeder
which distributed seeds efficiently across a plot of land. Joseph
Foljambe's Rotherham plough of 1730, was the first commercially
successful iron plough. Andrew Meikle's threshing machine of 1784 was
the final straw for many farm labourers, and led to the 1830
agricultural rebellion of the Swing Riots.

Transport in Britain

Main article: Transport during the Industrial Revolution

At the beginning of the Industrial Revolution, inland transport was by
navigable rivers and roads, with coastal vessels employed to move
heavy goods by sea. Railways or wagon ways were used for conveying
coal to rivers for further shipment, but canals had not yet been
constructed. Animals supplied all of the motive power on land, with
sails providing the motive power on the sea.
The Industrial Revolution improved Britain's transport infrastructure
with a turnpike road network, a canal and waterway network, and a
railway network. Raw materials and finished products could be moved
more quickly and cheaply than before. Improved transportation also
allowed new ideas to spread quickly.

Coastal sail

Sailing vessels had long been used for moving goods round the British
coast. The trade transporting coal to London from Newcastle had begun
in medieval times. The transport of goods coastwise by sea within
Britain was common during the Industrial Revolution, as for centuries
before. This became less important with the growth of the railways at
the end of the period.

Navigable rivers

See also: List of rivers of United Kingdom

All the major rivers of the United Kingdom were navigable during the
Industrial Revolution. Some were anciently navigable, notably the
Severn, Thames, and Trent. Some were improved, or had navigation
extended upstream, but usually in the period before the Industrial
Revolution, rather than during it.

The Severn, in particular, was used for the movement of goods to the
Midlands which had been imported into Bristol from abroad, and for the
export of goods from centres of production in Shropshire (such as iron
goods from Coalbrookdale) and the Black Country. Transport was by way
of trows—small sailing vessels which could pass the various shallows
and bridges in the river. The trows could navigate the Bristol Channel
to the South Wales ports and Somerset ports, such as Bridgwater and
even as far as France.


Main article: History of the British canal system

Pontcysyllte Aqueduct, Llangollen, WalesCanals began to be built in
the late eighteenth century to link the major manufacturing centres in
the Midlands and north with seaports and with London, at that time
itself the largest manufacturing centre in the country. Canals were
the first technology to allow bulk materials to be easily transported
across country. A single canal horse could pull a load dozens of times
larger than a cart at a faster pace. By the 1820s, a national network
was in existence. Canal construction served as a model for the
organisation and methods later used to construct the railways. They
were eventually largely superseded as profitable commercial
enterprises by the spread of the railways from the 1840s on.

Britain's canal network, together with its surviving mill buildings,
is one of the most enduring features of the early Industrial
Revolution to be seen in Britain.


Much of the original British road system was poorly maintained by
thousands of local parishes, but from the 1720s (and occasionally
earlier) turnpike trusts were set up to charge tolls and maintain some
roads. Increasing numbers of main roads were turnpiked from the 1750s
to the extent that almost every main road in England and Wales was the
responsibility of some turnpike trust. New engineered roads were built
by John Metcalf, Thomas Telford and John Macadam. The major turnpikes
radiated from London and were the means by which the Royal Mail was
able to reach the rest of the country. Heavy goods transport on these
roads was by means of slow, broad wheeled, carts hauled by teams of
horses. Lighter goods were conveyed by smaller carts or by teams of
pack horse. Stage coaches carried the rich, and the less wealthy could
pay to ride on carriers carts.


Main article: History of rail transport in Great Britain

A replica of the early locomotive Sans Pareil at a 1980 restaging of
the Rainhill Trials of 1829Wagonways for moving coal in the mining
areas had started in the 17th century and were often associated with
canal or river systems for the further movement of coal. These were
all horse drawn or relied on gravity, with a stationary steam engine
to haul the wagons back to the top of the incline. The first
applications of the steam locomotive were on wagon or plate ways (as
they were then often called from the cast iron plates used). Horse-
drawn public railways did not begin until the early years of the 19th
century. Steam-hauled public railways began with the Stockton and
Darlington Railway in 1825 and the Liverpool and Manchester Railway in
1830. Construction of major railways connecting the larger cities and
towns began in the 1830s but only gained momentum at the very end of
the first Industrial Revolution.

After many of the workers had completed the railways, they did not
return to their rural lifestyles but instead remained in the cities,
providing additional workers for the factories.

Railways helped Britain's trade enormously, providing a quick and easy
way of transport and an easy way to transport mail and news.

Social effects

In terms of social structure, the Industrial Revolution witnessed the
triumph of a middle class of industrialists and businessmen over a
landed class of nobility and gentry.

Ordinary working people found increased opportunities for employment
in the new mills and factories, but these were often under strict
working conditions with long hours of labour dominated by a pace set
by machines. However, harsh working conditions were prevalent long
before the Industrial Revolution took place. Pre-industrial society
was very static and often cruel—child labour, dirty living conditions,
and long working hours were just as prevalent before the Industrial

Factories and urbanisation

Manchester, England ("Cottonopolis"), pictured in 1840, showing the
mass of factory chimneysIndustrialisation led to the creation of the
factory. Arguably the first was John Lombe's water-powered silk mill
at Derby, operational by 1721. However, the rise of the factory came
somewhat later when cotton spinning was mechanised.

The factory system was largely responsible for the rise of the modern
city, as large numbers of workers migrated into the cities in search
of employment in the factories. Nowhere was this better illustrated
than the mills and associated industries of Manchester, nicknamed
"Cottonopolis", and arguably the world's first industrial city. For
much of the 19th century, production was done in small mills, which
were typically water-powered and built to serve local needs. Later
each factory would have its own steam engine and a chimney to give an
efficient draft through its boiler.

The transition to industrialisation was not without difficulty. For
example, a group of English workers known as Luddites formed to
protest against industrialisation and sometimes sabotaged factories.

In other industries the transition to factory production was not so
divisive. Some industrialists themselves tried to improve factory and
living conditions for their workers. One of the earliest such
reformers was Robert Owen, known for his pioneering efforts in
improving conditions for workers at the New Lanark mills, and often
regarded as one of the key thinkers of the early socialist movement.

By 1746, an integrated brass mill was working at Warmley near Bristol.
Raw material went in at one end, was smelted into brass and was turned
into pans, pins, wire, and other goods. Housing was provided for
workers on site. Josiah Wedgwood and Matthew Boulton were other
prominent early industrialists, who employed the factory system.

Child labour

A young "drawer" pulling a coal tub along a mine galleryThe Industrial
Revolution led to a population increase, but the chance of surviving
childhood did not improve throughout the industrial revolution
(although infant mortality rates were reduced markedly).[43][44] There
was still limited opportunity for education, and children were
expected to work. Employers could pay a child less than an adult even
though their productivity was comparable; there was no need for
strength to operate an industrial machine, and since the industrial
system was completely new there were no experienced adult labourers.
This made child labour the labour of choice for manufacturing in the
early phases of the Industrial Revolution between the 18th and 19th
centuries. In England and Scotland in 1788, two-thirds of the workers
in 143 water-powered cotton mills were described as children.[45]

Child labour had existed before the Industrial Revolution, but with
the increase in population and education it became more visible. Many
children were forced to work in relatively bad conditions for much
lower pay than their elders.[46]

Reports were written detailing some of the abuses, particularly in the
coal mines[47] and textile factories[48] and these helped to
popularise the children's plight. The public outcry, especially among
the upper and middle classes, helped stir change in the young workers'

Politicians and the government tried to limit child labour by law, but
factory owners resisted; some felt that they were aiding the poor by
giving their children money to buy food to avoid starvation, and
others simply welcomed the cheap labour. In 1833 and 1844, the first
general laws against child labour, the Factory Acts, were passed in
England: Children younger than nine were not allowed to work, children
were not permitted to work at night, and the work day of youth under
the age of 18 was limited to twelve hours. Factory inspectors
supervised the execution of the law. About ten years later, the
employment of children and women in mining was forbidden. These laws
decreased the number of child labourers; however, child labour
remained in Europe and the United States up to the 20th century.[49]
By 1900, there were 1.7 million child labourers reported in American
industry under the age of fifteen.[50]


Over London by Rail Gustave Doré c. 1870. Shows the densely populated
and polluted environments created in the new industrial citiesLiving
conditions during the Industrial Revolution varied from the splendour
of the homes of the owners to the squalor of the lives of the workers.
Poor people lived in very small houses in cramped streets. These homes
would share toilet facilities, have open sewers and would be at risk
of damp. Disease was spread through a contaminated water supply.
Conditions did improve during the 19th century as public health acts
were introduced covering things such as sewage, hygiene and making
some boundaries upon the construction of homes. Not everybody lived in
homes like these. The Industrial Revolution created a larger middle
class of professionals such as lawyers and doctors. The conditions for
the poor improved over the course of the 19th century because of
government and local plans which led to cities becoming cleaner
places, but life had not been easy for the poor before
industrialisation. However, as a result of the Revolution, huge
numbers of the working class died due to diseases spreading through
the cramped living conditions. Chest diseases from the mines, cholera
from polluted water and typhoid were also extremely common, as was
smallpox. Accidents in factories with child and female workers were
regular. Dickens' novels illustrate this; even some government
officials were horrified by what they saw[citation needed]. Strikes
and riots by workers were also relatively common.


Main article: Luddite

The Leader of the luddites, engraving of 1812The rapid
industrialisation of the English economy cost many craft workers their
jobs. The movement started first with lace and hosiery workers near
Nottingham and spread to other areas of the textile industry owing to
early industrialisation. Many weavers also found themselves suddenly
unemployed since they could no longer compete with machines which only
required relatively limited (and unskilled) labour to produce more
cloth than a single weaver. Many such unemployed workers, weavers and
others, turned their animosity towards the machines that had taken
their jobs and began destroying factories and machinery. These
attackers became known as Luddites, supposedly followers of Ned Ludd,
a folklore figure. The first attacks of the Luddite movement began in
1811. The Luddites rapidly gained popularity, and the British
government took drastic measures using the militia or army to protect
industry. Those rioters who were caught were tried and hanged, or
transported for life.

Unrest continued in other sectors as they industrialised, such as
agricultural labourers in the 1830s, when large parts of southern
Britain were affected by the Captain Swing disturbances. Threshing
machines were a particular target, and rick burning was a popular
activity. However the riots led to the first formation of trade
unions, and further pressure for reform.

Organisation of labour

See also: Trade union#History

The Great Chartist Meeting on Kennington Common, 1848The Industrial
Revolution concentrated labour into mills, factories and mines, thus
facilitating the organisation of combinations or trade unions to help
advance the interests of working people. The power of a union could
demand better terms by withdrawing all labour and causing a consequent
cessation of production. Employers had to decide between giving in to
the union demands at a cost to themselves or suffer the cost of the
lost production. Skilled workers were hard to replace, and these were
the first groups to successfully advance their conditions through this
kind of bargaining.

The main method the unions used to effect change was strike action.
Many strikes were painful events for both sides, the unions and the
management. In England, the Combination Act forbade workers to form
any kind of trade union from 1799 until its repeal in 1824. Even after
this, unions were still severely restricted.

In 1832, the year of the Reform Act which extended the vote in England
but did not grant universal suffrage, six men from Tolpuddle in Dorset
founded the Friendly Society of Agricultural Labourers to protest
against the gradual lowering of wages in the 1830s. They refused to
work for less than 10 shillings a week, although by this time wages
had been reduced to seven shillings a week and were due to be further
reduced to six shillings. In 1834 James Frampton, a local landowner,
wrote to the Prime Minister, Lord Melbourne, to complain about the
union, invoking an obscure law from 1797 prohibiting people from
swearing oaths to each other, which the members of the Friendly
Society had done. James Brine, James Hammett, George Loveless,
George's brother James Loveless, George's brother in-law Thomas
Standfield, and Thomas's son John Standfield were arrested, found
guilty, and transported to Australia. They became known as the
Tolpuddle martyrs. In the 1830s and 1840s the Chartist movement was
the first large scale organised working class political movement which
campaigned for political equality and social justice. Its Charter of
reforms received over three million signatures but was rejected by
Parliament without consideration.

Working people also formed friendly societies and co-operative
societies as mutual support groups against times of economic hardship.
Enlightened industrialists, such as Robert Owen also supported these
organisations to improve the conditions of the working class.

Unions slowly overcame the legal restrictions on the right to strike.
In 1842, a General Strike involving cotton workers and colliers was
organised through the Chartist movement which stopped production
across Great Britain.[51]

Eventually effective political organisation for working people was
achieved through the trades unions who, after the extensions of the
franchise in 1867 and 1885, began to support socialist political
parties that later merged to became the British Labour Party.

Other effects

The application of steam power to the industrial processes of printing
supported a massive expansion of newspaper and popular book
publishing, which reinforced rising literacy and demands for mass
political participation.

During the Industrial Revolution, the life expectancy of children
increased dramatically. The percentage of the children born in London
who died before the age of five decreased from 74.5% in 1730–1749 to
31.8% in 1810–1829.[43] Also, there was a significant increase in
worker wages during the period 1813-1913.[52][53][54]

According to Robert Hughes in The Fatal Shore, the population of
England and Wales, which had remained steady at 6 million from 1700 to
1740, rose dramatically after 1740. The population of England had more
than doubled from 8.3 million in 1801 to 16.8 million in 1851 and, by
1901, had nearly doubled again to 30.5 million.[55] As living
conditions and health care improved during the 19th century, Britain's
population doubled every 50 years.[56][57] Europe’s population doubled
during the 18th century, from roughly 100 million to almost 200
million, and doubled again during the 19th century, to around 400

The growth of modern industry from the late 18th century onward led to
massive urbanisation and the rise of new great cities, first in Europe
and then in other regions, as new opportunities brought huge numbers
of migrants from rural communities into urban areas. In 1800, only 3%
of the world's population lived in cities,[59] a figure that has risen
to nearly 50% at the beginning of the 21st century.[60] In 1717
Manchester was merely a market town of 10,000 people, but by 1911 it
had a population of 2.3 million.[61]

The greatest killer in the cities was tuberculosis (TB).[62] By the
late 19th century, 70 to 90% of the urban populations of Europe and
North America were infected with M. tuberculosis, and about 40% of
working-class deaths in cities were from TB.[63]

Continental Europe

The Industrial Revolution on Continental Europe came a little later
than in Great Britain. In many industries, this involved the
application of technology developed in Britain in new places. Often
the technology was purchased from Britain or British engineers and
entrepreneurs moved abroad in search of new opportunities. By 1809
part of the Ruhr Valley in Westphalia was called 'Miniature England'
because of its similarities to the industrial areas of England. The
German, Russian and Belgian governments all provided state funding to
the new industries. In some cases (such as iron), the different
availability of resources locally meant that only some aspects of the
British technology were adopted.

Wallonia, Belgium

Lifts on Canal du Centre (1888 - 1917) near La Louvière, Wallonia

Workers' housing at Bois-du-Luc (1838-1853) in La LouvièreRenowned for
its coal and steel, Wallonia has experienced strong industrial growth
since the Middle Ages. For many years, heavy industry was the driving
force behind the region's economy. Indeed, Wallonia was the birthplace
of the industrial revolution on continental Europe:

Before railway construction on the Continent demanded huge quantities
of maleable iron mainly for rails, for which low quality iron
sufficed, Wallonia was the only Continental region to follow the
British model successfully. Since the middle of the 1820s, numerous
works comprising coke blast furnaces as well as puddling and rolling
mills were built in the coal mining areas around Liège and Charleroi.
Excelling all others, John Cockerill's factories at Seraing integrated
all stages of production, from engineering to the supply of raw
materials, as early as 1825.[64]

Wallonia came to be regarded as an example of the radical evolution of
industrial expansion. Thanks to coal (the French word "houille" was
coined in Wallonia),[65] the region geared up to become the 2nd
industrial power in the world after England. But it is also pointed
out by many researchers, with its Sillon industriel, 'Especially in
the Haine, Sambre and Meuse valleys, between the Borinage and Liège,
(...) there was a huge industrial development based on coal-mining and
iron-making...'[66]. Philippe Raxhon wrote about the period after
1830: "It was not propaganda but a reality the Walloon regions were
becoming the second industrial power all over the world after
England."[67] "The sole industrial centre outside the collieries and
blast furnaces of Walloon was the old cloth making town of Ghent."[68]
Michel De Coster, Professor at the Université de Liège wrote also:
"The historians and the economists say that Belgium was the second
industrial power of the world, in proportion to its population and its
territory (...) But this rank is the one of Wallonia where the coal-
mines, the blast furnaces, the iron and zinc factories, the wool
industry, the glass industry, the weapons industry... were
concentrated" [69]

Demographic effects

Wallonia's Sillon industriel, not the blue bloth in the N

Gallow frame of the Crachet in Frameries IN Wallonia's French Châssis
à molettes or Belfleur (French Chevalement

Official Poster of the Liège's World fair in 1905Wallonia was also the
birthplace of a strong Socialist party and strong trade-unions in a
particular sociological landscape. At the left, the Sillon industriel,
which runs from Mons in the west, to Verviers in the east (except part
of North Flanders, in another period of the industrial revolution,
after 1920). Even if Wallonia is the second industrial country after
England, the effect of the industrial revolution there was very
different. In 'Breaking stereotypes', Muriel Beven and Isabelle Devos

The industrial revolution changed a mainly rural society into an urban
one, but with a strong contrast between northern and southern Belgium.
During the Middle Ages and the Early Modern Period, Flanders was
characterised by the presence of large urban centres (...) at the
beginning of the nineteenth century this region (Flanders), with an
urbanisation degree of more than 30 per cent, remained one of the most
urbanised in the world. By comparison, this proportion reached only 17
per cent in Wallonia, barely 10 per cent in most West European
countries, 16 per cent in France and 25 per cent in England.
Nineteenth century industrialisation did not affect the traditional
urban infrastructure, except in Ghent (...) Also, in Wallonia the
traditional urban network was largely unaffected by the
industrialisation process, even though the proportion of city-dwellers
rose from 17 to 45 per cent between 1831 and 1910. Especially in the
Haine, Sambre and Meuse valleys, between the Borinage and Liège, where
there was a huge industrial development based on coal-mining and iron-
making, urbanisation was rapid. During these eighty years the number
of municipalities with more than 5,000 inhabitants increased from only
21 to more than one hundred, concentrating nearly half of the Walloon
population in this region. Nevertheless, industrialisation remained
quite traditional in the sense that it did not lead to the growth of
modern and large urban centres, but to a conurbation of industrial
villages and towns developed around a coal-mine or a factory.
Communication routes between these small centres only became populated
later and created a much less dense urban morphology than, for
instance, the area around Liège where the old town was there to direct
migratory flows.[70]

Political and social effects

Wallonia became the country of the general strike. A general strike is
the "cessation of work by a majority of the workers in all industries
of a locality or nation. Such a stoppage is economic if it is for the
purpose of redressing some grievance or pressing upon the employer a
series of economic demands. It is political if called for the purpose
of wresting some concession from the government or if the goal is the
overthrow of the existing government. The political strike has been
advocated by the syndicalists and to a certain extent by anarchistic
movements".[71] General strikes in Wallonia took place in 1885 (this
strike began to celebrate the Commune de Paris), 1902, 1913 (in order
to win universal suffrage), 1932, 1936 (in order to win paid
holidays), 1950 (against Leopold III), in the winter 1960-1961 in
order to win the autonomy of Wallonia, when the Walloon economic
decline became clear and when it became (or seemed) clear for some
socialist Trade-Unions leaders, that the Belgian government would not
make anything for the economic recovery of Wallonia.


A barricade of the Commune de Paris—celebrated in march 1885 in
Wallonia by a General strike March 18th, 1871.The industrial
revolution in France was a particular process for it did not
correspond to the main model followed by other countries. Notably,
most French historians argue that France did not go through a clear
take-off [72]. Instead, France's economic growth and industrialisation
process was slow and steady along the eighteenth and nineteenth
centuries. However, some stages were identified by Maurice Lévy-
Leboyer :

French Revolution and Napoleonic wars (1789–1815),
industrialisation, along with Britain (1815–1860),
economic slowdown (1860–1905),
renewal of the growth after 1905.
This section requires expansion.

United States

Main article: Technological and industrial history of the United

Slater's MillThe United States originally used horse-powered machinery
to power its earliest factories, but eventually switched to water
power, with the consequence that industrialisation was essentially
limited to New England and the rest of the Northeastern United States,
where fast-moving rivers were located. Horse-drawn production proved
to be economically challenging and a more difficult alternative to the
newer water-powered production lines. However, the raw materials
(cotton) came from the Southern United States. It was not until after
the Civil War in the 1860s that steam-powered manufacturing overtook
water-powered manufacturing, allowing the industry to fully spread
across the nation.

Samuel Slater (1768–1835) is popularly known as the founder of the
American cotton industry. As a boy apprentice in Derbyshire, England,
he learned of the new techniques in the textile industry and defied
laws against the emigration of skilled workers by leaving for New York
in 1789, hoping to make money with his knowledge. Slater, among the
Cabot Brothers and investors, started the Beverly Cotton Manufactory
in Beverly, Massachusetts. This was the first cotton mill in America.
This cotton mill was designed to utilize horse-powered production. The
mill operators quickly learned that the economic stability of their
horse-drawn platform was unstable, and had fiscal issues for years
after it was built. Despite the losses, the Manufactory served as a
playground of innovation, both in turning a large amount of cotton,
but also developing the water-powered milling structure used in
Slater's second mill[73], Slater's Mill at Pawtucket, Rhode Island, in
1793. He went on to own thirteen textile mills.[74] Daniel Day
established a wool carding mill in the Blackstone Valley at Uxbridge,
Massachusetts in 1810, the third woollen mill established in the U.S.
(The first was in Hartford, Connecticut, and the second at Watertown,
Massachusetts.) The John H. Chafee Blackstone River Valley National
Heritage Corridor retraces the history of "America's Hardest-Working
River', the Blackstone. The Blackstone River and its tributaries,
which cover more than 45 miles (72 km) from Worcester to Providence,
was the birthplace of America's Industrial Revolution. At its peak
over 1100 mills operated in this valley, including Slater's mill, and
with it the earliest beginnings of America's Industrial and
Technological Development.

While on a trip to England in 1810, Newburyport merchant Francis Cabot
Lowell was allowed to tour the British textile factories, but not take
notes. Realising the War of 1812 had ruined his import business but
that a market for domestic finished cloth was emerging in America, he
memorised the design of textile machines, and on his return to the
United States, he set up the Boston Manufacturing Company. Lowell and
his partners built America's second cotton-to-cloth textile mill at
Waltham, Massachusetts, second to the Beverly Cotton Manufactory After
his death in 1817, his associates built America's first planned
factory town, which they named after him. This enterprise was
capitalised in a public stock offering, one of the first uses of it in
the United States. Lowell, Massachusetts, utilising 5.6 miles (9.0 km)
of canals and ten thousand horsepower delivered by the Merrimack
River, is considered by some to be a major contributor to the success
of the American Industrial Revolution. The short-lived utopia-like
Lowell System was formed, as a direct response to the poor working
conditions in Britain. However, by 1850, especially following the
Irish Potato Famine, the system had been replaced by poor immigrant

The industrialisation of the watch industry started 1854 also in
Waltham, Massachusetts, at the Waltham Watch Company, with the
development of machine tools, tools, gauges and assembling methods
adapted to the micro precision required for watches.

See also: History of Lowell, Massachusetts


Main articles: Meiji Restoration and Economic history of Japan

In 1871 a group of Japanese politicians known as the Iwakura Mission
toured Europe and the USA to learn western ways. The result was a
deliberate state led industrialisation policy to prevent Japan from
falling behind. The Bank of Japan, founded in 1877, used taxes to fund
model steel and textile factories. Education was expanded and Japanese
students were sent to study in the west.

Second Industrial Revolution and later evolution
Main article: Second Industrial Revolution

Bessemer converterThe insatiable demand of the railways for more
durable rail led to the development of the means to cheaply mass-
produce steel. Steel is often cited as the first of several new areas
for industrial mass-production, which are said to characterise a
"Second Industrial Revolution", beginning around 1850, although a
method for mass manufacture of steel was not invented until the 1860s,
when Sir Henry Bessemer invented a new furnace which could make
wrought iron and steel in large quantities. However, it only became
widely available in the 1870s. This second Industrial Revolution
gradually grew to include the chemical industries, petroleum refining
and distribution, electrical industries, and, in the twentieth
century, the automotive industries, and was marked by a transition of
technological leadership from Britain to the United States and

The introduction of hydroelectric power generation in the Alps enabled
the rapid industrialisation of coal-deprived northern Italy, beginning
in the 1890s. The increasing availability of economical petroleum
products also reduced the importance of coal and further widened the
potential for industrialisation.

Marshall McLuhan analysed the social and cultural impact of the
electric age. While the previous age of mechanisation had spread the
idea of splitting every process into a sequence, this was ended by the
introduction of the instant speed of electricity that brought
simultaneity. This imposed the cultural shift from the approach of
focusing on "specialized segments of attention" (adopting one
particular perspective), to the idea of "instant sensory awareness of
the whole", an attention to the "total field", a "sense of the whole
pattern". It made evident and prevalent the sense of "form and
function as a unity", an "integral idea of structure and
configuration". This had major impact in the disciplines of painting
(with cubism), physics, poetry, communication and educational theory.

By the 1890s, industrialisation in these areas had created the first
giant industrial corporations with burgeoning global interests, as
companies like U.S. Steel, General Electric, and Bayer AG joined the
railroad companies on the world's stock markets.

Intellectual paradigms and criticism


Main article: Capitalism

The advent of the Age of Enlightenment provided an intellectual
framework which welcomed the practical application of the growing body
of scientific knowledge—a factor evidenced in the systematic
development of the steam engine, guided by scientific analysis, and
the development of the political and sociological analyses,
culminating in Adam Smith's The Wealth of Nations. One of the main
arguments for capitalism, presented for example in the book The
Improving State of the World, is that industrialisation increases
wealth for all, as evidenced by raised life expectancy, reduced
working hours, and no work for children and the elderly.


Main article: Marxism

Marxism began essentially as a reaction to the Industrial Revolution.
[76] According to Karl Marx, industrialisation polarised society into
the bourgeoisie (those who own the means of production, the factories
and the land) and the much larger proletariat (the working class who
actually perform the labour necessary to extract something valuable
from the means of production). He saw the industrialisation process as
the logical dialectical progression of feudal economic modes,
necessary for the full development of capitalism, which he saw as in
itself a necessary precursor to the development of socialism and
eventually communism.


Main article: Romanticism

During the Industrial Revolution an intellectual and artistic
hostility towards the new industrialisation developed. This was known
as the Romantic movement. Its major exponents in English included the
artist and poet William Blake and poets William Wordsworth, Samuel
Taylor Coleridge, John Keats, Lord Byron and Percy Bysshe Shelley. The
movement stressed the importance of "nature" in art and language, in
contrast to "monstrous" machines and factories; the "Dark satanic
mills" of Blake's poem "And did those feet in ancient time". Mary
Shelley's novel Frankenstein reflected concerns that scientific
progress might be two-edged.

See also

Business and economics portal
Capitalism in the nineteenth century
Dialectics of progress
Ecological impact of colonial Americans before 1877
Economic history of the United Kingdom
Information revolution
Pre-industrial society
Protestant work ethic
Scientific Revolution


Industrial growth in the Muslim World
Industrial Revolution in China
Science and invention in Birmingham
Technological and industrial history of the United States


↑ Watt steam engine image: located in the lobby of into the Superior
Technical School of Industrial Engineers of a the UPM (Madrid)

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↑ Eric Hobsbawm, The Age of Revolution: Europe 1789–1848, Weidenfeld &
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↑ Joseph E Inikori. Africans and the Industrial Revolution in England,
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↑ Berg, Maxine (1992). [Expression error: Missing operand for >
"Rehabilitating the Industrial Revolution"]. The Economic History
Review 45: 24. doi:10.2307/2598327.

↑ Rehabilitating the Industrial Revolution by Julie Lorenzen, Central
Michigan University. Retrieved November 2006.

↑ Robert Lucas, Jr. (2003). "The Industrial Revolution". Federal
Reserve Bank of Minneapolis. http://www.minneapolisfed.org/pubs/region/04-05/essay.cfm.
Retrieved 2007-11-14. "it is fairly clear that up to 1800 or maybe
1750, no society had experienced sustained growth in per capita
income. (Eighteenth century population growth also averaged one-third
of 1 percent, the same as production growth.) That is, up to about two
centuries ago, per capita incomes in all societies were stagnated at
around $400 to $800 per year."

↑ Lucas, Robert (2003). "The Industrial Revolution Past and Future".
http://www.minneapolisfed.org/pubs/region/04-05/essay.cfm. "[consider]
annual growth rates of 2.4 percent for the first 60 years of the 20th
century, of 1 percent for the entire 19th century, of one-third of 1
percent for the 18th century"

↑ Industrial Revolution and the Standard of Living: The Concise
Encyclopedia of Economics, Library of Economics and Liberty

↑ "BBC – Plague in Tudor and Stuart Britain". bbc.co.uk.
Retrieved 2008-11-03.

↑ The Origins of the Industrial Revolution in England

↑ "Scientific Revolution". Microsoft Encarta Online Encyclopedia 2009.
Archived 2009-10-31.

↑ Hudson, Pat. The Industrial Revolution, Oxford University Press US.
ISBN 0-7131-6531-6

↑ Fullerton, Ronald A. (January 1988). [Expression error: Missing
operand for > "How Modern Is Modern Marketing? Marketing's Evolution
and the Myth of the "Production Era""]. The Journal of Marketing (New
York City, NY: American Marketing Association) 52 (1): 108–125. doi:

↑ "Technics & Civilization". Lewis Mumford.
%3D#reader-link. Retrieved 2009-01-08.

↑ Deane, Phyllis. The First Industrial Revolution, Cambridge
University Press. ISBN 0-521-29609-9 Read it

↑ Eric Schiff, Industrialisation without national patents: the
Netherlands, 1869-1912; Switzerland, 1850-1907, Princeton University
Press, 1971.

↑ Michele Boldrin and David K. Levine, Against Intellectual Monopoly,
Chapter 1, final online version January 2, 2008PDF (55 KB), page 15.
Cambridge University Press, 2008. ISBN 9780521879286

↑ Why No Industrial Revolution in Ancient Greece? J. Bradford DeLong,
Professor of Economics, University of California at Berkeley, 20
September 2002. Retrieved January 2007.

↑ The Origins of the Industrial Revolution in England | The History
Guide, Steven Kreis, 11 October 2006 – Accessed January 2007

↑ Jackson J. Spielvogel (2009). "Western Civilization: Since 1500". p.

↑ The Industrial Revolution – Causes

↑ Cobb-Douglas in pre-modern Europe1 – Simulating early modern
growthPDF (254 KB) Jan Luiten van Zanden, International Institute of
Social History/University of Utrecht. May 2005. Retrieved January

↑ Landes, David (1999). The Wealth and Poverty of Nations. London:
Abacus. pp. 38–9. ISBN 0349111669.

↑ How Earth Made Us: Fire by Professor Iain Stewart

↑ South Asian History -Pages from the history of the Indian
subcontinent: British rule and the legacy of colonisation. Rajni-Palme
Dutt India Today (Indian Edition published 1947). Retrieved January

↑ Monarchies 1000–2000. By W. M. SPELLMAN. London: Reaktion Books,
2001.. Journal of World History.

↑ Was slavery the engine of economic growth? Digital History

↑ The Royal Navy itself may have contributed to Britain's industrial
growth. Among the first complex industrial manufacturing processes to
arise in Britain were those that produced material for British
warships. For instance, the average warship of the period used roughly
1000 pulley fittings. With a fleet as large as the Royal Navy, and
with these fittings needing to be replaced ever 4 to 5 years, this
created a great demand which encouraged industrial expansion. The
industrial manufacture of rope can also be see as a similar factor.

↑ Barrington Moore, Jr., Social Origins of Dictatorship and Democracy:
Lord and Peasant in the Making of the Modern World, pp. 29-30, Boston,
Beacon Press, 1966.

↑ Foster, Charles (2004). Capital and Innovation: How Britain Became
the First Industrial Nation. Northwich: Arley Hall Press. ISBN
0951838245. Argues that capital accumulation and wealth concentration
in an entrepreneurial culture following the commercial revolution made
the industrial revolution possible, for example.

↑ The Industrial Revolution – Innovations

↑ Encyclopædia Britannica (2008) "Building construction: the
reintroduction of modern concrete"

↑ The Lunar Society at Moreabout, the website of the Birmingham
Jewellery Quarter guide, Bob Miles.

↑ Hulse, David H: The Early Development of the Steam Engine; TEE
Publishing, Leamington Spa, U.K., 1999 ISBN 1 85761 107 1

↑ L.T.C. Rolt and J. S. Allen, The Steam engine of Thomas Newcomen
(Landmark, Ashbourne, 1997), 44.

↑ Rolt and Allen, 145

↑ Clow, Archibald; Clow, Nan L. (June 1952), [Expression error:
Missing operand for > Chemical Revolution], Ayer Co, pp. 65–90, ISBN
↑ Properties of Concrete Published lecture notes from University of
Memphis Department of Civil Engineering. Retrieved 2007-10-17.

↑ R.M. Hartwell, The Industrial Revolution and Economic Growth,
Methuen and Co., 1971, page 339-341 ISBN 0-416-19500-8

↑ 43.0 43.1 Mabel C. Buer, Health, Wealth and Population in the Early
Days of the Industrial Revolution, London: George Routledge & Sons,
1926, page 30 ISBN 0-415-38218-1

↑ "Demographic Transition and Industrial Revolution: A Macroeconomic
Investigation" (PDF). 2007. http://www.unc.edu/~oksana/Paper1.pdf.
Retrieved 2007-11-05. "The decrease [in mortality] beginning in the
second half of the 18th century was due mainly to declining adult
mortality. Sustained decline of the mortality rates for the age groups
5-10, 10-15, and 15-25 began in the mid 19th century, while that for
the age group 0-5 began three decades later" . Although the survival
rates for infants and children were static over this period, the birth
rate & overall life expectancy increased. Thus the population grew,
but the average Briton was about as old in 1850 as in 1750 (see
figures 5 & 6, page 28). Population size statistics from mortality.org
put the mean age at about 26.

↑ "Child Labor and the Division of Labor in the Early English Cotton
Mills". Douglas A. Galbi. Centre for History and Economics, King's
College, Cambridge CB2 1ST.

↑ The Life of the Industrial Worker in Nineteenth-Century England,
Laura Del Col, West Virginia University.

↑ "Testimony Gathered by Ashley's Mines Commission". 2008.
http://www.victorianweb.org/history/ashley.html. Retrieved

↑ "The Life of the Industrial Worker in Nineteenth-Century England".

http://www.victorianweb.org/history/workers1.html. Retrieved

↑ "Photographs of Lewis Hine: Documentation of Child Labor". The U.S.
National Archives and Records Administration.
↑ "The Industrial Revolution". The Web Institute for Teachers.

↑ General Strike 1842 From chartists.net. Retrieved 13 November 2006.

↑ Crafts, N (1994). [Expression error: Missing operand for > "Trends
in Real Wages in Britain, 1750-1913"]. Explorations in Economic
History 31: 176. doi:10.1006/exeh.1994.1007.

↑ Industrial Revolution and the Standard of Living From www.econlib.org,
downloaded 17 July 2006.

↑ R.M. Hartwell, The Rising Standard of Living in England, 1800-1850,
Economic History Review, 1963, page 398 ISBN 0-631-18071-0

↑ "The UK population: past, present and future" (PDF).

↑ "A portrait of Britain in 2031". The Independent. October 24, 2007.

↑ BBC - History - Victorian Medicine - From Fluke to Theory.
Published: 2002-02-01.

↑ "Modernization - Population Change". Encyclopædia Britannica.

↑ "Human Population: Urbanization". Population Reference Bureau.

↑ "Human Population: Population Growth: Question and Answer".
Population Reference Bureau.
↑ Manchester (England, United Kingdom). Encyclopædia Britannica.

↑ "Diseases in industrial cities in the Industrial Revolution".

↑ "Tuberculosis in Europe and North America, 1800–1922". The Harvard
University Library, Open Collections Program: Contagion.

↑ Chris Evans, Göran Rydén, The Industrial Revolution in Iron; The
impact of British Coal Technology in Ninenteenth-Century Europe
Published by Ashgate Publishing, Ltd., Farnham2005, pp. 37-38 ISBN

↑ a word from Walloon origin

↑ Muriel Beven and Isabelle Devos, 'Breaking stereotypes', in M.Beyen
and I.Devos (editors), 'Recent work in Belgian Historical Demography',
in Revue belge d'histoire contemporaine, XXXI, 2001, 3-4, pages
347-359 [1]

↑ Philippe Raxhon, Le siècle des forges ou la Wallonie dans le creuset
belge (1794-1914), in B.Demoulin and JL Kupper (editors), Histoire de
la Wallonie, Privat, Toulouse, 2004, pages 233-276, p. 246 ISBN

↑ [European Route of Industrial Heritage http://en.erih.net/index.php?pageId=114]

↑ Michel De Coster, Les enjeux des conflits linguistiques,
L'Harmattan, Paris, 2007, ISBN 978-2-296-0339-8 , pages 122-123

↑ Muriel Beven and Isabelle Devos, Breaking stereotypes, art. cit.,
pages 315-316

↑ The Columbia Encyclopedia, 2008

↑ Jean Marczewski, « Y a-t-il eu un "take-off" en France ? », 1961,
dans les Cahiers de l'ISEA

↑ "Made In Beverly-A History of Beverly Industry", by Daniel J.
Hoisington. A publication of the Beverly Historic District Commission.
↑ Encyclopædia Britannica (1998): Samuel Slater

↑ Marshall McLuhan (1964) Understanding Media, p.13 [2]

↑ Karl Marx: Communist as Religious EschatologistPDF (3.68 MB)

Further reading

An Introduction to the Industrial History of England, 1920,

retrieved 2009-07-26

Ashton, Thomas S. (1948), online edition The Industrial Revolution
(1760-1830), Oxford University Press, http://www.questia.com/PM.qst?a=o&d=77198082
online edition, retrieved 2009-07-26

Berlanstein, Lenard R., ed. (1992), online edition The Industrial
Revolution and work in nineteenth-century Europe, London and New York:


online edition, retrieved 2009-07-26

Clapham, J. H. (1926), online edition An Economic History of Modern
Britain: The Early Railway Age, 1820-1850, Cambridge University Press,


online edition, retrieved 2009-07-26

Clark, Gregory (2007), [Expression error: Missing operand for > A
Farewell to Alms: A Brief Economic History of the World], Princeton
University Press
Daunton, M. J. (1995), online edition Progress and Poverty: An
Economic and Social History of Britain, 1700-1850, Oxford University


online edition, retrieved 2009-07-26

Dunham, Arthur Louis (1955), online edition The Industrial Revolution
in France, 1815-1848, New York: Exposition Press,


online edition, retrieved 2009-07-26

Gatrell, PETER (2004). [Expression error: Missing operand for > "Farm
to factory: a reinterpretation of the Soviet industrial revolution"].
The Economic History Review 57: 794. doi:10.1111/j.

Jacob, Margaret C. (1997), [Expression error: Missing operand for >
Scientific Culture and the Making of the Industrial West], Oxford, UK:
Oxford University Press
Kisch, Herbert (1989), online edition From Domestic Manufacture to
Industrial Revolution The Case of the Rhineland Textile Districts,
Oxford University Press, http://www.questia.com/PM.qst?a=o&d=78932320
online edition, retrieved 2009-07-26
Mantoux, Paul (First English translation 1928, revised 1961), online
edition The Industrial Revolution in the Eighteenth Century,
http://www.questia.com/PM.qst?a=o&d=22792856 online edition, retrieved

McLaughlin Green, Constance (1939), online edition Holyoke,
Massachusetts: A Case History of the Industrial Revolution in America,
New Haven, CT: Yale University Press, http://www.questia.com/PM.qst?a=o&d=8893044
online edition, retrieved 2009-07-26

Mokyr, Joel (1999), online edition The British Industrial Revolution:
An Economic Perspective, http://www.questia.com/PM.qst?a=o&d=98674232
online edition, retrieved 2009-07-26

More, Charles (2000), online edition Understanding the Industrial
Revolution, London: Routledge,


online edition, retrieved 2009-04-17

Pollard, Sidney (1981), online edition Peaceful Conquest: The
Industrialization of Europe, 1760-1970, Oxford University Press,


online edition, retrieved 2009-07-26

Roe, Joseph Wickham (1916), English and American Tool Builders, New
Haven, Connecticut, USA: Yale University Press, LCCN 16-011753,

http://books.google.com/books?id=X-EJAAAAIAAJ&printsec=titlepage .

Reprinted by McGraw-Hill, New York and London, 1926 (LCCN 27-024075);
and by Lindsay Publications, Inc., Bradley, IL, USA (ISBN

Smelser, Neil J. (1959), online edition Social Change in the
Industrial Revolution: An Application of Theory to the British Cotton
Industry, University of Chicago Press,


online edition, retrieved 2009-07-26

Stearns, Peter N. (1998), online version The Industrial Revolution in
World History, Westview Press,


online version, retrieved 2009-07-26

Smil, Vaclav (1994), online edition Energy in World History, Westview


online edition, retrieved 2009-07-26

Snooks, G.D. (2000), [Expression error: Missing operand for > Was the
Industrial Revolution Necessary?], London & New York: Routledge

Szostak, Rick (1991), online edition The Role of Transportation in the
Industrial Revolution: A Comparison of England and France, Montréal:
McGill-Queen's University Press,

http://www.questia.com/PM.qst?a=o&d=101607770 online edition,
retrieved 2009-07-26

Toynbee, Arnold (1884), Lectures on the Industrial Revolution of the
Eighteenth Century in England, Whitefish, Montana: Kessinger

retrieved 2009-07-26

Uglow, Jenny (2002), [Expression error: Missing operand for > The
Lunar Men: The Friends who made the Future 1730-1810], London: Faber
and Faber

Usher, Abbott Payson (1920), online edition An Introduction to the
Industrial History of England, University of Michigan, pp. 529,


online edition, retrieved 2009-07-26

Chambliss, William J. (editor), Problems of Industrial Society,
Reading, Massachusetts : Addison-Wesley Publishing Co, December 1973.
ISBN 9780201009583

External links

Wikimedia Commons has media related to: Industrial revolution

Industrial Revolution at the Open Directory Project

Internet Modern History Sourcebook: Industrial Revolution

"The Day the World Took Off" Six part video series from the University
of Cambridge tracing the question "Why did the Industrial Revolution
begin when and where it did."

BBC History Home Page: Industrial Revolution

National Museum of Science and Industry website: machines and

Industrial Revolution and the Standard of Living by Clark Nardinelli –
the debate over whether standards of living rose or fell.

Factory Workers in the Industrial Revolution

Revolutionary Players website


...and I am Sid Harth
2010-02-25 19:02:14 UTC
Reference »
Wikipedia Articles
East India Company

In this article: Locations Images From the web: Images Videos East
India Company
For other uses, see East India Company (disambiguation).
East India Company
Fate Dissolved and activities absorbed by the British Raj
Founded 1600
Defunct 1858 (formally dissolved in 1873)

Headquarters London

The East India Company (also the East India Trading Company, English
East India Company, ("Also 1st Major International Drug Cartel & Arms
Dealer Bartering Opium for Saltpeter (Gun Powder) & International
Slave Trading")[1][2] and then the British East India Company)[3] was
an early English joint-stock company[4] that was formed initially for
pursuing trade with the East Indies, but that ended up trading mainly
with the Indian subcontinent and China. The oldest among several
similarly formed European East India Companies, the Company was
granted an English Royal Charter, under the name Governor and Company
of Merchants of London Trading into the East Indies, by Elizabeth I on
31 December 1600.[5] After a rival English company challenged its
monopoly in the late 17th century, the two companies were merged in
1708 to form the United Company of Merchants of England Trading to the
East Indies, commonly styled the Honourable East India Company,[6] and
abbreviated, HEIC;[7] the Company was colloquially referred to as John
Company,[8] and in India as Company Bahadur (Hindustani bahādur,

The East India Company traded mainly in cotton, silk, indigo dye,
saltpetre, tea, and opium. However, it also came to rule large swathes
of India, exercising military power and assuming administrative
functions, to the exclusion, gradually, of its commercial pursuits.
Company rule in India, which effectively began in 1757 after the
Battle of Plassey, lasted until 1858, when, following the events of
the Indian Rebellion of 1857, and under the Government of India Act
1858, the British Crown assumed direct administration of India in the
new British Raj. The Company itself was finally dissolved on 1 January
1874, as a result of the East India Stock Dividend Redemption Act.

The Company long held a privileged position in relation to the
English, and later the British, government. As a result, it was
frequently granted special rights and privileges, including trade
monopolies and exemptions. These caused resentment among its
competitors, who saw unfair advantage in the Company's position.
Despite this resentment, the Company remained a powerful force for
over 200 years over India.

Colonial India

Portuguese India 1510–1961
Dutch India 1605–1825
Danish India 1696–1869
French India 1759–1954
British India 1612–1947

East India Company 1612–1757
Company rule in India 1757–1857
British Raj 1858–1947
British rule in Burma 1826–1947
Princely states 1765–1947
Partition of India 1947
This box: view • [[|talk]] • edit


The foundation years

Soon after the defeat of the Spanish Armada in 1588, a group of
merchants of London presented a petition to Queen Elizabeth I for
permission to sail to the Indian Ocean.[10] The permission was granted
and in 1591 three ships sailed from England, around the Cape of Good
Hope, to the Arabian Sea; one of them, the Edward Bonaventure then
sailed around Cape Comorin and on to the Malay Peninsula, and
subsequently returned to England in 1594.[10] In 1596, three more
ships sailed out east, however, these were all lost at sea.[10] Two
years later, on 24 September 1598, another group of merchants of
London, having raised £30,133 in capital, met to form a corporation.
Although their first attempt was unsuccessful, they nonetheless set
about seeking the Queen's unofficial approval, purchased ships for
their venture, increased their capital to £68,373, and convened again
a year later.[10] This time they succeeded, and on 31 December 1600,
the Queen granted a Royal Charter to "George, Earl of Cumberland, and
215 Knights, Aldermen, and Burgesses" under the name, Governor and
Company of Merchants of London trading with the East Indies.[11] The
charter awarded the newly formed company, for a period of fifteen
years, a monopoly of trade (known today as a patent) with all
countries to the east of the Cape of Good Hope and to the west of the
Straits of Magellan.[11] Sir James Lancaster commanded the first East
India Company voyage in 1601.[12]

Initially, the Company struggled in the spice trade due to the
competition from the already well established Dutch. However the
Company did open a factory (trading post) in Bantam on the first
voyage and imports of pepper from Java were an important part of the
Company's trade for twenty years. The factory in Bantam was finally
closed in 1683. During this time ships belonging to the company
arrived in India, docking at Surat, which was established as a trade
transit point in 1608. In the next two years, it managed to build its
first factory in the town of Machilipatnam on the Coromandel Coast of
the Bay of Bengal. The high profits reported by the Company after
landing in India (presumably owing to a reduction in overhead costs
affected by the transit points), initially prompted King James I to
grant subsidiary licenses to other trading companies in England. But,
in 1609, he renewed the charter given to the Company for an indefinite
period, including a clause which specified that the charter would
cease to be in force if the trade turned unprofitable for three
consecutive years.

The Company was led by one Governor and 24 directors who made up the
Court of Directors. They were appointed by, and reported to, the Court
of Proprietors. The Court of Directors had ten committees reporting to

Foothold in India

English traders frequently engaged in hostilities with their Dutch and
Portuguese counterparts in the Indian Ocean. The Company achieved a
major victory over the Portuguese in the Battle of Swally in 1612.
Perhaps realizing the cost of waging trade wars in remote seas, the
Company decided to explore the feasibility of gaining a territorial
foothold in mainland India, with official sanction of both countries,
and requested the Crown to launch a diplomatic mission. In 1615, Sir
Thomas Roe was instructed by James I to visit the Mughal Emperor
Nuruddin Salim Jahangir (r. 1605 - 1627) to arrange for a commercial
treaty which would give the Company exclusive rights to reside and
build factories in Surat and other areas. In return, the Company
offered to provide the Emperor with goods and rarities from the
European market. This mission was highly successful as Jahangir sent a
letter to James through Sir Thomas Roe:[13]

Upon which assurance of your royal love I have given my general
command to all the kingdoms and ports of my dominions to receive all
the merchants of the English nation as the subjects of my friend; that
in what place soever they choose to live, they may have free liberty
without any restraint; and at what port soever they shall arrive, that
neither Portugal nor any other shall dare to molest their quiet; and
in what city soever they shall have residence, I have commanded all my
governors and captains to give them freedom answerable to their own
desires; to sell, buy, and to transport into their country at their
For confirmation of our love and friendship, I desire your Majesty to
command your merchants to bring in their ships of all sorts of
rarities and rich goods fit for my palace; and that you be pleased to
send me your royal letters by every opportunity, that I may rejoice in
your health and prosperous affairs; that our friendship may be
interchanged and eternal.


This section requires expansion.

The Company, benefiting from the imperial patronage, soon expanded its
commercial trading operations, eclipsing the Portuguese Estado da
India, which had established bases in Goa, Chittagong and Bombay
(which was later ceded to England as part of the dowry of Catherine de
Braganza). The Company created trading posts in Surat (where a factory
was built in 1612), Madras (1639), Bombay (1668) and Calcutta (1690).
By 1647, the Company had 23 factories, each under the command of a
factor or master merchant and governor if so chosen, and 90 employees
in India. The major factories became the walled forts of Fort William
in Bengal, Fort St George in Madras and the Bombay Castle.

In 1634, the Mughal emperor extended his hospitality to the English
traders to the region of Bengal (and in 1717 completely waived customs
duties for the trade). The company's mainstay businesses were by now
in cotton, silk, indigo dye, saltpetre and tea. All the while in
1650-56, it was making inroads into the Dutch monopoly of the spice
trade in the Malaccan straits, which the Dutch had acquired by ousting
the Portuguese in 1640-41. In 1657, Oliver Cromwell renewed the
charter of 1609, and brought about minor changes in the holding of the
Company. The status of the Company was further enhanced by the
restoration of monarchy in England. By a series of five acts around
1670, King Charles II provisioned it with the rights to autonomous
territorial acquisitions, to mint money, to command fortresses and
troops and form alliances, to make war and peace, and to exercise both
civil and criminal jurisdiction over the acquired areas.[citation
needed] In 1711, the Company established a trading post in Canton
(Guangzhou), China, to trade tea for silver.

The road to a complete monopoly

Trade monopoly

This section needs additional citations for verification.

Please help improve this article by adding reliable references.
Unsourced material may be challenged and removed. (May 2008)

The prosperity that the officers of the company enjoyed allowed them
to return to their country and establish sprawling estates and
businesses, and to obtain political power. Consequently, the Company
developed for itself a lobby in the English parliament. However, under
pressure from ambitious tradesmen and former associates of the Company
(pejoratively termed Interlopers by the Company), who wanted to
establish private trading firms in India, a deregulating act was
passed in 1694. This allowed any English firm to trade with India,
unless specifically prohibited by act of parliament, thereby annulling
the charter that was in force for almost 100 years. By an act that was
passed in 1698, a new "parallel" East India Company (officially titled
the English Company Trading to the East Indies) was floated under a
state-backed indemnity of £2 million. However, the powerful
stockholders of the old company quickly subscribed a sum of £315,000
in the new concern, and dominated the new body. The two companies
wrestled with each other for some time, both in England and in India,
for a dominant share of the trade. However, it quickly became evident
that, in practice, the original Company faced scarcely any measurable
competition. Both companies finally merged in 1708, by a tripartite
indenture involving them both as well as the state. Under this
arrangement, the merged company lent to the Treasury a sum of
£3,200,000, in return for exclusive privileges for the next three
years, after which the situation was to be reviewed. The amalgamated
company became the United Company of Merchants of England Trading to
the East Indies.[citation needed]

In the following decades there was a constant see-saw battle between
the Company lobby and the Parliament. The Company sought a permanent
establishment, while the Parliament would not willingly allow it
greater autonomy, and so relinquish the opportunity to exploit the
Company's profits. In 1712, another act renewed the status of the
Company, though the debts were repaid. By 1720, 15% of British imports
were from India, almost all passing through the Company, which
reasserted the influence of the Company lobby. The license was
prolonged until 1766 by yet another act in 1730.

At this time, Britain and France became bitter rivals. Frequent
skirmishes between them took place for control of colonial
possessions. In 1742, fearing the monetary consequences of a war, the
British government agreed to extend the deadline for the licensed
exclusive trade by the Company in India until 1783, in return for a
further loan of £1 million. The skirmishes did escalate to the feared
war. Between 1756 and 1763, the Seven Years' War diverted the state's
attention towards consolidation and defence of its territorial
possessions in Europe and its colonies in North America. The war took
place on Indian soil, between the Company troops and the French
forces. This angered the Indian people. In 1757, the Law Officers of
the Crown delivered the Pratt-Yorke opinion distinguishing overseas
territories acquired by conquest from those acquired by private
treaty. The opinion asserted that, while the Crown of Great Britain
enjoyed sovereignty over both, only the property of the former was
vested in the Crown.[14]

With the advent of the Industrial Revolution, Britain surged ahead of
its European rivals. Demand for Indian commodities was boosted by the
need to sustain the troops and the economy during the war, and by the
increased availability of raw materials and efficient methods of
production. As home to the revolution, Britain experienced higher
standards of living. Its spiralling cycle of prosperity, demand and
production had a profound influence on overseas trade. The Company
became the single largest player in the British global market. It
reserved for itself an unassailable position in the decision-making
process of the Government.

William Pyne notes in his book The Microcosm of London (1808) that

"On the 1 March 1801, the debts of the East India Company to
£5,393,989 their effects to £15,404,736 and their sales increased
since February 1793, from £4,988,300 to £7,602,041."

Saltpetre trade

Sir John Banks, a businessman from Kent who negotiated an agreement
between the King and the Company, began his career in a syndicate
arranging contracts for victualling the navy, an interest he kept up
for most of his life. He knew Pepys and John Evelyn and founded a
substantial fortune from the Levant and Indian trades. He also became
a Director and later, as Governor of the East Indian Company in 1672,
he was able to arrange a contract which included a loan of £20,000 and
£30,000 worth of saltpetre for the King 'at the price it shall sell by
the candle'[citation needed] - that is by auction - where an inch of
candle burned and as long as it was alight bidding could continue. The
agreement also included with the price 'an allowance of interest which
is to be expressed in tallies.'[citation needed] This was something of
a breakthrough in royal prerogative because previous requests for the
King to buy at the Company's auctions had been turned down as 'not
honourable or decent.'[citation needed] Outstanding debts were also
agreed and the Company permitted to export 250 tons of saltpetre.
Again in 1673, Banks successfully negotiated another contract for 700
tons of saltpetre at £37,000 between the King and the Company. So
urgent was the need to supply the armed forces in the United Kingdom,
America and elsewhere that the authorities sometimes turned a blind
eye on the untaxed sales. One governor of the Company was even
reported as saying in 1864 that he would rather have the saltpetre
made than the tax on salt.[15]

The basis for the monopoly

Colonial monopoly

Robert Clive, 1st Baron Clive, became the first British Governor of
Bengal.Further information: Great Britain in the Seven Years War
The Seven Years' War (1756 – 1763) resulted in the defeat of the
French forces and limited French imperial ambitions, also stunting the
influence of the industrial revolution in French territories. Robert
Clive, the Governor General, led the Company to an astounding victory
against Joseph François Dupleix, the commander of the French forces in
India, and recaptured Fort St George from the French. The Company took
this respite to seize Manila[16] in 1762. By the Treaty of Paris
(1763), the French were allowed to maintain their trade posts only in
small enclaves in Pondicherry, Mahe, Karikal, Yanam, and Chandernagar
without any military presence. Although these small outposts remained
French possessions for the next two hundred years, French ambitions on
Indian territories were effectively laid to rest, thus eliminating a
major source of economic competition for the Company. In contrast, the
Company, fresh from a colossal victory, and with the backing of a
disciplined and experienced army, was able to assert its interests in
the Carnatic from its base at Madras and in Bengal from Calcutta,
without facing any further obstacles from other colonial powers.
[citation needed]

Military expansion

Main article: Company rule in India

The Company continued to experience resistance from local rulers
during its expansion. Robert Clive led company forces against Siraj Ud
Daulah, the last independent Nawab of Bengal, Bihar and Orissa(only
Midnapore district) to victory at the Battle of Plassey in 1757,
resulting in the conquest of Bengal. This victory estranged the
British and the Mughals, since Siraj Ud Daulah was a Mughal feudatory
ally. But the Mughal empire was already on the wane after the demise
of Aurangzeb, and was breaking up into pieces and enclaves. After the
Battle of Buxar, Shah Alam II, the ruling emperor, gave up the
administrative rights over Bengal, Bihar, and Orissa (only Midnapore
district, rest of Orissa was under the rule of Maratha and Nizam of
Hyderabad). Clive thus became the first British Governor of Bengal.

Haidar Ali and Tipu Sultan, the legendary rulers of Mysore (in
Carnatic, modern day Indian state of Karnataka - capital city
Bangalore), gave a tough time to the British forces. Having sided with
the French during the war, the rulers of Mysore continued their
struggle against the Company with the four Anglo-Mysore Wars. Mysore
finally fell to the Company forces in 1799, with the slaying of Tipu

With the gradual weakening of the Maratha empire in the aftermath of
the three Anglo-Maratha wars, the British also secured Bombay and the
surrounding areas. It was during these campaigns, both against Mysore
and the Marathas, that Arthur Wellesley, later Duke of Wellington,
first showed the abilities which would lead to victory in the
Peninsular War and at the Battle of Waterloo. A particularly notable
engagement involving forces under his command was the Battle of
Assaye. Thus, the British had secured the entire region of Southern
India (with the exception of small enclaves of French and local
rulers), Western India and Eastern India.

The last vestiges of local administration were restricted to the
northern regions of Delhi, Oudh, Rajputana, and Punjab, where the
Company's presence was ever increasing amidst the infighting and
dubious offers of protection against each other. Coercive action,
threats and diplomacy aided the Company in preventing the local rulers
from putting up a united struggle against it. The hundred years from
the Battle of Plassey in 1757 to the Sepoy Mutiny of 1857 were a
period of consolidation for the Company, which began to function more
as a nation and less as a trading concern.

The first cholera pandemic began in Bengal, then spread across India
by 1820. 10,000 British troops and countless Indians died during this
pandemic.[17] Between 1736 and 1834 only some 10% of East India
Company's officers survived to take the final voyage home.[18]

Opium trade

Main article: Opium Wars

In the eighteenth century, Britain had a huge trade deficit with Qing
Dynasty China and so in 1773, the Company created a British monopoly
on opium buying in Bengal. As opium trade was illegal in China,
Company ships could not carry opium to China. So the opium produced in
Bengal was sold in Calcutta on condition that it be sent to China.[19]

Despite the Chinese ban on opium imports, reaffirmed in 1799, it was
smuggled into China from Bengal by traffickers and agency houses (such
as Jardine, Matheson and Company, Ltd.) averaging 900 tons a year. The
proceeds from drug-runners at Lintin Island were paid into the
Company’s factory at Canton and by 1825, most of the money needed to
buy tea in China was raised by the illegal opium trade. In 1838, with
opium smuggling approaching 1400 tons a year, the Chinese imposed a
death penalty on opium smuggling and sent a new governor, Lin Zexu to
curb smuggling. This finally resulted in the First Opium War,
eventually leading to the British seizure of Hong Kong.

Regulation of the company's affairs

Monopolistic activity by the company triggered the Boston Tea Party.
Financial troubles
Though the Company was becoming increasingly bold and ambitious in
putting down resisting states, it was getting clearer day by day that
the Company was incapable of governing the vast expanse of the
captured territories. The Bengal famine, in which one-third of the
local population died, set the alarm bells ringing back home. Military
and administrative costs mounted beyond control in British
administered regions in Bengal due to the ensuing drop in labour
productivity. At the same time, there was commercial stagnation and
trade depression throughout Europe following the lull in the post-
Industrial Revolution period. The desperate directors of the company
attempted to avert bankruptcy by appealing to Parliament for financial
help. This led to the passing of the Tea Act in 1773, which gave the
Company greater autonomy in running its trade in America, and allowed
it an exemption from the tea tax—which its colonial competitors were
required to pay. When the American colonists, who included tea
merchants, were told of the act, they tried to boycott it, claiming
that, although the price had gone down on the tea when enforcing the
act, it was a tax all the same, and the king should not have the right
to just have a tax for no apparent reason. The arrival of tax-exempt
Company tea, undercutting the local merchants, triggered the Boston
Tea Party in the Province of Massachusetts Bay, one of the major
events leading up to the American Revolution.

Regulating Acts of Parliament

East India Company Act 1773

By this Act (13 Geo. III, c. 63), the Parliament of Great Britain
imposed a series of administrative and economic reforms and by doing
so clearly established its sovereignty and ultimate control over the
Company. The Act recognized the Company's political functions and
clearly established that the "acquisition of sovereignty by the
subjects of the Crown is on behalf of the Crown and not in its own

Despite stiff resistance from the East India lobby in parliament, and
from the Company's shareholders, the Act was passed. It introduced
substantial governmental control, and allowed the land to be formally
under the control of the Crown, but leased to the Company at £40,000
for two years. Under this provision, the governor of Bengal Warren
Hastings was promoted to the rank of Governor General, having
administrative powers over all of British India. It provided that his
nomination, though made by a court of directors, should in future be
subject to the approval of a Council of Four appointed by the Crown -
namely Lt. General John Clavering, George Monson, Richard Barwell and
Philip Francis. He was entrusted with the power of peace and war.
British judicial personnel would also be sent to India to administer
the British legal system. The Governor General and the council would
have complete legislative powers. Thus, Warren Hastings became the
first Governor-General of India. The company was allowed to maintain
its virtual monopoly over trade, in exchange for the biennial sum and
an obligation to export a minimum quantity of goods yearly to Britain.
The costs of administration were also to be met by the company. These
provisions, initially welcomed by the Company, backfired. The Company
had an annual burden on its back, and its finances continued steadily
to decline.[20]

East India Company Act (Pitt's India Act) 1784

The India Act of 1784 (24 Geo. III, s. 2, c. 25) had two key aspects:

Relationship to the British government: the bill differentiated the
East India Company's political functions from its commercial
activities. In political matters the East India Company was
subordinated to the British government directly. To accomplish this,
the Act created a Board of Commissioners for the Affairs of India,
usually referred to as the Board of Control. The members of the Board
were the Chancellor of the Exchequer, a Secretary of State, and four
Privy Councillors, nominated by the King. The act specified that the
Secretary of State "shall preside at, and be President of the said

Internal Administration of British India: the bill laid the foundation
for the centralized and bureaucratic British administration of India
which would reach its peak at the beginning of the twentieth century
during the governor-generalship of George Nathaniel Curzon, 1st Baron

The expanded East India House, Leadenhall Street, London, as rebuilt
1799-1800, Richard Jupp, architect (as seen c. 1817; demolished in
1929)Pitt's Act was deemed a failure because it quickly became
apparent that the boundaries between government control and the
company's powers were nebulous and highly subjective. The government
also felt obliged to respond to humanitarian calls for better
treatment of local peoples in British-occupied territories. Edmund
Burke, a former East India Company shareholder and diplomat, was moved
to address the situation and introduced a new Regulating Bill in 1783.
The bill was defeated, however, due to intense lobbying by company
loyalists and accusations of nepotism in the bill's recommendations
for the appointment of councillors.

Act of 1786

This Act (26 Geo. III c. 16) enacted the demand of Lord Cornwallis,
that the powers of the Governor-General be enlarged to empower him, in
special cases, to override the majority of his Council and act on his
own special responsibility. The Act also enabled the offices of the
Governor-General and the Commander-in-Chief to be jointly held by the
same official.

This Act clearly demarcated borders between the Crown and the Company.
After this point, the Company functioned as a regularized subsidiary
of the Crown, with greater accountability for its actions and reached
a stable stage of expansion and consolidation. Having temporarily
achieved a state of truce with the Crown, the Company continued to
expand its influence to nearby territories through threats and
coercive actions. By the middle of the 19th century, the Company's
rule extended across most of India, Burma, Malaya, Singapore and Hong
Kong, and a fifth of the world's population was under its trading

Charter Act 1813

The aggressive policies of Lord Wellesley and the Marquis of Hastings
led to the Company gaining control of all India, except for the
Punjab, Sindh and Nepal. The Indian Princes had become vassals of the
Company. But the expense of wars leading to the total control of India
strained the Company’s finances to the breaking point. The Company was
forced to petition Parliament for assistance. This was the background
to the Charter Act of 1813 (53 Geo. III c. 155) which, among other

asserted the sovereignty of the British Crown over the Indian
territories held by the Company;
renewed the Charter of Company for a further twenty years but,
deprived the Company of its Indian trade monopoly except for trade in
tea and the trade with China;
required the Company to maintain separate and distinct its commercial
and territorial accounts; and,
opened India to missionaries.

Charter Act 1833

The Industrial Revolution in Britain, and the consequent search for
markets, and the rise of laissez-faire economic ideology form the
background to this act. The Act:

removed the Company's remaining trade monopolies and divested it of
all its commercial functions;
renewed for another twenty years the Company’s political and
administrative authority;
invested the Board of Control with full power and authority over the
Company. As stated by Kapur Professor Sri Ram Sharma, thus, summed up
the point: "The President of the Board of Control now became Minister
for Indian Affairs";
carried further the ongoing process of administrative centralization
through investing the Governor-General in Council with, full power and
authority to superintend and, control the Presidency Governments in
all civil and military matters;
initiated a machinery for the codification of laws;
provided that no Indian subject of the Company would be debarred from
holding any office under the Company by reason of his religion, place
of birth, descent or colour. However, this remained a dead letter well
into the 20th century;
vested the Island of St Helena in the Crown.

Meanwhile, British influence continued to expand; in 1845, the Danish
colony of Tranquebar was sold to Great Britain. The Company had at
various stages extended its influence to China, the Philippines, and
Java. It had solved its critical lack of the cash needed to buy tea by
exporting Indian-grown opium to China. China's efforts to end the
trade led to the First Opium War with Britain.

Charter Act 1853

This Act provided that British India would remain under the
administration of the Company in trust for the Crown until Parliament
should decide otherwise.

Indian Rebellion of 1857-8

Main article: Indian Rebellion of 1857

The Indian Rebellion of 1857, known to the British as the "Great
Mutiny", but to Indians as the "First War of Independence", resulted
in widespread devastation in India and condemnation of the Company for
permitting the events to occur.[citation needed] One of the
consequences was that the British government nationalized the Company.
The Company lost all its administrative powers; its Indian
possessions, including its armed forces, were taken over by the Crown
pursuant to the provisions of the Government of India Act 1858.

The Company continued to manage the tea trade on behalf of the British
government (and the supply of Saint Helena) until the East India Stock
Dividend Redemption Act came into effect, on 1 January 1874, under the
terms of which the Company was dissolved.[21]


The East India Company has had a long lasting impact on the Indian
Subcontinent. Although dissolved following the rebellion of 1857, it
stimulated the growth of the British Empire. Its armies after 1857
were to become the armies of British India and it played a key role in
replacing the official language of India from Persian to English. Even
today the English language has official status in Pakistan and India,
being used by the government and civil service. Some phrases
introduced by the company are considered to be archaic in British
English today, such as do the needful, but live on in the English of
South Asia and are used daily.[22]

East India Club

The East India Club in London was formed in 1849 for officers of the
East India Company. The Club still exists today as a private
Gentlemen's Club and its club house is situated at 16, St. James's
Square, London.


Downman (1685)

Lens (1700)

Rees (1820)

Laurie (1842)

National Geographic (1917)

Prior to the Acts of Union which created the Kingdom of Great Britain,
the flag contained the St George's Cross in the canton representing
the Kingdom of England.

The flag had a Union Flag in the canton after the creation of the
Kingdom of Great Britain in 1707.

After 1801 the flag contains the Union Flag of the United Kingdom of
Great Britain and Ireland in the canton.(1810)

The East India Company flag changed over time. From the period of 1600
to 1707 (Act of Union between England and Scotland) the flag consisted
of a St George's cross in the canton and a number of alternating Red
and White stripes. After 1707 the canton contained the original Union
Flag consisting of a combined St George's cross and a St Andrew's
cross. After the Act of Union 1800, that joined Ireland into the
United Kingdom, the canton of the East India Company's flag was
altered accordingly to include the new Union Flag with the additional
St Patrick's cross. There has been much debate and discussion
regarding the number of stripes on the flag and the order of the
stripes. Historical documents and paintings show many variations from
9 to 13 stripes, with some images showing the top stripe being red and
others showing the top stripe being white.

It has been suggested that the stripes were inspired by the flag of
the Majapahit Empire, whose flags may still have flown across the
Spice Islands in the Company's early days.

At the time of the American Revolution the East India Company flag
would have been identical to the Grand Union Flag. The flag probably
inspired the Stars and Stripes (as argued by Sir Charles Fawcett in
1937).[23] Comparisons between the Stars and Stripes and the Company's
flag from historical records present some convincing arguments. The
John Company flag dates back to the 1600s whereas the United States
adopted the Stars and Stripes in 1777.[24]

The stripes and gridlike appearance of the flag gave rise to several
pieces of imperial slang. Most notably is the phrase 'riding the
gridiron'; this referred to travelling on a ship flying the company
flag to / from India.


A ship of the East India Company can also be called an East Indiaman.

Red Dragon

Earl of Abergavenny
Royal Captain
Agamemnon (1855)

East India Company records

Unlike all other British Government records, the records from the East
India Company (and its successor the India Office) are not in The
National Archives at Kew, London, but are stored by the British
Library in London as part of the Asia, Pacific and Africa Collection.
The catalogue is searchable online in the Access to Archives
catalogues.[26] Many of the East India Company records are freely
available online under an agreement that FIBIS have with the British

Trading Again

On 14 September 2004, the name The British East India Company Limited
[1] was purchased from The British Government Agents by Captain
William George MacDonald.

The Company Registered Number is now on The British Companies House
Register and it is Number 3667052.

The Company Head Office is The John Laird Centre, Park Road North,
Birkenhead, Wirral, CH41 4EZ, United Kingdom.

On 21 July 2006, the name and the house flag of The British East India
Company Limited was trademarked on The British Trademark Registry and
two certificates were issued.

The first certificate was for the name (The British East India Company
Limited) - Trademark Number 2404311B (Dated 28 September 2005).

The second certificate was for The Original House Flag of The British
East India Company Limited - Trademark Number 2404311A (Dated 28
September 2005).

Both trademarks belong exclusively to Captain William George MacDonald
who is Chairman of The British East India Company Limited

See also

British Empire portal
Wikimedia Commons has media related to: British East India Company

History of India

British Empire
History of South Asia series
Company rule in India
British Raj (also Crown rule in India, also British Indian Empire)
New Imperialism series
Imperialism in Asia
Chartered companies
Governor-General of India
Commander-in-Chief, India
List of BEIC directors
East India Docks, London
Blackwall Yard, London

East India Companies

Assada Company, English, founded 1635 and ceased 1657
Dutch East India Company, founded 1602 and ceased 1798
Danish East India Company, founded in 1616 and ceased 1846
Portuguese East India Company, founded 1628 and ceased 1633
French East India Company, founded 1664 and ceased 1769
Swedish East India Company, founded 1731 and ceased 1813
West India Companies
Dutch West India Company, founded 1621 and ceased 1791
French West India Company, founded 1664 and ceased 1674
Danish West India Company, founded 1671 and ceased 1776

Other trading companies:

London Virginia Company, founded 1606 and ceased 1622
Hudson's Bay Company, founded 1670 and still operating as a Canadian
Muscovy Company, founded 1555 and ceased 1917
Royal African Company founded 1660 and ceased 1752
Virginia Company of Plymouth, founded 1606 and ceased 1609
East India Company College 1805-1858
Robert Brooke 1744-1811
East India Company Cemetery in Macau
Spice wars
Indian Mutiny
British Imperial Lifeline


↑ Common Sense/Historical Fact

↑ Encyclopaedia Britannica 2008, "East India Company"

↑ 1. Columbia Encyclopedia 2007, "East India Company, British". 2.
Marx, Karl (June 25, 1853), [Expression error: Missing operand for >
"The British rule in India"], New York Daily Tribune republished in
Carter, Mia; Harlow (editors), Barbara (2003), Archives of Empire,
Raleigh: Duke University Press. Pp. 802, ISBN 0822331640,

. Quote (p. 118): "I do not allude to European despotism, planted upon
Asiatic despotism, by the British East India Company, forming a more
monstrous combination than any of the divine monsters startling us in
the temple of Salsette."

↑ The Dutch East India Company was the first to issue public stock.

↑ The Register of Letters &c. of the Governor and Company of Merchants
of London trading into the East Indies, 1600–1619. On page 3, a letter
written by Elizabeth I on January 23, 1601 ("Witnes or selfe at
Westminster the xxiiijth of Ianuarie in the xliijth yeare of or
Reigne.") states, "Haue been pleased to giue lysence vnto or said
Subjects to proceed in the said voiadgs, & for the better inabling
them to establish a trade into & from the said East Indies Haue by or
tres Pattents vnder or great seale of England beareing date at
Westminster the last daie of december last past incorporated or said
Subjecte by the name of the Gournor & Companie of the merchaunts of
London trading into the East Indies, & in the same tres Pattents haue
geven them the sole trade of theast Indies for the terme of XVteen
yeares ..."

↑ A. Oxford English Dictionary (Draft Edition, September 2008,
requires subscription) entry for "honourable": "2b. Applied as an
official or courtesy title of honour or distinction." Usage: ... the
prefix ‘Honourable’ ... is also applied to the House of Commons
collectively; ... also formerly to the East India Company, etc.
Examples: 1698 FRYER Acc. E. India & P. 38 "In pay for the Honourable
East India Company." B. Encyclopaedia Britannica 1911, "HONOURABLE
(Fr. honorable, from Lat. honorabilis, worthy of honour), a style or
title of honour common to the United Kingdom, the British colonies and
the United States of America.... The epithet is also applied to the
House of Commons as a body and to individual members during debate
('the honourable member for X.'). Certain other corporate bodies have,
by tradition or grant, the right to bear the style; e.g. the
Honourable Irish Society, the Inns of Court (Honourable Society of the
Inner Temple, &c.) and the Honourable Artillery Company; the East
India Company also had the prefix 'honourable' . The style may not be
assumed by corporate bodies at will, as was proved in the case of the
Society of Baronets, whose original style of 'Honourable' Society was
dropped by command." C. Birdwood, George (1891), Report on The Old
Record of the India Office, London: W. H. Allen & Co., Limited, and at


Quote (p. 14): "The English Company [Including The General Society
chartered by William III, 3rd September 1698] trading with the East ,
commonly called "the New Company," was incorporated by William III,
5th September 1698; its charter running to 1714. The above Company of
Merchants of London and the English Company, were finally incorporated
under the name of "The United Company of Merchants of England trading
to the East [commonly styled, "the Honourable East India Company"] in

↑ Hawes, Christopher J. (1996), Poor Relations: The Making of a
Eurasian Community in British India, 1773-1833, London: Routledge. Pp.
217., ISBN 0700704256,


Quote (p. xiii): "Abbreviations: Honourable East India Company

↑ Ride, Lindsay; Ride, May; Mellor, Bernard (1995), An East India
Company Cemetery: Protestant Burials in Macao, Hong Kong: Hong Kong
University Press. Pp. 304, ISBN 9622093841,
Quote (p. 7): "In 1709, the Company amalgamated with a rival group,
which had been chartered in 1698 by William III. This union took the
title 'The Honourable East India Company,' which was shortened for
general use to 'the Honourable Company' and more often still to John
Company, until it ceased operations in 1834, after its monopoly of
British trade with China was discontinued."

↑ Gandhi, M. K. (1997), Hind Swaraj and other writings, (Edited by
Anthony J. Parel) Cambridge and London: Cambridge University Press.
Pp. 208., ISBN 0521574315,


Quote (p.39): "... They came to our country originally for the purpose
of trade. Recall the Company Bahadur.† Who made it Bahadur? They had
not the slightest intention at the time of establishing a kingdom. Who
assisted the Company's officers? Who was tempted by their silver? Who
bought their goods? History testifies that we did all this. ... †:
'the Company Bahadur': an honorific title by which the East India
Company was known among Indians. 'Bahadur' means brave, powerful,

↑ 10.0 10.1 10.2 10.3 Imperial Gazetteer of India vol. IV 1908, p.

↑ 11.0 11.1 Imperial Gazetteer of India vol. II 1908, p. 6

↑ Gardner, Brian (1972). The East India Company: a History. McCall
Publishing Company. ISBN 0841501246.

↑ Indian History Sourcebook: England, India, and The East Indies, 1617

↑ Thomas, P. D. G. (2008) "Pratt, Charles, first Earl Camden (1714–
1794)", Oxford Dictionary of National Biography, Oxford University
Press, online edn, accessed 15 February 2008 subscription or UK public
library membership required

↑ SALTPETER the secret salt - Salt made the world go round

↑ Company incursion, Manila 1762-1763. See the Bib. for the citation
of Sirs Draper and Cornish; see also Cushner's citation.

↑ Cholera's seven pandemics. CBC News. December 2, 2008

↑ Sahib: The British Soldier in India, 1750-1914 by Richard Holmes

↑ EAST INDIA COMPANY FACTORY RECORDS Sources from the British Library,
LondonPart 1: China and Japan

↑ Anthony, Frank. Britain's Betrayal in India: The Story of the Anglo
Indian Community. Second Edition. London: The Simon Wallenberg Press,
2007 Pages 18- 19, 42, 45.

↑ The Times reported, "It accomplished a work such as in the whole
history of the human race no other company ever attempted and as such
is ever likely to attempt in the years to come."

↑ Deccan Herald

↑ The Striped Flag Of The East India Company, And Its Connexion With
The American "Stars And Stripes"

↑ http://www.kimber.org/flag/index.htm[dead link]

↑ Sutton, Jean (1981) Lords of the East: the East India Company and
its ships. London: Conway Maritime

↑ A2A - Access to Archives Home


Andrews, Kenneth R. (1985). Trade, Plunder, and Settlement: Maritime
Enterprise and the Genesis of the British Empire, 1480–1630.
Cambridge, U.K.: Cambridge University Press. ISBN 0521257603.

Bowen, H. V. (1991). Revenue and Reform: The Indian Problem in British
Politics, 1757–1773. Cambridge, U.K.: Cambridge University Press. ISBN

Bowen, H. V.; Margarette Lincoln, and Nigel Rigby, eds. (2003). The
Worlds of the East India Company. Rochester, NY: Brewer. ISBN

Brenner, Robert (1993). Merchants and Revolution: Commercial Change,
Political Conflict, and London’s Overseas Traders, 1550–1653.
Princeton, NJ: Princeton University Press. ISBN 0691055947.

Carruthers, Bruce G. (1996). City of Capital: Politics and Markets in
the English Financial Revolution. Princeton, NJ: Princeton University
Press. ISBN 978-0-691-04455-2.

Chaudhuri, K. N. (1965). The English East India Company: The Study of
an Early Joint-Stock Company, 1600–1640. London: Cass.

Chaudhuri, K. N. (1978). The Trading World of Asia and the English
East India Company, 1660–1760. Cambridge, U.K.: Cambridge University
Press. ISBN 0521217164.
Farrington, Anthony (2002). Trading Places: The East India Company and
Asia, 1600–1834. London: British Library. ISBN 0712347569.

Furber, Holden (1976). Rival Empires of Trade in the Orient, 1600–
1800. Minneapolis: University of Minnesota Press. ISBN 0816607877.

Imperial Gazetteer of India vol. II (1908), [Expression error: Missing
operand for > The Indian Empire, Historical], Published under the
authority of His Majesty's Secretary of State for India in Council,
Oxford at the Clarendon Press. Pp. xxxv, 1 map, 573.

Imperial Gazetteer of India vol. IV (1908), [Expression error: Missing
operand for > The Indian Empire, Administrative], Published under the
authority of His Majesty's Secretary of State for India in Council,
Oxford at the Clarendon Press. Pp. xxx, 1 map, 552.

Lawson, Philip (1993). The East India Company: A History. London:
Longman. ISBN 0582073863.

Sen, Sudipta (1998). Empire of Free Trade: The East India Company and
the Making of the Colonial Marketplace. Philadelphia: University of
Pennsylvania Press. ISBN 978-0812234268.

Steensgaard, Niels (1975). The Asian Trade Revolution of the
Seventeenth Century: The East India Companies and the Decline of the
Caravan Trade. Chicago: University of Chicago Press. ISBN 0226771385.

Dirks, Nicholas (2006). The Scandal of EMPIRE : India and the creation
of Imperial Britain. Cambridge, Massachusetts, London, England: The
Belknap Press of Harvard University Press. ISBN 0674021665.

External links

The Twilight of the East India Company: The Evolution of Anglo-Asian
Commerce and Politics, 1790-1860: Boydell & Brewer, Woodbridge, 2009
From Trade to Colonization: Historical Dynamics of the East India
Seals and Insignias of East India Company
The Secret Trade The basis of the monopoly.

Trading Places - a learning resource from the British Library

Trading Places: The East India Company and Asia, a free seminar from
the British Library on the history of the British East India Company.

Port Cities: History of the East India Company

Ships of the East India Company

Plant Cultures: East India Company in India

Library of Congress Federal Research Division Country Studies

History and Politics: East India Company

English Expansionism

Nick Robins, New Statesman, 13 December 2004, "The world's first
Karl Marx, New York Tribune, 1853–1858, The Revolt in India

East India Company: Its History and Results article by Karl Marx, MECW
Volume 12, p. 148

East India Club Gentlemen's club originally for officers and former
officers of the Company, now open to others.

Text of East India Company Act 1773

Text of East India Company Act 1784

John Stuart Mill and The East India Company, Vinay Lal's review of
Lynn Zastoupil's 1994 book

The Richest East India Merchant: The Life and Business of John Palmer
of Calcutta, 1767-1836 (Worlds of the East India Company) by Anthony
"The East India Company – a corporate route to Europe" on BBC Radio
4’s In Our Time featuring Huw Bowen, Linda Colley and Maria Misra

A timeline of India in the 1800s


Mole Timeline: The British East India Company
showv • [[|d]] • eChartered companies

British Company of Merchant Adventurers of London · Company of
Merchant Adventurers · London and Bristol Company · African Company of
Merchants · Muscovy Company · Spanish Company · Eastland Company ·
Morocco Company · East India Company · Levant Company · Virginia
Company · French Company · Massachusetts Bay Company · Providence
Island Company · Royal West Indian Company · Hudson's Bay Company ·
Royal African Company · Greenland Company · South Sea Company · Sierra
Leone Company · North Borneo Company · Royal Niger Company · South
Africa Company

French Company of One Hundred Associates · Compagnie de l'Occident ·
Compagnie du Mississippi · Compagnie des Îles de l'Amérique ·
Compagnie des Indes Occidentales · Compagnie des Indes Orientales

German Brandenburg African Company · Emden Company · West African
Company · New Guinea Company · East Africa Company

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This article is about the social science. For other uses, see
Economics (disambiguation).

Economists study trade, production and consumption decisions, such as
those that occur in a traditional marketplace. Look up economics in
Wiktionary, the free dictionary.
For a topical guide to this subject, see Outline of economicss.
Economics is the social science that studies the production,
distribution, and consumption of goods and services. The term
economics comes from the Ancient Greek οἰκονομία (oikonomia,
"management of a household, administration") from οἶκος (oikos,
"house") + νόμος (nomos, "custom" or "law"), hence "rules of the
house(hold)". [1] Current economic models developed out of the broader
field of political economy in the late 19th century, owing to a desire
to use an empirical approach more akin to the physical sciences. [2]

A definition that captures much of modern economics is that of Lionel
Robbins in a 1932 essay:

"... the science which studies human behaviour as a relationship
between ends and scarce means which have alternative uses." [3]

Scarcity means that available resources are insufficient to satisfy
all wants and needs. Absent of scarcity and alternative uses of
available resources there is no economic problem. The subject thus
defined involves the study of choices as they are affected by
incentives and resources.

Economics aims to explain how economies work and how economic agents
interact. Economic analysis is applied throughout society, in
business, finance and government, but also in crime,[4] education,[5]
the family, health, law, politics, religion,[6] social institutions,
war,[7] and science.[8] The expanding domain of economics in the
social sciences has been described as economic imperialism.[9][10]

Common distinctions are drawn between various dimensions of economics:
between positive economics (describing "what is") and normative
economics (advocating "what ought to be") or between economic theory
and applied economics or between mainstream economics (more "orthodox"
dealing with the "rationality-individualism-equilibrium nexus") and
heterodox economics (more "radical" dealing with the "institutions-
history-social structure nexus"[11]). However the primary textbook
distinction is between microeconomics ("small" economics), which
examines the economic behavior of agents (including individuals and
firms) and macroeconomics ("big" economics), addressing issues of
unemployment, inflation, monetary and fiscal policy for an entire


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The economy: concept and history
Business and Economics Portal

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History of economic thought

The upper part of the stele of Hammurabi's code of lawsMain article:
History of economic thought
The city states of Sumer developed a trade and market economy based
originally on the commodity money of the Shekel which was a certain
weight measure of barley, while the Babylonians and their city state
neighbors later developed the earliest system of economics using a
metric of various commodities, that was fixed in a legal code.[12] The
early law codes from Sumer could be considered the first (written)
economic formula, and had many attributes still in use in the current
price system today... such as codified amounts of money for business
deals (interest rates), fines in money for 'wrong doing', inheritance
rules, laws concerning how private property is to be taxed or divided,
etc.[13][14] For a summary of the laws, see Babylonian law and Ancient
economic thought.

Economic thought dates from earlier Mesopotamian, Greek, Roman,
Indian, Chinese, Persian and Arab civilizations. Notable writers
include Aristotle, Chanakya (also known as Kautilya), Qin Shi Huang,
Thomas Aquinas and Ibn Khaldun through to the 14th century. Joseph
Schumpeter initially considered the late scholastics of the 14th to
17th centuries as "coming nearer than any other group to being the
'founders' of scientific economics" as to monetary, interest, and
value theory within a natural-law perspective.[15] After discovering
Ibn Khaldun's Muqaddimah, however, Schumpeter later viewed Ibn Khaldun
as being the closest forerunner of modern economics,[16] as many of
his economic theories were not known in Europe until relatively modern

Nonetheless, recent research indicates that the Indian scholar-
philosopher Chanakya (c. 340-293 BCE) predates Ibn Khaldun by a
millennium and a half as the forerunner of modern economics,[18][19]
[20][21] and has written more expansively on this subject,
particularly on political economy. His magnum opus, the Arthashastra
(The Science of Wealth and Welfare),[22] is the genesis of economic
concepts that include the opportunity cost, the demand-supply
framework, diminishing returns, marginal analysis, public goods, the
distinction between the short run and the long run, asymmetric
information and the producer surplus.[23] In his capacity as an
advisor to the throne of the Maurya Empire of ancient India, he has
also advised on the sources and prerequisites of economic growth,
obstacles to it and on tax incentives to encourage economic growth.

1638 painting of a French seaport during the heyday of mercantilismTwo
other groups, later called 'mercantilists' and 'physiocrats', more
directly influenced the subsequent development of the subject. Both
groups were associated with the rise of economic nationalism and
modern capitalism in Europe. Mercantilism was an economic doctrine
that flourished from the 16th to 18th century in a prolific pamphlet
literature, whether of merchants or statesmen. It held that a nation's
wealth depended on its accumulation of gold and silver. Nations
without access to mines could obtain gold and silver from trade only
by selling goods abroad and restricting imports other than of gold and
silver. The doctrine called for importing cheap raw materials to be
used in manufacturing goods, which could be exported, and for state
regulation to impose protective tariffs on foreign manufactured goods
and prohibit manufacturing in the colonies.[25][26]

Physiocrats, a group of 18th century French thinkers and writers,
developed the idea of the economy as a circular flow of income and
output. Adam Smith described their system "with all its imperfections"
as "perhaps the purest approximation to the truth that has yet been
published" on the subject. Physiocrats believed that only agricultural
production generated a clear surplus over cost, so that agriculture
was the basis of all wealth.

Thus, they opposed the mercantilist policy of promoting manufacturing
and trade at the expense of agriculture, including import tariffs.
Physiocrats advocated replacing administratively costly tax
collections with a single tax on income of land owners. Variations on
such a land tax were taken up by subsequent economists (including
Henry George a century later) as a relatively non-distortionary source
of tax revenue. In reaction against copious mercantilist trade
regulations, the physiocrats advocated a policy of laissez-faire,
which called for minimal government intervention in the economy.[27]

Classical political economy

Main article: Classical economics

Publication of Adam Smith's The Wealth of Nations in 1776, has been
described as "the effective birth of economics as a separate
discipline."[29] The book identified land, labor, and capital as the
three factors of production and the major contributors to a nation's

Adam Smith wrote The Wealth of NationsIn Smith's view, the ideal
economy is a self-regulating market system that automatically
satisfies the economic needs of the populace. He described the market
mechanism as an "invisible hand" that leads all individuals, in
pursuit of their own self-interests, to produce the greatest benefit
for society as a whole. Smith incorporated some of the Physiocrats'
ideas, including laissez-faire, into his own economic theories, but
rejected the idea that only agriculture was productive.

In his famous invisible-hand analogy, Smith argued for the seemingly
paradoxical notion that competitive markets tended to advance broader
social interests, although driven by narrower self-interest. The
general approach that Smith helped initiate was called political
economy and later classical economics. It included such notables as
Thomas Malthus, David Ricardo, and John Stuart Mill writing from about
1770 to 1870.[30]

While Adam Smith emphasized the production of income, David Ricardo
focused on the distribution of income among landowners, workers, and
capitalists. Ricardo saw an inherent conflict between landowners on
the one hand and labor and capital on the other. He posited that the
growth of population and capital, pressing against a fixed supply of
land, pushes up rents and holds down wages and profits.

Malthus cautioned law makers on the effects of poverty reduction
policiesThomas Robert Malthus used the idea of diminishing returns to
explain low living standards. Population, he argued, tended to
increase geometrically, outstripping the production of food, which
increased arithmetically. The force of a rapidly growing population
against a limited amount of land meant diminishing returns to labor.
The result, he claimed, was chronically low wages, which prevented the
standard of living for most of the population from rising above the
subsistence level.

Malthus also questioned the automatic tendency of a market economy to
produce full employment. He blamed unemployment upon the economy's
tendency to limit its spending by saving too much, a theme that lay
forgotten until John Maynard Keynes revived it in the 1930s.

Coming at the end of the Classical tradition, John Stuart Mill parted
company with the earlier classical economists on the inevitability of
the distribution of income produced by the market system. Mill pointed
to a distinct difference between the market's two roles: allocation of
resources and distribution of income. The market might be efficient in
allocating resources but not in distributing income, he wrote, making
it necessary for society to intervene.

Value theory was important in classical theory. Smith wrote that the
"real price of every thing ... is the toil and trouble of acquiring
it" as influenced by its scarcity. Smith maintained that, with rent
and profit, other costs besides wages also enter the price of a
commodity.[31] Other classical economists presented variations on
Smith, termed the 'labour theory of value'. Classical economics
focused on the tendency of markets to move to long-run equilibrium.


Main article: Marxian economics

The Marxist school of economic thought comes from the work of German
economist Karl Marx.Marxist (later, Marxian) economics descends from
classical economics. It derives from the work of Karl Marx. The first
volume of Marx's major work, Das Kapital, was published in German in
1867. In it, Marx focused on the labour theory of value and what he
considered to be the exploitation of labour by capital.[32][33] The
labour theory of value held that the value of a thing was determined
by the labor that went into its production. This contrasts with the
modern understanding that the value of a thing is determined by what
one is willing to give up to obtain the thing.

Neoclassical economics

Main article: Neoclassical economics

A body of theory later termed 'neoclassical economics' or
'marginalism' formed from about 1870 to 1910. The term 'economics' was
popularized by such neoclassical economists as Alfred Marshall as a
concise synonym for 'economic science' and a substitute for the
earlier, broader term 'political economy'.[34][35] This corresponded
to the influence on the subject of mathematical methods used in the
natural sciences.[2]

Neoclassical economics systematized supply and demand as joint
determinants of price and quantity in market equilibrium, affecting
both the allocation of output and the distribution of income. It
dispensed with the labour theory of value inherited from classical
economics in favor of a marginal utility theory of value on the demand
side and a more general theory of costs on the supply side.[36]

In microeconomics, neoclassical economics represents incentives and
costs as playing a pervasive role in shaping decision making. An
immediate example of this is the consumer theory of individual demand,
which isolates how prices (as costs) and income affect quantity
demanded. In macroeconomics it is reflected in an early and lasting
neoclassical synthesis with Keynesian macroeconomics.[37][38]

Neoclassical economics is occasionally referred as orthodox economics
whether by its critics or sympathizers. Modern mainstream economics
builds on neoclassical economics but with many refinements that either
supplement or generalize earlier analysis, such as econometrics, game
theory, analysis of market failure and imperfect competition, and the
neoclassical model of economic growth for analyzing long-run variables
affecting national income.

Keynesian economics

Main articles: Keynesian economics and Post-Keynesian economics

John Maynard Keynes (above, right), widely considered a key theorist
in economics.Keynesian economics derives from John Maynard Keynes, in
particular his book The General Theory of Employment, Interest and
Money (1936), which ushered in contemporary macroeconomics as a
distinct field.[39][40] The book focused on determinants of national
income in the short run when prices are relatively inflexible. Keynes
attempted to explain in broad theoretical detail why high labour-
market unemployment might not be self-correcting due to low "effective
demand" and why even price flexibility and monetary policy might be
unavailing. Such terms as "revolutionary" have been applied to the
book in its impact on economic analysis.[41][42][43]

Keynesian economics has two successors. Post-Keynesian economics also
concentrates on macroeconomic rigidities and adjustment processes.
Research on micro foundations for their models is represented as based
on real-life practices rather than simple optimizing models. It is
generally associated with the University of Cambridge and the work of
Joan Robinson.[44]

New-Keynesian economics is also associated with developments in the
Keynesian fashion. Within this group researchers tend to share with
other economists the emphasis on models employing micro foundations
and optimizing behavior but with a narrower focus on standard
Keynesian themes such as price and wage rigidity. These are usually
made to be endogenous features of the models, rather than simply
assumed as in older Keynesian-style ones.

Chicago School of economics

Main article: Chicago school (economics)

The Chicago School of economics is best known for its free market
advocacy and monetarist ideas. According to Milton Friedman and
monetarists, market economies are inherently stable if left to
themselves and depressions result only from government intervention.
[45] Friedman, for example, argued that the Great Depression was
result of a contraction of the money supply, controlled by the Federal
Reserve, and not by the lack of investment as Keynes had argued. Ben
Bernanke, current Chairman of the Federal Reserve, is among the
economists today generally accepting Friedman's analysis of the causes
of the Great Depression.[46]

Milton Friedman effectively took many of the basic principles set
forth by Adam Smith and the classical economists and modernized them.
One example of this is his article in the September 1970 issue of The
New York Times Magazine, where he claims that the social
responsibility of business should be “to use its resources and engage
in activities designed to increase its profits...(through) open and
free competition without deception or fraud.” [47]

Other schools and approaches

Main article: Schools of economics

Other well-known schools or trends of thought referring to a
particular style of economics practiced at and disseminated from well-
defined groups of academicians that have become known worldwide,
include the Austrian School, the Freiburg School, the School of
Lausanne, post-Keynesian economics and the Stockholm school.
Contemporary mainstream economics is sometimes separated into the
Saltwater approach of those universities along the Eastern and Western
coasts of the US, and the Freshwater, or Chicago-school approach.

Within macroeconomics there is, in general order of their appearance
in the literature; classical economics, Keynesian economics, the
neoclassical synthesis, post-Keynesian economics, monetarism, new
classical economics, and supply-side economics. Alternative
developments include ecological economics, institutional economics,
evolutionary economics, dependency theory, structuralist economics,
world systems theory, econophysics, and biophysical economics.[48]


Main article: Microeconomics

Microeconomics looks at interactions through individual markets, given
scarcity and government regulation. A given market might be for a
product, say fresh corn, or the services of a factor of production,
say bricklaying. The theory considers aggregates of quantity demanded
by buyers and quantity supplied by sellers at each possible price per
unit. It weaves these together to describe how the market may reach
equilibrium as to price and quantity or respond to market changes over

This is broadly termed supply and demand analysis. Market structures,
such as perfect competition and monopoly, are examined as to
implications for behavior and economic efficiency. Analysis of change
in a single market often proceeds from the simplifying assumption that
behavioral relations in other markets remain unchanged, that is,
partial-equilibrium analysis. General-equilibrium theory allows for
changes in different markets and aggregates across all markets,
including their movements and interactions toward equilibrium.[49][50]


Main articles: Production-possibility frontier, Opportunity cost, and
Production theory basics

In microeconomics, production is the conversion of inputs into
outputs. It is an economic process that uses resources to create a
commodity that is suitable for exchange. This can include
manufacturing, warehousing, shipping, and packaging. Some economists
define production broadly as all economic activity other than
consumption. They see every commercial activity other than the final
purchase as some form of production. Production is a process, and as
such it occurs through time and space. Because it is a flow concept,
production is measured as a "rate of output per period of time".

There are three aspects to production processes, including the
quantity of the commodity produced, the form of the good created and
the temporal and spatial distribution of the commodity produced.
Opportunity cost expresses the idea that for every choice, the true
economic cost is the next best opportunity. Choices must be made
between desirable yet mutually exclusive actions. It has been
described as expressing "the basic relationship between scarcity and
choice.".[51] The notion of opportunity cost plays a crucial part in
ensuring that scarce resources are used efficiently.[52] Thus,
opportunity costs are not restricted to monetary or financial costs:
the real cost of output forgone, lost time, pleasure or any other
benefit that provides utility should also be considered.

The inputs or resources used in the production process are called
factors of production. Possible inputs are typically grouped into six
categories. These factors are raw materials, machinery, labour
services, capital goods, land, and enterprise. In the short-run, as
opposed to the long-run, at least one of these factors of production
is fixed. Examples include major pieces of equipment, suitable factory
space, and key personnel.

A variable factor of production is one whose usage rate can be changed
easily. Examples include electrical power consumption, transportation
services, and most raw material inputs. In the "long-run", all of
these factors of production can be adjusted by management. In the
short run, a firm's "scale of operations" determines the maximum
number of outputs that can be produced, but in the long run, there are
no scale limitations. Long-run and short-run changes play an important
part in economic models.

Economic efficiency describes how well a system generates the maximum
desired output a with a given set of inputs and available technology.
Efficiency is improved if more output is generated without changing
inputs, or in other words, the amount of "friction" or "waste" is
reduced. Economists look for Pareto efficiency, which is reached when
a change cannot make someone better off without making someone else
worse off.

Economic efficiency is used to refer to a number of related concepts.
A system can be called economically efficient if: No one can be made
better off without making someone else worse off, more output cannot
be obtained without increasing the amount of inputs, and production
ensures the lowest possible per unit cost. These definitions of
efficiency are not exactly equivalent. However, they are all
encompassed by the idea that nothing more can be achieved given the
resources available.


Main articles: Division of labour, Comparative advantage, and Gains
from trade
Specialization is considered key to economic efficiency because
different individuals or countries have different comparative
advantages. While one country may have an absolute advantage in every
area over other countries, it could nonetheless specialize in the area
which it has a relative comparative advantage, and thereby gain from
trading with countries which have no absolute advantages. For example,
a country may specialize in the production of high-tech knowledge
products, as developed countries do, and trade with developing nations
for goods produced in factories, where labor is cheap and plentiful.

According to theory, in this way more total products and utility can
be achieved than if countries produced their own high-tech and low-
tech products. The theory of comparative advantage is largely the
basis for the typical economist's belief in the benefits of free
trade. This concept applies to individuals, farms, manufacturers,
service providers, and economies. Among each of these production
systems, there may be a corresponding division of labour with each
worker having a distinct occupation or doing a specialized task as
part of the production effort, or correspondingly different types of
capital equipment and differentiated land uses.[53][54][55]

Adam Smith's Wealth of Nations (1776) discusses the benefits of the
division of labour. Smith noted that an individual should invest a
resource, for example, land or labour, so as to earn the highest
possible return on it. Consequently, all uses of the resource should
yield an equal rate of return (adjusted for the relative riskiness of
each enterprise). Otherwise reallocation would result. This idea,
wrote George Stigler, is the central proposition of economic theory,
and is today called the marginal productivity theory of income
distribution. French economist Turgot had made the same point in 1766.

In more general terms, it is theorized that market incentives,
including prices of outputs and productive inputs, select the
allocation of factors of production by comparative advantage, that is,
so that (relatively) low-cost inputs are employed to keep down the
opportunity cost of a given type of output. In the process, aggregate
output increases as a by product or by design.[57] Such specialization
of production creates opportunities for gains from trade whereby
resource owners benefit from trade in the sale of one type of output
for other, more highly-valued goods. A measure of gains from trade is
the increased output (formally, the sum of increased consumer surplus
and producer profits) from specialization in production and resulting

Supply and demand

Main article: Supply and demand

The supply and demand model describes how prices vary as a result of a
balance between product availability and demand. The graph depicts an
increase (that is, right-shift) in demand from D1 to D2 along with the
consequent increase in price and quantity required to reach a new
equilibrium point on the supply curve (S).The theory of demand and
supply is an organizing principle to explain prices and quantities of
goods sold and changes thereof in a market economy. In microeconomic
theory, it refers to price and output determination in a perfectly
competitive market. This has served as a building block for modeling
other market structures and for other theoretical approaches.

For a given market of a commodity, demand shows the quantity that all
prospective buyers would be prepared to purchase at each unit price of
the good. Demand is often represented using a table or a graph
relating price and quantity demanded (see boxed figure). Demand theory
describes individual consumers as rationally choosing the most
preferred quantity of each good, given income, prices, tastes, etc. A
term for this is 'constrained utility maximization' (with income as
the constraint on demand). Here, utility refers to the (hypothesized)
preference relation for individual consumers. Utility and income are
then used to model hypothesized properties about the effect of a price
change on the quantity demanded.

The law of demand states that, in general, price and quantity demanded
in a given market are inversely related. In other words, the higher
the price of a product, the less of it people would be able and
willing to buy of it (other things unchanged). As the price of a
commodity rises, overall purchasing power decreases (the income
effect) and consumers move toward relatively less expensive goods (the
substitution effect). Other factors can also affect demand; for
example an increase in income will shift the demand curve outward
relative to the origin, as in the figure.

Supply is the relation between the price of a good and the quantity
available for sale from suppliers (such as producers) at that price.
Supply is often represented using a table or graph relating price and
quantity supplied. Producers are hypothesized to be profit-maximizers,
meaning that they attempt to produce the amount of goods that will
bring them the highest profit. Supply is typically represented as a
directly proportional relation between price and quantity supplied
(other things unchanged).

In other words, the higher the price at which the good can be sold,
the more of it producers will supply. The higher price makes it
profitable to increase production. At a price below equilibrium, there
is a shortage of quantity supplied compared to quantity demanded. This
pulls the price up. At a price above equilibrium, there is a surplus
of quantity supplied compared to quantity demanded. This pushes the
price down. The model of supply and demand predicts that for given
supply and demand curves, price and quantity will stabilize at the
price that makes quantity supplied equal to quantity demanded. This is
at the intersection of the two curves in the graph above, market

For a given quantity of a good, the price point on the demand curve
indicates the value, or marginal utility[61] to consumers for that
unit of output. It measures what the consumer would be prepared to pay
for the corresponding unit of the good. The price point on the supply
curve measures marginal cost, the increase in total cost to the
supplier for the corresponding unit of the good. The price in
equilibrium is determined by supply and demand. In a perfectly
competitive market, supply and demand equate cost and value at

Demand and supply can also be used to model the distribution of income
to the factors of production, including labour and capital, through
factor markets. In a labour market for example, the quantity of labour
employed and the price of labour (the wage rate) are modeled as set by
the demand for labour (from business firms etc. for production) and
supply of labour (from workers).

Demand and supply are used to explain the behavior of perfectly
competitive markets, but their usefulness as a standard of performance
extends to any type of market. Demand and supply can also be
generalized to explain variables applying to the whole economy, for
example, quantity of total output and the general price level, studied
in macroeconomics.

In supply-and-demand analysis, the price of a good coordinates
production and consumption quantities. Price and quantity have been
described as the most directly observable characteristics of a good
produced for the market.[63] Supply, demand, and market equilibrium
are theoretical constructs linking price and quantity. But tracing the
effects of factors predicted to change supply and demand—and through
them, price and quantity—is a standard exercise in applied
microeconomics and macroeconomics. Economic theory can specify under
what circumstances price serves as an efficient communication device
to regulate quantity.[64] A real-world application might attempt to
measure how much variables that increase supply or demand change price
and quantity.

Marginalism is the use of marginal concepts within economics. Marginal
concepts are associated with a specific change in the quantity used of
a good or of a service, as opposed to some notion of the over-all
significance of that class of good or service, or of some total
quantity thereof. The central concept of marginalism proper is that of
marginal utility, but marginalists following the lead of Alfred
Marshall were further heavily dependent upon the concept of marginal
physical productivity in their explanation of cost; and the
neoclassical tradition that emerged from British marginalism generally
abandoned the concept of utility and gave marginal rates of
substitution a more fundamental rôle in analysis.

Market failure

Main articles: Market failure, Government failure, Information
economics, Environmental economics, and Agricultural economics

Pollution can be a simple example of market failure. If costs of
production are not borne by producers but are by the environment,
accident victims or others, then prices are distorted.The term "market
failure" encompasses several problems which may undermine standard
economic assumptions. Although economists categorise market failures
differently,[65] the following categories emerge in the main texts.

Natural monopoly, or the overlapping concepts of "practical" and
"technical" monopoly, involves a failure of competition as a restraint
on producers. The problem is described as one where the more of a
product is made, the greater the returns are. This means it only makes
economic sense to have one producer.

Information asymmetries arise where one party has more or better
information than the other. The existence of information asymmetry
gives rise to problems such as moral hazard, and adverse selection,
studied in contract theory. The economics of information has relevance
in many fields, including finance, insurance, contract law, and
decision-making under risk and uncertainty.[67]

Incomplete markets is a term used for a situation where buyers and
sellers do not know enough about each other's positions to price goods
and services properly. Based on George Akerlof's Market for Lemons
article, the paradigm example is of a dodgy second hand car market.
Customers without the possibility to know for certain whether they are
buying a "lemon" will push the average price down below what a good
quality second hand car would be. In this way, prices may not reflect
true values.

Public goods are goods which are undersupplied in a typical market.
The defining features are that people can consume public goods without
having to pay for them and that more than one person can consume the
good at the same time.

Externalities occur where there are significant social costs or
benefits from production or consumption that are not reflected in
market prices. For example, air pollution may generate a negative
externality, and education may generate a positive externality (less
crime, etc.). Governments often tax and otherwise restrict the sale of
goods that have negative externalities and subsidize or otherwise
promote the purchase of goods that have positive externalities in an
effort to correct the price distortions caused by these externalities.
[68] Elementary demand-and-supply theory predicts equilibrium but not
the speed of adjustment for changes of equilibrium due to a shift in
demand or supply.[69]

In many areas, some form of price stickiness is postulated to account
for quantities, rather than prices, adjusting in the short run to
changes on the demand side or the supply side. This includes standard
analysis of the business cycle in macroeconomics. Analysis often
revolves around causes of such price stickiness and their implications
for reaching a hypothesized long-run equilibrium. Examples of such
price stickiness in particular markets include wage rates in labour
markets and posted prices in markets deviating from perfect

Macroeconomic instability, addressed below, is a prime source of
market failure, whereby a general loss of business confidence or
external shock can grind production and distribution to a halt,
undermining ordinary markets that are otherwise sound.

Environmental scientist sampling waterSome specialised fields of
economics deal in market failure more than others. The economics of
the public sector is one example, since where markets fail, some kind
of regulatory or government programme is the remedy. Much
environmental economics concerns externalities or "public bads".

Policy options include regulations that reflect cost-benefit analysis
or market solutions that change incentives, such as emission fees or
redefinition of property rights.[70][71]


Main articles: Theory of the firm, Industrial organization, Labour
economics, Financial economics, Business economics, and Managerial

In Virtual Markets, buyer and seller are not present and trade via
intermediates and electronic information. Pictured: São Paulo Stock
Exchange.One of the assumptions of perfectly competitive markets is
that there are many producers, none of whom can influence prices or
act independently of market forces. In reality, however, people do not
simply trade on markets, they work and produce through firms. The most
obvious kinds of firms are corporations, partnerships and trusts.
According to Ronald Coase people begin to organise their production in
firms when the costs of doing business becomes lower than doing it on
the market.[72] Firms combine labour and capital, and can achieve far
greater economies of scale (when producing two or more things is
cheaper than one thing) than individual market trading.

Labour economics seeks to understand the functioning of the market and
dynamics for labour. Labour markets function through the interaction
of workers and employers. Labour economics looks at the suppliers of
labour services (workers), the demanders of labour services
(employers), and attempts to understand the resulting patterns of
wages and other labour income and of employment and unemployment,
Practical uses include assisting the formulation of full employment of

Industrial organization studies the strategic behavior of firms, the
structure of markets and their interactions. The common market
structures studied include perfect competition, monopolistic
competition, various forms of oligopoly, and monopoly.[74]

Financial economics, often simply referred to as finance, is concerned
with the allocation of financial resources in an uncertain (or risky)
environment. Thus, its focus is on the operation of financial markets,
the pricing of financial instruments, and the financial structure of

Managerial economics applies microeconomic analysis to specific
decisions in business firms or other management units. It draws
heavily from quantitative methods such as operations research and
programming and from statistical methods such as regression analysis
in the absence of certainty and perfect knowledge. A unifying theme is
the attempt to optimize business decisions, including unit-cost
minimization and profit maximization, given the firm's objectives and
constraints imposed by technology and market conditions.[76][77]

Public sector

Main articles: Economics of the public sector and Public finance

See also: Welfare economics

Public finance is the field of economics that deals with budgeting the
revenues and expenditures of a public sector entity, usually
government. The subject addresses such matters as tax incidence (who
really pays a particular tax), cost-benefit analysis of government
programs, effects on economic efficiency and income distribution of
different kinds of spending and taxes, and fiscal politics. The
latter, an aspect of public choice theory, models public-sector
behavior analogously to microeconomics, involving interactions of self-
interested voters, politicians, and bureaucrats.[78]

Much of economics is positive, seeking to describe and predict
economic phenomena. Normative economics seeks to identify what is
economically good and bad.

Welfare economics is a normative branch of economics that uses
microeconomic techniques to simultaneously determine the allocative
efficiency within an economy and the income distribution associated
with it. It attempts to measure social welfare by examining the
economic activities of the individuals that comprise society.[79]


A depiction of the circular flow of incomeMain article: Macroeconomics
Macroeconomics examines the economy as a whole to explain broad
aggregates and their interactions "top down," that is, using a
simplified form of general-equilibrium theory.[80] Such aggregates
include national income and output, the unemployment rate, and price
inflation and subaggregates like total consumption and investment
spending and their components. It also studies effects of monetary
policy and fiscal policy.

Since at least the 1960s, macroeconomics has been characterized by
further integration as to micro-based modeling of sectors, including
rationality of players, efficient use of market information, and
imperfect competition.[81] This has addressed a long-standing concern
about inconsistent developments of the same subject.[82]

Macroeconomic analysis also considers factors affecting the long-term
level and growth of national income. Such factors include capital
accumulation, technological change and labor force growth.[83][84]


World map showing GDP real growth rates for 2008Main articles:
Economic growth and General equilibrium

Growth economics studies factors that explain economic growth – the
increase in output per capita of a country over a long period of time.
The same factors are used to explain differences in the level of
output per capita between countries, in particular why some countries
grow faster than others, and whether countries converge at the same
rates of growth.

Much-studied factors include the rate of investment, population
growth, and technological change. These are represented in theoretical
and empirical forms (as in the neoclassical and endogenous growth
models) and in growth accounting.[85][86]

The Business Cycle

Main article: Business cycle

See also: Circular flow of income, Aggregate supply, Aggregate demand,
Unemployment, and Great Depression

The economics of a depression were the spur for the creation of
"macroeconomics" as a separate discipline field of study. During the
Great Depression of the 1930s, John Maynard Keynes authored a book
entitled The General Theory of Employment, Interest and Money
outlining the key theories of Keynesian economics. Keynes contended
that aggregate demand for goods might be insufficient during economic
downturns, leading to unnecessarily high unemployment and losses of
potential output.

He therefore advocated active policy responses by the public sector,
including monetary policy actions by the central bank and fiscal
policy actions by the government to stabilize output over the business
cycle[87] Thus, a central conclusion of Keynesian economics is that,
in some situations, no strong automatic mechanism moves output and
employment towards full employment levels. John Hicks' IS/LM model has
been the most influential interpretation of The General Theory.

Over the years, the understanding of the business cycle has branched
into various schools, related to or opposed to Keynesianism. The
neoclassical synthesis refers to the reconciliation of Keynesian
economics with neoclassical economics, stating that Keynesianism is
correct in the short run, with the economy following neoclassical
theory in the long run.

The New classical school critiques the Keynesian view of the business
cycle. It includes Friedman's permanent income hypothesis view on
consumption, the "rational expectations revolution"[88] spearheaded by
Robert Lucas, and real business cycle theory.

In contrast, the New Keynesian school retains the rational
expectations assumption, however it assumes a variety of market
failures. In particular, New Keynesians assume prices and wages are
"sticky", which means they do not adjust instantaneously to changes in
economic conditions.

Thus, the new classicals assume that prices and wages adjust
automatically to attain full employment, whereas the new Keynesians
see full employment as being automatically achieved only in the long
run, and hence government and central-bank policies are needed because
the "long run" may be very long.

Inflation and monetary policy

Main articles: Inflation and Monetary policy

See also: Money, Quantity theory of money, Monetary policy, History of
money, and Milton Friedman

A 640 BCE one-third stater electrum coin from Lydia, shown larger. One
of the first standardized coins.Money is a means of final payment for
goods in most price system economies and the unit of account in which
prices are typically stated. It includes currency held by the nonbank
public and checkable deposits. It has been described as a social
convention, like language, useful to one largely because it is useful
to others.

As a medium of exchange, money facilitates trade. Its economic
function can be contrasted with barter (non-monetary exchange). Given
a diverse array of produced goods and specialized producers, barter
may entail a hard-to-locate double coincidence of wants as to what is
exchanged, say apples and a book. Money can reduce the transaction
cost of exchange because of its ready acceptability. Then it is less
costly for the seller to accept money in exchange, rather than what
the buyer produces.[89]

At the level of an economy, theory and evidence are consistent with a
positive relationship running from the total money supply to the
nominal value of total output and to the general price level. For this
reason, management of the money supply is a key aspect of monetary

Fiscal policy and regulation

The Bank of England is a central bankMain articles: Fiscal policy,
Government spending, Regulation, and National accounts

National accounting is a method for summarizing aggregate economic
activity of a nation. The national accounts are double-entry
accounting systems that provide detailed underlying measures of such
information. These include the national income and product accounts
(NIPA), which provide estimates for the money value of output and
income per year or quarter.

NIPA allows for tracking the performance of an economy and its
components through business cycles or over longer periods. Price data
may permit distinguishing nominal from real amounts, that is,
correcting money totals for price changes over time.[92][93] The
national accounts also include measurement of the capital stock,
wealth of a nation, and international capital flows.[94]

International economics

Main articles: International economics and Economic system

International trade studies determinants of goods-and-services flows
across international boundaries. It also concerns the size and
distribution of gains from trade. Policy applications include
estimating the effects of changing tariff rates and trade quotas.
International finance is a macroeconomic field which examines the flow
of capital across international borders, and the effects of these
movements on exchange rates. Increased trade in goods, services and
capital between countries is a major effect of contemporary

World map showing GDP (PPP) per capita.The distinct field of
development economics examines economic aspects of the development
process in relatively low-income countries focussing on structural
change, poverty, and economic growth. Approaches in development
economics frequently incorporate social and political factors.[98][99]

Economic systems is the branch of economics that studies the methods
and institutions by which societies determine the ownership,
direction, and allocaton of economic resources. An economic system of
a society is the unit of analysis.

Among contemporary systems at different ends of the organizational
spectrum are socialist systems and capitalist systems, in which most
production occurs in respectively state-run and private enterprises.
In between are mixed economies. A common element is the interaction of
economic and political influences, broadly described as political
economy. Comparative economic systems studies the relative performance
and behavior of different economies or systems.[100][101]

Economics in practice

Main articles: Mathematical economics, Economic methodology, and
Schools of economics

Contemporary mainstream economics, as a formal mathematical modeling
field, could also be called mathematical economics.[102] It draws on
the tools of calculus, linear algebra, statistics, game theory, and
computer science.[103] Professional economists are expected to be
familiar with these tools, although all economists specialize, and
some specialize in econometrics and mathematical methods while others
specialize in less quantitative areas.

Heterodox economists place less emphasis upon mathematics, and several
important historical economists, including Adam Smith and Joseph
Schumpeter, have not been mathematicians. Economic reasoning involves
intuition regarding economic concepts, and economists attempt to
analyze to the point of discovering unintended consequences.


Mainstream economic theory relies upon a priori quantitative economic
models, which employ a variety of concepts. Theory typically proceeds
with an assumption of ceteris paribus, which means holding constant
explanatory variables other than the one under consideration. When
creating theories, the objective is to find ones which are at least as
simple in information requirements, more precise in predictions, and
more fruitful in generating additional research than prior theories.

In microeconomics, principal concepts include supply and demand,
marginalism, rational choice theory, opportunity cost, budget
constraints, utility, and the theory of the firm.[105][106] Early
macroeconomic models focused on modeling the relationships between
aggregate variables, but as the relationships appeared to change over
time macroeconomists were pressured to base their models in

The aforementioned microeconomic concepts play a major part in
macroeconomic models – for instance, in monetary theory, the quantity
theory of money predicts that increases in the money supply increase
inflation, and inflation is assumed to be influenced by rational
expectations. In development economics, slower growth in developed
nations has been sometimes predicted because of the declining marginal
returns of investment and capital, and this has been observed in the
Four Asian Tigers. Sometimes an economic hypothesis is only
qualitative, not quantitative.[107]

Expositions of economic reasoning often use two-dimensional graphs to
illustrate theoretical relationships. At a higher level of generality,
Paul Samuelson's treatise Foundations of Economic Analysis (1947) used
mathematical methods to represent the theory, particularly as to
maximizing behavioral relations of agents reaching equilibrium. The
book focused on examining the class of statements called operationally
meaningful theorems in economics, which are theorems that can
conceivably be refuted by empirical data.[108]

Empirical investigation

Main articles: Econometrics and Experimental economics

Economic theories are frequently tested empirically, largely through
the use of econometrics using economic data.[109] The controlled
experiments common to the physical sciences are difficult and uncommon
in economics[110] , and instead broad data is observationally studied;
this type of testing is typically regarded as less rigorous than
controlled experimentation, and the conclusions typically more
tentative. The number of laws discovered by the discipline of
economics is relatively very low compared to the physical sciences.
[citation needed]

Statistical methods such as regression analysis are common.
Practitioners use such methods to estimate the size, economic
significance, and statistical significance ("signal strength") of the
hypothesized relation(s) and to adjust for noise from other variables.
By such means, a hypothesis may gain acceptance, although in a
probabilistic, rather than certain, sense. Acceptance is dependent
upon the falsifiable hypothesis surviving tests. Use of commonly
accepted methods need not produce a final conclusion or even a
consensus on a particular question, given different tests, data sets,
and prior beliefs.

Criticism based on professional standards and non-replicability of
results serve as further checks against bias, errors, and over-
generalization,[106][111] although much economic research has been
accused of being non-replicable, and prestigious journals have been
accused of not facilitating replication through the provision of the
code and data.[112] Like theories, uses of test statistics are
themselves open to critical analysis,[113][114][115] although critical
commentary on papers in economics in prestigious journals such as the
American Economic Review has declined precipitously in the past 40
years.[116] This has been attributed to journals' incentives to
maximize citations in order to rank higher on the Social Science
Citation Index (SSCI).[117]

In applied economics, input-output models employing linear programming
methods are quite common. Large amounts of data are run through
computer programs to analyze the impact of certain policies; IMPLAN is
one well-known example.

Experimental economics has promoted the use of scientifically
controlled experiments. This has reduced long-noted distinction of
economics from natural sciences allowed direct tests of what were
previously taken as axioms.[118][119] In some cases these have found
that the axioms are not entirely correct; for example, the ultimatum
game has revealed that people reject unequal offers.

In behavioral economics, psychologists Daniel Kahneman and Amos
Tversky have won Nobel Prizes in economics for their empirical
discovery of several cognitive biases and heuristics. Similar
empirical testing occurs in neuroeconomics. Another example is the
assumption of narrowly selfish preferences versus a model that tests
for selfish, altruistic, and cooperative preferences.[120][121] These
techniques have led some to argue that economics is a "genuine

Game theory

Main article: Game theory

Game theory is a branch of applied mathematics that studies strategic
interactions between agents. In strategic games, agents choose
strategies that will maximize their payoff, given the strategies the
other agents choose. It provides a formal modeling approach to social
situations in which decision makers interact with other agents.

Game theory generalizes maximization approaches developed to analyze
markets such as the supply and demand model. The field dates from the
1944 classic Theory of Games and Economic Behavior by John von Neumann
and Oskar Morgenstern. It has found significant applications in many
areas outside economics as usually construed, including formulation of
nuclear strategies, ethics, political science, and evolutionary theory.


Main article: Economist

The professionalization of economics, reflected in the growth of
graduate programs on the subject, has been described as "the main
change in economics since around 1900".[123] Most major universities
and many colleges have a major, school, or department in which
academic degrees are awarded in the subject, whether in the liberal
arts, business, or for professional study.

The Nobel Memorial Prize in Economic Sciences (commonly known as the
Nobel Prize in Economics) is a prize awarded to economists each year
for outstanding intellectual contributions in the field. In the
private sector, professional economists are employed as consultants
and in industry, including banking and finance. Economists also work
for various government departments and agencies, for example, the
national Treasury, Central Bank or Bureau of Statistics.

Economics and other subjects

Main articles: Philosophy of economics, Law and Economics, Political
economy, and Natural resource economics
Economics is one social science among several and has fields bordering
on other areas, including economic geography, economic history, public
choice, energy economics, cultural economics, and institutional

Law and economics, or economic analysis of law, is an approach to
legal theory that applies methods of economics to law. It includes the
use of economic concepts to explain the effects of legal rules, to
assess which legal rules are economically efficient, and to predict
what the legal rules will be.[124][125] A seminal article by Ronald
Coase published in 1961 suggested that well-defined property rights
could overcome the problems of externalities.[126]

Political economy is the interdisciplinary study that combines
economics, law, and political science in explaining how political
institutions, the political environment, and the economic system
(capitalist, socialist, mixed) influence each other. It studies
questions such as how monopoly, rent seeking behavior, and
externalities should impact government policy.[127][128] Historians
have employed political economy to explore the ways in the past that
persons and groups with common economic interests have used politics
to effect changes beneficial to their interests.[129]

Energy economics is a broad scientific subject area which includes
topics related to energy supply and energy demand. Georgescu-Roegen
reintroduced the concept of entropy in relation to economics and
energy from thermodynamics, as distinguished from what he viewed as
the mechanistic foundation of neoclassical economics drawn from
Newtonian physics. His work contributed significantly to
thermoeconomics and to ecological economics. He also did foundational
work which later developed into evolutionary economics.[130][131][132]

The sociological subfield of economic sociology arose, primarily
through the work of Émile Durkheim, Max Weber and Georg Simmel, as an
approach to analysing the effects of economic phenomena in relation to
the overarching social paradigm (i.e. modernity).[135] Classic works
include Max Weber's The Protestant Ethic and the Spirit of Capitalism
(1905) and Georg Simmel's The Philosophy of Money (1900). More
recently, the works of Mark Granovetter, Peter Hedstrom and Richard
Swedberg have been influential in this field.

Criticisms of economics

"The dismal science" is a derogatory alternative name for economics
devised by the Victorian historian Thomas Carlyle in the 19th century.
It is often stated that Carlyle gave economics the nickname "the
dismal science" as a response to the late 18th century writings of The
Reverend Thomas Robert Malthus, who grimly predicted that starvation
would result, as projected population growth exceeded the rate of
increase in the food supply. The teachings of Malthus eventually
became known under the umbrella phrase "Malthus' Dismal Theorem". His
predictions were forestalled by unanticipated dramatic improvements in
the efficiency of food production in the 20th century; yet the bleak
end he proposed remains as a disputed future possibility, assuming
human innovation fails to keep up with population growth.[136]

Some economists, like John Stuart Mill or Leon Walras, have maintained
that the production of wealth should not be tied to its distribution.
The former is in the field of "applied economics" while the latter
belongs to "social economics" and is largely a matter of power and

In The Wealth of Nations, Adam Smith addressed many issues that are
currently also the subject of debate and dispute. Smith repeatedly
attacks groups of politically aligned individuals who attempt to use
their collective influence to manipulate a government into doing their
bidding. In Smith's day, these were referred to as factions, but are
now more commonly called special interests, a term which can comprise
international bankers, corporate conglomerations, outright
oligopolies, monopolies, trade unions and other groups.[138]

Economics per se, as a social science, is independent of the political
acts of any government or other decision-making organization, however,
many policymakers or individuals holding highly ranked positions that
can influence other people's lives are known for arbitrarily using a
plethora of economic concepts and rhetoric as vehicles to legitimize
agendas and value systems, and do not limit their remarks to matters
relevant to their responsibilities.[citation needed] The close
relation of economic theory and practice with politics[139] is a focus
of contention that may shade or distort the most unpretentious
original tenets of economics, and is often confused with specific
social agendas and value systems.[140] Notwithstanding, economics
legitimately has a role in informing government policy. It is, indeed,
in some ways an outgrowth of the older field of political economy.
Some academic economic journals are currently focusing increased
efforts on gauging the consensus of economists regarding certain
policy issues in hopes of effecting a more informed political
environment. Currently, there exists a low approval rate from
professional economists regarding many public policies. Policy issues
featured in a recent survey of AEA economists include trade
restrictions, social insurance for those put out of work by
international competition, genetically modified foods, curbside
recycling, health insurance (several questions), medical malpractice,
barriers to entering the medical profession, organ donations,
unhealthy foods, mortgage deductions, taxing internet sales, Wal-Mart,
casinos, ethanol subsidies, and inflation targeting.[141]

In Steady State Economics 1977, Herman Daly argues that there exist
logical inconsistencies between the emphasis placed on economic growth
and the limited availability of natural resources.[142]

Issues like central bank independence, central bank policies and
rhetoric in central bank governors discourse or the premises of
macroeconomic policies[143] (monetary and fiscal policy) of the
States, are focus of contention and criticism.[144][145][146][147]

Deirdre McCloskey has argued that many empirical economic studies are
poorly reported, and while her critique has been well-received, she
and Stephen Ziliak argue that practice has not improved.[148] This
latter contention is controversial.[149]

A 2002 International Monetary Fund study looked at “consensus
forecasts” (the forecasts of large groups of economists) that were
made in advance of 60 different national recessions in the ’90s: in
97% of the cases the economists did not predict the contraction a year
in advance. On those rare occasions when economists did successfully
predict recessions, they significantly underestimated their severity.

Criticism of assumptions
Economics has been subject to criticism that it relies on unrealistic,
unverifiable, or highly simplified assumptions, in some cases because
these assumptions lend themselves to elegant mathematics. Examples
include perfect information, profit maximization and rational choices.
[151] [152][153] Some contemporary economic theory has focused on
addressing these problems through the emerging subdisciplines of
information economics, behavioral economics, and complexity economics,
with Geoffrey Hodgson forecasting a major shift in the mainstream
approach to economics.[154] Nevertheless, prominent mainstream
economists such as Keynes[155] and Joskow, along with heterodox
economists, have observed that much of economics is conceptual rather
than quantitative, and difficult to model and formalize
quantitatively. In a discussion on oligopoly research, Paul Joskow
pointed out in 1975 that in practice, serious students of actual
economies tended to use "informal models" based upon qualitative
factors specific to particular industries. Joskow had a strong feeling
that the important work in oligopoly was done through informal
observations while formal models were "trotted out ex post". He argued
that formal models were largely not important in the empirical work,
either, and that the fundamental factor behind the theory of the firm,
behavior, was neglected.[156]

Despite these concerns, mainstream graduate programs have become
increasingly technical and mathematical.[157] Although much of the
most groundbreaking economic research in history involved concepts
rather than math, today it is nearly impossible to publish a non-
mathematical paper in top economic journals.[158] Disillusionment on
the part of some students with the abstract and technical focus of
economics led to the post-autistic economics movement, which began in
France in 2000.

David Colander, an advocate of complexity economics, has also
commented critically on the mathematical methods of economics, which
he associates with the MIT approach to economics, as opposed to the
Chicago approach (although he also states that the Chicago school can
no longer be called intuitive). He believes that the policy
recommendations following from Chicago's intuitive approach had
something to do with the decline of intuitive economics. He notes that
he has encountered colleagues who have outright refused to discuss
interesting economics without a formal model, and he believes that the
models can sometimes restrict intuition.[159] More recently, however,
he has written that heterodox economics, which generally takes a more
intuitive approach, needs to ally with mathematicians and become more
mathematical.[102] "Mainstream economics is a formal modeling field",
he writes, and what is needed is not less math but higher levels of
math. He notes that some of the topics highlighted by heterodox
economists, such as the importance of institutions or uncertainty, are
now being studied in the mainstream through mathematical models
without mention of the work done by the heterodox economists. New
institutional economics, for example, examines institutions
mathematically without much relation to the largely heterodox field of
institutional economics.

In his 1974 Nobel Prize lecture, Friedrich Hayek, known for his close
association to the heterodox school of Austrian economics, attributed
policy failures in economic advising to an uncritical and unscientific
propensity to imitate mathematical procedures used in the physical
sciences. He argued that even much-studied economic phenomena, such as
labor-market unemployment, are inherently more complex than their
counterparts in the physical sciences where such methods were earlier
formed. Similarly, theory and data are often very imprecise and lend
themselves only to the direction of a change needed, not its size.
[160] In part because of criticism, economics has undergone a thorough
cumulative formalization and elaboration of concepts and methods since
the 1940s, some of which have been toward application of the
hypothetico-deductive method to explain real-world phenomena.[161]

See also

Economics portal

Main article: Outline of economics

Books are collections of articles which can be downloaded or ordered
in print.


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↑ Campos, Antonietta (1987). "Marginalist Economics", The New
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↑ Hicks, J.R. (1937). "Mr. Keynes and the 'Classics': A Suggested
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↑ Blanchard, Olivier Jean (1987). "Neoclassical Synthesis", The New
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↑ Keynes, John Maynard (1936). The General Theory of Employment,
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↑ Blaug, Mark (2007). "The Social Sciences: Economics," The New
Encyclopædia Britannica, v. 27, p. 347. Chicago.

↑ Tarshis, L. (1987). "Keynesian Revolution", The New Palgrave: A
Dictionary of Economics, v. 3, pp. 47–50.

↑ Samuelson, Paul A., and William D. Nordhaus (2004). Economics, p.

↑ Blaug, Mark (2007). "The Social Sciences: Economics," The New
Encyclopædia Britannica, v. 27, p. 346. Chicago.

↑ Harcourt, G.C.(1987). "Post-Keynesian Economics", The New Palgrave:
A Dictionary of Economics, v. 3, pp. 47–50.

↑ Felderer, Bernhard. Macroeconomics and New Macroeconomics.

↑ Ben Bernanke (2002-11-08). "Remarks by Governor Ben S. Bernanke".
The Federal Reserve Board.

Retrieved 2008-02-26.

↑ Friedman, Milton. "The Social Responsibility of Business is to
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↑ New School of Thought Brings Energy to 'the Dismal Science' New York
Times Retrieved Oct-26-09

↑ Blaug, Mark (2007). "The Social Sciences: Economics,"
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Chicago. ISBN 0852294239

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Dictionary of Economics, v. 3, pp. 461–63. London and New York:
Macmillan and Stockton. ISBN 0-333-37235-2

↑ James M. Buchanan (1987). "Opportunity Cost", The New Palgrave: A
Dictionary of Economics, v. 3, pp. 718–21.

↑ The Economist's definition of Opportunity Cost

↑ Groenewegen, Peter (1987). "Division of Labour", The New Palgrave: A
Dictionary of Economics, v. 1, pp. 901–05.

↑ Johnson, Paul M. (2005)."Specialization," A Glossary of Political
Economy Terms.
↑ Yang, Xiaokai, and Yew-Kwang Ng (1993). Specialization and Economic
Organization. Amsterdam: North-Holland.

↑ Adam Smith, Biography: The Concise Encyclopedia of Economics:
Library of Economics and Liberty

↑ Cameron, Rondo (1993, 2nd ed.). A Concise Economic History of the
World: From Paleolithic Times to the Present, Oxford, pp. 25, 32, 276–

↑ Samuelson, Paul A., and William D. Nordhaus (2004). Economics,ch. 2,
"Trade, Specialization, and Division of Labor" section, ch. 12, 15,
"Comparative Advantage among Nations" section," "Glossary of Terms,"
Gains from trade.

↑ Findlay, Ronald (1987). "Comparative Advantage", The New Palgrave: A
Dictionary of Economics, v. 1, pp. 514–17.

↑ Kemp, Murray C. (1987). "Gains from Trade", The New Palgrave: A
Dictionary of Economics, v. 2, pp. 453–54.

↑ Baumol, William J. (2007). "Economic Theory" (Measurement and
ordinal utility). The New Encyclopædia Britannica, v. 17, p. 719.

↑ Hicks, John Richard (1939). Value and Capital. London: Oxford
University Press. 2nd ed., paper, 2001. ISBN 978–0198282693.

↑ Brody, A. (1987). "Prices and Quantities", The New Palgrave: A
Dictionary of Economics, v. 3, p. 957.

↑ Jordan, J.S. (1982). "The Competitive Allocation Process Is
Informationally Efficient Uniquely." Journal of Economic Theory,
28(1), p. 1–18.

↑ Cf. Barr (2004) pp. 72–79, whose list of market failures is melded
with failures of economic assumptions, which are (1) producers as
price takers (i.e. presence of oligopoly or monopoly; but why is this
not a product of the following?) (2) equal power of consumers (what
labour lawyers call an imbalance of bargaining power) (3) complete
markets (4) public goods (5) external effects (i.e. externalities?)
(6) increasing returns to scale (i.e. practical monopoly) (7) perfect

↑ Stiglitz (2000) Ch.4, states the sources of market failure can be
enumerated as natural monopolies, information asymmetries, incomplete
markets, externalities, public good situations and macroeconomic

↑ Lippman, S. S., and J. J. McCall (2001). "Information, Economics
of," International Encyclopedia of the Social & Behavioral Sciences,
pp. 7480–7486. Abstract.

↑ Laffont, J.J. (1987). "Externalities", The New Palgrave: A
Dictionary of Economics, v. 2, p. 263–65.

↑ Blaug, Mark (2007). "The Social Sciences: Economics". The New
Encyclopædia Britannicav. 27, p. 347. Chicago. ISBN 0852294239

↑ Kneese, Allen K., and Clifford S. Russell (1987). "Environmental
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18, "Protecting the Environment." McGraw-Hill.

↑ Coase, The Nature of the Firm (1937)

↑ Freeman, R.B. (1987). "Labour Economics", The New Palgrave: A
Dictionary of Economics, v. 3, pp. 72–76.

↑ Schmalensee, Richard (1987). "Industrial Organization", The New
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↑ Ross, Stephen A. (1987). "Finance", The New Palgrave: A Dictionary
of Economics, v. 2, pp. 322–26.

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Dictionary of Economics, v. 3, pp. 293–96.

↑ Musgrave, R.A. (1987). "Public Finance", The New Palgrave: A
Dictionary of Economics, v. 3, pp. 1055–60.

↑ Feldman, Allan M. (1987). "Welfare Economics", The New Palgrave: A
Dictionary of Economics, v. 4, pp. 889–95.

↑ Blaug, Mark (2007). "The Social Sciences: Economics," The New
Encyclopædia Britannica, v. 27, p. 345.

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↑ Howitt, Peter M. (1987). "Macroeconomics: Relations with
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London and New York: Macmillan and Stockton. ISBN 0-333-37235-2.

↑ Blaug, Mark (2007). "The Social Sciences: Economics,"
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↑ Blanchard, Olivier Jean (1987). "Neoclassical Synthesis", The New
Palgrave: A Dictionary of Economics, v. 3, pp. 634–36.

↑ Samuelson, Paul A., and William D. Nordhaus (2004). Economics, ch.
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↑ Probability, econometrics and truth: the methodology of econometrics
By Hugo A. Keuzenkamp Published by Cambridge University Press, 2000
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↑ Blaug, Mark (2007). "The Social Sciences: Economics" ( Methods of
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↑ McCullough, B.D. (2007). "Got Replicability" (PDF). The Journal of
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Retrieved 2008-06-07.

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↑ McCloskey, Deirdre N. and Stephen T. Ziliak (1996). "The Standard
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↑ Hoover, Kevin D., and Mark V. Siegler (2008). "Sound and Fury:
McCloskey and Significance Testing in Economics," Journal of Economic
Methodology, 15(1), pp. 1–37 (2005 prepubication version). Reply of
McCloskey and Ziliak and rejoinder, pp. 39–68.

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Journals". Econ Journal Watch 3 (2): 275–282.
http://ideas.repec.org/a/ejw/volone/2006275-282.html. Retrieved

↑ [Bastable, C.F.] (1925). "Experimental Methods in Economics,"
Palgrave's Dictionary of Economics, reprinted in The New Palgrave: A
Dictionary of Economics (1987, v. 2, p. 241.

↑ Smith, Vernon L. (1987), "Experimental Methods in Economics", ii.
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↑ Fehr, Ernst, and Urs Fischbacher (2003). "The Nature of Human
Altruism," Nature 425, October 23, pp. 785–791.

↑ Sigmund, Karl, Ernst Fehr, and Martin A. Nowak (2002),"The Economics
of Fair Play," Scientific American, 286(1) January, pp. 82–87.

↑ Aumann, R.J. (1987). "Game Theory", The New Palgrave: A Dictionary
of Economics, v. 2, pp. 460–82.

↑ O. Ashenfelter (2001), "Economics: Overview," The Profession of
Economics, International Encyclopedia of the Social & Behavioral
Sciences, v. 6, p. 4159.

↑ Friedman, David (1987). "Law and Economics," The New Palgrave: A
Dictionary of Economics, v. 3, p. 144.

↑ Posner, Richard A. (1972). Economic Analysis of Law. Aspen, 7th ed.,
2007) ISBN 978-0-735-56354-4.

↑ Coase, Ronald, "The Problem of Social Cost", The Journal of Law and
Economics Vol.3, No.1 (1960). This issue was actually published in

↑ Groenwegen (1987, p.906)

↑ Anne O. Krueger, "The Political Economy of the Rent-Seeking
Society," American Economic Review, 64(3), June 1974, pp.291–303

↑ McCoy, Drew R. "The Elusive Republic: Political Ecocomy in
Jeffersonian America", Chapel Hill, University of North Carolina,

↑ Cleveland, C. and Ruth, M. 1997. When, where, and by how much do
biophysical limits constrain the economic process? A survey of
Georgescu-Roegen's contribution to ecological economics. Ecological
Economics 22: 203-223.

↑ Daly, H. 1995. On Nicholas Georgescu-Roegen’s contributions to
economics: An obituary essay. Ecological Economics 13: 149-54.

↑ Mayumi, K. 1995. Nicholas Georgescu-Roegen (1906-1994): an admirable
epistemologist. Structural Change and Economic Dynamics 6: 115-120.

↑ Mayumi,K. and Gowdy, J. M. (eds.) 1999. Bioeconomics and
Sustainability: Essays in Honor of Nicholas Georgescu-Roegen.
Cheltenham: Edward Elgar.

↑ Mayumi, K. 2001. The Origins of Ecological Economics: The
Bioeconomics of Georgescu-Roegen. London: Routledge.

↑ "Principles of Economic Sociology by Richard Swedberg - An

http://press.princeton.edu/chapters/s7525.html. Retrieved 2009-12-02.

↑ Malthus, Thomas Robert (1798). "Chapter II". An Essay on the
Principle of Population, As It Affects the Future Improvement of
Society, with Remarks on the Speculations of Mr. Godwin, M. Condorcet,
and Other Writers (1st ed.). London: J Johnson.
http://www.econlib.org/library/Malthus/malPop.html. Retrieved

↑ The Origin of Economic Ideas, Guy Routh (1989)

↑ See Noam Chomsky (Understanding Power), [2] on Smith's emphasis on
class conflict in the Wealth of Nations

↑ Research Paper No. 2006/148 Ethics, Rhetoric and Politics of Post-
conflict Reconstruction How Can the Concept of Social ContractHelp Us
in Understanding How to Make Peace Work? Sirkku K. Hellsten, pg. 13

↑ Political Communication: Rhetoric, Government, and Citizens, second
edition, Dan F. Hahn

↑ Whaples, Robert. "The Policy Views of American Economic Association
Members: The Results of a New Survey". Econ Journal Watch 6(3):
337-348. [3]

↑ http://dieoff.org/page88.htm Steady-State Economics, by Herman Daly

↑ Johan Scholvinck, Director of the UN Division for Social Policy and
Development in New York, Making the Case for the Integration of Social
and Economic Policy, The Social Development Review

↑ Bernd Hayo (Georgetown University & University of Bonn), Do We
Really Need Central Bank Independence? A Critical Re- examination,
IDEAS at the Department of Economics, College of Liberal Arts and
Sciences, University of Connecticut

↑ Gabriel Mangano (Centre Walras-Pareto, University of Lausanne BFSH
1, 1015 Lausanne, Switzerland, and London School of Economics),
Measuring Central Bank Independence: A Tale of Subjectivity and of Its
Consequences, Oxford Economic Papers. 1998; 50: 468–492

↑ Friedrich Heinemann, Does it Pay to Watch Central Bankers' Lips? The
Information Content of ECB Wording, IDEAS at the Department of
Economics, College of Liberal Arts and Sciences, University of

↑ Stephen G. Cecchetti, Central Bank Policy Rules: Conceptual Issues
and Practical Considerations, IDEAS at the Department of Economics,
College of Liberal Arts and Sciences, University of Connecticut

↑ Ziliak, S.T.; McCloskey, D.N. (2004). "Size Matters: The Standard
Error of Regressions in the American Economic Review" (PDF). Econ
Journal Watch 1 (2): 331–358. http://www.econjournalwatch.org/pdf/ZiliakMcCloskeyAugust2004.pdf.
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↑ Sound and Fury: McCloskey and Significance Testing in Economics.

http://ideas.repec.org/p/wpa/wuwpem/0511018.html. Retrieved

↑ "How Accurate Are Private Sector Forecasts? Cross-Country Evidence
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↑ Rappaport, Steven (1996). "Abstraction and Unrealistic Assumptions
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Abstract, (1998). Models and Reality in Economics. Edward Elgar, p. 6,
ch. 6–8.

↑ Friedman, Milton (1953), "The Methodology of Positive Economics,"
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↑ Boland, Lawrence A. (2008). "Assumptions Controversy", The New
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↑ Hodgson, G.M (200). "Evolutionary and Institutional Economics as the
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↑ Keynes, J. M. (September 1924). "Alfred Marshall 1842–1924". The
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Barr, Nicholas (2004) Economics of the Welfare State, 4th ed., Oxford
University Press

Stiglitz, Joseph (2000) Economics of the Public Sector, 3rd ed.,
Norton Press

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Capitalism is an economic and social system in which capital and land,
the non-labor factors of production (also known as the means of
production), are privately owned;[citation needed] labor, goods and
resources are traded in markets; and profit, after taxes, is
distributed to the owners or invested in technologies and industries.

There is no consensus on the definition of capitalism, nor how it
should be used as an analytical category.[1] There are a variety of
historical cases over which it is applied, varying in time, geography,
politics and culture.[2] Economists, political economists and
historians have taken different perspectives on the analysis of
capitalism. Scholars in the social sciences, including historians,
economic sociologists, economists, anthropologists and philosophers
have debated over how to define capitalism, however there is little
controversy that private ownership of the means of production,
creation of goods or services for profit in a market, and prices and
wages are elements of capitalism.[3]

Economists usually put emphasis on the market medievalism, degree of
government does not have control over markets (laissez faire), and
property rights[4][5], while most political economists emphasize
private property, power relations, wage labor, and class.[6] There is
a general agreement that capitalism encourages economic growth.[7] The
extent to which different markets are "free", as well as the rules
determining what may and may not be private property, is a matter of
politics and policy and many states have what are termed "mixed

Capitalism as a system developed incrementally from the 16th century
in Europe,[8] although capitalist-like organizations existed in the
ancient world, and early aspects of merchant capitalism flourished
during the Late Middle Ages.[9][10][11] Capitalism became dominant in
the Western world following the demise of feudalism.[11] Capitalism
gradually spread throughout Europe, and in the 19th and 20th
centuries, it provided the main means of industrialization throughout
much of the world.[2]

Variants on capitalism may include, depending on the theorist, such
concepts as anarcho-capitalism, corporate capitalism, crony
capitalism, finance capitalism, laissez-faire capitalism,
technocapitalism, Neo-Capitalism, late capitalism, post-capitalism,
state capitalism and state monopoly capitalism. There are also anti-
capitalist movements and ideologies including Anti-capitalism and
negative associations with the system such as tragedy of the commons,
corporatism and wage slavery.

Etymology and early usage

Other terms sometimes used for capitalism:

capitalist mode of production

economic liberalism[12]
free-enterprise economy[11][13]
free market[13][14]
laissez-faire capitalism[15]
market economy[16]
market liberalism[17][18]

self-regulating market[13]

Look up capitalism in Wiktionary, the free dictionary.

Capital evolved from Capitale, a late Latin word based on proto-Indo-
European kaput, meaning "head"—also the origin of chattel and cattle
in the sense of movable property (only much later to refer only to
livestock). Capitale emerged in the 12th to 13th centuries in the
sense of funds, stock of merchandise, sum of money, or money carrying
interest.[9][19][20] By 1283 it was used in the sense of the capital
assets of a trading firm. It was frequently interchanged with a number
of other words—wealth, money, funds, goods, principal, assets,
property, patrimony.[9]

The term capitalist refers to an owner of capital rather than an
economic system, but shows earlier recorded use than the term
capitalism, dating back to the mid-seventeenth century. The
Hollandische Mercurius uses it in 1633 and 1654 to refer to owners of
capital.[9] Arthur Young used the term capitalist in his work Travels
in France (1792).[20][21] David Ricardo, in his Principles of
Political Economy and Taxation (1817), referred to "the capitalist"
many times.[22]

Samuel Taylor Coleridge, an English poet, used capitalist in his work
Table Talk (1823).[23] Pierre-Joseph Proudhon used the term capitalist
in his first work, What is Property? (1840) to refer to the owners of
capital. Benjamin Disraeli used the term capitalist in his 1845 work
Sybil.[20] Karl Marx and Friedrich Engels used the term capitalist
(Kapitalist) in The Communist Manifesto (1848) to refer to a private
owner of capital.

The term capitalism appeared in 1753 in the Encyclopédia, with the
narrow meaning of "The state of one who is rich".[9] However,
according to the Oxford English Dictionary (OED), the term capitalism
was first used by novelist William Makepeace Thackeray in 1854, by
which he meant having ownership of capital.[20] Also according to the
OED, Carl Adolph Douai, a German-American socialist and abolitionist,
used the term private capitalism in 1863.

The initial usage of the term capitalism in its modern sense has been
attributed to Louis Blanc in 1850 and Pierre-Joseph Proudhon in 1861.
[24] Marx and Engels referred to the capitalistic system
(kapitalistisches System)[25][26] and to the capitalist mode of
production (kapitalistische Produktionsform) in Das Kapital (1867).
[27] The use of the word "capitalism" in reference to an economic
system appears twice in Volume I of Das Kapital, p. 124 (German
edition), and in Theories of Surplus Value, tome II, p. 493 (German
edition). Marx did not extensively use the form capitalism, but
instead those of capitalist and capitalist mode of production, which
appear more than 2600 times in the trilogy Das Kapital.

Marx's notion of the capitalist mode of production is characterised as
a system of primarily private ownership of the means of production in
a mainly market economy, with a legal framework on commerce and a
physical infrastructure provided by the state.[28][page needed] Engels
made more frequent use of the term capitalism; volumes II and III of
Das Kapital, both edited by Engels after Marx's death, contain the
word "capitalism" four and three times, respectively. The three
combined volumes of Das Kapital (1867, 1885, 1894) contain the word
capitalist more than 2,600 times.

An 1877 work entitled Better Times by Hugh Gabutt and an 1884 article
in the Pall Mall Gazette also used the term capitalism.[20] A later
use of the term capitalism to describe the production system was by
the German economist Werner Sombart, in his 1902 book The Jews and
Modern Capitalism (Die Juden und das Wirtschaftsleben). Sombart's
close friend and colleague, Max Weber, also used capitalism in his
1904 book The Protestant Ethic and the Spirit of Capitalism (Die
protestantische Ethik und der Geist des Kapitalismus).

Economic elements

The economics of capitalism developed out of the interactions of the
following five items:


There are two types of commodities: capital goods and consumer goods.
Capital goods are products not produced for immediate consumption
(i.e. land, raw materials, tools, machines and factories), but as the
inputs of consumer goods (i.e. televisions, cars, computers, houses)
to be sold to others.


Money was primarily a standardized means of exchange which serves to
reduce all goods and commodities to a standard value. It eliminates
the cumbersome system of barter by separating the transactions
involved in the exchange of products, thus greatly facilitating
specialization and trade through encouraging the exchange of

However, besides serving as a medium of exchange for labour, goods and
services, money is also a store of value, similar to precious metals.

Labour power

Labour includes all mental and physical human resources, including
entrepreneurial capacity and management skills, which are needed to
transform one type of commodity into another.

Means of production

Another term for capital goods – all manufactured aids to production
such as tools, machinery, and buildings.

Production, costs, and pricing|Production

The act of making goods or services through the combination of labour
power and means of production.[29][30]

HistoryMain article: History of capitalism

Greco-Roman capitalism

The origins of modern markets can be traced back to the Roman Empire,
[31] which re-emerged later in its Muslim form when early Syrian
Muslims, known as Umayyad, triumphed.[32]

Islamic capitalism

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Main article: Islamic capitalism

The origins of capitalism and free markets can be traced back to the
Islamic Golden Age and Muslim Agricultural Revolution,[33][Need
quotation on talk to verify] where the first market economy and
earliest forms of merchant capitalism took root between the eighth–
twelfth centuries, which some refer to as "Islamic capitalism".[34] A
vigorous monetary economy was created by Muslims on the basis of the
expanding levels of circulation of a stable high-value currency (the
dinar) and the integration of monetary areas that were previously
independent. Innovative new business techniques and forms of business
organisation were introduced by economists, merchants and traders
during this time. Such innovations included the earliest trading
companies, big businesses, contracts, bills of exchange, long-distance
international trade, the first forms of partnership (mufawada) such as
limited partnerships (mudaraba), and the earliest forms of credit,
debt, profit, loss, capital (al-mal), capital accumulation (nama al-
mal),[10] circulating capital, capital expenditure, revenue, cheques,
promissory notes,[35] trusts (see Waqf), startup companies,[36]
savings accounts, transactional accounts, pawning, loaning, exchange
rates, bankers, money changers, ledgers, deposits, assignments, the
double-entry bookkeeping system,[37] and lawsuits.[38] Organizational
enterprises similar to corporations independent from the state also
existed in the medieval Islamic world, while the agency institution
was also introduced.[39][40] Many of these early capitalist concepts
were adopted and further advanced in medieval Europe from the 13th
century onwards.[10]

The systems of contract relied upon by merchants was very effective.
Merchants would buy and sell on commission, with money loaned to them
by wealthy investors, or a joint investment of several merchants, who
were often Muslim, Christian and Jewish. Recently, a collection of
documents was found in an Egyptian synagogue shedding a very detailed
and human light on the life of medieval Middle Eastern merchants.
Business partnerships would be made for many commercial ventures, and
bonds of kinship enabled trade networks to form over huge distances.
Networks developed during this time enabled a world in which money
could be promised by a bank in Baghdad and cashed in Spain, creating
the cheque system of today.[citation needed] Three forms of
partnership developed from the use and more reliable application of
contracts. First, the fraterna was a method of pooling capital from
within the family.[41] Often two brothers would divide the labor into
at home supervisor and traveling with exports from market to market.
[41] Second, the commenda is a partnership where the first partner
supplies two-thirds of the capital, and the second partner supplies
the other third plus his labor.[41] Third, the stans or sleeping
partner is where there is an inactive financial backer and an active
partner who received a quarter of the profit.[42] Each time items
passed through the cities along this extraordinary network, the city
imposed a tax, resulting in high prices once reaching the final
destination. These innovations made by Muslims and Jews laid the
foundations for the modern economic system.


Main article: Mercantilism

A painting of a French seaport from 1638 at the height of
mercantilism.The period between the sixteenth and eighteenth centuries
is commonly described as mercantilism.[43] This period was associated
with geographic exploration of the Age of Discovery being exploited by
merchant overseas traders, especially from England and the Low
Countries; the European colonization of the Americas; and the rapid
growth in overseas trade. Mercantilism was a system of trade for
profit, although commodities were still largely produced by non-
capitalist production methods.[2]

While some scholars see mercantilism as the earliest stage of modern
capitalism, others argue that modern capitalism did not emerge until
later. For example, Karl Polanyi, noted that "mercantilism, with all
its tendency toward commercialization, never attacked the safeguards
which protected [the] two basic elements of production—labor and land—
from becoming the elements of commerce"; thus mercantilist attitudes
towards economic regulation were closer to feudalist attitudes, "they
disagreed only on the methods of regulation."

Moreover Polanyi argued that the hallmark of capitalism is the
establishment of generalized markets for what he referred to as the
"fictitious commodities": land, labor, and money. Accordingly, "not
until 1834 was a competitive labor market established in England,
hence industrial capitalism as a social system cannot be said to have
existed before that date."[44]

The earliest forms of mercantilism date back to the Roman Empire. When
the Roman Empire expanded, the mercantilist economy expanded
throughout Europe. After the collapse of the Roman Empire, most of the
European economy became controlled by local feudal powers, and
mercantilism collapsed there. However, mercantilism persisted in
Arabia. Due to its proximity to neighboring countries, the Arabs
established trade routes to Egypt, Persia, and Byzantium. As Islam
spread in the seventh century, mercantilism spread rapidly to Spain,
Portugal, Northern Africa, and Asia. Mercantilism finally revived in
Europe in the fourteenth century, as mercantilism spread from Spain
and Portugal.[45]

Among the major tenets of mercantilist theory was bullionism, a
doctrine stressing the importance of accumulating precious metals.
Mercantilists argued that a state should export more goods than it
imported so that foreigners would have to pay the difference in
precious metals. Mercantilists asserted that only raw materials that
could not be extracted at home should be imported; and promoted
government subsides, such as the granting of monopolies and protective
tariffs, were necessary to encourage home production of manufactured

European merchants, backed by state controls, subsidies, and
monopolies, made most of their profits from the buying and selling of
goods. In the words of Francis Bacon, the purpose of mercantilism was
"the opening and well-balancing of trade; the cherishing of
manufacturers; the banishing of idleness; the repressing of waste and
excess by sumptuary laws; the improvement and husbanding of the soil;
the regulation of prices…"[46]

Similar practices of economic regimentation had begun earlier in the
medieval towns. However, under mercantilism, given the contemporaneous
rise of absolutism, the state superseded the local guilds as the
regulator of the economy. During that time the guilds essentially
functioned like cartels that monopolized the quantity of craftsmen to
earn above-market wages.[47]

At the period from the eighteenth century, the commercial stage of
capitalism originated from the start of the British East India Company
and the Dutch East India Company.[10][48] These companies were
characterized by their colonial and expansionary powers given to them
by nation-states.[10] During this era, merchants, who had traded under
the previous stage of mercantilism, invested capital in the East India
Companies and other colonies, seeking a return on investment. In his
"History of Economic Analysis," Austrian economist Joseph Schumpeter
reduced mercantilist propositions to three main concerns: exchange
controls, export monopolism and balance of trade.[49]


See also: Industrial Revolution

The Bank of England is one of the oldest central banks. It was founded
in 1694 and nationalised in 1946.A new group of economic theorists,
led by David Hume[50] and Adam Smith, in the mid 18th century,
challenged fundamental mercantilist doctrines as the belief that the
amount of the world’s wealth remained constant and that a state could
only increase its wealth at the expense of another state.

During the Industrial Revolution, the industrialist replaced the
merchant as a dominant actor in the capitalist system and effected the
decline of the traditional handicraft skills of artisans, guilds, and
journeymen. Also during this period, the surplus generated by the rise
of commercial agriculture encouraged increased mechanization of
agriculture. Industrial capitalism marked the development of the
factory system of manufacturing, characterized by a complex division
of labor between and within work process and the routinization of work
tasks; and finally established the global domination of the capitalist
mode of production.[43]

Britain also abandoned its protectionist policy, as embraced by
mercantilism. In the 19th century, Richard Cobden and John Bright, who
based their beliefs on the Manchester School, initiated a movement to
lower tariffs.[51] In the 1840s, Britain adopted a less protectionist
policy, with the repeal of the Corn Laws and the Navigation Acts.[43]
Britain reduced tariffs and quotas, in line with Adam Smith and David
Ricardo's advocacy for free trade.

Karl Polanyi argued that capitalism did not emerge until the
progressive commodification of land, money, and labor culminating in
the establishment of a generalized labor market in Britain in the
1830s. For Polanyi, "the extension of the market to the elements of
industry - land, labor and money - was the inevitable consequence of
the introduction of the factory system in a commercial society." [52]
Other sources argued that mercantilism fell after the repeal of the
Navigation Acts in 1849.[51][53][54].


See also: Gilded Age and Progressive Era

In the late 19th century, the control and direction of large areas of
industry came into the hands of trusts, financiers and holding
companies. This period was dominated by an increasing number of
oligopolistic firms earning supernormal profits.[55] Major
characteristics of capitalism in this period included the
establishment of large industrial cartels or monopolies; the ownership
and management of industry by financiers divorced from the production
process; and the development of a complex system of banking, an equity
market, and corporate holdings of capital through stock ownership.[2]
The petroleum, telecommunication, railroad, shipping, banking and
financial industries are characterized by its monopolistic domination.
Inside these corporations, a division of labor separates shareholders,
owners, managers, and actual laborers.[56]

By the last quarter of the 19th century, the emergence of large
industrial trusts had provoked legislation in the US to reduce the
monopolistic tendencies of the period. Gradually, during this
Progressive Era, the US government played a larger and larger role in
passing antitrust laws and regulation of industrial standards for key
industries of special public concern. By the end of the 19th century,
economic depressions and boom and bust business cycles had become a
recurring problem.

In particular, the Long Depression of the 1870s and 1880s and the
Great Depression of the 1930s affected almost the entire capitalist
world, and generated discussion about capitalism’s long-term survival
prospects. During the 1930s, Marxist commentators often posited the
possibility of capitalism's decline or demise, often in contrast to
the ability of the Soviet Union to avoid suffering the effects of the
global depression.[57]

Keynesianism and neoliberalism

Main articles: Keynesianism and Neoliberalism

In the period following the global depression of the 1930s, the state
played an increasingly prominent role in the capitalistic system
throughout much of the world.

The New York stock exchange traders' floor (1963)After World War II, a
broad array of new analytical tools in the social sciences were
developed to explain the social and economic trends of the period,
including the concepts of post-industrial society and the welfare
state.[43] This era was greatly influenced by Keynesian economic
stabilization policies. The postwar boom ended in the late 1960s and
early 1970s, and the situation was worsened by the rise of stagflation.

Exceptionally high inflation combined with slow output growth, rising
unemployment, and eventually recession to cause a loss of credibility
in the Keynesian welfare-statist mode of regulation. Under the
influence of Friedrich Hayek and Milton Friedman, Western states
embraced policy prescriptions inspired by laissez-faire capitalism and
classical liberalism.

In particular, monetarism, a theoretical alternative to Keynesianism
that is more compatible with laissez-faire, gained increasing
prominence in the capitalist world, especially under the leadership of
Ronald Reagan in the US and Margaret Thatcher in the UK in the 1980s.
Finally, the general public's interest was shifted from the
collectivist concerns of Keynes's managed capitalism to a focus on
individual freedom and choice, called "remarketized capitalism." [59]
In the eyes of many economic and political commentators, the collapse
of the Soviet Union brought further evidence of the superiority of
market capitalism over communism.


Main article: Globalization

Although international trade has been associated with the development
of capitalism for over five hundred years, some thinkers argue that a
number of trends associated with globalization have acted to increase
the mobility of people and capital since the last quarter of the 20th
century, combining to circumscribe the room to maneuver of states in
choosing non-capitalist models of development. Today, these trends
have bolstered the argument that capitalism should now be viewed as a
truly world system.[43] However, other thinkers argue that
globalization, even in its quantitative degree, is no greater now than
during earlier periods of capitalist trade.[60]

How capitalism works

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Neoclassical economics explain capitalism as comprised of individuals,
enterprises, markets and government. The following section is an
explanation only through the point of view of neoclassical economists
and does not conform to the views of heterodox economists such as John
Maynard Keynes, Thorstein Veblen, Joseph Schumpeter or Karl Marx as
seen below.


Individuals engage in a capitalist economy as consumers, labourers,
and investors. For example, as consumers, individuals influence
production patterns through their purchase decisions, as producers
will change production to produce what is most profitable (most often
what consumers want to buy).

As labourers, individuals may decide which jobs to prepare for and in
which markets to look for work. As investors they decide how much of
their income to save and how to invest their savings. These savings,
which become investments, provide much of the money that businesses
need to grow.


Business firms decide what to produce and where this production should
occur. They also purchase inputs (materials, labour, and capital).
Businesses try to influence consumer purchase decisions through
marketing and advertisement as well as the creation of new and
improved products. Driving the capitalist economy is the search for
profits (revenues minus expenses). This is known as the profit motive,
and it helps ensure that companies produce the goods and services that
consumers desire and are able to buy.

To be successful, firms must sell a quantity of their product at a
certain price to yield a profit. A business may consequently lose
money if sales fall too low or costs are incurred that are too high.
The profit motive also encourages firms to operate efficiently by
using their resources in the most productive manner. By using less
materials, labour or capital, a firm can cut its production costs
which can lead to increased profits.

Commerce plays an important role in determining the growth rate of the
capitalist economy. An economy grows when the total value of goods and
services produced rises. This growth requires investment in
infrastructure, capital and other resources necessary in production.
In a capitalist nation, businesses decide when and how much they want
to invest for these purposes.

The market

The price P of a product is determined by a balance between production
at each price (supply S) and the desires of those with purchasing
power at each price (demand D). This results in a market equilibrium,
with a given quantity (Q) sold of the product. A rise in demand from
D1 to D2 would result in an increase in price from P1 to P2 and an
increase in output from Q1 to Q2.The market is a term used by
economists to describe a central exchange through which people are
able to buy and sell goods and services. In a capitalist economy, the
prices of goods and services are controlled mainly through supply and
demand and competition.

Supply is the amount of a good or service produced by a firm and
available for sale. Demand is the amount that people are willing to
buy at a specific price. Prices tend to rise when demand exceeds
supply and fall when supply exceeds demand, so that the market is able
to coordinate itself through pricing until a new equilibrium price and
quantity is reached.

Competition arises when many producers are trying to sell the same or
similar kinds of products to the same buyers. Competition is important
in capitalist economies because it leads to innovation and more
reasonable prices as firms that charge lower prices or improve the
quality of their production can take buyers away from its competitors.

Furthermore, without competition, a monopoly or cartel may develop. A
monopoly occurs when a firm supplies the total output in the market
and means that the firm can limit output and raise prices because it
has no fear of competition. A cartel is a group of firms that act
together in a monopolistic manner to control output and raise prices.
Many countries have competition laws that prohibit monopolies and
cartels from forming.

However, even though antimonopoly laws exist, large corporations can
form near monopolies in some industries. Such firms can temporarily
drop prices and accept losses to prevent competition from entering the
market and then raise them again once the threat of entry is reduced.
In many capitalist nations, public utilities (communications, gas,
electricity, etc), are able to operate as a monopoly under government
regulation due to high economies of scale.


Income in a capitalist economy depends primarily on what skills are in
demand and what skills are currently being supplied. People who have
skills that are in scarce supply are worth a lot more in the market
and can attract higher incomes. Competition among employers for
workers and among workers for jobs, help determine wage rates.

Firms need to pay high enough wages to attract the appropriate
workers; however, when jobs are scarce workers may accept lower wages
than when jobs are plentiful. Labour unions and the government also
influence wages in capitalist nations. Unions act to represent
labourers in negotiations with employers over such things as wage
rates and acceptable working conditions. Most countries have an
established minimum wage and other government agencies work to
establish safety standards.

The government

Further information: Competition regulator, Consumer protection, and
Competition law
In capitalist nations, the government does not prohibit private
property, or prevent individuals from working where they please. The
government also does not prevent firms from determining what wages
they will pay and what prices they will charge for their products.

Under some versions of 'capitalism' the government also carries out a
number of economic functions. For instance, it issues money,
supervises public utilities and enforces private contracts. Laws, such
as policy competition, protect against competition and prohibit unfair
business practices. Government agencies regulate the standards of
service in many industries, such as airlines and broadcasting, as well
as financing a wide range of programs. In addition, the government
regulates the flow of capital and uses things such as the interest
rate to control factors such as inflation and unemployment.[61]

While in other versions, the governing body/bodies have no monopoly
characteristics or legal exceptions.


Classical political economy

Main articles: Classical economics and Classical liberalism

Adam SmithThe classical school economic thought emerged in Britain in
the late 18th century. The classical political economists Adam Smith,
David Ricardo, Jean-Baptiste Say, and John Stuart Mill published
analyses of the production, distribution and exchange of goods in a
market that have since formed the basis of study for most contemporary

In France, 'Physiocrats' like François Quesnay promoted free trade
based on a conception that wealth originated from land. Quesnay's
Tableau Économique (1759), described the economy analytically and laid
the foundation of the Physiocrats' economic theory, followed by Anne
Robert Jacques Turgot who opposed tariffs and customs duties and
advocated free trade. Richard Cantillon defined long-run equilibrium
as the balance of flows of income, and argued that the supply and
demand mechanism around land influenced short-term prices.

Adam Smith's attack on mercantilism and his reasoning for "the system
of natural liberty" in The Wealth of Nations (1776) are usually taken
as the beginning of classical political economy. Smith devised a set
of concepts that remain strongly associated with capitalism today,
particularly his theory of the "invisible hand" of the market, through
which the pursuit of individual self-interest unintentionally produces
a collective good for society. It was necessary for Smith to be so
forceful in his argument in favor of free markets because he had to
overcome the popular mercantilist sentiment of the time period.[62]

He criticized monopolies, tariffs, duties, and other state enforced
restrictions of his time and believed that the market is the most fair
and efficient arbitrator of resources. This view was shared by David
Ricardo, second most important of the classical political economists
and one of the most influential economists of modern times.[63]

In The Principles of Political Economy and Taxation (1817), he
developed the law of comparative advantage, which explains why it is
profitable for two parties to trade, even if one of the trading
partners is more efficient in every type of economic production. This
principle supports the economic case for free trade. Ricardo was a
supporter of Say's Law and held the view that full employment is the
normal equilibrium for a competitive economy.[64] He also argued that
inflation is closely related to changes in quantity of money and
credit and was a proponent of the law of diminishing returns, which
states that each additional unit of input yields less and less
additional output.[65]

The values of classical political economy are strongly associated with
the classical liberal doctrine of minimal government intervention in
the economy, though it does not necessarily oppose the state's
provision of a few basic public goods.[66] Classical liberal thought
has generally assumed a clear division between the economy and other
realms of social activity, such as the state.[67]

While economic liberalism favors markets unfettered by the government,
it maintains that the state has a legitimate role in providing public
goods.[68] For instance, Adam Smith argued that the state has a role
in providing roads, canals, schools and bridges that cannot be
efficiently implemented by private entities. However, he preferred
that these goods should be paid proportionally to their consumption
(e.g. putting a toll). In addition, he advocated retaliatory tariffs
to bring about free trade, and copyrights and patents to encourage

Marxist political economy

Main article: Marxian economics

Karl Marx considered capitalism to be a historically specific mode of
production (the way in which the productive property is owned and
controlled, combined with the corresponding social relations between
individuals based on their connection with the process of production)
in which capitalism has become the dominant mode of production.[43]

The capitalist stage of development or "bourgeois society," for Marx,
represented the most advanced form of social organization to date, but
he also thought that the working classes would come to power in a
worldwide socialist or communist transformation of human society as
the end of the series of first aristocratic, then capitalist, and
finally working class rule was reached.[69][70]

Karl MarxFollowing Adam Smith, Marx distinguished the use value of
commodities from their exchange value in the market. Capital,
according to Marx, is created with the purchase of commodities for the
purpose of creating new commodities with an exchange value higher than
the sum of the original purchases. For Marx, the use of labor power
had itself become a commodity under capitalism; the exchange value of
labor power, as reflected in the wage, is less than the value it
produces for the capitalist.

This difference in values, he argues, constitutes surplus value, which
the capitalists extract and accumulate. In his book Capital, Marx
argues that the capitalist mode of production is distinguished by how
the owners of capital extract this surplus from workers—all prior
class societies had extracted surplus labor, but capitalism was new in
doing so via the sale-value of produced commodities.[71] He argues
that a core requirement of a capitalist society is that a large
portion of the population must not possess sources of self-sustenance
that would allow them to be independent, and must instead be
compelled, to survive, to sell their labor for a living wage.[72][73]

In conjunction with his criticism of capitalism was Marx's belief that
exploited labor would be the driving force behind a revolution to a
socialist-style economy.[75] For Marx, this cycle of the extraction of
the surplus value by the owners of capital or the bourgeoisie becomes
the basis of class struggle. This argument is intertwined with Marx's
version of the labor theory of value asserting that labor is the
source of all value, and thus of profit.

Vladimir Lenin, in Imperialism, the Highest Stage of Capitalism
(1916), modified classic Marxist theory and argued that capitalism
necessarily induced monopoly capitalism—which he also called
"imperialism"—to find new markets and resources, representing the last
and highest stage of capitalism.[76] Some 20th century Marxian
economists consider capitalism to be a social formation where
capitalist class processes dominate, but are not exclusive.[77]

Capitalist class processes, to these thinkers, are simply those in
which surplus labor takes the form of surplus value, usable as
capital; other tendencies for utilization of labor nonetheless exist
simultaneously in existing societies where capitalist processes are
predominant. However, other late Marxian thinkers argue that a social
formation as a whole may be classed as capitalist if capitalism is the
mode by which a surplus is extracted, even if this surplus is not
produced by capitalist activity, as when an absolute majority of the
population is engaged in non-capitalist economic activity.[78]

David Harvey extends Marxian thinking through which he theorizes the
differential production of place, space and political activism under
capitalism. He uses Marx’s theory of crisis to aid his argument that
capitalism must have its “fixes” but that we cannot predetermine what
fixes will be implemented, nor in what form they will be.

This idea of fix is suggestive and could mean fix as in stabilize,
heal or solve, or as in a junky needing a fix – the idea of preventing
feeling worse in order to feel better. In Limits to Capital (1982),
Harvey outlines an overdetermined, spatially restless capitalism
coupled with the spatiality of crisis formation and its resolution.
Furthermore, his work has been central for understanding the
contractions of capital accumulation and international movements of
capitalist modes of production and money flows.[79]

In his essay, Notes towards a theory of uneven geographical
development, Harvey examines the causes of the extreme volatility in
contemporary political economic fortunes across and between spaces of
the world economy. He bases this uneven development on four
conditionalities, being: The material embedding of capital
accumulation processes in the web of socio-ecological life;
accumulation by dispossession; the law-like character of capital
accumulation in space and time; and, political, social and “class”
struggles at a variety of geographical scales.[80]

Weberian political sociology

Max Weber in 1917In some social sciences, the understanding of the
defining characteristics of capitalism has been strongly influenced by
19th century German social theorist Max Weber. Weber considered market
exchange, rather than production, as the defining feature of
capitalism; capitalist enterprises, in contrast to their counterparts
in prior modes of economic activity, was their rationalization of
production, directed toward maximizing efficiency and productivity; a
tendency leading to a sociological process of enveloping
'rationalization'. According to Weber, workers in pre-capitalist
economic institutions understood work in terms of a personal
relationship between master and journeyman in a guild, or between lord
and peasant in a manor.[81]

In his book The Protestant Ethic and the Spirit of Capitalism
(1904-1905), Weber sought to trace how a particular form of religious
spirit, infused into traditional modes of economic activity, was a
condition of possibility of modern western capitalism. For Weber, the
'spirit of capitalism' was, in general, that of ascetic Protestantism;
this ideology was able to motivate extreme rationalization of daily
life, a propensity to accumulate capital by a religious ethic to
advance economically, and thus also the propensity to reinvest
capital: this was sufficient, then, to create "self-mediating capital"
as conceived by Marx.

This is pictured in Proverbs 22:29, “Seest thou a man diligent in his
calling? He shall stand before kings” and in Colossians 3:23,
"Whatever you do, do your work heartily, as for the Lord rather than
for men." In the Protestant Ethic, Weber further stated that
“moneymaking – provided it is done legally – is, within the modern
economic order, the result and the expression of diligence in one’s

And, "If God show you a way in which you may lawfully get more than in
another way (without wrong to your soul or to any other), if you
refuse this, and choose the less gainful way, you cross one of the
ends of your calling, and you refuse to be God's steward, and to
accept His gifts and use them for him when He requierth it: you may
labour to be rich for God, though not for the flesh and sin" (p. 108).

Western Capitalism, was, most generally for Weber, the "rational
organization of formally free labor." The idea of the "formally free"
laborer, meant, in the double sense of Marx, that the laborer was both
free to own property, and free of the ability to reproduce his labor
power, i.e., was the victim of expropriation of his means of
production. It is only on these conditions, still abundantly obvious
in the modern world of Weber, that western capitalism is able to

For Weber, modern western capitalism represented the order "now bound
to the technical and economic conditions of machine production which
to-day determine the lives of all the individuals who are born into
this mechanism, not only those directly concerned with economic
acquisition, with irresistible force. Perhaps it will so determine
them until the last ton of fossilized coal is burnt" (p. 123).[82]
This is further seen in his criticism of "specialists without spirit,
hedonists without a heart" that were developing, in his opinion, with
the fading of the original Puritan "spirit" associated with

Institutional economics

Main article: Institutional economics

Thorstein VeblenInstitutional economics, once the main school of
economic thought in the United States, holds that capitalism cannot be
separated from the political and social system within which it is
embedded. It emphasizes the legal foundations of capitalism (see John
R. Commons) and the evolutionary, habituated, and volitional processes
by which institutions are erected and then changed (see John Dewey,
Thorstein Veblen, and Daniel Bromley.)

One key figure in institutional economics was Thorstein Veblen who in
his book The Theory of the Leisure Class (1899) analyzed the
motivations of wealthy people in capitalism who conspicuously consumed
their riches as a way of demonstrating success. The concept of
conspicuous consumption was in direct contradiction to the
neoclassical view that capitalism was efficient.

In The Theory of Business Enterprise (1904) Veblen distinguished the
motivations of industrial production for people to use things from
business motivations that used, or misused, industrial infrastructure
for profit, arguing that the former is often hindered because
businesses pursue the latter. Output and technological advance are
restricted by business practices and the creation of monopolies.
Businesses protect their existing capital investments and employ
excessive credit, leading to depressions and increasing military
expenditure and war through business control of political power.

German Historical School and Austrian School

Main articles: Historical school of economics and Austrian School

From the perspective of the German Historical School, capitalism is
primarily identified in terms of the organization of production for
markets. Although this perspective shares similar theoretical roots
with that of Weber, its emphasis on markets and money lends it
different focus.[43] For followers of the German Historical School,
the key shift from traditional modes of economic activity to
capitalism involved the shift from medieval restrictions on credit and
money to the modern monetary economy combined with an emphasis on the
profit motive.

Ludwig von MisesIn the late 19th century, the German Historical School
of economics diverged, with the emerging Austrian School of economics,
led at the time by Carl Menger. Later generations of followers of the
Austrian School continued to be influential in Western economic
thought through much of the 20th century. The Austrian economist
Joseph Schumpeter, a forerunner of the Austrian School of economics,
emphasized the "creative destruction" of capitalism—the fact that
market economies undergo constant change.

At any moment of time, posits Schumpeter, there are rising industries
and declining industries. Schumpeter, and many contemporary economists
influenced by his work, argue that resources should flow from the
declining to the expanding industries for an economy to grow, but they
recognized that sometimes resources are slow to withdraw from the
declining industries because of various forms of institutional
resistance to change.

The Austrian economists Ludwig von Mises and Friedrich Hayek were
among the leading defenders of market capitalism against 20th century
proponents of socialist planned economies. Mises and Hayek argued that
only market capitalism could manage a complex, modern economy.

Since a modern economy produces such a large array of distinct goods
and services, and consists of such a large array of consumers and
enterprises, asserted Mises and Hayek, the information problems facing
any other form of economic organization other than market capitalism
would exceed its capacity to handle information. Thinkers within
Supply-side economics built on the work of the Austrian School, and
particularly emphasize Say's Law: "supply creates its own demand."
Capitalism, to this school, is defined by lack of state restraint on
the decisions of producers.

Austrian economists claim that Marx failed to make the distinction
between capitalism and mercantilism.[83][84] They argue that Marx
conflated the imperialistic, colonialistic, protectionist and
interventionist doctrines of mercantilism with capitalism.

Austrian economics has been a major influence on some forms of
libertarianism, in which laissez-faire capitalism is considered to be
the ideal economic system.[85] It influenced economists and political
philosophers and theorists including Henry Hazlitt, Hans-Hermann
Hoppe, Israel Kirzner, Murray Rothbard, Walter Block and Richard M.

Keynesian economics

Main article: Keynesian economics

John Maynard KeynesIn his 1937 The General Theory of Employment,
Interest, and Money, the British economist John Maynard Keynes argued
that capitalism suffered a basic problem in its ability to recover
from periods of slowdowns in investment. Keynes argued that a
capitalist economy could remain in an indefinite equilibrium despite
high unemployment.

Essentially rejecting Say's law, he argued that some people may have a
liquidity preference that would see them rather hold money than buy
new goods or services, which therefore raised the prospect that the
Great Depression would not end without what he termed in the General
Theory "a somewhat comprehensive socialization of investment."

Keynesian economics challenged the notion that laissez-faire
capitalist economics could operate well on their own, without state
intervention used to promote aggregate demand, fighting high
unemployment and deflation of the sort seen during the 1930s. He and
his followers recommended "pump-priming" the economy to avoid
recession: cutting taxes, increasing government borrowing, and
spending during an economic down-turn. This was to be accompanied by
trying to control wages nationally partly through the use of inflation
to cut real wages and to deter people from holding money.[88]

John Maynard Keynes tried to provide solutions to many of Marx’s
problems without completely abandoning the classical understanding of
capitalism. His work attempted to show that regulation can be
effective, and that economic stabilizers can reign in the aggressive
expansions and recessions that Marx disliked. These changes sought to
create more stability in the business cycle, and reduce the abuses of
laborers. Keynesian economists argue that Keynesian policies were one
of the primary reasons capitalism was able to recover following the
Great Depression.[89] The premises of Keynes’s work have, however,
since been challenged by neoclassical and supply-side economics and
the Austrian School.

Another challenge to Keynesian thinking came from his colleague Piero
Sraffa, and subsequently from the Neo-Ricardian school that followed
Sraffa. In Sraffa's highly technical analysis, capitalism is defined
by an entire system of social relations among both producers and
consumers, but with a primary emphasis on the demands of production.
According to Sraffa, the tendency of capital to seek its highest rate
of profit causes a dynamic instability in social and economic

Neoclassical economics and the Chicago School

Main article: Neoclassical economics

Today, the majority academic research on capitalism in the English-
speaking world draws on neoclassical economic thought. It favors
extensive market coordination and relatively neutral patterns of
governmental market regulation aimed at maintaining property rights;
deregulated labor markets; corporate governance dominated by financial
owners of firms; and financial systems depending chiefly on capital
market-based financing rather than state financing.

Milton FriedmanMilton Friedman took many of the basic principles set
forth by Adam Smith and the classical economists and gave them a new
twist. One example of this is his article in the September 1970 issue
of The New York Times Magazine, where he claims that the social
responsibility of business is “to use its resources and engage in
activities designed to increase its profits…(through) open and free
competition without deception or fraud.” This is similar to Smith’s
argument that self-interest in turn benefits the whole of society.[90]
Work like this helped lay the foundations for the coming marketization
(or privatization) of state enterprises and the supply-side economics
of Ronald Reagan and Margaret Thatcher.

The Chicago School of economics is best known for its free market
advocacy and monetarist ideas. According to Friedman and other
monetarists, market economies are inherently stable if left to
themselves and depressions result only from government intervention.

Friedman, for example, argued that the Great Depression was result of
a contraction of the money supply, controlled by the Federal Reserve,
and not by the lack of investment as John Maynard Keynes had argued.
Ben Bernanke, current Chairman of the Federal Reserve, is among the
economists today generally accepting Friedman's analysis of the causes
of the Great Depression.[92]

Neoclassical economists, today the majority of economists,[93]
consider value to be subjective, varying from person to person and for
the same person at different times, and thus reject the labor theory
of value. Marginalism is the theory that economic value results from
marginal utility and marginal cost (the marginal concepts). These
economists see capitalists as earning profits by forgoing current
consumption, by taking risks, and by organizing production.

Political advocacy


Economic growth

World's GDP per capita shows exponential acceleration since the
beginning of the Industrial Revolution.[94]Many theorists and
policymakers in predominantly capitalist nations have emphasized
capitalism's ability to promote economic growth, as measured by Gross
Domestic Product (GDP), capacity utilization or standard of living.
This argument was central, for example, to Adam Smith's advocacy of
letting a free market control production and price, and allocate
resources. Many theorists have noted that this increase in global GDP
over time coincides with the emergence of the modern world capitalist

Proponents argue that increasing GDP (per capita) is empirically shown
to bring about improved standards of living, such as better
availability of food, housing, clothing, and health care.[97] The
decrease in the number of hours worked per week and the decreased
participation of children and the elderly in the workforce have been
attributed to capitalism.[98][99][100][101]

Proponents also believe that a capitalist economy offers far more
opportunities for individuals to raise their income through new
professions or business ventures than do other economic forms. To
their thinking, this potential is much greater than in either
traditional feudal or tribal societies or in socialist societies.

Political freedom

Milton Friedman argued that the economic freedom of competitive
capitalism is a requisite of political freedom. Friedman argued that
centralized control of economic activity is always accompanied by
political repression. In his view, transactions in a market economy
are voluntary, and the wide diversity that voluntary activity permits
is a fundamental threat to repressive political leaders and greatly
diminish power to coerce. Friedman's view was also shared by Friedrich
Hayek and John Maynard Keynes, both of whom believed that capitalism
is vital for freedom to survive and thrive.[102][103]


Austrian School economists have argued that capitalism can organize
itself into a complex system without an external guidance or planning
mechanism. Friedrich Hayek coined the term "catallaxy" to describe
what he considered the phenomenon of self-organization underpinning
capitalism. From this perspective, in process of self-organization,
the profit motive has an important role. From transactions between
buyers and sellers price systems emerge, and prices serve as a signal
as to the urgent and unfilled wants of people. The promise of profits
gives entrepreneurs incentive to use their knowledge and resources to
satisfy those wants. Thus the activities of millions of people, each
seeking his own interest, are coordinated.[104]

This decentralized system of coordination is viewed by some supporters
of capitalism as one of its greatest strengths. They argue that it
permits many solutions to be tried, and that real-world competition
generally finds a good solution to emerging challenges. In contrast,
they argue, central planning often selects inappropriate solutions as
a result of faulty forecasting. However, in all existing modern
economies, the state conducts some degree of centralized economic
planning (using such tools as allowing the country's central bank to
set base interest rates), ostensibly as an attempt to improve
efficiency, attenuate cyclical volatility, and further particular
social goals. Proponents who follow the Austrian School argue that
even this limited control creates inefficiencies because we cannot
predict the long-term activity of the economy. Milton Friedman, for
example, has argued that the Great Depression was caused by the
erroneous policy of the Federal Reserve.[92]

Moral imperative

See also: Capitalism: The Unknown Ideal

Ayn Rand was a prominent supporter of laissez-faire capitalism, and
her best-selling novel Atlas Shrugged has been an influential
publication on business.[105] Rand was the first person to endow
capitalism with a new code of morality (rational selfishness),[106],
arguing that capitalism is the only morally valid socio-political
system because it allows people to be free to act in their rational


Main articles: Criticism of capitalism and Anti-capitalism

Notable critics of capitalism have included: socialists, anarchists,
communists, technocrats, some types of conservatives, Luddites,
Narodniks, Shakers and some types of nationalists. Marxists advocated
a revolutionary overthrow of capitalism that would lead to socialism,
before eventually transforming into communism. Marxism influenced
social democratic and labour parties, as well as some moderate
democratic socialists. Many aspects of capitalism have come under
attack from the anti-globalization movement, which is primarily
opposed to corporate capitalism.

Many religions have criticized or opposed specific elements of
capitalism; traditional Judaism, Christianity, and Islam forbid
lending money at interest, although methods of Islamic banking have
been developed. Christianity has been a source of both praise and
criticism for capitalism, particularly its materialist aspects.[109]
Indian philosopher P.R. Sarkar, founder of the Ananda Marga movement,
developed the Law of Social Cycle to identify the problems of

Critics argue that capitalism is associated with the unfair
distribution of wealth and power; a tendency toward market monopoly or
oligopoly (and government by oligarchy); imperialism, counter-
revolutionary wars and various forms of economic and cultural
exploitation; repression of workers and trade unionists, and phenomena
such as social alienation, economic inequality, unemployment, and
economic instability. Capitalism is regarded by many socialists to be
irrational in that production and the direction of the economy are
unplanned, creating many inconsistencies and internal contradictions.

Environmentalists have argued that capitalism requires continual
economic growth, and will inevitably deplete the finite natural
resources of the earth, and other broadly utilized resources. Labor
historians and scholars, such as Immanuel Wallerstein have argued that
unfree labor—by slaves, indentured servants, prisoners, and other
coerced persons—is compatible with capitalist relations.[113]

Democracy, the state, and legal frameworks
Main article: History of capitalist theory

Private property

The relationship between the state, its formal mechanisms, and
capitalist societies has been debated in many fields of social and
political theory, with active discussion since the 19th century.
Hernando de Soto is a contemporary economist who has argued that an
important characteristic of capitalism is the functioning state
protection of property rights in a formal property system where
ownership and transactions are clearly recorded.[114]

According to de Soto, this is the process by which physical assets are
transformed into capital, which in turn may be used in many more ways
and much more efficiently in the market economy. A number of Marxian
economists have argued that the Enclosure Acts in England, and similar
legislation elsewhere, were an integral part of capitalist primitive
accumulation and that specific legal frameworks of private land
ownership have been integral to the development of capitalism.[115]


New institutional economics, a field pioneered by Douglass North,
stresses the need of a legal framework in order for capitalism to
function optimally, and focuses on the relationship between the
historical development of capitalism and the creation and maintenance
of political and economic institutions.[117] In new institutional
economics and other fields focusing on public policy, economists seek
to judge when and whether governmental intervention (such as taxes,
welfare, and government regulation) can result in potential gains in
efficiency. According to Gregory Mankiw, a New Keynesian economist,
governmental intervention can improve on market outcomes under
conditions of "market failure," or situations in which the market on
its own does not allocate resources efficiently.[118]

Market failure occurs when an externality is present and a market will
either underproduce a product with a positive externality or
overproduce a product that generates a negative externality. Air
pollution, for instance, is a negative externality that cannot be
incorporated into markets as the world’s air is not owned and then
sold for use to polluters. So, too much pollution could be emitted and
people not involved in the production pay the cost of the pollution
instead of the firm that initially emitted the air pollution. Critics
of market failure theory, like Ronald Coase, Harold Demsetz, and James
M. Buchanan argue that government programs and policies also fall
short of absolute perfection. Market failures are often small, and
government failures are sometimes large. It is therefore the case that
imperfect markets are often better than imperfect governmental
alternatives. While all nations currently have some kind of market
regulations, the desirable degree of regulation is disputed.


The relationship between democracy and capitalism is a contentious
area in theory and popular political movements. The extension of
universal adult male suffrage in 19th century Britain occurred along
with the development of industrial capitalism, and democracy became
widespread at the same time as capitalism, leading many theorists to
posit a causal relationship between them, or that each affects the
other. However, in the 20th century, according to some authors,
capitalism also accompanied a variety of political formations quite
distinct from liberal democracies, including fascist regimes,
monarchies, and single-party states,[43] while some democratic
societies such as the Bolivarian Republic of Venezuela and Anarchist
Catalonia have been expressly anti-capitalist.[119]

While some thinkers argue that capitalist development more-or-less
inevitably eventually leads to the emergence of democracy, others
dispute this claim. Research on the democratic peace theory indicates
that capitalist democracies rarely make war with one another and have
little internal violence.[120][121] However critics of the democratic
peace theory note that democratic capitalist states may fight
infrequently and or never with other democratic capitalist states
because of political similarity or stability rather than because they
are democratic or capitalist.

Some commentators argue that though economic growth under capitalism
has led to democratization in the past, it may not do so in the
future, as authoritarian regimes have been able to manage economic
growth without making concessions to greater political freedom.[122]
[123] States that have highly capitalistic economic systems have
thrived under authoritarian or oppressive political systems.
Singapore, which maintains a highly open market economy and attracts
lots of foreign investment, does not protect civil liberties such as
freedom of speech and expression. The private (capitalist) sector in
the People's Republic of China has grown exponentially and thrived
since its inception, despite having an authoritarian government.
Private investment in Fascist states, such as Nazi Germany, greatly
increased[citation needed], and Augusto Pinochet's rule in Chile led
to economic growth by using authoritarian means to create a safe
environment for investment and capitalism.

In response to criticism of the system, some proponents of capitalism
have argued that its advantages are supported by empirical research.
For example, advocates of different Indices of Economic Freedom point
to a statistical correlation between nations with more economic
freedom (as defined by the indices) and higher scores on variables
such as income and life expectancy, including the poor, in these

See also

Capitalism portal

Economic liberalism
Capitalist mode of production
Objectivism (Ayn Rand)
Capitalism: The Unknown Ideal by Ayn Rand
Das Kapital by Karl Heinrich Marx
The Theory of Business Enterprise by Thorstein Veblen
Positive non-interventionism


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↑ Etymology of "Cattle"

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↑ Karl Marx. Chapter 16: Absolute and Relative Surplus-Value. Das
Die Verlängrung des Arbeitstags über den Punkt hinaus, wo der Arbeiter
nur ein Äquivalent für den Wert seiner Arbeitskraft produziert hätte,
und die Aneignung dieser Mehrarbeit durch das Kapital - das ist die
Produktion des absoluten Mehrwerts. Sie bildet die allgemeine
Grundlage des kapitalistischen Systems und den Ausgangspunkt der
Produktion des relativen Mehrwerts.

The prolongation of the working-day beyond the point at which the
labourer would have produced just an equivalent for the value of his
labour-power, and the appropriation of that surplus-labour by capital,
this is production of absolute surplus-value. It forms the general
groundwork of the capitalist system, and the starting-point for the
production of relative surplus-value.

↑ Karl Marx. Chapter Twenty-Five: The General Law of Capitalist
Accumulation. Das Kapital.

Die Erhöhung des Arbeitspreises bleibt also eingebannt in Grenzen, die
die Grundlagen des kapitalistischen Systems nicht nur unangetastet
lassen, sondern auch seine Reproduktion auf wachsender Stufenleiter

Die allgemeinen Grundlagen des kapitalistischen Systems einmal
gegeben, tritt im Verlauf der Akkumulation jedesmal ein Punkt ein, wo
die Entwicklung der Produktivität der gesellschaftlichen Arbeit der
mächtigste Hebel der Akkumulation wird.

Wir sahen im vierten Abschnitt bei Analyse der Produktion des
relativen Mehrwerts: innerhalb des kapitalistischen Systems vollziehn
sich alle Methoden zur Steigerung der gesellschaftlichen
Produktivkraft der Arbeit auf Kosten des individuellen Arbeiters;

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↑ The Communist Manifesto

↑ "To Marx, the problem of reconstituting society did not arise from
some prescription, motivated by his personal predilections; it
followed, as an iron-clad historical necessity – on the one hand, from
the productive forces grown to powerful maturity; on the other, from
the impossibility further to organize these forces according to the
will of the law of value." - Leon Trotsky, "Marxism in our Time", 1939
(Inevitability of Socialism) [1]

↑ Karl Marx. "Capital. v. 3. Chapter 47: Genesis of capitalist ground

Marxists. http://www.marxists.org/archive/marx/works/1894-c3/ch47.htm.
Retrieved 2008-02-26.

↑ Karl Marx. Chapter Twenty-Five: The General Law of Capitalist
Accumulation. Das Kapital.

↑ Dobb, Maurice 1947 Studies in the Development of Capitalism. New
York: International Publishers Co., Inc.

↑ David Harvey 1989 The Condition of Postmodernity

↑ Wheen, Francis Books That Shook the World: Marx's Das Kapital1st ed.
London: Atlantic Books, 2006
↑ "Imperialism, the Highest Stage of Capitalism". Marxists. 1916.

Retrieved 2008-02-26.

↑ See, for example, the works of Stephen Resnick and Richard Wolff.

↑ Ste. Croix, G. E. M. de (1982). The Class Struggle in the Ancient
Greek World. pp. 52–3.

↑ Lawson, Victoria. Making Development Geography (Human Geography in
the Making). New York: A Hodder Arnold Publication, 2007. Print.

↑ Harvey, David. Notes towards a theory of uneven geographical
development. Print.

↑ Kilcullen, John (1996). "MAX WEBER: ON CAPITALISM". Macquarie
University. http://www.humanities.mq.edu.au/Ockham/y64l10.html.
Retrieved 2008-02-26.
↑ "Conference Agenda" (PDF). Economy and Society.

Retrieved 2008-02-26.

↑ Rothbard, Murray N. (1973). "A Future of Peace and Capitalism".
Modern Political Economy (Boston: Allyn and Bacon): 419–430.
http://www.mises.org/story/1559. "In fact the mercantilist system is
essentially what we’ve got right now. There is very little difference
between state monopoly capitalism, or corporate state capitalism,
whatever you want to call it, in the United States and Western Europe
today, and the mercantilist system of the pre-Industrial Revolution
era. There are only two differences; one is that their major activity
was commerce and ours is industry. But the essential modus operandi of
the two systems is exactly the same: monopoly privilege, a complete
meshing in what is now called the "partnership of government and
industry," a pervasive system of militarism and war contracts, a drive
toward war and imperialism; the whole shebang characterized the
seventeenth and eighteenth centuries.".

↑ Osterfeld, David (1991). [Expression error: Missing operand for >
"Marxism, Capitalism and Mercantilism"]. The Review of Austrian
Eonomics 5 (1): 107–114. ISSN 0889-304.

↑ What is Austrian Economics?, Ludwig Von Mises Institute.

↑ DiLorenzo, Thomas. "Frederic Bastiat (1801-1850): Between the French
and Marginalist Revolutions." Mises.org|http://www.mises.org/

↑ http://www.mises.org/journals/scholar/BastiatAustrian.pdf|Thornton,
Mark. "Frédéric Bastiat as an Austrian Economist." Mises.org.

↑ Paul Mattick. "Marx and Keynes: the limits of the mixed economy".

Retrieved 2008-02-26.

↑ Erhardt III, Erwin. "History of Economic Development." University of
Cincinnati. Lindner Center Auditorium, Cincinnati. 07 Nov. 2008.

↑ Friedman, Milton. "The Social Responsibility of Business is to
Increase its Profits." The New York Times Magazine 13 Sep. 1970.

↑ Felderer, Bernhard. Macroeconomics and New Macroeconomics.

↑ 92.0 92.1 Ben Bernanke (2002-11-08). "Remarks by Governor Ben S.
Bernanke". The Federal Reserve Board.

Retrieved 2008-02-26.

↑ Yonary, Yuval P. (1998). The Struggle Over the Soul of Economics.
Princeton University Press. pp. 29. ISBN 0691034192.

↑ Angus Maddison (2001). The World Economy: A Millennial Perspective.
Paris: OECD. ISBN 92-64-18998-X.

↑ Robert E. Lucas Jr.. "The Industrial Revolution: Past and Future".
Federal Reserve Bank of Minneapolis 2003 Annual Report.

http://www.minneapolisfed.org/pubs/region/04-05/essay.cfm. Retrieved
↑ J. Bradford DeLong. "Estimating World GDP, One Million B.C. –
Present". http://www.j-bradford-delong.net/TCEH/1998_Draft/World_GDP/Estimating_World_GDP.html.
Retrieved 2008-02-26.

↑ Clark Nardinelli. "Industrial Revolution and the Standard of
Retrieved 2008-02-26.

↑ Barro, Robert J. (1997). Macroeconomics. MIT Press. ISBN

↑ "Labor and Minimum Wages". Capitalism.org.

http://www.capitalism.org/faq/labor.htm. Retrieved 2008-02-26.
↑ Woods, Thomas E. (2004-04-05). "Morality and Economic Law: Toward a
Reconciliation". Ludwig von Mises Institute.

http://www.mises.org/article.aspx?Id=1481. Retrieved 2008-02-26.

↑ Norberg, Johan. "Three Cheers for Global Capitalism". The American

Retrieved 2008-02-26.

↑ Friedrich Hayek (1944). The Road to Serfdom. University Of Chicago
Press. ISBN 0-226-32061-8.

↑ Bellamy, Richard (2003). The Cambridge History of Twentieth-Century
Political Thought. Cambridge University Press. pp. 60. ISBN

↑ Walberg, Herbert (2001). Education and Capitalism. Hoover
Institution Press. pp. 87–89. ISBN 0-8179-3972-5.

↑ Ayn Rand's Literature of Capitalism, The New York Times

↑ The Virtue of Selfishness

↑ Capitalism: The Unknown Ideal

↑ Capitalism - TheoryThe Ayn Rand Lexicon.

↑ "III. The Social Doctrine of the Church". The Vatican.

http://www.vatican.va/archive/ENG0015/__P8C.HTM#-2FX. Retrieved

↑ Dada Maheshvarananda. "After Capitalism". http://www.prout.org/aftercapitalism/.
Retrieved 2008-02-26.
↑ "proutworld". ProutWorld. http://www.proutworld.org/. Retrieved

↑ Brander, James A. Government policy toward business. 4th ed.
Mississauga, Ontario: John Wiley & Sons Canada, Ltd., 2006. Print.

↑ That unfree labor is acceptable to capital was argued during the
1980s by Tom Brass. See Towards a Comparative Political Economy of
Unfree Labor (Cass, 1999). Marcel van der Linden. ""Labour History as
the History of Multitudes", Labour/Le Travail, 52, Fall 2003, p.

Retrieved 2008-02-26.

↑ Hernando de Soto. "The mystery of capital".

Retrieved 2008-02-26.
↑ Karl Marx. "Capital, v. 1. Part VIII: primitive accumulation".

http://www.marxists.org/archive/marx/works/1867-c1/ch27.htm. Retrieved
↑ N. F. R. Crafts (April 1978). [Expression error: Missing operand for
"Enclosure and labor supply revisited"]. Explorations in economic
history 15 (15): 172–183. doi:10.1016/0014-4983(78)90019-0. .we the
say yes

↑ North, Douglass C. (1990). Institutions, Institutional Change and
Economic Performance. Cambridge University Press.

↑ Principles of Economics. Harvard University. 1997. pp. 10.

↑ On the democratic nature of the Venezuelan state, see [2]. On the
current government's rejection of capitalism in favor of socialism,
see[3] and[4]

↑ James Lee Ray. "Does democracy cause peace".

http://www.mtholyoke.edu/acad/intrel/ray.htm. Retrieved 2008-02-26.
↑ Hegre, Håvard. "Towards a democratic civil peace? : opportunity,
grievance, and civil war 1816-1992".
Retrieved 2008-02-26.

↑ Mesquita, Bruce Bueno de (2005-09). "Development and Democracy".
Foreign Affairs.
Retrieved 2008-02-26.

↑ Single, Joseph T. (2004-09). "Why Democracies Excel". New York

Retrieved 2008-02-26.


Bacher, Christian (2007) Capitalism, Ethics and the Paradoxon of Self-
exploitation Grin Verlag. p. 2
De George, Richard T. (1986) Business ethics p. 104
Lash, Scott and Urry, John (2000). Capitalism. In Nicholas
Abercrombie, S. Hill & BS Turner (Eds.), The Penguin dictionary of
sociology (4th ed.) (pp. 36–40).
Obrinsky, Mark (1983). Profit Theory and Capitalism. University of
Pennsylvania Press. pp. 1. http://www.questia.com/PM.qst?a=o&d=4995059.
Wolf, Eric (1982) Europe and the People Without History
Wood, Ellen Meiksins (2002) The Origins of Capitalism: A Longer View
London: Verso

Further reading

Abu-Lughod, Janet L. Before European Hegemony The World System A.D.
1250-1350. New York: Oxford UP, USA, 1991.
Ackerman, Frank; Lisa Heinzerling (August 24, 2005). Priceless: On
Knowing the Price of Everything and the Value of Nothing. New Press.
pp. 277. ISBN 1565849817.
Buchanan, James M.. Politics Without Romance.
Braudel, Fernand. Civilization and Capitalism: 15th - 18 Century.
Bottomore, Tom (1985). Theories of Modern Capitalism.
H. Doucouliagos and M. Ulubasoglu (2006). [Expression error: Missing
operand for > "Democracy and Economic Growth: A meta-analysis"].
School of Accounting, Economics and Finance Deakin University
Coase, Ronald (1974). The Lighthouse in Economics.
Demsetz, Harold (1969). Information and Efficiency.
Fulcher, James (2004). Capitalism.
Friedman, Milton (1952). Capitalism and Freedom.
Galbraith, J.K. (1952). American Capitalism.
Böhm-Bawerk, Eugen von (1890). Capital and Interest: A Critical
History of Economical Theory. London: Macmillan and Co..
Harvey, David (1990). The Political-Economic Transformation of Late
Twentieth Century Capitalism.. Cambridge, MA: Blackwell Publishers.
ISBN 0-631-16294-1.
Hayek, Friedrich A. (1975). The Pure Theory of Capital. Chicago:
University of Chicago Press. ISBN 0-226-32081-2.
Hayek, Friedrich A. (1963). Capitalism and the Historians. Chicago:
University of Chicago Press.
Heilbroner, Robert L. (1966). The Limits of American Capitalism.
Heilbroner, Robert L. (1985). The Nature and Logic of Capitalism.
Heilbroner, Robert L. (1987). Economics Explained.
Cryan, Dan (2009). Capitalism: A Graphic Guide.
Josephson, Matthew, The Money Lords; the great finance capitalists,
1925-1950, New York, Weybright and Talley, 1972.
Luxemburg, Rosa (1913). The Accumulation of Capital.
Marx, Karl (1886). Capital: A Critical Analysis of Capitalist
Mises, Ludwig von (1998). Human Action: A Treatise on Economics.
Scholars Edition.
Rand, Ayn (1986). Capitalism: The Unknown Ideal. Signet.
Reisman, George (1996). Capitalism: A Treatise on Economics. Ottawa,
Illinois: Jameson Books. ISBN 0-915463-73-3.
Resnick, Stephen (1987). Knowledge & Class: a Marxian critique of
political economy. Chicago: University of Chicago Press.
Rostow, W. W. (1960). The Stages of Economic Growth: A Non-Communist
Manifesto. Cambridge: Cambridge University Press.
Schumpeter, J. A. (1983). Capitalism, Socialism, and Democracy.
Scott, Bruce (2009). The Concept of Capitalism. Springer. pp. 76. ISBN
Scott, John (1997). Corporate Business and Capitalist Classes.
Seldon, Arthur (2007). Capitalism: A Condensed Version. London:
Institute of Economic Affairs.
Sennett, Richard (2006). The Culture of the New Capitalism.
Smith, Adam (1776). An Inquiry into the Nature and Causes of the
Wealth of Nations.
De Soto, Hernando (2000). The Mystery of Capital: Why Capitalism
Triumphs in the West and Fails Everywhere Else. New York: Basic Books.
ISBN 0-465-01614-6.
Strange, Susan (1986). Casino Capitalism.
Wallerstein, Immanuel. The Modern World System.
Weber, Max (1926). The Protestant Ethic and the Spirit of Capitalism.

External links

Center on Capitalism and Society directed by Edmund Phelps

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In this article: Locations Images From the web: Images Videos
This article is about the economic term. For the board game, see
Monopoly (game). For other uses, see Monopoly (disambiguation).

This article needs additional citations for verification.
Please help improve this article by adding reliable references.
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Competition law
Basic concepts
History of competition law
Coercive monopoly
Natural monopoly
Barriers to entry
Market power
SSNIP test
Relevant market
Merger control

Anti-competitive practices
Formation of cartels
Price fixing
Bid rigging
Product bundling and tying
Refusal to deal
Group boycott
Exclusive dealing
Dividing territories
Conscious parallelism
Predatory pricing
Misuse of patents and copyrights

Laws and doctrines
United States

Sherman Antitrust Act
Clayton Antitrust Act
Robinson-Patman Act
Hart-Scott-Rodino Act
Merger guidelines
Essential facilities doctrine
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Rule of reason
European Union

UK competition law
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Trade Practices Act 1974

Enforcement authorities and organizations
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In economics, a monopoly (from Greek monos / μονος (alone or single) +
polein / πωλειν (to sell)) exists when a specific individual or an
enterprise has sufficient control over a particular product or service
to determine significantly the terms on which other individuals shall
have access to it.[1][clarification needed] Monopolies are thus
characterized by a lack of economic competition for the good or
service that they provide and a lack of viable substitute goods.[2]
The verb "monopolize" refers to the process by which a firm gains
persistently greater market share than what is expected under perfect

A monopoly must be distinguished from monopsony, in which there is
only one buyer of a product or service ; a monopoly may also have
monopsony control of a sector of a market. Likewise, a monopoly should
be distinguished from a cartel (a form of oligopoly), in which several
providers act together to coordinate services, prices or sale of
goods. Monopolies can form naturally or through vertical or horizontal
mergers. A monopoly is said to be coercive when the monopoly firm
actively prohibits competitors from entering the field.

In many jurisdictions, competition laws place specific restrictions on
monopolies. Holding a dominant position or a monopoly in the market is
not illegal in itself, however certain categories of behavior can,
when a business is dominant, be considered abusive and therefore be
met with legal sanctions. A government-granted monopoly or legal
monopoly, by contrast, is sanctioned by the state, often to provide an
incentive to invest in a risky venture or enrich a domestic
constituency. The government may also reserve the venture for itself,
thus forming a government monopoly.

Market structures

In economics, monopoly is a pivotal area to the study of market
structures, which directly concerns normative aspects of economic
competition, and sets the foundations for fields such as industrial
organization and economics of regulation. There are four basic types
of market structures under traditional economic analysis: perfect
competition, monopolistic competition, oligopoly and monopoly. A
monopoly is a market structure in which a single supplier produces and
sells the product. If there is a single seller in a certain industry
and there are no close substitutes for the goods being produced, then
the market structure is that of a "pure monopoly". Sometimes, there
are many sellers in an industry and/or there exist many close
substitutes for the goods being produced, but nevertheless firms
retain some market power. This is called monopolistic competition,
whereas in oligopoly the main theoretical framework revolves around
firm's strategic interactions.

In general, the main results from this theory refer to compare price-
fixing methods across market structures, analyze the impact of a
certain structure on welfare, and play with different variations of
technological/demand assumptions in order to assess its consequences
on the abstract model of society. Most economic textbooks follow the
practice of carefully explaining the perfect competition model, only
because of its usefulness to understand "departures" from it (the so
called imperfect competition models).

The boundaries of what constitutes a market and what doesn't, is a
relevant distinction to make in economic analysis. In a general
equilibrium context, a good is a specific concept entangling
geographical and time-related characteristics (grapes sold in October
of 2009 in Moscow is a different good from grapes sold in October of
2009 in New York). Most studies of market structure relax a little
their definition of a good, allowing for more flexibility at the
identification of substitute-goods. Therefore, one can find an
economic analysis of the market of grapes in Russia, for example,
which is not a market in the strict sense of general equilibrium


Single Seller: In a monopoly there is one seller of the monopolized
good who produces all the output.[3] Therefore, the whole market is
being served by a single firm, and for practical purposes, the firm is
the same as the industry. In a competitive market (that is, a market
with perfect competition) there are an infinite number of sellers each
producing an infinitesimally small quantity of output.
Market Power: Market Power is the ability to affect the terms and
conditions of exchange so that the price of the product is set by the
firm (price is not imposed by the market as in perfect competition).[4]
[5] Although a monopoly's market power is high it is still limited by
the demand side of the market. A monopoly faces a negatively sloped
demand curve not a perfectly inelastic curve. Consequently, any price
increase will result in the loss of some customers.

Sources of monopoly power

Monopolies derive their market power from barriers to entry -
circumstances that prevent or greatly impede a potential competitor's
entry into the market or ability to compete in the market. There are
three major types of barriers to entry; economic, legal and deliberate.

Economic Barriers:Economic barriers include economies of scale,
capital requirements, cost advantages and technological superiority.

Economies of scale: Monopolies are characterized by declining costs
over a relatively large range of production.[8] Declining costs
coupled with large start up costs give monopolies an advantage over
would be competitors. Monopolies are often in a position to cut prices
below a new entrant's operating costs and drive them out of the
industry.[8] Further the size of the industry relative to the minimum
efficient scale may limit the number of firms that can effectively
compete within the industry. If for example the industry is large
enough to support one firm of minimum efficient scale then other firms
entering the industry will operate at a size that is less than MES
meaning that these firms cannot produce at an average cost that is
competitive with the dominant industry.

Capital requirements: Production processes that require large
investments of capital, or large research and development costs or
substantial sunk costs limit the number of firms in an industry.[9]
Large fixed costs also make it difficult for a small firm to enter an
industry and expand.[10]

Technological Superiority: A monopoly may be better able to acquire,
integrate and use the best possible technology in producing its goods
while entrants do not have the size or fiscal muscle to use the best
available technology.[8] In plain English one large firm can sometimes
produce goods cheaper than several small firms.[11]
No Substitute Goods:A monopoly sells a good for which there is no
close substitutes. The absence of substitutes makes the demand for the
good relatively inelastic enabling monopolies to extract positive

Control of Natural Resources: A prime source of monopoly power is the
control of resources that are critical to the production of a final

Legal Barriers: Legal rights can provide opportunity to monopolize the
market in a good. Intellectual property rights, including patents and
copyrights, give a monopolist exclusive control over the production
and selling of certain goods. Property rights may give a firm the
exclusive control over the materials necessary to produce a good.

Deliberate Actions: A firm wanting to monopolize a market may engage
in various types of deliberate action to exclude competitors or
eliminate competition. Such actions include collusion, lobbying
governmental authorities, and force.
In addition to barriers to entry and competition, barriers to exit may
be a source of market power. Barriers to exit are market conditions
that make it difficult or expensive for a firm to leave the market.
High liquidation costs are a primary barrier to exit.[12] Market exit
and shutdown are separate events. The decision whether to shut down or
operate is not affected by exit barriers. A firm will shut down if
price falls below minimum average variable costs.

Monopoly versus competitive markets

While monopoly and perfect competition mark the extremes of market
structures[13] there are many point of similarity. The cost functions
are the same.[14] Both monopolies and perfectly competitive firms
minimize cost and maximize profit. The shutdown decisions are the
same. Both are assumed to face perfectly competitive factors markets.
There are distinctions, some of the more important of which are as

Market Power - market power is the ability to control the terms and
condition of exchange. Specifically market power is the ability to
raise prices without losing all one's customers to competitors.
Perfectly competitive (PC) firms have zero market power when it comes
to setting prices. All firms in a PC market are price takers. The
price is set by the interaction of demand and supply at the market or
aggregate level. Individual firms simply take the price determined by
the market and produce that quantity of output that maximize the
firm's profits. If a PC firm attempted to raise prices above the
market level all its "customers" would abandon the firm and purchase
at the market price from other firms. A monopoly has considerable
although not unlimited market power. A monopoly has the power to set
prices or quantities although not both.[15] A monopoly is a price
maker.[16] The monopoly is the market[17] and prices are set by the
monopolist based on his circumstances and not the interaction of
demand and supply. The two primary factors determining monopoly market
power are the firm's demand curve and its cost structure.[18]

Product differentiation: There is zero product differentiation in a
perfectly competitive market. Every product is perfectly homogeneous
and a perfect substitute. With a monopoly there is high to absolute
product differentiation in the sense that there is no available
substitute for a monopolized good. The monopolist is the sole supplier
of the good in question.[19] A customer either buys from the
monopolist on her terms or does without.

Number of competitors: PC markets are populated by an infinite number
of buyers and sellers. Monopoly involves a single seller.[19]

Barriers to Entry - Barriers to entry are factors and circumstances
that prevent entry into market by would be competitors and impediments
to competition that limit new firm’s from operating and expanding
within the market. PC markets have free entry and exit. There are no
barriers to entry, exit or competition. Monopolies have relatively
high barriers to entry. The barriers must be strong enough to prevent
or discourage any potential competitor from entering the market.

PED; the price elasticity of demand is the percentage change in demand
caused by a one percent change in relative price. A successful
monopoly would face a relatively inelastic demand curve. A low
coefficient of elasticity is indicative of effective barriers to
entry. A PC firm faces what it perceives to be perfectly elastic
demand curve. The coefficient of elasticity for a perfectly
competitive demand curve is infinite.

Excess Profits- Excess or positive profits are profit above the normal
expected return on investment. A PC firm can make excess profits in
the short run but excess profits attract competitors who can freely
enter the market and drive down prices eventually reducing excess
profits to zero.[20] A monopoly can preserve excess profits because
barriers to entry prevent competitors from entering the market.

Profit Maximization - A PC firm maximizes profits by producing where
price equals marginal costs. A monopoly maximizes profits by producing
where marginal revenue equals marginal costs.[21] The rules are
equivalent. The demand curve for a PC firm is perfectly elastic -
flat. The demand curve is identical to the average revenue curve and
the price line. Since the average revenue curve is constant the
marginal revenue curve is also constant and equals the demand curve,
Average revenue is the same as price (AR = TR/Q = P x Q/Q = P). Thus
the price line is also identical to the demand curve. In sum, D = AR =
MR = P.

P-Max quantity, price and profit: if a monopolist took over a
perfectly competitive industry he would raise prices cut production
and realize positive economic profits.[22]

The most significant distinction between a PC firm and a monopoly is
that the monopoly faces a downward sloping demand curve rather than
the "perceived" perfectly elastic curve of the PC firm.[23]
Practically all the variations above mentioned relate to this fact. If
there is a downward sloping demand curve then by necessity there is a
distinct marginal revenue curve. The implications of this fact are
best made manifest with a linear demand curve, Assume that the inverse
demand curve is of the form x = a - by. Then the total revenue curve
is TR = ay - by2 and the marginal revenue curve is thus MR = a - 2by.
From this several things are evident. First the marginal revenue curve
has the same y intercept as the inverse demand curve. Second the slope
of the marginal revenue curve is twice that of the inverse demand
curve. Third the x intercept of the marginal revenue curve is half
that of the inverse demand curve. What is not quite so evident is that
the marginal revenue curve lies below the inverse demand curve at all
points.[23] Since all firms maximize profits by equating MR and MC it
must be the case that at the profit maximizing quantity MR and MC are
less than price which further implies that a monopoly produces less
quantity at a higher price than if the market were perfectly

A company with a monopoly does not undergo price pressure from
competitors, although it may face pricing pressure from potential
competition. If a company raises prices too high, then others may
enter the market if they are able to provide the same good, or a
substitute, at a lower price.[24] The idea that monopolies in markets
with easy entry need not be regulated against is known as the
"revolution in monopoly theory".[25]

A monopolist can extract only one premium,[clarification needed] and
getting into complementary markets does not pay. That is, the total
profits a monopolist could earn if it sought to leverage its monopoly
in one market by monopolizing a complementary market are equal to the
extra profits it could earn anyway by charging more for the monopoly
product itself. However, the one monopoly profit theorem does not hold
true if customers in the monopoly good are stranded or poorly
informed, or if the tied good has high fixed costs.

A pure monopoly follows the same economic rationality of firms under
perfect competition, i.e. to optimize a profit function given some
constraints. Under the assumptions of increasing marginal costs,
exogenous inputs' prices, and control concentrated on a single agent
or entrepreneur, the optimal decision is to equate the marginal cost
and marginal revenue of production. Nonetheless, a pure monopoly can -
unlike a competitive firm- alter the market price for her own
convenience: a decrease in the level of production results in a higher
price. In the economics' jargon, it is said that pure monopolies "face
a downward-sloping demand". An important consequence of such behavior
is worth noticing: typically a monopoly selects a higher price and
lower quantity of output than a price-taking firm; again, less is
available at a higher price.[26]

There are important points for one to remember when considering the
monopoly model diagram (and its associated conclusions) displayed
here. The result that monopoly prices are higher, and production
output lower, than a competitive firm follow from a requirement that
the monopoly not charge different prices for different customers. That
is, the monopoly is restricted from engaging in price discrimination
(this is called first degree price discrimination, where all customers
are charged the same amount). If the monopoly were permitted to charge
individualized prices (this is called third degree price
discrimination), the quantity produced, and the price charged to the
marginal customer, would be identical to a competitive firm, thus
eliminating the deadweight loss; however, all gains from trade (social
welfare) would accrue to the monopolist and none to the consumer. In
essence, every consumer would be just indifferent between (1) going
completely without the product or service and (2) being able to
purchase it from the monopolist.

As long as the price elasticity of demand for most customers is less
than one in absolute value, it is advantageous for a firm to increase
its prices: it then receives more money for fewer goods. With a price
increase, price elasticity tends to rise, and in the optimum case
above it will be greater than one for most customers.

Monopoly and efficiency

This section does not cite any references or sources.

Please help improve this article by adding citations to reliable
sources. Unsourced material may be challenged and removed. (October

Surpluses and deadweight loss created by monopoly price
settingAccording to the standard model,[citation needed] in which a
monopolist sets a single price for all consumers, the monopolist will
sell a lower quantity of goods at a higher price than would firms
under perfect competition. Because the monopolist ultimately forgoes
transactions with consumers who value the product or service more than
its cost, monopoly pricing creates a deadweight loss referring to
potential gains that went neither to the monopolist or to consumers.
Given the presence of this deadweight loss, the combined surplus (or
wealth) for the monopolist and consumers is necessarily less than the
total surplus obtained by consumers under perfect competition. Where
efficiency is defined by the total gains from trade, the monopoly
setting is less efficient than perfect competition.

It is often argued that monopolies tend to become less efficient and
innovative over time, becoming "complacent giants", because they do
not have to be efficient or innovative to compete in the marketplace.
Sometimes this very loss of psychological efficiency can raise a
potential competitor's value enough to overcome market entry barriers,
or provide incentive for research and investment into new
alternatives. The theory of contestable markets argues that in some
circumstances (private) monopolies are forced to behave as if there
were competition because of the risk of losing their monopoly to new
entrants. This is likely to happen where a market's barriers to entry
are low. It might also be because of the availability in the longer
term of substitutes in other markets. For example, a canal monopoly,
while worth a great deal in the late eighteenth century United
Kingdom, was worth much less in the late nineteenth century because of
the introduction of railways as a substitute.

Natural monopoly

A natural monopoly is a firm which experiences increasing returns to
scale over the relevant range of output.[27] A natural monopoly occurs
where the average cost of production “declines throughout the relevant
range of product demand.” The relevant range of product demand is
where the average cost curve is below the demand curve.[28] When this
situation occurs it is always cheaper for one large firm to supply the
market than multiple smaller firms, in fact, absent government
intervention in such markets will naturally evolve into a monopoly. An
early market entrant who takes advantage of the cost structure and can
expand rapidly can exclude smaller firms from entering and can drive
or buy out other firms. A natural monopoly suffers from the same
inefficiencies as any other monopoly. Left to its own devices a profit
seeking natural monopoly will produce where marginal revenue equals
marginal costs. Regulation of natural monopolies is problematic.
Breaking up such monopolies is counter productive[citation needed].
The most frequently used methods dealing with natural monopolies is
government regulations and public ownership. Government regulation
generally consists of regulatory commissions charged with the
principal duty of setting prices.[29] To reduce prices and increase
output regulators often use average cost pricing. Under average cost
pricing the price and quantity are determined by the intersection of
the average cost curve and the demand curve.[30] This pricing scheme
eliminates any positive economic profits since price equals average
cost. Average cost pricing is not perfect. Regulators must estimate
average costs. Firms have a reduced incentive to lower costs. And
regulation of this type has not been limited to natural monopolies.

Government-granted monopoly

A government-granted monopoly (also called a "de jure monopoly") is a
form of coercive monopoly by which a government grants exclusive
privilege to a private individual or firm to be the sole provider of a
good or service; potential competitors are excluded from the market by
law, regulation, or other mechanisms of government enforcement.
Copyright, patents and trademarks are examples of government-granted

Breaking up monopolies

When monopolies are not broken through the open market, sometimes a
government will step in, either to regulate the monopoly, turn it into
a publicly owned monopoly environment, or forcibly break it up (see
Antitrust law and trust busting). Public utilities, often being
naturally efficient with only one operator and therefore less
susceptible to efficient breakup, are often strongly regulated or
publicly owned. AT&T and Standard Oil are debatable examples of the
breakup of a private monopoly: When AT&T was broken up into the "Baby
Bell" components, MCI, Sprint, and other companies were able to
compete effectively in the long distance phone market.


Main article: Competition law

The existence of a very high market share does not always mean
consumers are paying excessive prices since the threat of new entrants
to the market can restrain a high-market-share firm's price increases.
Competition law does not make merely having a monopoly illegal, but
rather abusing the power a monopoly may confer, for instance through
exclusionary practices.

First it is necessary to determine whether a firm is dominant, or
whether it behaves "to an appreciable extent independently of its
competitors, customers and ultimately of its consumer."[31] As with
collusive conduct, market shares are determined with reference to the
particular market in which the firm and product in question is sold.

Under EU law, very large market shares raises a presumption that a
firm is dominant,[32] which may be rebuttable.[33] If a firm has a
dominant position, then there is "a special responsibility not to
allow its conduct to impair competition on the common market".[34] The
lowest yet market share of a firm considered "dominant" in the EU was

Certain categories of abusive conduct are usually prohibited under the
country's legislation, though the lists are seldom closed.[36] The
main recognized categories are:

Limiting supply
Predatory pricing
Price discrimination
Refusal to deal and exclusive dealing
Tying (commerce) and product bundling

Despite wide agreement that the above constitute abusive practices,
there is some debate about whether there needs to be a causal
connection between the dominant position of a company and its actual
abusive conduct. Furthermore, there has been some consideration of
what happens when a firm merely attempts to abuse its dominant

Historical monopolies

This section requires expansion.

The term "monopoly" first appears in Aristotle's Politics, wherein
Aristotle describes Thales of Miletus' cornering of the market in
olive presses as a monopoly (μονοπωλίαν).[37][38]

Common salt (sodium chloride) historically gave rise to natural
monopolies. Until recently, a combination of strong sunshine and low
humidity or an extension of peat marshes was necessary for winning
salt from the sea, the most plentiful source. Changing sea levels
periodically caused salt "famines" and communities were forced to
depend upon those who controlled the scarce inland mines and salt
springs, which were often in hostile areas (the Sahara desert)
requiring well-organized security for transport, storage, and
distribution. The "Gabelle", a notoriously high tax levied upon salt,
played a role in the start of the French Revolution, when strict legal
controls were in place over who was allowed to sell and distribute

Robin Gollan argues in The Coalminers of New South Wales that anti-
competitive practices developed in the Newcastle coal industry as a
result of the business cycle. The monopoly was generated by formal
meetings of the local management of coal companies agreeing to fix a
minimum price for sale at dock. This collusion was known as "The
Vend." The Vend collapsed and was reformed repeatedly throughout the
late nineteenth century, cracking under recession in the business
cycle. "The Vend" was able to maintain its monopoly due to trade union
support, and material advantages (primarily coal geography). In the
early twentieth century as a result of comparable monopolistic
practices in the Australian coastal shipping business, the vend took
on a new form as an informal and illegal collusion between the
steamship owners and the coal industry, eventually going to the High
Court as Adelaide Steamship Co. Ltd v. R. & AG.[39]

Examples of legal (and or) illegal monopolies

The salt commission, a legal monopoly in China formed in 758.

British East India Company; created as a legal trading monopoly in

Dutch East India Company; created as a legal trading monopoly in

Western Union was criticized as a price gouging monopoly in the late
19th century.[40]

Standard Oil; broken up in 1911, two of its surviving "baby companies"
are ExxonMobil and the Chevron Corporation.

U.S. Steel; anti-trust prosecution failed in 1911.

Major League Baseball; survived U.S. anti-trust litigation in 1922,
though its special status is still in dispute as of 2009.

United Aircraft and Transport Corporation; aircraft manufacturer
holding company forced to divest itself of airlines in 1934.

National Football League; survived anti-trust lawsuit in the 1960s,
convicted of being an illegal monopoly in the 1980s.

American Telephone & Telegraph; telecommunications giant broken up in

De Beers; settled charges of price fixing in the diamond trade in the

Microsoft; settled anti-trust litigation in the U.S. in 2001; fined by
the European Commission in 2004 for 497 million Euros,[41] which was
upheld for the most part by the Court of First Instance of the
European Communities in 2007. The fine was 1.35 Billion USD in 2008
for noncompliance with the 2004 rule.[42][43]

Joint Commission; has a monopoly over whether or not US hospitals are
able to participate in the Medicare and Medicaid programs.

Telecom New Zealand; local loop unbundling enforced by central
Deutsche Telekom; former state monopoly, still partially state owned,
currently monopolizes high-speed VDSL broadband network.[44]

Monsanto has been sued by competitors for anti-trust and monopolistic
practices. They hold between 70% and 100% of the commercial seed

AAFES has a monopoly on retail sales at overseas military

GameStop has a near exclusive control over the sale of used games, and
frequently buys out competing companies.
SAQ is a monopoly.

How to counter monopolies?
This section requires expansion.

According to professor Milton Friedman, laws against monopolies cause
more harm than good, but unnecessary monopolies should be countered by
removing tariffs and other regulation that upholds monopolies.

A monopoly can seldom be established within a country without overt
and covert government assistance in the form of a tariff or some other
device. It is close to impossible to do so on a world scale. The De
Beers diamond monopoly is the only one we know of that appears to have
succeeded. - - In a world of free trade, international cartels would
disappear even more quickly.[45]

On the other hand, professor Steve H. Hanke believes that although
private monopolies are more efficient than public ones, often by
factor two, sometimes private natural monopolies, such as local water
distribution, should be regulated (not prohibited) through, e.g.,
price auctions[46].

See also

Look up monopoly in Wiktionary, the free dictionary.

Bilateral monopoly
Complementary monopoly
Flag carrier
History of monopoly
Monopolistic competition
Ramsey problem, a policy rule concerning what price a monopolist
should set
Simulations and games in economics education that model monopolistic

Notes and references

↑ Milton Friedman (2002). "VIII: Monopoly and the Social
Responsibility of Business and Labor" (paperback). Capitalism and
Freedom (40th anniversary edition ed.). The University of Chicago
Press. pp. 208. ISBN 0-226-26421-1.

↑ Blinder, Alan S; William J Baumol and Colton L Gale (June 2001).
"11: Monopoly" (paperback). Microeconomics: Principles and Policy.
Thomson South-Western. pp. 212. ISBN 0-324-22115-0. "A pure monopoly
is an industry in which there is only one supplier of a product for
which there are no close substitutes and in which is very difficult or
impossible for another firm to coexist"

↑ Binger, B & Hoffman, E.: Microeconomics with Calculus, 2nd ed. p 391
Addison-Wesley 1998.

↑ Png, Managerial Economics (Blackwell 1999)

↑ Krugman & Wells: Microeconomics 2d ed. Worth 2009

↑ Goodwin, Nelson, Ackerman, & Weissskopf, Microeconomics in Context
2d ed. (Sharpe 2009) at 307&08.

↑ Samuelson & Marks, Managerial Economics 4th ed. (Wiley 2003) at

↑ 8.0 8.1 8.2 Nicholson & Snyder, Intermediate Microeconomics (Thomson
2007) at 379.

↑ Samuelson & Marks, Managerial Economics 4th ed. (Wiley 2003) at

↑ Goodwin, Nelson, Ackerman, & Weissskopf, Microeconomics in Context
2d ed. (Sharpe 2009) at 307.

↑ Ayers & Collinge, Microeconomics (Pearson 2003) at 238.

↑ Png, I: Managerial Economics p. 271 Blackwell 1999 ISBN
↑ Png, I: Managerial Economics p. 268 Blackwell 1999 ISBN
↑ Negbennebor, A: Microeconomics, The Freedom to Choose CAT 2001
↑ Hirschey, M, Managerial Economics. p. 412 Dreyden 2000.
↑ Melvin & Boyes, Microeconomics 5th ed. (Houghton Mifflin 2002) 239
↑ Pindyck, R & Rubinfeld, D: Microeconomics 5th ed. p.328 Prentice-
Hall 2001
↑ Varian, H.: Microeconomic Analysis 3rd ed. p. 233. Norton 1992.
↑ 19.0 19.1 Hirschey, M, Managerial Economics. p. 426 Dreyden 2000.
↑ Pindyck, R & Rubinfeld, D: Microeconomics 5th ed. p. 333 Prentice-
Hall 2001.
↑ Varian, H: Microeconomic Analysis 3rd ed. p. 235 Norton 1992.
↑ Pindyck, R & Rubinfeld, D: Microeconomics 5th ed. p. 370 Prentice-
Hall 2001.

↑ 23.0 23.1 Binger, B & Hoffman, E.: Microeconomics with Calculus, 2nd
ed. Addison-Wesley 1998.

↑ Depken, Craig (November 23, 2005). "10". Microeconomics Demystified.
McGraw Hill. pp. 170. ISBN 0071459111.

↑ The revolution in monopoly theory, by Glyn Davies and John Davies.
Lloyds Bank Review, July 1984, no. 153, p. 38-52.

↑ Levine, David; Michele Boldrin (2008-09-07). Against intellectual
monopoly. Cambridge University Press. pp. 312. ISBN 978-0521879286.


↑ Binger, B & Hoffman, E.: Microeconomics with Calculus, 2nd ed. 406
Addison-Wesley 1998.

↑ Samuelson, P. & Nordhaus, W.: Microeconomics, 17th ed. McGraw-Hill

↑ Samuelson, W & Marks, S: p. 376. Managerial Economics 4th ed. Wiley

↑ 30.0 30.1 Samuelson, W & Marks, S: 100. Managerial Economics 4th ed.
Wiley 2003

↑ C-27/76 United Brands Continental BV v. Commission [1978] ECR 207

↑ C-85/76 Hoffmann-La Roche & Co AG v. Commission [1979] ECR 461

↑ AKZO [1991]
↑ Michelin [1983]
↑ BA/Virgin [2000] OJ L30/1
↑ Continental Can [1973]
↑ Aristotle: Politics: Book 1
↑ Aristotle, Politics

↑ Robin Gollan, The Coalminers of New South Wales: a history of the
union, 1860-1960, Melbourne: Melbourne University Press, 1963,

↑ Ars technica The Victorian Internet
↑ EU competition policy and the consumer

↑ Leo Cendrowicz. "Microsoft Gets Mother Of All EU Fines". Forbes.

Retrieved 2008-03-10.
↑ "EU fines Microsoft record $1.3 billion". Time Warner.

http://money.cnn.com/2008/02/27/technology/eu_microsoft.ap/. Retrieved

↑ Kevin J. O'Brien, IHT.com, Regulators in Europe fight for
independence, International Herald Tribune, November 9, 2008, Accessed
November 14, 2008.

↑ Milton Friedman, Free to Choose, p. 53-54

↑ In Praise of Private Infrastructure, Globe Asia, April 2008

Further reading

Guy Ankerl, Beyond Monopoly Capitalism and Monopoly Socialism.
Cambridge, Mass.: Schenkman Pbl., 1978. ISBN0870739387

Impact of Antitrust Laws on American Professional Team Sports

External links

Monopoly: A Brief Introduction by The Linux Information Project
Monopoly by Elmer G. Wiens: Online Interactive Models of Monopoly
(Public or Private) and Oligopoly
Monopoly Profit and Loss by Fiona Maclachlan and Monopoly and Natural
Monopoly by Seth J. Chandler, Wolfram Demonstrations Project.


Natural Monopoly and Its Regulation

The Myth of the Natural Monopoly

Natural Monopoly and Its Regulation

From rulers' monopolies to users' choices A critical survey of
monopolistic practices

Body of Knowledge on Infrastructure Regulation Monopoly and Market


...and I am Sid Harth
Sid Harth
2010-02-25 23:26:43 UTC
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Mercantilism is an economic theory that holds the prosperity of a
nation is dependent upon its supply of capital, and that the global
volume of international trade is "unchangeable." Economic assets or
capital, are represented by bullion (gold, silver, and trade value)
held by the state, which is best increased through a positive balance
of trade with other nations (exports minus imports) and assumes wealth
and monetary assets are identical. Mercantilism suggests that the
ruling government should advance these goals by playing a
protectionist role in the economy; by encouraging exports and
discouraging imports, notably through the use of tariffs and subsidies.


This section needs additional citations for verification.

Please help improve this article by adding reliable references.
Unsourced material may be challenged and removed. (January 2010)

Mercantilism was the dominant school of thought in Europe throughout
the late Renaissance and early modern period (from the 15th to the
18th century). Mercantilism encouraged the many inter-European wars of
the period and fueled European expansion and imperialism both in
Europe and throughout the rest of the world until the 19th century or
early 20th century. Arguments have been made for the historical
promotion of mercantilism in Europe since recorded history with
authors noting the trade policies of Athens and its Delian League
specifically mention control of value of trade in bullion as necessary
for the promotion of the Greek polis. Additionally, the noted
competition of Medieval Monarchs for control of the market town trade
and the Spice trade, as well as the copious documentation of Venice,
Genoa, and Pisa regarding control of the Mediterranean Sea trade of
bullion clearly points to an early understanding of mercantalistic
principles. However, as a codified school, Mercantilism's real birth
is marked by the Empiricism of the Renaissance, which first began to
qualify large scale trade accurately.

England began the first large scale and integrative approach to
mercantilism during the Elizabethan Era. The period featured various
but often disjointed efforts by the court of Queen Elizabeth to
develop a naval and merchant fleet capable of challenging the Spanish
stranglehold on trade and expanding the growth of bullion at home.
Queen Elizabeth promoted the expansion of the Trade and Navigation
Acts in Parliament and gave orders-in-council to her Admiralty for the
protection and promotion of English shipping. These efforts organized
national resources sufficiently in the defense of England from the far
larger and more powerful Spanish Empire, and in turn paved the
foundation for establishing the most successful global empire in
history. The authors noted most for establishing the English
mercantilist system include Gerard de Malynes and Thomas Mun, who
first articulated the Elizabethan System, which in turn was then
developed further by Josiah Child. The English era provided the bulk
of surveys and evidence of mercantilism, and its success spurred the
French into developing their own system. Numerous French authors
helped cement French policy around mercantilism in the 17th century.
This French mercantilism is best articulated by Jean-Baptiste Colbert.
In later years, the United States took mercantilism to its most
advanced and fully developed level as an economic policy when
Alexander Hamilton enunciated the Hamiltonian economic program, and
Abraham Lincoln finally solidified a trade and industrial policy which
was to guide American economic policy into 1972. Paradoxically, during
the 19th and early 20th centuries, at a time when America's pursuit of
mercantilism made it the greatest economic power in the world, Europe,
by contrast, with the noteworthy exception of Germany, began
abandoning mercantilism.

In Europe, academic belief in mercantilism began to fade in the late
18th century, especially in England, as the arguments of Adam Smith
and classical economists rose in conjunction with the expansion and
international banking infrastructure of financial capitalism and the
practical power and influence it had on policy. The confluence of
these movements peaked with the defeat of national patriotism in
Europe following World War Two and the end of European colonialism
during the Cold War. Each of the main European powers that had
struggled to maintain mercantalistic policies as means of promoting
their national supremacy had been defeated or occupied in turn,
including France, Netherlands, Italy, Germany, whilst the United
Kingdom was indebted to the United States. Comparatively, the two most
powerful victors, the Soviet Union and the United States pursued
differing variants of internationalism, communism and capitalism. In
turn, the supremacy of the United States gave it the opportunity to
force its allies into accepting a new multi-national economic system
of free-trade under America's corporate and financial dominance,
thereby displacing the royal and nationalist centers of power in
Europe. However, throughout the rest of the world, mercantilism or neo-
mercantilism has been pursued, most successfully in Asia.

Neo-mercantalism and its related school of economic nationalism, which
emphasizes the nation and government intervention but deemphasizes
bullion in favor of productive capacity, has been and continues to be
a dominant model of development economics, throughout the non-Western
world. Many of these nations seek to practice either neo-mercantalism
or economic nationalism in relation to the policies of Western
economic powerhouses. Asian nations in particular study 19th century
United States policy known as the National System, including the
American System which was promoted by Henry Clay and Friedrich List
whose ideas also began the foundations of Germany's rise to greatness
in the Zollverein system. Countries most successful with these
policies include Japan as it has practiced since the reforms of the
19th century, and as practiced in the late 20th and early 21st century
by other Asian nations such as the Four Asian Tigers of Hong Kong,
South Korea, Taiwan, and Singapore, and most significantly, China and
India. The export-led economies of present-day China, Japan, and
Germany are cited as the most successful latter-day variants of


Most of the European economists who wrote between 1500 and 1750 are
today generally considered mercantilists; this term was initially used
solely by critics, such as Mirabeau and Smith, but was quickly adopted
by historians. Originally the standard English term was "mercantile
system". The word "mercantilism" was introduced into English from
German in the early 19th century.

The bulk of what is commonly called "mercantilist literature" appeared
in the 1620s in Great Britain.[2] Smith saw English merchant Thomas
Mun (1571–1641) as a major creator of the mercantile system,
especially in his posthumously published Treasure by Foreign Trade
(1664), which Smith considered the archetype of manifesto of the
movement.[3] Perhaps the last major mercantilist work was James
Steuart’s Principles of Political Economy published in 1767.[2]

Beyond England, Italy, France, and Spain produced noted writers who
pursued mercantilist themes in their work, indeed the earliest
examples of mercantilism are from outside of England: in Italy,
Giovanni Botero (1544–1617) and Antonio Serra (1580–?), in France,
Jean Bodin, Colbert and some other precursors to the physiocrats, in
Spain, the School of Salamanca writers Francisco de Vitoria (1480 or
1483–1546), Domingo de Soto (1494–1560), Martin de Azpilcueta (1491–
1586), and Luis de Molina (1535–1600). Themes also existed in writers
from the German historical school from List, as well as followers of
the "American system" and British "free-trade imperialism," thus
stretching the system into the nineteenth century. However, many
British writers, including Mun and Misselden, were merchants, while
many of the writers from other countries were public officials. Beyond
mercantilism as a way of understanding the wealth and power of
nations, Mun and Misselden are noted for their viewpoints on a wide
range of economic matters.[4]

Merchants in VeniceThe Austrian lawyer and scholar Philipp Wilhelm von
Hornick, in his Austria Over All, If She Only Will of 1684, detailed a
nine-point program of what he deemed effective national economy, which
sums up the tenets of mercantilism comprehensively:[5]

That every inch of a country's soil be utilized for agriculture,
mining or manufacturing.

That all raw materials found in a country be used in domestic
manufacture, since finished goods have a higher value than raw

That a large, working population be encouraged.
That all export of gold and silver be prohibited a
nd all domestic money be kept in circulation.

That all imports of foreign goods be discouraged as much as possible.

That where certain imports are indispensable they be obtained at first
hand, in exchange for other domestic goods instead of gold and

That as much as possible, imports be confined to raw materials that
can be finished [in the home country].

That opportunities be constantly sought for selling a country's
surplus manufactures to foreigners, so far as necessary, for gold and

That no importation be allowed if such goods are sufficiently and
suitably supplied at home.

Other than Von Hornick, there were no mercantilist writers presenting
an overarching scheme for the ideal economy, as Adam Smith would later
do for classical economics. Rather, each mercantilist writer tended to
focus on a single area of the economy.[6] Only later did non-
mercantilist scholars integrate these "diverse" ideas into what they
called mercantilism. Some scholars thus reject the idea of
mercantilism completely, arguing that it gives "a false unity to
disparate events". Smith saw the mercantile system as an enormous
conspiracy by manufacturers and merchants against consumers, a view
that has led some authors, especially Robert E. Ekelund and Robert D.
Tollison to call mercantilism "a rent-seeking society". To a certain
extent, mercantilist doctrine itself made a general theory of
economics impossible. Mercantilists viewed the economic system as a
zero-sum game, in which any gain by one party required a loss by
another.[7] Thus, any system of policies that benefited one group
would by definition harm the other, and there was no possibility of
economics being used to maximize the "commonwealth", or common good.
[8] Mercantilists' writings were also generally created to rationalize
particular practices rather than as investigations into the best

Mercantilist domestic policy was more fragmented than its trade
policy. While Adam Smith portrayed mercantilism as supportive of
strict controls over the economy, many mercantilists disagreed. The
early modern era was one of letters patent and government-imposed
monopolies; some mercantilists supported these, but others
acknowledged the corruption and inefficiency of such systems. Many
mercantilists also realized that the inevitable results of quotas and
price ceilings were black markets. One notion mercantilists widely
agreed upon was the need for economic oppression of the working
population; laborers and farmers were to live at the "margins of
subsistence". The goal was to maximize production, with no concern for
consumption. Extra money, free time, or education for the "lower
classes" was seen to inevitably lead to vice and laziness, and would
result in harm to the economy.[10]


Scholars are divided on why mercantilism was the dominant economic
ideology for two and a half centuries.[11] One group, represented by
Jacob Viner, argues that mercantilism was simply a straightforward,
common-sense system whose logical fallacies could not be discovered by
the people of the time, as they simply lacked the required analytical

The second school, supported by scholars such as Robert B. Ekelund,
contends that mercantilism was not a mistake, but rather the best
possible system for those who developed it. This school argues that
mercantilist policies were developed and enforced by rent-seeking
merchants and governments. Merchants benefited greatly from the
enforced monopolies, bans on foreign competition, and poverty of the
workers. Governments benefited from the high tariffs and payments from
the merchants. Whereas later economic ideas were often developed by
academics and philosophers, almost all mercantilist writers were
merchants or government officials.[12]

A third explanation for mercantilism is monetary. European trade
exported bullion to pay for goods from Asia, thus reducing the money
supply and putting downward pressure on prices and economic activity.
The evidence for this hypothesis is the lack of inflation in the
English economy until the Revolutionary and Napoleonic wars when paper
money was extensively used.

A fourth explanation lies in the increasing professionalisation and
technification of the wars of the era, which turned the maintenance of
adequate reserve funds in the prospect of war into a more and more
expensive and eventually competitive business.

Mercantilism developed at a time when the European economy was in
transition. Isolated feudal estates were being replaced by centralized
nation-states as the focus of power. Technological changes in shipping
and the growth of urban centers led to a rapid increase in
international trade.[13] Mercantilism focused on how this trade could
best aid the states. Another important change was the introduction of
double-entry bookkeeping and modern accounting. This accounting made
extremely clear the inflow and outflow of trade, contributing to the
close scrutiny given to the balance of trade.[14] Of course, the
impact of the discovery of America cannot be ignored. New markets and
new mines propelled foreign trade to previously inconceivable heights.
The latter led to “the great upward movement in prices” and an
increase in “the volume of merchant activity itself.”[15]

Prior to mercantilism, the most important economic work done in Europe
was by the medieval scholastic theorists. The goal of these thinkers
was to find an economic system that was compatible with Christian
doctrines of piety and justice. They focused mainly on microeconomics
and local exchanges between individuals. Mercantilism was closely
aligned with the other theories and ideas that were replacing the
medieval worldview. This period saw the adoption of the very
Machiavellian realpolitik and the primacy of the raison d'état in
international relations. The mercantilist idea that all trade was a
zero sum game, in which each side was trying to best the other in a
ruthless competition, was integrated into the works of Thomas Hobbes.
The dark view of human nature also fit well with the Puritan view of
the world, and some of the most stridently mercantilist legislation,
such as the Navigation Acts, were enacted by the government of Oliver


French finance minister and mercantilist Jean-Baptiste Colbert served
for over 20 years.Mercantilist ideas were the dominant economic
ideology of all of Europe in the early modern period, and most states
embraced it to a certain degree. Mercantilism was centered in England
and France, and it was in these states that mercantilist polices were
most often enacted. Mercantilism arose in France in the early 16th
century, soon after the monarchy had become the dominant force in
French politics. In 1539, an important decree banned the importation
of woolen goods from Spain and some parts of Flanders. The next year,
a number of restrictions were imposed on the export of bullion.[17]
Over the rest of the sixteenth century further protectionist measures
were introduced. The height of French mercantilism is closely
associated with Jean-Baptiste Colbert, finance minister for 22 years
in the 17th century, to the extent that French mercantilism is
sometimes called "Colbertism". Under Colbert, the French government
became deeply involved in the economy in order to increase exports.
Protectionist policies were enacted that limited imports and favored
exports. Industries were organized into guilds and monopolies, and
production was regulated by the state through a series of over a
thousands directives outlining how different products should be
produced. To encourage industry, foreign artisans and craftsmen were
imported. Colbert also worked to decrease internal barriers to trade,
reducing internal tariffs and building an extensive network of roads
and canals. Colbert's policies were quite successful, and France's
industrial output and economy grew considerably during this period, as
France became the dominant European power. He was less successful in
turning France into a major trading power, and Britain and the
Netherlands remained supreme in this field.[18]

In England, mercantilism reached its peak during the Long Parliament
government (1640–1660). Mercantilist policies were also embraced
throughout much of the Tudor and Stuart periods, with Robert Walpole
being another major proponent. In Britain, government control over the
domestic economy was far less extensive than on the Continent, limited
by common law and the steadily increasing power of Parliament.[19]
Government-controlled monopolies were common, especially before the
English Civil War, but were often controversial.[20] British
mercantilist writers were themselves divided on whether domestic
controls were necessary. British mercantilism thus mainly took the
form of efforts to control trade. A wide array of regulations was put
in place to encourage exports and discourage imports. Tariffs were
placed on imports and bounties given for exports, and the export of
some raw materials was banned completely. The Navigation Acts expelled
foreign merchants from England's domestic trade. The nation
aggressively sought colonies and once under British control,
regulations were imposed that allowed the colony to only produce raw
materials and to only trade with Britain. This led to friction with
the inhabitants of these colonies, and mercantilist policies were one
of the major causes of the American Revolution. Over all, however,
mercantilist policies had an important effect on Britain helping turn
it into the world's dominant trader, and an international superpower.
One domestic policy that had a lasting impact was the conversion of
"waste lands" to agricultural use. Mercantilists felt that to maximize
a nation's power all land and resources had to be used to their
utmost, and this era thus saw projects like the draining of The Fens.

Mercantilism helped create trade patterns such as the triangular trade
in the North Atlantic, in which raw materials were imported to the
metropolis and then processed and redistributed to other colonies.The
other nations of Europe also embraced mercantilism to varying degrees.
The Netherlands, which had become the financial center of Europe by
being its most efficient trader, had little interest in seeing trade
restricted and adopted few mercantilist policies. Mercantilism became
prominent in Central Europe and Scandinavia after the Thirty Years'
War (1618–1648), with Christina of Sweden and Christian IV of Denmark
being notable proponents. The Habsburg Holy Roman Emperors had long
been interested in mercantilist policies, but the vast and
decentralized nature of their empire made implementing such notions
difficult. Some constituent states of the empire did embrace
Mercantilism, most notably Prussia, which under Frederick the Great
had perhaps the most rigidly controlled economy in Europe. During the
economic collapse of the seventeenth century Spain had little coherent
economic policy, but French mercantilist policies were imported by
Philip V with some success. Russia under Peter I (Peter the Great)
attempted to pursue mercantilism, but had little success because of
Russia's lack of a large merchant class or an industrial base.

Mercantilism also fueled the intense violence of the 17th and 18th
centuries in Europe. Since the level of world trade was viewed as
fixed, it followed that the only way to increase a nation's trade was
to take it from another. A number of wars, most notably the Anglo-
Dutch Wars and the Franco-Dutch Wars, can be linked directly to
mercantilist theories. The unending warfare of this period also
reinforced mercantilism as it was seen as an essential component to
military success. It also fueled the imperialism of this era, as each
nation that was able attempted to seize colonies that would be sources
of raw materials and exclusive markets. During the mercantilist
period, European power spread around the globe. As with the domestic
economy this expansion was often conducted under the aegis of
companies with government-guaranteed monopolies in a certain part of
the world, such as the Dutch East India Company or the Hudson's Bay
Company (operating in present-day Canada).


Much of Adam Smith's The Wealth of Nations is an attack on
mercantilismAdam Smith and David Hume are considered to be the
founding fathers of anti-mercantilist thought. A number of scholars
found important flaws with mercantilism long before Adam Smith
developed an ideology that could fully replace it. Critics like Hume,
Dudley North, and John Locke undermined much of mercantilism, and it
steadily lost favor during the 18th century. In 1690, John Locke made
perfectly clear that prices vary in proportion to the quantity of
money, but in general, the mercantilists did not put this
together[citation needed]. Locke's Second Treatise also points towards
the heart of the anti-mercantilist critique: that the wealth of the
world is not fixed, but created by human labor (represented
embryonically by Locke's labor theory of value). Mercantilists failed
to understand the notions of absolute advantage and comparative
advantage (although this idea was only fully fleshed out in 1817 by
David Ricardo) and the benefits of trade[citation needed]. For
instance, suppose Portugal was a more efficient producer of both wine
and cloth than England, yet in England it was relatively cheaper to
produce cloth compared to wine. Thus if Portugal specialized in wine
and England in cloth, both states would end up better off if they
traded. This is an example of the reciprocal benefits of trade due to
a comparative advantage. In modern economic theory, trade is not a
zero-sum game of cutthroat competition because both sides can benefit.

Hume famously noted the impossibility of the mercantilists' goal of a
constant positive balance of trade[citation needed]. As bullion flowed
into one country, the supply would increase and the value of bullion
in that state would steadily decline relative to other goods.
Conversely, in the state exporting bullion, its value would slowly
rise. Eventually it would no longer be cost-effective to export goods
from the high-price country to the low-price country, and the balance
of trade would reverse itself. Mercantilists fundamentally
misunderstood this, long arguing that an increase in the money supply
simply meant that everyone gets richer.[22]

The importance placed on bullion was also a central target, even if
many mercantilists had themselves begun to de-emphasize the importance
of gold and silver. Adam Smith noted at the core of the mercantile
system was the "popular folly of confusing wealth with money," bullion
was just the same as any other commodity, and there was no reason to
give it special treatment.[23] More recently, scholars have discounted
the accuracy of this critique. They believe Mun and Misselden were not
making this mistake in the 1620s, and point to their followers Child
and Davenant, who, in 1699, wrote: "Gold and Silver are indeed the
Measure of Trade, but that the Spring and Original of it, in all
nations is the Natural or Artificial Product of the Country; that is
to say, what this Land or what this Labour and Industry Produces."[24]
The critique that mercantilism was a form of rent-seeking has also
seen criticism, as scholars such Jacob Viner in the 1930s point out
that merchant mercantilists such as Mun understood that they would not
gain by higher prices for English wares abroad.[25]

The first school to completely reject mercantilism was the
physiocrats, who developed their theories in France. Their theories
also had several important problems, and the replacement of
mercantilism did not come until Adam Smith published The Wealth of
Nations in 1776. This book outlines the basics of what is today known
as classical economics. Smith spends a considerable portion of the
book rebutting the arguments of the mercantilists, though often these
are simplified or exaggerated versions of mercantilist thought.[12]

Scholars are also divided over the cause of mercantilism's end. Those
who believe the theory was simply an error hold that its replacement
was inevitable as soon as Smith's more accurate ideas were unveiled.
Those who feel that mercantilism was rent seeking hold that it ended
only when major power shifts occurred. In Britain, mercantilism faded
as the Parliament gained the monarch's power to grant monopolies.
While the wealthy capitalists who controlled the House of Commons
benefited from these monopolies, Parliament found it difficult to
implement them because of the high cost of group decision making.[26]

Mercantilist regulations were steadily removed over the course of the
Eighteenth Century in Britain, and during the 19th century the British
government fully embraced free trade and Smith's laissez-faire
economics. On the continent, the process was somewhat different. In
France economic control remained in the hands of the royal family and
mercantilism continued until the French Revolution. In Germany
mercantilism remained an important ideology in the 19th and early 20th
centuries, when the historical school of economics was paramount.[27]


In spite of Adam Smith's repudiation of mercantilism, it was favored
in the United States by such prominent figures as Alexander
Hamilton[28], Henry Clay, Henry Charles Carey, and Abraham Lincoln and
in Britain by such figures as Thomas Malthus. When Britain passed its
Corn Laws in 1815, Malthus thought such restrictions were a good idea,
but Ricardo disagreed. Eventually Smith's view was accepted in the
English-speaking world, and in 1849 the corn laws were repealed
largely on "Free Market" arguments given by Sir Robert Peel.[citation

Adam Smith rejected the mercantilist focus on production, arguing that
consumption was the only way to grow an economy. Keynes argued that
encouraging production was just as important as consumption. Keynes
also noted that in the early modern period the focus on the bullion
supplies was reasonable. In an era before paper money, an increase for
bullion was one of the few ways to increase the money supply. Keynes
and other economists of the period also realized the balance of
payments is an important concern. Since the 1930s, all nations have
closely monitored the inflow and outflow of capital, and most
economists agree that a favorable balance of trade is desirable.
[citation needed] Keynes also supported government intervention in the
economy as necessity, as did mercantilism.[29] Today the word remains
a pejorative term, often used to attack various forms of protectionism.
[30] The similarities between Keynesianism, and its successor ideas,
with mercantilism have sometimes led critics to call them neo-
mercantilism. Indeed, Paul Samuelson, writing within a Keynesian
framework, defended mercantilism, writing: "With employment less than
full and Net National Product suboptimal, all the debunked
mercantilist arguments turn out to be valid."[31]

Some other systems that do copy several mercantilist policies, such as
Japan's economic system, are also sometimes called neo-mercantilist.
[32] In an essay appearing in the 14 May 2007 issue of Newsweek,
business columnist Robert J. Samuelson argued that China was pursuing
an essentially mercantilist trade policy that threatened to undermine
the post-World War II international economic structure.[33]

The Austrian School of economics, always an opponent of mercantilism,
describes it this way:

“ Mercantilism, which reached its height in the Europe of the
seventeenth and eighteenth centuries, was a system of statism which
employed economic fallacy to build up a structure of imperial state
power, as well as special subsidy and monopolistic privilege to
individuals or groups favored by the state. Thus, mercantilism held
exports should be encouraged by the government and imports discouraged.
[34] ”

One area Smith was reversed on well before Keynes was in the use of
data. Mercantilists, who were generally merchants or government
officials, gathered vast amounts of trade data and used it
considerably in their research and writing. William Petty, a strong
mercantilist, is generally credited with being the first to use
empirical analysis to study the economy. Smith rejected this, arguing
that deductive reasoning from base principles was the proper method to
discover economic truths. Today, many schools of economics accept that
both methods are important.

In specific instances, protectionist mercantilist policies also had an
important and positive impact on the state that enacted them. Adam
Smith himself, for instance, praised the Navigation Acts as they
greatly expanded the British merchant fleet, and played a central role
in turning Britain into the naval and economic superpower that it was
for several centuries.[35] Some economists thus feel that protecting
infant industries, while causing short term harm, can be beneficial in
the long term.

Nonetheless, The Wealth of Nations had a profound impact on the end of
the mercantilist era and the later adoption of free market policy. By
1860, England removed the last vestiges of the mercantile era.
Industrial regulations, monopolies and tariffs were withdrawn.
[citation needed]


↑ LaHaye, Laura. "Mercantilism". Library Fund, Inc..

http://www.econlib.org/library/Enc/Mercantilism.html. Retrieved
↑ 2.0 2.1 Magnusson (2003), p. 46.

↑ Magnusson (2003), p. 47.

↑ Magnusson (2003), p. 50.

↑ Ekelund, Robert B., Jr. and Hébert, Robert F. (1997). A History of
Economic Theory and Method (4th ed.). Waveland Press [Long Grove,
Illinois]. pp. 40–41. ISBN 1-57766-381-0.

↑ Landreth & Colander (2002), p. 44.

↑ Ekelund & Tollison (1981), p. 9.

↑ Landreth & Colander (2002), p. 48.

↑ Landes, David S. (1997). The Unbound Prometheus: Technological
Change and Industrial Development in Western Europe from 1750 to the
Present. Cambridge: Cambridge University Press. pp. 31. ISBN

↑ Ekelund & Hébert (1975), p. 46.

↑ Ekelund & Hébert (1975), p. 61.

↑ 12.0 12.1 Niehans (1990), p. 19.

↑ Landreth & Colander (1981), p. 43.

↑ Wilson (1963), p. 10.

↑ Galbraith, John Kenneth (1987). Economics in Perspective: A Critical
Boston: Houghton Mifflin. pp. 33–34. ISBN 0395355729.

↑ Landreth & Colander (2002), p. 53.

↑ Hermann Kellenbenz. The Rise of the European Economy. pg. 29

↑ E.N. Williams. The Ancien Regime in Europe. pg. 177-83

↑ E. Damsgaard Hansen. European Economic History. pg. 65

↑ Christopher Hill. The Century of Revolution. pg. 32

↑ Wilson pg. 15

↑ Ekelund & Hébert (1975), p. 43.

↑ Magnussen (2003), p.46.

↑ Referenced to Davenant, 1771 [1699], p. 171 in Magnussen (2003), p.

↑ Magnussen (2003), p. 54.

↑ Ekelund & Tollison (1981).

↑ Wilson (1963), p. 6.

↑ DiLorenzo, Thomas (2008). Hamilton's Curse: How Jefferson's Arch
Enemy Betrayed the American Revolution--and What It Means for
Americans Today. New York, NY: Crown Forum. pp. 256. ISBN

↑ See Donald Markwell (2006), John Maynard Keynes and International
Relations: Economic Paths to War and Peace, Oxford & New York: Oxford
University Press.

↑ Wilson (1963), p. 3.

↑ Paul Samuelson, Theoretical notes on trade problems, 1964

↑ Walters, Robert S.; Blake, David H. (1976). The Politics of Global
Economic Relations. Englewood Cliffs, NJ: Prentice-Hall. ISBN

↑ Samuelson, Robert J. (17 May 2007). "China's Wrong Turn on Trade".
Newsweek. http://www.newsweek.com/id/34952. Retrieved 2007-12-06.

↑ Murray Rothbard, “Mercantilism: A Lesson for Our Times?” , The Logic
of Action II (Cheltenham, England: Edward Elgar, 1997), p. 43.

↑ Hansen, p. 64.


Ekelund, Robert B.; Tollison, Robert D. (1981). Mercantilism as a Rent-
Seeking Society: Economic Regulation in Historical Perspective.
College Station, TX: Texas A&M University Press. ISBN 0890961204.

Ekelund, Robert B.; Hébert, Robert F. (1975). A History of Economic
Theory and Method. New York: McGraw–Hill. ISBN 0070191433.

Heckscher, Eli F. (1935). Mercantilism. London: Allen & Unwin.

Keynes, John Maynard (1936). "Notes on Mercantilism, the Usury Laws,
Stamped Money and the Theories of Under-Consumption". The General
Theory of Employment, Interest, and Money. London: Palgrave

Landreth, Harry; Colander, David C. (2002). History of Economic
Thought (4th edition ed.). Boston: Houghton Mifflin. ISBN 0618133941.

Letwin, William (2003) [1963]. The Origins of Scientific Economics:
English Economic Thought 1660–1776. London: Routledge. ISBN

Magnusson, Lars G. (2003). "Mercantilism". in Biddle, Jeff E.; Davis,
Jon B.; Samuels, Warren J.. A Companion to the History of Economic
Thought. Malden, MA: Blackwell Publishing. ISBN 0631225730.

Niehans, Jürg (1990). A History of Economic Theory: Classic
Contributions, 1720–1980. Baltimore, MD: Johns Hopkins University
Press. ISBN 0801838347.

Vaggi, Gianni; Groenewegen, Peter (2003). A Concise History of
Economic Thought:

From Mercantilism to Monetarism. New York: Palgrave Macmillan. ISBN

Wilson, Charles (1963) [1958]. Mercantilism. London: Routledge and
Kegan Paul.

External links

Thomas Mun's Englands Treasure by Forraign Trade
Book IV of The Wealth of Nations, Adam Smith's attack on the
Mercantile System
Mercantilism List of references


...and I am Sid Harth
Sid Harth
2010-02-25 23:31:27 UTC
Reference »
Wikipedia Articles
Balance of trade

In this article: Locations Images From the web: Images Videos Balance
of trade

The balance of trade encompasses the activity of exports and imports,
like the work of this cargo ship going through the Panama Canal.The
balance of trade (or net exports, sometimes symbolized as NX) is the
difference between the monetary value of exports and imports of output
in an economy over a certain period. It is the relationship between a
nation's imports and exports.[1] A favourable balance of trade is
known as a trade surplus and consists of exporting more than is
imported; an unfavourable balance of trade is known as a trade deficit
or, informally, a trade gap. The balance of trade is sometimes divided
into a goods and a services balance.

Early understanding of the functioning of balance of trade informed
the economic policies of Early Modern Europe that are grouped under
the heading mercantilism. An early statement appeared in Discourse of
the Common Weal of this Realm of England, 1549: "We must always take
heed that we buy no more from strangers than we sell them, for so
should we impoverish ourselves and enrich them."[2]


The balance of trade form part of the current account, which include
other transactions such as income from the international investment
position as well as international aid. If the current account is in
surplus, the country's net international asset position increases
correspondingly. Equally, a deficit decrease the net international
asset position.

The trade balance is identical to the difference between a country's
output and its domestic demand (the difference between what goods a
country produces and how many goods it buys from abroad; this does not
include money re-spent on foreign stock, nor does it factor the
concept of importing goods to produce for the domestic market).

Measuring the balance of trade can be problematic because of problems
with recording and collecting data. As an illustration of this
problem, when official data for all the world's countries are added
up, exports exceed imports by a few percent; it appears the world is
running a positive balance of trade with itself. This cannot be true,
because all transactions involve an equal credit or debit in the
account of each nation. The discrepancy is widely believed to be
explained by transactions intended to launder money or evade taxes,
smuggling and other visibility problems. However, especially for
developed countries, accuracy is likely.

Factors that can affect the balance of trade include:

The cost of production (land, labor, capital, taxes, incentives, etc.)
in the exporting economy vis-à-vis those in the importing economy;
The cost and availability of raw materials, intermediate goods and
other inputs;
Exchange rate movements;
Multilateral, bilateral and unilateral taxes or restrictions on
Non-tariff barriers such as environmental, health or safety
The availability of adequate foreign exchange with which to pay for
imports; and
Prices of goods manufactured at home (influenced by the responsiveness
of supply)
In addition, the trade balance is likely to differ across the business
cycle. In export led growth (such as oil and early industrial goods),
the balance of trade will improve during an economic expansion.
However, with domestic demand led growth (as in the United States and
Australia) the trade balance will worsen at the same stage in the
business cycle.

Since the mid 1980s, United States has had a growing deficit in
tradeable goods, especially with Asian nations (China and Japan) which
now hold large sums of U.S debt that has funded the consumption.[3][4]
The U.S. has a trade surplus with nations such as Australia and
Canada. The issue of trade deficits can be complex. Trade deficits
generated in tradeable goods such as manufactured goods or software
may impact domestic employment to different degrees than trade
deficits in raw materials.

Economies such as Canada, Japan, and Germany which have savings
surpluses, typically run trade surpluses. China, a high growth
economy, has tended to run trade surpluses. A higher savings rate
generally corresponds to a trade surplus. Correspondingly, the United
States with its lower savings rate has tended to run high trade
deficits, especially with Asian nations.

Views on economic impact

Economists are sometimes divided on the economic impact of the trade

Conditions where trade deficits may be considered harmful

Those who ignore the effects of long run trade deficits may be
confusing David Ricardo's principle of comparative advantage with Adam
Smith's principle of absolute advantage, specifically ignoring the
latter. The economist Paul Craig Roberts notes that the comparative
advantage principles developed by David Ricardo do not hold where the
factors of production are internationally mobile.[5][6] Global labor
arbitrage, a phenomenon described by economist Stephen S. Roach, where
one country exploits the cheap labor of another, would be a case of
absolute advantage that is not mutually beneficial.[7][8][9]

Deteriorating U.S. net international investment position (NIIP) has
caused concern among economists over the effects of outsourcing and
high U.S. trade deficits over the long-run.[3]Since the stagflation of
the 1970s, the U.S. economy has been characterized by slower GDP
growth. In 1985, the U.S. began its growing trade deficit with China.
Over the long run, nations with trade surpluses tend also to have a
savings surplus. The U.S. has been plagued by persistently lower
savings rates than its trading partners which tend to have trade
surpluses. Germany, France, Japan, and Canada have maintained higher
savings rates than the U.S. over the long run.[10] Some economists
believe that GDP and employment can be dragged down by an over-large
deficit over the long run.[11][12] The opportunity cost of a forgone
tax base may outweigh perceived gains, especially where artificial
currency pegs and manipulations are present to distort trade.[13]
Wealth-producing primary sector jobs in the U.S. such as those in
manufacturing and computer software have often been replaced by much
lower paying wealth-consuming jobs such those in retail and government
in the service sector when the economy recovered from recessions.[6]
[14][15] Some economists contend that the U.S. is borrowing to fund
consumption of imports while accumulating unsustainable amounts of

In 2006, the primary economic concerns centered around: high national
debt ($9 trillion), high non-bank corporate debt ($9 trillion), high
mortgage debt ($9 trillion), high financial institution debt ($12
trillion), high unfunded Medicare liability ($30 trillion), high
unfunded Social Security liability ($12 trillion), high external debt
(amount owed to foreign lenders) and a serious deterioration in the
United States net international investment position (NIIP) (-24% of
GDP),[3] high trade deficits, and a rise in illegal immigration.[16]

These issues have raised concerns among economists and unfunded
liabilities were mentioned as a serious problem facing the United
States in the President's 2006 State of the Union address.[17][18] On
June 26 2009, Jeff Immelt, the CEO of General Electric, called for the
United States to increase its manufacturing base employment to 20% of
the workforce, commenting that the U.S. has outsourced too much in
some areas and can no longer rely on the financial sector and consumer
spending to drive demand.[19]

See also: Friedrich List

Conditions where trade imbalances may not be harmful

Small trade deficit are generally not considered to be harmful to
either the importing or exporting economy. However, when a national
trade imbalance expands beyond prudence (generally thought to be
several percent of GDP, for several years), adjustments tend to occur.
While unsustainable imbalances may persist for long periods (cf,
Singapore and New Zealand’s surpluses and deficits, respectively), the
distortions likely to be caused by large flows of wealth out of one
economy and into another tend to become intolerable.

In simple terms, trade deficits are paid for out of foreign exchange
reserves, and may continue until such reserves are depleted. At such a
point, the importer can no longer continue to purchase more than is
sold abroad. This is likely to have exchange rate implications: a
sharp loss of value in the deficit economy’s exchange rate with the
surplus economy’s currency will change the relative price of tradable
goods, and facilitate a return to balance or (more likely) an over-
shooting into surplus the other direction.

More complexly, an economy may be unable to export enough goods to pay
for its imports, but is able to find funds elsewhere. Service exports,
for example, are more than sufficient to pay for Hong Kong’s domestic
goods export shortfall. In poorer countries, foreign aid may fill the
gap while in rapidly developing economies a capital account surplus
often off-sets a current-account deficit. Finally, there are some
economies where transfers from nationals working abroad contribute
significantly to paying for imports. The Philippines, Bangladesh and
Mexico are examples of transfer-rich economies.

Milton Friedman on trade deficits

In the 1980s, Milton Friedman, the Nobel Prize-winning economist and
father of Monetarism, contended that some of the concerns of trade
deficits are unfair criticisms in an attempt to push macroeconomic
policies favorable to exporting industries.

Prof. Friedman argued that trade deficits are not necessarily
important as high exports raise the value of the currency, reducing
aforementioned exports, and vise versa for imports, thus naturally
removing trade deficits not due to investment. Milton Friedman's son,
David D. Friedman, shares this view and cites the comparative
advantage concepts of David Ricardo.[20]

In the late 1970s and early 1980s, the U.S. had experienced high
inflation and Friedman's policy positions tended to defend the
stronger dollar at that time. He stated his belief that these trade
deficits were not necessarily harmful to the economy at the time since
the currency comes back to the country (country A sells to country B,
country B sells to country C who buys from country A, but the trade
deficit only includes A and B). However, it may be in one form or
another including the possible tradeoff of foreign control of assets.
In his view, the "worst case scenario" of the currency never returning
to the country of origin was actually the best possible outcome: the
country actually purchased its goods by exchanging them for pieces of
cheaply-made paper. As Friedman put it, this would be the same result
as if the exporting country burned the dollars it earned, never
returning it to market circulation.[21] This position is a more
refined version of the theorem first discovered by David Hume.[22]
Hume argued that England could not permanently gain from exports,
because hoarding gold (i.e., currency) would make gold more plentiful
in England; therefore, the prices of English goods would rise, making
them less attractive exports and making foreign goods more attractive
imports. In this way, countries' trade balances would balance out.[23]

Friedman believed that deficits would be corrected by free markets as
floating currency rates rise or fall with time to encourage or
discourage imports in favor of the exports, reversing again in favor
of imports as the currency gains strength. In the real world, a
potential difficulty is that currency markets are far from a free
market, with government and central banks being major players, and
this is unlikely to change within the foreseeable future.
Nevertheless, recent developments have shown that the global economy
is undergoing a fundamental shift. For many years the U.S. has
borrowed and bought while in general, the rest of the world has lent
and sold. However, as Friedman predicted, this paradigm appears to be

As of October 2007, the U.S. dollar weakened against the euro, British
pound, and many other currencies. For instance, the euro hit $1.42 in
October 2007[24], the strongest it has been since its birth in 1999.
Against this backdrop, American exporters are finding quite favorable
overseas markets for their products and U.S. consumers are responding
to their general housing slowdown by slowing their spending.
Furthermore, China, the Middle East, central Europe and Africa are
absorbing more of the world's imports which in the end may result in a
world economy that is more evenly balanced. All of this could well add
up to a major readjustment of the U.S. trade deficit, which as a
percentage of GDP, began in 1991.[25]

Friedman and other economists have pointed out that a large trade
deficit (importation of goods) signals that the country's currency is
strong and desirable. To Friedman, a trade deficit simply meant that
consumers had opportunity to purchase and enjoy more goods at lower
prices; conversely, a trade surplus implied that a country was
exporting goods its own citizens did not get to consume or enjoy,
while paying high prices for the goods they actually received.

Friedman contended that the structure of the balance of payments was
misleading. In an interview with Charlie Rose, he stated that "on the
books" the US is a net borrower of funds, using those funds to pay for
goods and services. He essentially claimed that the foreign assets
were not carried on the books at their higher, truer value.

Friedman presented his analysis of the balance of trade in Free to
Choose, widely considered his most significant popular work.

Warren Buffett on trade deficits

The successful American businessman and investor Warren Buffett was
quoted in the Associated Press (January 20, 2006) as saying "The U.S
trade deficit is a bigger threat to the domestic economy than either
the federal budget deficit or consumer debt and could lead to
political turmoil... Right now, the rest of the world owns $3 trillion
more of us than we own of them."

John Maynard Keynes on the balance of trade

In the last few years of his life, John Maynard Keynes was much
preoccupied with the question of balance in international trade. He
was the leader of the British delegation to the United Nations
Monetary and Financial Conference in 1944 that established the Bretton
Woods system of international currency management.

He was the principal author of a proposal—the so-called Keynes Plan—
for an International Clearing Union. The two governing principles of
the plan were that the problem of settling outstanding balances should
be solved by 'creating' additional 'international money', and that
debtor and creditor should be treated almost alike as disturbers of
equilibrium. In the event, though, the plans were rejected, in part
because "American opinion was naturally reluctant to accept the
principal of equality of treatment so novel in debtor-creditor
relationships". [26]

His view, supported by many economists and commentators at the time,
was that creditor nations may be just as responsible as debtor nations
for disequilibrium in exchanges and that both should be under an
obligation to bring trade back into a state of balance. Failure for
them to do so could have serious consequences. In the words of
Geoffrey Crowther, then editor of The Economist, "If the economic
relationships between nations are not, by one means or another,
brought fairly close to balance, then there is no set of financial
arrangements that can rescue the world from the impoverishing results
of chaos." [27]

These ideas were informed by events prior to the Great Depression when—
in the opinion of Keynes and others—international lending, primarily
by the United States, exceeded the capacity of sound investment and so
got diverted into non-productive and speculative uses, which in turn
invited default and a sudden stop to the process of lending. [28]

Influenced by Keynes, economics texts in the immediate post-war period
put a significant emphasis on balance in trade. For example, the
second edition of the popular introductory textbook, An Outline of
Money, [29] devoted the last three of its ten chapters to questions of
foreign exchange management and in particular the 'problem of
balance'. However, in more recent years, since the end of the Bretton
Woods system in 1971, with the increasing influence of Monetarist
schools of thought in the 1980s, and particularly in the face of large
sustained trade imbalances, these concerns—and particularly concerns
about the destabilising affects of large trade surpluses—have largely
disappeared from mainstream economics discourse [30] and Keynes'
insights have slipped from view [31], they are receiving some
attention again in the wake of the Financial crisis of 2007–2010. [32]

Physical balance of trade

Monetary balance of trade is different from physical balance of trade
(which is expressed in amount of raw materials). Developed countries
usually import a lot of primary raw materials from developing
countries at low prices. Often, these materials are then converted
into finished products, and a significant amount of value is added.
Although for instance the EU (as well as many other developed
countries) has a balanced monetary balance of trade, its physical
trade balance (especially with developing countries) is negative,
meaning that a lot less material is exported than imported.

United States trade deficit

United States trade deficit (1991-2005).The United States of America
has held a trade deficit starting late in the 1960s. It was this very
deficit that forced the United States in 1971 off the gold standard.
Its trade deficit has been increasing at a large rate since 1997 [33]
(See chart) and increased by 49.8 billion dollars between 2005 and
2006, setting a record high of 817.3 billion dollars, up from 767.5
billion dollars the previous year.[34]

It is worth noting on the graph that the deficit slackened during
recessions and grew during periods of expansion. Also of note, many
economists calculate trade deficits and/or current account deficits as
a percentage of GDP. The US last had a trade surplus in 1975.[35]
Every year there has been a major reduction in economic growth, it is
followed by a reduction in the US trade deficit.[25] The investor
Warren Buffett has proposed a tool called Import Certificates as a
solution to the United States' problem.[36]

See also

List of the largest trading partners of the United States
Current account
Balance of payments
FRED (Federal Reserve Economic Data)
List of countries by current account balance
Marshall–Lerner Condition


↑ Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles
in action. Upper Saddle River, New Jersey 07458: Pearson Prentice
Hall. pp. 462. ISBN 0-13-063085-3.


↑ Now attributed to Sir Thomas Smith; quoted in Fernand Braudel, The
Wheels of Commerce, vol. II of Civilization and Capitalism 15th-18th
Century, 1979:204.

↑ 3.0 3.1 3.2 3.3 Bivens, L. Josh (December 14, 2004). Debt and the
dollar Economic Policy Institute. Retrieved on July 8, 2007.


↑ Roberts, Paul Craig (August 7, 2003). Jobless in the USA Newsmax.
Retrieved on May 6, 2007.

↑ 6.0 6.1 Hira, Ron and Anil Hira with forward by Lou Dobbs, (May

Outsourcing America: What's Behind Our National Crisis and How We Can
Reclaim American Jobs. (AMACOM) American Management Association.
Citing Paul Craig Roberts, Paul Samuelson, and Lou Dobbs, pp. 36-38.
↑ See Roberts, Loc. cit.

↑ Paul Craig Roberts (07/28/04)."Global Labor Arbitrage".VDARE.
Retrieved on July 7, 2009.

↑ Whitney, Mike (June 2006).Labor arbitrage. Entrepreneur. Retrieved
on July 7, 2009.

↑ The shift away form thrift.The Economist, April 7 2005.

↑ Free Trade Bulletin no. 27: Are Trade Deficits a Drag on U.S.
Economic Growth? | Cato's Center for Trade Policy Studies

↑ Causes and Consequences of the Trade Deficit: An Overview

↑ Bivens, Josh (September 25, 2006 ).China Manipulates Its Currency—A
Response is Needed. Economic Policy Institute. Retrieved on February
2, 2010.

↑ David Friedman, New America Foundation (2002-06-15).No Light at the
End of the Tunnel Los Angeles Times.

↑ Sir Keith Joseph, Centre for Policy Studies (1976-04-05).Stockton
Lecture, Monetarism Is Not Enough, with forward by Margaret Thatcher.
(Barry Rose Pub.) Margaret Thatcher Foundation (2006).

↑ 16.0 16.1 Phillips, Kevin (2007). Bad Money: Reckless Finance,
Failed Politics, and the Global Crisis of American Capitalism.
Penguin. ISBN 9780143143284.

↑ 17.0 17.1 Cauchon, Dennis and John Waggoner (October 3, 2004).The
Looming National Benefit Crisis USA Today

↑ George W. Bush (2006) State of the Union. Retrieved on April 17,

↑ Bailey, David and Soyoung Kim (June 26, 2009).GE's Immelt says U.S.
economy needs industrial renewal.UK Guardian.. Retrieved on June 28,

↑ Price Theory, Chapter 6: Simple Trade

↑ Free to Choose video series from PBS

↑ Hume, David (1987). "Essays, Moral, Political, and Literary".
Liberty Fund, Inc.


↑ ""David Hume: The Concise Encyclopedia of Economics"". 2008.

http://www.econlib.org/library/Enc/bios/Hume.html. Retrieved

↑ Dollar Hits a New Low, Oil Hits a New High - New York Times
↑ 25.0 25.1 Michael M. Phillips, World Economy in Flux As America
↑ Crowther, Geoffrey (1948). An Outline of Money. Thomas Nelson and
Sons. p. 326–9.
↑ Crowther, Geoffrey (1948). An Outline of Money. Thomas Nelson and
Sons. p. 336.
↑ Crowther, Geoffrey (1948). An Outline of Money. Thomas Nelson and
Sons. p. 368–72.

↑ Crowther, Geoffrey (1948). An Outline of Money. Thomas Nelson and

↑ See for example, Krugman, P and Wells, R (2006). "Economics", Worth

↑ although see Duncan, R (2005). "The Dollar Crisis: Causes,
Consequences, Cures", Wiley

↑ See for example, ""Clearing Up This Mess"". 2008-11-18.

Retrieved 2009-01-09.

↑ http://www.census.gov/foreign-trade/statistics/historical/gands.txt

↑ FTD - Statistics - Country Data - U.S. Trade Balance with World
(Seasonally Adjusted)

↑ http://usinfo.org/enus/economy/trade/docs/06s1288.xls

↑ http://www.berkshirehathaway.com/letters/growing.pdf

External links

Wikisource has the text of the 1911 Encyclopædia Britannica article
Balance of Trade.

Are Trade Deficits a Drag on U.S. Economic Growth?

Graph of Historical U.S. Net Export of Goods and Services

Where Do U.S. Dollars Go When the United States Runs a Trade Deficit?
from Dollars & Sense magazine

The Economic Impact of a U.S. Slowdown on the Americas from the Center
for Economic and Policy Research

OECD Trade balance statistics

U.S. Government Export Assistance


...and I am Sid Harth
Sid Harth
2010-02-25 23:34:52 UTC
February 24, 2010

As Greece Goes, So Goes the U.S.?
by Paul Kasriel

Greece hasn't gotten so much press since 146 B.C. when the Romans took
over. Of late, Greece sneezes and investors think the U.S. is going to
catch the swine flu. Of course, it is not just Greece. Greece is part
of the EU and the EMU. So, it is thought that as goes Greece, so goes
Europe. And then, the next step is that as goes Europe, so goes the
U.S. But is Europe really where the action is with regard to U.S.
economic growth?

Let us see what has been happening to U.S. exports of late and how
Europe relates to that. Chart 6 shows that in the third and fourth
quarters of last year, real U.S. exports of goods increased at annual
rates of 24.6% and 28.1%, respectively.

Chart 1

Europe's role in our recent acceleration in export growth has
diminished. As U.S. exports increased sharply in the second half of
2009, U.S. exports to Europe as a percent of total U.S. exports fell
(see Chart 7). For example, in Q1:2009, Europe's contribution to total
U.S. exports was 26.5%; in Q4:2009, it was 23.1%. In contrast, South
America and the Pacific Rim excluding Japan have played a more
important role in the recent growth in U.S. exports. In Q1:2009, South
America and the Pacific Rim ex Japan accounted for 27.8% of total U.S.
exports. In Q4:2009, these regions accounted for 31.7% of total U.S.
exports (see Chart 8).

Chart 2

Chart 3

The economies in South America and the Pacific Rim excluding Japan
are, with the exception of Australia and New Zealand, developing
economies. Even before the recession hit, these developing economies
accounted for a larger share of total U.S. exports than did European
economies. Now that the global economic recovery is underway, these
developing economies have increased their share of total U.S. exports.
Both because of their absolute size and their growth, the developing
economies will play a more important role in the fate of the U.S.
economy than will Greece, in particular, and Europe, in general.

Paul L. Kasriel, Director of Economic Research
The Northern Trust Company
Economic Research Department
Positive Economic Commentary
"The economics of what is, rather than what you might like it to be."
50 South LaSalle Street, Chicago, Illinois 60675

The information herein is based on sources which The Northern Trust
Company believes to be reliable, but we cannot warrant its accuracy or
completeness. Such information is subject to change and is not
intended to influence your investment decisions.

Copyright © 2005-2010 The Northern Trust Company

Image rendition and html coding Copyright © 2000-2010 SafeHaven.com


Economic Recovery to Continue at Moderate Pace
By Don Lee

RISMEDIA, February 25, 2010—(MCT)—Federal Reserve Chairman Ben
Bernanke told Congress recently that he expected the U.S. economic
recovery to continue at a moderate pace, but he expressed concerns
about weakness in residential and commercial construction as well as
the “quite weak” labor situation that has lifted chronic unemployment
to very high levels.

“Of particular concern, because of its long-term implications for
workers’ skills and wages, is the increasing incidence of long-term
unemployment,” Bernanke said in prepared remarks as he delivered the
Fed chairman’s semiannual report to the House Financial Services
Committee. He noted that more than 40% of the unemployed workers have
been jobless for six months or more, nearly double the share of a year

Bernanke, in addressing Congress for the first time since his
reappointment to a second four-year term as chairman last month, said
the U.S. economy had expanded at an annual rate of about 4% in the
second half of last year, with big help from temporary factors related
to business inventory levels and stimulative fiscal and monetary
policies. “A sustained recovery will depend on continued growth in
private-sector final demand for goods and services,” he said.

With the early economic recovery and inflation remaining subdued,
Bernanke reiterated that central bank policymakers expected to keep
short-term interest rates at near zero for an “extended period,” which
most analysts view as at least several months.

Bernanke also said again that the Fed had the tools to gradually
siphon out of the economy the billions of dollars in emergency aid
that the central bank pumped out to keep the economy from plunging
into a depression. The so-called exit strategy is crucial, in both
economic and political terms. If the Fed pulls back too fast, it could
stifle recovery. If it moves too slowly, an outbreak of inflation
could wreak havoc at home and damage confidence abroad.

Lawmakers questioning Bernanke were focused on jobs and the record
federal deficits that are becoming a major political challenge for
Bernanke and for the Obama administration. In statements before
Bernanke’s testimony, Democratic members blamed the previous,
Republican administration for the unemployment troubles and the bank
bailouts that have fanned public ire at Bernanke and the political

Pressed by lawmakers, Bernanke said that the current pace of federal
deficits was unsustainable and that the Obama administration’s
economic stimulus plan—which Republican opponents have criticized as
ineffective—had created jobs, though he didn’t cite any figures.

(c)2010, Tribune Co.

Distributed by McClatchy-Tribune Information Services.


U.S. New-Home Sales Registers an 11.2% Fall
Submitted by Medha Sood on Wed, 02/24/2010 - 23:10 EconomyReal

U. S. sales of new homes registered an 11.2% slip in January to a
seasonally adjusted annual rate of 309,000, establishing a record low
and wiping off all gains in the market for new homes over the past
year, as the economy copes from recession.

However, economists surveyed by Dow Jones Newswires had predicted
sales would rise 3.8%, to 355,000.

Its sales in December are reported to fall by 3.9%, revised from an
originally reported 7.6% decline. The new-home sales report is
volatile because it is based on a particularly small sample. The
Government said it was 90% confident that the true change in new-home
sales in January was between minus 25.2% and plus 2.8%.

"It's awful. This is with the home buyer tax credit. I don't
understand people who say the housing market is turning", said Joe
Saluzzi, co-manager of trading at Themis Trading in Chatham, New

The $8,000 tax credit and purchases of mortgage-related securities by
the Federal Reserve is reported to have suppressed the housing market
recovery from a three-year slump, which slipped the U. S. economy into
the troubling waters of worst economic downturn since the 1930s.



Crude Oil Futures Extend Declines After U.S. Economic Reports
February 25, 2010, 9:00 AM EST

By Rachel Graham

Feb. 25 (Bloomberg) -- Crude oil declined, extending earlier losses
after U.S. economic reports increased concerns that the economic
recovery in the world’s biggest energy- consuming nation may stall.

Crude oil for April delivery fell as much as $1.55, or 1.9 percent, to
$78.45 a barrel in electronic trading on the New York Mercantile
Exchange. It was at $78.81 a barrel at 1:44 p.m. London time.

Unemployment claims in the U.S. increased more than forecast last
week, Labor Department figures showed today in Washington. January
orders for durable goods excluding transportation equipment, as
reported today by the U.S. Commerce Department, fell short of

“There is a lack of conviction as to where the global economy is
going,” said Paul Harris, head of natural resources risk management at
the Bank of Ireland in Dublin.

Oil closed up 1.5 percent yesterday at $80 a barrel after Federal
Reserve Chairman Ben S. Bernanke said the U.S. economy is in a
“nascent” recovery that requires low interest rates to encourage
demand from consumers and businesses. The Dow Jones Industrial Average
closed up 91.75 points, or 0.9 percent, yesterday after Bernanke’s

Brent crude for April fell as much as $1.49, or 1.9 percent, to $76.60
a barrel on the ICE Futures Europe exchange in London. It was at
$76.93 a barrel at 1:44 p.m. local time.

--Editors: John Buckley, Amanda Jordan

To contact the reporter on this story: Rachel Graham in London
+44-20-7073-3184 or ***@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at
+44-20-7073-3520 or ***@bloomberg.net



Stocks, Copper, Oil Fall on Greek Debt Risk, U.S. Economic Data
February 25, 2010, 1:33 PM EST

By Nick Baker

Feb. 25 (Bloomberg) -- Stocks and commodities fell and the euro
weakened as Moody’s Investors Service said it may cut Greece’s rating
and U.S. employment and durable-goods orders missed forecasts. German
two-year yields fell to a record low.

The Standard & Poor’s 500 Index dropped 1.3 percent at 1:25 p.m. in
New York for the biggest loss in three weeks. The MSCI World Index of
shares in 23 developed nations slumped 1.4 percent. Copper and oil
retreated in New York. The euro weakened against the yen, which
strengthened against the 16 most-traded currencies. The yield premium
on Greek 10-year bonds versus German debt widened to the most since
Feb. 8.

The warning from Moody’s, a day after S&P’s statement that it may
downgrade Greek debt, rattled investors who drove the euro down more
than 8 percent against the yen in 2010 on concern Greece’s fiscal woes
may spread through Europe. Federal Reserve Chairman Ben S. Bernanke
testifies to Congress today after saying yesterday that the U.S.
economy is in a “nascent” recovery and requires low interest rates to
stoke demand.

“Signs of discomfort with sovereign debt are surfacing, with investors
putting upward pressure on interest rates in developed nations in
Europe,” Tony Crescenzi, a strategist and fund manager at Pacific
Investment Management Co. in Newport Beach, California, wrote in a
research note.

Default Risk

The cost of insuring against default on Greek government debt rose for
a fourth day on concern ratings downgrades will cut the nation’s
access to European Central Bank funding. Credit-default swaps on
Greece jumped 10 basis points to 394, the highest in more than two
weeks, according to CMA DataVision prices at 2:45 p.m. in London.

The premium that investors demand to hold Greek 10-year bonds over
German debt widened 16 basis points to 355 basis points, quadruple the
average over the past five years.

Greece has to repay more than 20 billion euros ($27 billion) of
maturing bonds and bills by the end of May, according to data compiled
by Bloomberg. A Moody’s downgrade may make it harder for the nation’s
banks to fund themselves by making Greek government debt ineligible as
collateral for European Central Bank loans.

The U.S. Labor Department said initial jobless applications rose by
22,000 to 496,000 in the week ended Feb. 20, the highest level in
three months. Economists forecast a decline to 460,000, according to
the median estimate in a Bloomberg survey. In a separate report, the
Commerce Department said orders for U.S. durable goods excluding
transportation equipment fell 0.6 percent in January, the most since
August and compared with the median economist projection for a 1
percent increase.

Caterpillar, UPS

General Electric Co., Caterpillar Inc. and United Parcel Service Inc.
led declines in U.S. industrial companies, while Alcoa Inc. and Exxon
Mobil Corp. retreated with commodity prices. Coca-Cola Co., the
world’s largest soda maker, lost 4.4 percent after agreeing to buy
Coca-Cola Enterprises Inc.’s North American bottling unit. GameStop
Corp. lost 8.2 percent after its chief financial officer quit to join
Wal-Mart Stores Inc.

Europe’s Dow Jones Stoxx 600 Index fell 1.6 percent. Tenaris SA led
declines in basic-resource shares, losing 12 percent in Italy. British
American Tobacco Plc, Europe’s second- largest cigarette maker,
dropped 2.3 percent after reporting net income that missed forecasts.

Copper futures slipped 1.5 percent in New York, while crude oil
slumped 2.9 percent.

One-Year High

The yen climbed to a one-year high against the euro as concern
Greece’s credit ratings may be downgraded spurred investors to unwind
positions in riskier assets. The yen appreciated 1.5 percent to 120.24
per euro from 122.03 yen yesterday. It touched 119.66, the first time
the currency has fallen below the 120 yen level since Feb. 24, 2009.

Turkish stocks fell, heading for the biggest weekly loss since
November 2008, after talks between the army and government today
failed to ease political tensions over an alleged coup plot. The ISE
National 100 index lost 1.9 percent after gaining 2 percent earlier.

Investors are betting political turmoil will weaken Turkey’s lira more
than any other currency as the arrest about 50 army officers over an
alleged coup plot raises tension between the government and the
military. One-month put options that grant the right to sell the lira
against the dollar have surged to a 3.4 percentage-point premium over
equivalent call options to buy the currency. The gap, known as the
risk-reversal rate, widened from 2.25 percentage points a week ago and
is the highest of 48 currencies on Bloomberg.

--With assistance from Abigail Moses and Laura Cochrane in London and
Seda Sezer in Istanbul. Editor: Chris Nagi

To contact the reporter on this story: Nick Baker at +1-212-617-5919
or ***@bloomberg.net.

To contact the editor responsible for this story: Chris Nagi at
+1-212-617-2179 or ***@bloomberg.net.


...and I am Sid Harth
Sid Harth
2010-02-25 23:39:36 UTC
U.S. Economy Isn’t Out of the Deflation Woods Yet: Analysis

Feb. 23 (Bloomberg Multimedia) -- Deflation remains a possibility in
the U.S. because the drivers of last year’s price declines are still
in effect, an analysis shows.

Click here for a Bloomberg Multimedia interactive visual analysis of
the pressures on inflation.

#<582242.1010.># -0- Feb/23/2010 10:45 GMT

Last Updated: February 23, 2010 05:45 EST



Bernanke: U.S. On Long Road To Economic Recovery
2/25/2010 10:09 AM ET

(RTTNews) - Fed Chairman Ben Bernanke said Thursday that while the
U.S. economy appears to be recovering from its collapse during the
2008 financial crisis, it still has a long way to go, and that the
recovery will move slowly through the coming months.

Speaking before the United States Senate Committee on Banking, Housing
and Urban Affairs, the Fed chief repeated remarks he made Wednesday
before the House Committee on Financial Services, saying that low
inflation expectations will keep the target for the federal funds rate
at near zero levels.

Bernanke also touched on problems in the labor market, saying that
although the market's deterioration seems to be slowing, weaknesses in
the job market still remain in light of decreases in job losses and a
modest January rise in full-time manufacturing jobs.

"Notwithstanding...positive signs, the job market remains quite weak,
with the unemployment rate near 10 percent and job openings scarce,"
he said in prepared remarks.

"Of particular concern, because of its long-term implications for
workers' skills and wages, is the increasing incidence of long-term
unemployment; indeed, more than 40 percent of the unemployed have been
out of work six months or more, nearly double the share of a year

Concerns about the health of the labor market were fueled this morning
by government data showing jobless claims rose last week to 496,000,
marking an increase for a second straight week.

He pointed out later in the testimony that the Fed expects the
unemployment rate to fall to 6.5-7.5 percent by the end of 2012, well
above the "long-term sustainable rate" of five percent.

Speaking on inflation, Bernanke said that slack in the labor markets
and a flattening of oil prices will keep inflation subdued for some

Bernanke also added that holding mortgage backed securities off the
market will hold mortgage rates down, though the Fed does not know the
direct effect of stopping the Fed's mortgage backed securities
purchases, which are set to run down in March.

The central bank chief also defended the Independence of the Fed
saying that stripping it of its regulatory authority would be a

The central bank chief also spoke on concerns about the country's
budget deficits, saying that long-term budget deficits could not, and
should not be sustained, saying that ignoring the deficit problem
would have wide spread negative effects on the economy.

Elsewhere in his testimony, Bernanke touched on the Fed's announcement
last week to raise the discount rate to 0.75 percent, and the decision
to shorten the maximum term of discount window loans to overnight for
most banks, saying that improved financial conditions are limiting the
need for Fed assistance.

(RTTNews) - "These changes, like the closure of most of the special
lending facilities earlier this month, are in response to the improved
functioning of financial markets, which has reduced the need for
extraordinary assistance from the Federal Reserve," he said.

The Fed chief also talked about new tools to unwind its accommodative
monetary policy, including expansion of reverse repurchase agreements
and a term deposit facility "that could convert a portion of
depository institutions' holdings of reserve balances into deposits
that are less liquid and could not be used to meet reserve

by RTT Staff Writer

For comments and feedback: contact ***@rttnews.com

US Economic News

Fed's Bullard: Financial Reforms Might Not Prevent Future Crises

Durable Goods Orders Increase Amid Spike In Orders For Aircraft

Weekly Jobless Claims Unexpectedly Jump To 3-Month High

Weekly Jobless Claims Rise To 496,000



A late wave buying couldn't quite bring the stock market back from a
morning swoon, leaving major averages modestly lower at the bell, hurt
by investors' worries about the U.S. jobs picture and sovereign debt
in Europe.

Unwinding of bearish bets in the euro boosted that currency's value
versus the dollar as the afternoon progressed, encouraging some
traders to take on risk in stocks and commodities. But the trading
session's overall tone was clearly bearish, with weak jobless-claims
data renewing worries about the pace of the U.S. economic recovery,
while comments by Moody's Investors Service kept long-term concerns
about Greece's creditworthiness alive.

The Dow Jones Industrial Average, which was off more than 188 points
at its late-morning low, ended down 53.13 points, or 0.5%, at
10321.03. Its biggest loser in percentage terms was Coca-Cola, off
3.7% after the soft-drink maker agreed to buy most of its largest
bottler, Coca-Cola Enterprises, in a deal estimated to be worth
between $12 billion and $13 billion. Shares of the bottler surged

With one trading session to go in February, the Dow is now up 2.5% for
the month, which has seen a marked increase in volatility. Traders say
the U.S. has regained some of its safe-haven status lately, but few
are willing to bet that a full-blown bull market is back.

"A lot of portfolio managers are just sitting on their hands, building
cash in their portfolios because they feel like they're getting
conflicting signals about the economy," said John Bollinger, president
of Bollinger Capital Management, in Manhattan Beach, Calif.
"Unfortunately, it will probably take some improvement in the jobs
picture to get people the kind of certainty they're looking for."

Investors received evidence of just the opposite as the Labor
Department said that weekly jobless claims unexpectedly surged last
week by 22,000 to 496,000, their highest level in over three months.
Economists had expected initial claims to decrease by 13,000.

The four-week average of claims, viewed as a more dependable barometer
of the job market than volatile week-to-week readings, shook
investors. The four-week average rose by 6,000 to a total of 473,750,
up from the previous week's revised average 467,750.

The U.S. Dollar Index, which posted gains early in the session,
reversed course to post a 0.2% decline. One euro cost $1.3557, up from
$1.3534 late Wednesday, helped by the unwinding of bearish bets made
earlier in the month when questions began to swirl about Greece's
heavy debt load.

"It looks like we're just experiencing some exhaustion in the euro,
since so many speculators had gotten to one side of the market," said
James L. Dailey, chief investment officer at the portfolio-management
firm TEAM Financial.

The dollar's reversal helped commodities, which are traded globally in
terms of the U.S. currency. The Dow Jones-UBS Commodity Index ended
down 1.3%, improving from a decline of nearly 3% at its late-morning
low. Oil futures fell, but gold contracts snapped a three-day losing
streak, rising $11.30 to end at $1,107.80 per ounce in New York.

The Nasdaq Composite slipped 0.1%, while the Standard & Poor's 500-
share index fell 0.2%, hurt by selling in every sector.

Composite volume in New York Stock Exchange-listed companies hit
billion shares, below this year's daily average.

Among stocks in focus, Palm tumbled 19.3% after the company
acknowledged its new smart phones aren't selling as well as hoped.

J.P. Morgan Chase slipped 0.5% after its investment banking chief said
the bank expects a return on equity of 17% this year, down from 21%
last year.

Dr Pepper Snapple Group jumped 11.1% after reporting slightly better-
than-expected fourth-quarter earnings and predicted 2010 sales would
rise 3% to 5%.

Dynegy tumbled 9 after reporting that its fourth-quarter loss widened
on asset sales and mark-to-market losses, as the electricity generator
reported a steeper-than-expected decline in revenue.

Treasury prices climbed, with the 10-year note up 14/32 to yield

— David Benoit contributed to this article.
Write to Kristina Peterson at ***@dowjones.com


Oil prices tumble on economy worries

By MARK WILLIAMS, AP Energy Writer Mark Williams, Ap Energy Writer – 2
hrs 24 mins ago
Oil prices tumbled Thursday on new signs that the economy remains weak
and that demand for crude is still tepid at best.

Benchmark crude for April delivery fell $1.83 to settle at $78.17 a
barrel on the New York Mercantile Exchange.

Oil has been bouncing back and forth for months between $70 and $80 as
investors watch economic data for clues about where the economy is
heading following the Great Recession.

The signs Thursday were mostly negative as the government said new
claims for unemployment benefits last week jumped unexpectedly while a
separate report on big-ticket manufactured goods was mixed.

Crude prices rose Wednesday after Federal Reserve Chairman Ben
Bernanke told Congress that he expects interest rates to stay low for
a while to help boost the economy.

The economy has grown for six months but is not yet spurring hiring
and unemployment remains stubbornly high. Couple that with more than
ample supplies and signs that the economy still needs to be propped up
by federal stimulus "means that the demand were expecting to see may
not develop," said Phil Flynn of PFGBest.

Oil prices were also pushed down Thursday by a stronger dollar and a
drop in the stock market.

Because crude is traded in dollars, it gets cheaper when the dollar
climbs and forces investors holding other currencies such as the euro
to pay more for oil. The dollar was near a nine-month high against the
euro over worries about economic growth and debt problems in Europe.

Major stock averages were down about one percent around mid-afternoon.

A weekly report on natural gas supplies from the Energy Information
Administration showed gas in storage shrank by 172 billion cubic feet
last week, to 1.85 trillion cubic feet. That was in line with
analysts' estimates, according to a survey by Platts, the energy
information arm of McGraw-Hill Cos., and less than the 190 billion
cubic feet draw the week before.

Retail gasoline prices headed higher for the eighth straight day,
rising 1.5 cents a gallon to a national average of $2.693, according
to AAA, Wright Express and Oil Price Information Service.

Pump prices have climbed 7.9 cents over the past week and are nearly
back to the levels of a month ago when they were at $2.70 per gallon.
Prices remain 80.2 cents above year-ago levels.

In other Nymex trading in March contracts, heating oil fell 5.59 cents
to $1.9862 a gallon, and gasoline lost 6.19 cents at $2.0370 a gallon.
April natural gas prices were down 9.2 cents to $4.767 per 1,000 cubic

In London, Brent crude gave up $1.80 at $76.29 on the ICE futures

Associated Press writers Pablo Gorondi in Budapest and Alex Kennedy in
Singapore contributed to this report.


Imagine the US Economy Is a Baseball Game

by Bill Sardi

Recently by Bill Sardi: The Man Who Shouldn’t Be Alive

Imagine the US economy is a baseball game. The score is 142 to 1
against your team. Your team is about to lose a game by the worst
score of all time. But your team stalls for time. The game isn't
over. There is still the hope your team can make the playoffs, they

It's the eighth inning with a runner on second base with two out and
the manager, Benny Bernanke, walks up whispers in the ear of the
batter to keep swinging at pitches and fouling them off. A pitcher
named Slim Geithner keeps serving up the lop balls, and the batter has
now fouled off 4,283 pitches in a row. The game is now into its third

The batter has had his contract changed so he gets paid on the number
of foul balls he hits in a row. It's still the 8th inning. Ball boys
begin running hot dogs and Cokes to the runner on second base.
Finally, substitute runners rotate from the bench. Someday your team
is gonna lose, but for now, the game is stalled.

Imagine, in this surreal allegory, that team owners offer season
ticket packages at introductory teaser prices, no down payment, low
interest rates if you buy a 30-year season ticket package, with free
parking passes, and you get this season ticket pass on a layaway time
payment plan. Team owners then begin bundling these long-term season
ticket packages and selling them to investors. The owners are making a
killing off of this. The fans have no idea.

But after a few games the fine print in the season ticket contract
says the interest rate on the ticket package will rise and a strong
number of fans can’t continue to pay. They claim they have been
unfairly forced out of their reserved seats and that somebody ought to
bail them out. The problem is, some of these season ticket package
holders never even made one payment. Some took out a secondary loan,
offered by the team owners, on the value of the ticket package, and
began to use it as a piggy bank – to buy team jackets and memorabilia,
even cars with the team logo on the side.

Also imagine that baseball team owners have taken the season ticket
holders money and invested it into risky investments that have
produced unprecedented losses so that continuation of the baseball
schedule is now threatened. There is no money left to pay umpires,
light bills, hot dog vendors.

The out-of-cash owners then begin to sell more season tickets than
there are seats in their stadiums, banking on the fact many ticket
holders are no-shows. Investors who are buying the packaged long-term
season ticket contracts have no idea they are buying something the
owners can't deliver.

Also imagine that other season ticket holders, fearing a financial
collapse of the league, have begun a rush on ticket windows, demanding
their unused tickets be redeemed back for cash. Something must be
done, so a lady named Sheila Bair is designated to head up a season
ticket holder insurance plan, which the team owners kick money into.
Now the season ticket holders need not fear loss of their money, even
though more insolvent teams are being forced out of business by the
Sheila lady every day and she has had to request bailout money from
the government.

In reality, the American economy is about to crash into oblivion.
Bankers are still practicing phony accounting and keeping losses off
the books, and not appraising real estate assets to their true value,
and their reserves are entirely contrived, loaned from printed money
from the Federal Reserve.

If the banks begin to loan the money and distribute funds into the
economy, massive inflation will result. If the banks don't loan out
the money, there will continue to be economic paralysis – homebuilding
and construction will be frozen and unemployment will remain high.
For now it’s best to keep hitting foul balls.

Back to our imaginary scenario, the government has deemed American
baseball as such an important icon of modern American history that it
cannot be allowed to fail. So it subsidizes the teams in the form of
a bailout program. The worst managed teams get the most bailout money.
Inexplicably, team leadership remains intact.

Debt-laden teams cut back on player salaries, reduce the size of minor
league teams, and create a temporary increase in their profit margins,
prompting team owners to take obscene bonuses for, as they claim,
"exercising their unusual skill in rescuing the team."

But weren’t these the same guys who got the team into this fix in the
first place? It was all accomplished with money borrowed from the fans
(i.e. tax payers), right? If baseball had been nationalized, none of
these baseball executives would receive more than maximum civil
servant wages. Instead, in some instances, baseball executive bonuses
exceed the entire profits of the team, all while the team still owes
the government for loaning money to keep it in operation.

Back to the real world, debt-laden companies, seeing that consumers
are electing to pay down their credit card bills and home mortgages
rather than spend on consumer goods, are cutting inventories, laying
off more employees, and increasing their margin of profit, temporarily
driving up the price of their stock, even though they cannot possibly
continue to service their debt. Things look rosy, for now.

At our imagined game, everybody is stalling for time – hitting foul
balls, hoping the fans will stay for the end of the game. The longer
it lasts the more hot dogs they sell.

The fans don’t get it. They are wrapped up in what they see as a
thriller game, the longest on record. Typical of Americans, they wanna
wear T-shirts that say "I was there when the longest baseball game was

In the real world, the banks are being paid to park their borrowed
money with the Federal Reserve, like the batter in this imaginary
baseball game is being paid to hit foul balls. The economy is forever

To fix the problem, government has even offered to pay fans to attend
games (stimulus plans to buy homes, cars, etc.). Imagine – this phony
consumer activity will be counted as part of attendance figures (Gross
Domestic Product).

Furthermore, because of the alleged threat of terrorists at baseball
games, the government now requires full-body scans of all fans upon
entry to the ballpark (there is said to be a full body scan photo of
some busty babe who attended a recent Dodgers game circulating the
internet), and cars in the parking lot are screened with bomb
detectors, and security teams have begun to form a list of potential
terrorist fans (you know, the ones in Philly who yell obscenities and
topple their beer cups on opposing players as they attempt to make a
catch at the outfield wall).

Cameras now scan and record all events in the stands. Terrorist
drills, where costumed terrorists attempt to light a cigarette in the
bleachers, become reality as the fact this was a staged drill never
gets reported. And again, the business of thwarting potential
terrorists is now counted as part of the nation’s Gross Domestic

Does this metaphorical story sound silly or distorted? Does it conger
up thoughts of massive public deceit? It should. America has become
surreal, manipulated, bizarre.

Game reformers want more security in the stands, biodegradable beer
mugs, and higher taxes so more underprivileged kids can get a seat at
the ball park. Ushers, grounds crewmen and parking lot attendants say
they will burn the ball park down if their pay checks are cut.

But this IS America, so let’s grab a beer and get back to that
ballgame. All the fans are emailing friends now to say they haven’t
gone home and intend to stay for the entire game, no matter how long
this guy at the plate keeps fouling off pitches. It’s better than
reality TV.

But when the game is over, there will be no car in the parking lot.
There will be no house to go home to. There will be no team either.
When the game is over, it will be too late.

If you’re at the game now, eat a couple of extra hot dogs, because
fans are going to be hungry after this game is over. And make sure you
get an autographed ball before the last out is recorded. It could be
worth more than the paper money in your pocket.

February 15, 2010

Bill Sardi [send him mail] is a frequent writer on health and
political topics. His health writings can be found at www.naturalhealthlibrarian.com.
He is the author of You Don’t Have To Be Afraid Of Cancer Anymore.

Copyright © 2010 Bill Sardi Word of Knowledge Agency, San Dimas,
California. This article has been written exclusively for www.LewRockwell.com
and other parties who wish to refer to it should link rather than post
at other URLs.

The Best of Bill Sardi


...and I am Sid Harth
Sid Harth
2010-02-25 23:42:19 UTC
U.S. Steel Unions Score Yet Another Huge Victory As China Slammed With
New Steel Tariffs

Vincent Fernando | Feb. 25, 2010, 3:15 AM | 719 | 3
One has to envy the amount of pull U.S. steel workers have. The
majority of U.S.-China trade agitation is caused by this one
relatively tiny part of the U.S. economy.

China Daily:

The United States on Wednesday imposed preliminary duties ranging from
11 to 13 percent on steel pipe from China to offset government
subsidies, the Commerce Department said.

The decision puts further strain on US-China trade relations, already
tested by disputes over other US trade actions and China's currency

It is a victory for US Steel Corp and the United Steelworkers union,
which filed a petition in October asking for protection against the
Chinese imports.

China's steel industry is undoubtedly supported in various manners,
and as a result the country is threatened by massive steel
overcapacity. But at the same time, maybe some Americans would be
happy to have stupidly cheap steel in the future. Nevertheless, expect
calls for steel tariffs to intensify as the China steel glut unravels
which we feel is likely even in a China soft-landing scenario. U.S.
steel will likely be slammed even with government support, so this
tariff game is probably causing more harm than help.

Here's a little reminder about the state of things:

Image: posco


Research & Analysis | Biofuels
Joshua Kagan 02 24 10

The State of U.S. Biodiesel: Up the Creek Without a Paddle?

It seems like yesterday biodiesel was the rage of the biofuels
movement. How have times changed.
Biodiesel is a renewable fuel that serves as an alternative to
petroleum diesel. Although it can be used as a source of heating oil,
its primary use is as a blend with diesel in trucks and automobiles.
There are a variety of feedstocks that can produce biodiesel. First-
generation feedstocks include animal fats, recycled cooking oils, and
vegetable oils like rapeseed, soy, and palm oil. Biodiesel is produced
through a simple refinery process called transesterification that uses
catalysts to convert either vegetable oil or fats into methyl esters
(86%) and a byproduct called glycerin (9%), which is used by the
pharmaceutical, cosmetics, and soap industries.

On an environmental basis, biodiesel has a number of compelling
attributes, as it produces approximately 78% less CO2 than traditional
diesel, with reductions of 58% for particulate matter and 60-90% for
other GHGs. NOx emissions actually increase 10% compared to diesel,
yet there are simple methods that can be used to ameliorate the NOx.
In general, biodiesel is better suited to overcome many of the
upstream and downstream infrastructure issues that plague ethanol. For
example, biodiesel can use all the same storage containers and
pipelines that are currently used with traditional diesel. Low blends
of biodiesel can be used in any diesel engine without modifications,
though high blends require some engine adaption. However, most
biodiesel fuels have a higher cloud point than diesel, meaning that
special care must be taken in cold-weather climates when storing,
transporting, or blending biodiesel. Biodiesel performs similarly
relative to diesel on a BTU basis (8% lower than diesel), with higher
cetane and fuel density levels.

Although biodiesel has many positive attributes, it is not immune from
the criticisms leveled at first-generation ethanol, specifically the
"food vs. fuel" debate. Biodiesel production uses at least 10% of the
U.S. soybean crop and 60% of European rapeseed oil for what amounts to
a relatively limited impact on the overall diesel market. That is,
global biodiesel was 4.1 billion gallons in 2008 -- about 1.5% of the
265 billion gallons of diesel consumed in that year.

The last 18 months have been a very difficult stretch for U.S.
biodiesel producers.

Subsidized U.S. biodiesel flooded the EU market in recent years,
resulting in estimated U.S. exports of 550 million gallons in 2008 --
accounting for approximately 19% of total E.U. biodiesel consumption
in 2008. In 2009, the EU responded with an anti-subsidy tariff (€237/
MT, which translates to $0.78 per gallon) and an anti- dumping duty
(€208.20 per MT -- $0.68 per gallon) that essentially locked out U.S.
producers from Europe.

Call this strike one.

Then, on January 1st, 2010, the U.S. Congress let the $1 per gallon
tax credit for biodiesel producers expire.

Why are subsidies so important to biodiesel producers?

Let's assume that 7.2 pounds of feedstock is required to produce a
gallon of biodiesel. The current spot price of soybean oil is
$0.38lb, which translates to $2.74/gal. If you add $0.81 per gallon
in capital, energy, and operational costs (net of any sales of
glycerin), we find that the levelized cost to produce a gallon of
unsubsidized soy-based biodiesel is $3.55/gal. As of February 15,
2010, the U.S. national retail price for diesel is $2.76/gal --
illustrating why U.S. biodiesel is estimated to be running at 15% of

Strike two.

In recent weeks, Senators Max Baucas (D-Mo) and Charles Grassley (R-
IA) have attempted retroactively to reinstate the $1/gal tax credit
via the Jobs Bill that passed the Senate. The original $85B bill
contained the tax credit. However, in recent weeks, Congress has
miraculously discovered fiscal restraint and as such, has nixed the
biodiesel credits.

Proponents of the industry, like the National Biodiesel Board, point
out that 25,000 jobs were lost in 2009 in the biodiesel industry and
at least that many could be lost in 2010 if the biodiesel credit is
not restored.

Critics counter that implementing the biodiesel credit is a very
expensive way to save/create jobs. For example, a 30MGY facility
would receive approximately $30M in subsidies to save about 30 jobs
(at $1M per job). This compares to a $100M construction project for
roads and bridges that support 1750-2000 jobs ($57K per job).

Strike two and a half (foul tip).

One saving grace for the industry could be the recently updated
Renewable Fuel Standards (see EPA Issues Renewable Fuel Standards:
What it Means for 1st and 2nd Generation Biofuels). U.S. refiners are
required to purchase at least 650 million gallons of biomass-based
diesel in 2010.

Yet, it is not entirely clear whether these RFS mandates will be
sufficient to avert the collapse of the industry. In an industry with
production capacity close to 3 billion gallons, limitations on its
ability to export to the largest global market, and without the
subsidies to compete against diesel in the domestic market, it is
likely that we will see a wave of companies in permanent bankruptcy.


Curt Felix 02/24/10 4:02 PM
Well written except for two basic factual errors: 1) a pound of soy
produces 6/7 of a pound of food for every 1/7 of a pound of fuel. If
soy is grown for fuel, we consume more fuel than food and the food
portion of soy would flood the market lowering food prices
dramatically. 2) Although old EPA data showed NOx increases, when
newer engines are used especially the common rail and TDI types now
proliferating, NOx is the same or better and the engines can be
further optimized to reduce NOx. 3) Jobs, Jobs, Jobs The calculation
of $1M per job is a ridiculous comparison since it compares a captial
intensive industry biodiesel to a labor intensive business road
building. If you were to calculate all the new jobs created from a
smart grid, or drill baby drill (electricity and oil being capital
intensive businesses) the numbers would be substantially worse.
Moreover, soley focussing on jobs, without looking at the impact of
reducing exports and the multiplier effect of trading imported
petroleum for domestic, the energy security costs associated with
imported oil and the global insecurity costs of having continous
sources of new funding for Al Qada, not to mention the human health
care costs in cancer and emphysema from continued combustion of
petroleum, misses some of the even more significant high points for

Jon Smith 02/24/10 4:19 PM
Well written Curt, and here’s more on the subject: .http://

randydutton 02/24/10 4:29 PM
Biodiesel from food is “Not Too Big To Fail”. It was a foolish
concept from the start to promote a food based 1st gen fuel with major
technical problems. Subisidizing production only saps the overall
cost to taxpayers and the US economy. Sure, it helped some political
special interest groups but overall it cost America.

America doesn’t have a shortage of domestic petroleum, it has a
leadership shortage. http://www.naruc.org/News/default.cfm?pr=183.

Trying to justify biofuel as a savior of the climate was false
science. CO2 never was the problem.

Doug DiLillo 02/24/10 4:45 PM
Concerning strike two, if you look at the fact that biodiesel is
blended in low quantities, there isn’t a huge impact on the price of
fuel, even without the subsidy. Taks as example, $2.00/gallon
wholesale cost for petrodiesel and $4.00/gallon wholesale cost for
biodiesel. At a 5% blend, the cost for the blended gallon is only
$2.10. Hardly enough of a difference to make an argument to kill
biodiesel, especially when all the benefits are factored in. Let’s
also not forget, $4.00 a gallon wholesale petrodiesel is likely
(again) in the not too distant future ....

glenn2ns 02/24/10 10:07 PM
Josh, I didn’t see any mention of jatropha curcus (pictured in story
photo) as a 2nd generation feed stock, which has a slightly toxic
nature (casin), and therefore is free of the food displacement
issues. In sub tropical climates it grows remarkably quick. Last I
knew an a mechnical harvestor was seen as an alternative to hugely
intense labor requirements to herald in this WEED as the 800 lb.
gorilla for biodiesel feedstocks. Derives from latin/central america,
and was exported to far east as a wind block for other crops (15’ tall

An alternative to transesterification is gasification with Fischer
Tropsch as a downstream process to produce your fuel of choice.
What’s nice about gasification is that so much more of the fodder
(seed casings, leaves, trimmings, etc) which have BTU content convert
to fuel and remove much of the costly processing steps - chop the
biomass once or twice and throw it in the hopper. This is vastly less
complex than standard enzyme processing.

Randy, even if CO2 doesn’t hold center stage in your perspective,
their is little support for a continued energy policy buying 1 Billion
barrels of oil a day from Saudi Arabia alone. Energy independence is
a manta that resonates in every quarter. National Security, trade
deficits, and domestic employment are prime motivators and are going
to take a big bite out of petro fortunes.

Nice job GTM/Kagan

Mackinnon 02/25/10 2:58 AM

Great article and run-down of the current state of the biodiesel

Below is a good piece covering ethanol subsidies from Robert Rapier,
which has relevance to the biodiesel subsidy issue:


It will be interesting to see if the RFS2 can sufficiently resuscitate
the market in the absence of the $1 subsidy. Mandates with penalties,
coupled with biodiesel potentially qualifying as advanced biofuels,
may make the subsidy issue moot. As you noted, time will tell.


sukamadek 02/25/10 1:22 PM
The fact that Biodiesel would cost today $3.55/gallon (which is a “Pre-
tax value”) the real price comparison would be $4.35/gal once road-use
taxes are applied. If biodiesel can exist without tax credits and
mandates it is a solution. if not it is welfare. Another thing $.38/lb
soy oil would go a lot higher if this tax-credit is reinstated.


...and I am Sid Harth
Sid Harth
2010-02-25 23:55:46 UTC
Poll shows concern about American influence waning as China's grows

By John Pomfret and Jon Cohen
Washington Post Staff Writer
Thursday, February 25, 2010

Facing high unemployment and a difficult economy, most Americans think
the United States will have a smaller role in the world economy in the
coming years, and many believe that while the 20th century may have
been the "American Century," the 21st century will belong to China.

These results come from a new Washington Post-ABC News poll conducted
during a time of significant tension between Washington and Beijing.

"China's on the rise," said Wayne Nunnery, 56, a retired U.S. Air
Force employee from Bexar, Tex., who was one of 1,004 randomly
selected adults polled. "I don't worry about a Chinese century, but I
do wonder how it's going to be for my three sons."

Asked whether this century would be more of an "American Century" or
more of a "Chinese Century," Americans divide evenly in terms of the
economy (41 percent say Chinese, 40 percent American) and tilt toward
the Chinese in terms of world affairs (43 percent say Chinese, 38
percent American). A slim majority say the United States will play a
diminished role in the world's economy this century, and nearly half
see the country's position shrinking in world affairs more generally.

The results are consistent with recent polls by Gallup, the Pew
Research Center and others that have tracked a significant public
concern about China's growing prominence on the world stage, as its
economy has expanded into what is arguably the second-biggest in the
world. In 2000, for example, when the U.S. economy was booming, 65
percent of Americans polled by Gallup said the United States had the
world's strongest economy. By last year, the United States and China
ran neck-and-neck on the question.

Analysts say the bubbling anti-China sentiment in the United States
could constitute a problem for U.S. policy toward that country if the
polls also coincide, as they seem to, with growing support for trade

Annetta Jordan, another poll participant, said in a follow-up
interview that she has witnessed the shifting economic strength
firsthand. Jordan, a mother of two from Sandoval, N.M., was working at
a cellular telephone plant in the early 1990s as production and hiring
were ramped up. By 1992, the plant had 3,200 workers. "Then this whole
China thing started and we were very quickly training Chinese to take
our jobs," she said. Now the plant has 100 people left.

"We're transferring our wealth to China," she said. "I see that as a
very negative thing. When I was younger, a lot of corporations had a
lot of pride and patriotism toward America. But corporations have
changed. If we in the U.S. go down, that's okay; they'll just move
their offices to Beijing."

Carla Hills, the former U.S. trade representative who negotiated
China's entry into the World Trade Organization in the late 1990s,
said any shift in American public opinion away from China is a

"I really worry about public opinion in both countries getting ahead
of where we want to be," she said. "I worry about the public discourse
here that 'it's all China's fault,' and the reverse in China that says
we're trying to push China around."

In a poll last year in urban areas of China done by the Lowy
Institute, Australia's premier think tank, Chinese respondents picked
the United States as the No. 1 threat to China's rise by a factor of
two over Japan and India, which were tied for second place.

Despite the mutual wariness, most Americans in the Post-ABC News poll
say a diminished U.S. role in the world's economy or affairs would be
positive or "neither good nor bad."

For Andrew Kohut, the president of the Pew Research Center, increasing
public concerns with China remind him of America's reaction to another
rising Asian nation three decades ago: Japan.

"This is déjà vu all over again, to quote Yogi," he said. "When a
Japanese company bought Rockefeller Center, Americans went nuts. We
asked questions about whether Japan was going to become No. 1 and
people said yes. These two sentiments are very similar."

Kohut said he doesn't necessarily agree with the answers.

"Anyone who would say that China has eclipsed the United States hasn't
been in a Chinese house," he said. But, he added, an "inflated view of
what China is today" could have ramifications.

"When Americans are unhappy with themselves, they are unhappy with
others, which can translate into protectionist pressure and security
anxieties, both of which make it hard to manage U.S.-China relations,"
said David M. Lampton, a professor of China studies at the Johns
Hopkins School of Advanced International Studies. "People tend to be
anxious about big, rapidly changing, nontransparent things -- China is
all three."

In recent weeks, U.S. relations with Beijing have taken a nose dive as
President Obama met the Tibetan spiritual leader, the Dalai Lama, who
is considered a separatist by China, and the administration moved to
sell $6.4 billion in weapons to Taiwan. Although both Washington and
Beijing have signaled that they don't want the relationship to be
damaged, other issues -- most notably trade and a U.S. belief that
China's currency needs to rise against the dollar -- could conspire to
keep tension high.

Other analysts say the polling may foreshadow something bigger and
more complicated than just a potential rise in protectionist

"If we face perceptions around the world that China's rise is
inexorable and the U.S. is on the decline," said Bonnie S. Glaser, a
senior fellow at the Center for Strategic and International Studies,
"this will hamper U.S. diplomacy and negatively affect U.S.

This explains why, for example, Asian countries near China routinely
raise concerns with U.S. officials about America's commitment to

"All of us want to hedge against China," said a senior official in the
region, "but we need to know that the U.S. government will be here for
the long haul.

"But even if you do stick around," he said, "there is no doubt that
all of us now factor in how China will react to what America wants."

The Post-ABC News poll was conducted Feb. 4-8 by conventional and
cellular telephone. The questions reported here were asked of half-
samples of respondents; the results have a margin of sampling error of
plus or minus five percentage points.

Polling analyst Jennifer Agiesta contributed to this report.


February 24, 2010

Gallup: Economic Confidence Steady in Recent WeeksConference Board
report lags Gallup finding that attitudes dipped in mid-Januaryby
Lydia SaadPRINCETON, NJ -- Gallup's Economic Confidence Index stands
at -27 for the week ending Feb. 21, on par with the previous week's
-28. The trend, based on roughly 3,500 interviews each week, clearly
shows that consumer attitudes have been steady thus far in February,
as well as for the past six weeks. The most recent decline in
confidence was recorded in mid-January, and followed a modest post-
Christmas bounce that Gallup first detected in late December.

The Gallup Economic Confidence Index is based on Americans' answers to
two questions -- one asking about current economic conditions in the
country and the other about the direction of the economy. Both
components of the index have been highly stable in recent weeks.
However, in late December and early January there was an uptick in
consumer optimism about the economy's direction, resulting in the
slight improvement to the overall index at those points.

Gallup's weekly findings are based on aggregated results of Gallup
Daily tracking interviews with a nationally representative sample of
approximately 3,500 U.S. adults per week, and thus provide highly
reliable estimates of consumer views.

Conference Board Release Behind the Curve

"As the Gallup trend suggests, the souring of consumer attitudes that
The Conference Board detected with its early February reading most
likely set in around mid-January."Gallup's Economic Confidence Index
weekly trend highlights a significant timing issue inherent in The
Conference Board's recent release, which stated, "Consumer Confidence,
which had been improving over the past few months, declined sharply in
February." That report -- showing a drop in consumer confidence from
56.5 in January to 46.0 in February -- is widely credited with
rattling the nation's equity markets on Tuesday, helping to drive the
Dow Jones Industrial Average down more than 100 points by the close of

The Conference Board data are based on mail surveys received in the
first half of each month, meaning most of those surveys are likely
filled out by respondents in the first 10 days of the month. As a
result, The Conference Board's Consumer Confidence Index is largely a
gauge of consumer attitudes at the beginning of each month. Thus, The
Conference Board's finding of a drop in consumer confidence in
February in reality describes a decline that happened between early
January and early February. Conference Board preliminary numbers are
not reported until late in a given month.

As the Gallup trend suggests, the souring of consumer attitudes that
The Conference Board detected with its early February reading most
likely set in around mid-January. The February finding looks
particularly dramatic in comparison with the slightly elevated level
of consumer confidence that The Conference Board found in early
January. Gallup data, however, show that current confidence levels are
generally no more negative than they have been for much of the last
six months. (This insight has been widely available on Gallup.com in
near-"real time," both on a weekly basis and in Gallup's daily
reporting of continuous three-day rolling averages.

The fact that Gallup's data show little change in economic confidence
in recent weeks is not to say that consumer attitudes at present are
positive or that they haven't shown some decline since the beginning
of the year. Gallup's Economic Confidence Index has been in negative
territory since March 2007, and has fallen well below 0, the neutral
Index point, for the past two years. However, the -27 figure for Feb.
15-21 is not much different from the values Gallup recorded in the
last quarter of 2009.

When one focuses just on Gallup's Economic Confidence Index for the
first full week of each month (the week most comparable to The
Conference Board's field schedule), the results tend to track The
Conference Board's monthly Consumer Confidence Index closely. Gallup's
ability to monitor attitudes on a continuous basis throughout the
month, however, provides a much more complete understanding of how
American consumers are feeling about the national economy and its
direction -- an understanding not available from surveys conducted in
only certain parts of each month.

While The Conference Board's 46.0 reading this month is technically
the lowest seen since April 2009 (when it was 40.8), given the likely
sample size and associated margins of error around a mail panel survey
of its kind, the current reading is essentially the same as the
October (48.7) and July 2009 (47.4) readings.

Bottom Line

On the whole, American consumers are more negative than positive about
the U.S. economy -- both in their assessments of current conditions
and their outlook for whether things are improving or getting worse.
While Americans are now slightly more negative than they were at the
start of the year, this shift occurred roughly five weeks ago, in mid-
January. Since then, Gallup's Daily tracking shows that consumer
attitudes have been highly stable.

More broadly, the good news is that consumer attitudes are no worse
than they have been for much of the past six months, and are in fact
substantially less negative than they were a year ago at this time,
and for most of 2008.

Learn more about Gallup's economic measures.

Survey Methods

For Gallup Daily tracking, Gallup interviews approximately 1,000
national adults, aged 18 and older, each day. The Gallup Economic
Index is based on random half-samples of approximately 500 national
adults, aged 18 and older, each day. Weekly results are based on
telephone interviews with approximately 3,500 adults. For these
results, one can say with 95% confidence that the maximum margin of
sampling error is ±2 percentage points.

Interviews are conducted with respondents on land-line telephones and
cellular phones.

In addition to sampling error, question wording and practical
difficulties in conducting surveys can introduce error or bias into
the findings of public opinion polls.


February 24, 2010 4:55 PM EST

U.S. rate hike likely to be delayed by slow economic recovery

Fed Chairman Ben Bernanke was the center focus for global markets on
Wednesday as he testified before the House Financial Services
Committee about the state of the U.S. economy and the Fed's monetary

Investors are eyeing the U.S. as the next country to aggressively
reign in their excess liquidity. The expected rate hike, however, may
be delayed as persistently high unemployment and poor business credit
conditions dampen private demand.

Private Demand

A recovering economy would set the stage for potential interest rates
hikes; however Bernanke noted that demand from businesses and
consumers remained weak.

Although the second half of 2009 did show a 4 percent annualized rate
of growth, the chairman readily admits that "a significant portion of
that growth" was due to the "progress firms made in working down
unwanted inventories of unsold goods." As the government winds down
"fiscal support," the economic recovery will lean more on private
demand, he said.

But the outlook for private demand continues to be hampered by high
unemployment levels and deteriorating credit conditions for businesses
and consumers.

Bernanke acknowledges that "bank lending continues to contract,
reflecting both tightened lending standards and weak demand for credit
amid uncertain economic prospects."

Unemployment, and fears stemming from the prospect of it, are also
playing a role. He notes that "job openings are scarce" and that 40
percent of unemployed Americans have been out of work for over 6

Slow Growth Europe and U.S.

The sentiment was echoed by Bank of England Governor Mervyn King in a
statement on Tuesday.

Domestically, U.K. bank lending to businesses continues to fall. In
the euro zone -- U.K.'s main export destination -- economic recovery
"appears to have stalled."

King is particularly concerned about the global economic imbalance
between debtor and creditor nations.

He stated that some countries who rely on foreign lending, namely
Western nations, have reduced their reliance on such capital.
However, "without a compensating pick up in external demand for their
goods and services," these countries will "continue to experience weak

King also added that the countries who showed strong growth in recent
quarters are "those whose banking systems were relatively unscathed by
the crisis."

Although King's comments referred to the euro zone, the same
conditions apply to the U.S.

The U.S. is the world's largest debtor nation and the near collapse of
its financial system was the catalyst of the global financial

Rate Hikes around the World

Australia was the first to raise its interest rate. The country was
supported by its mining boom, its trade with China, and its banks were
relatively unscathed by the financial crisis.

Although officials unexpectedly left the rate unchanged at its latest
meeting, some market participants anticipate another rate hike in

Chinese banks also proved to be fairly resilient and some economists
forecast that its Gross Domestic Product will grow 10 percent in

Although China did not raise its interest rate yet, it began to
restrict big bank lending and already raised the bank reserve
requirement twice. Some analysts expect China may raise its interest
rate as early as March.

Investors are also eyeing Canada and India to soon raise their
interest rates.

Countries likely to raise rates at a slower pace than the U.S. include
Japan and European nations.

Japan's economy is extremely fragile, plagued by deflationary
pressures, unemployment, and a woeful banking system.

The euro zone economy is recovering slower than the U.S. and sovereign
debt worries of peripheral members nations will slow and complicate
the ECB's liquidity withdraw.


Asia's Latest Export: Recovery

David Wessel says countries in Asia are the new "haves," while
countries in Europe are the new "have-nots."
.This week's headlines well illustrate the striking contrasts:
Thailand said its economy expanded at a 15.3% annual rate in the
fourth quarter, and Taiwan said its grew at an 18% pace. But Germany
said its economy didn't grow at all in the quarter, and the only
reason it didn't contract was that German industry managed to boost
exports to healthier economies.

"The slump was very synchronized. The recovery? Increasingly less so,"
says Olivier Blanchard, chief International Monetary Fund economist.

Take a quick tour of the world economic recovery room. First stop is
the rich, mature economies—the U.S., Europe and Japan. None are
healthy yet, but the U.S. is doing better than the others.

The U.S. economy is growing, helped by a mix of insulin (the fiscal
and monetary stimulus) and sugar (the eagerness of businesses to
rebuild depleted inventories). By the standards of past recoveries,
though, it isn't growing very fast.

American consumers, turning thrifty, are reluctant to spend. Banks are
reluctant to lend. Employers are reluctant to hire. Government is
reluctant to administer more stimulus. Yet forecasters at J.P. Morgan
Chase, more optimistic than some others, predict that U.S. output of
goods and services, its gross domestic product, will be back at
prerecession levels by mid-2010. Europe and Japan won't reach that
point until well into 2012.

View Interactive

See details on consumer spending in the U.S. and emerging markets.
.Europe still looks ill. The recession was deeper there, and fiscal
and monetary stimulus less aggressive than in the U.S. and China. Its
businesses are more dependent on banks than U.S. firms, and European
banks haven't been—or haven't been forced to be—as open about their
losses or as quick to bolster capital cushions.

And now the sinners of Europe, economies that were living and
borrowing well above their means, are being forced to repent: Greece,
Spain, Ireland, Portugal. Because they share a currency, the euro, and
have surrendered interest-rate setting to the European Central Bank,
they can't cut interest rates or let currencies fall to goose exports,
and now their ability to keep borrowing cheaply to cushion weak
economies is in doubt.

The only options are painful: austere government budgets and cuts in
wages to make prices of exports more attractive. The U.K. has the
luxury of allowing the pound to slide, but, as central banker Mervyn
King noted this week, exporting its way out of its woes depends on the
willingness of Europe to buy.

Japan is harder to read. Like other export-dependent economies, it
took a hit when the U.S. stopped buying. U.S. imports from Japan fell
31% in 2009 from 2008. But it's now benefiting from its proximity to
China. Japan's exports to China, which surpassed the U.S. as its
biggest market last year, were 80% higher in January than in the same
month last year, the Ministry of Finance said Wednesday. That was
three times the increase in exports to the U.S. in the same period.
Japan's fourth-quarter performance was encouraging, but the persistent
threats of deflation and political paralysis cloud its outlook.

The big question hanging over all these economies, despite all these
differences: As fiscal stimulus wanes and central banks inch toward
the exit from extraordinarily low interest rates, will consumer and
business demand revive and sustain the recovery?

.Wander now to the new wing of the recovery room, the emerging
markets of Asia. They're not only out of bed, they're back at work and
doing push-ups.

China led the way, demonstrating that one advantage of an
authoritarian government is that it can inject massive doses of
stimulus quickly and order banks to lend. The policy has been so
successful that the Chinese central bank now is restraining bank
lending to avoid over-stimulating the economy and provoking bubbles in
asset markets.

The other countries in the neighborhood are benefiting, offsetting
some of the weakness in exports to the U.S. by exporting more to China
or drawing more tourists from China. Among Asian economies, those more
tightly linked to China—such as Taiwan, Malaysia, Singapore—have been
growing fastest.

But Asian consumers are doing their part, too. Auto sales in Malaysia
in January were up 33% from a year earlier, for instance; India's were
up 50%. In contrast, U.S. vehicle sales were up only 6% in January.

Indeed, one milestone passed without much notice during the crisis.
Emerging-market consumers, more numerous and better off than they were
a couple of decades ago, outspent American consumers for the first
time in modern history.

Emerging-market consumers will account for 34% of global consumption
and U.S. consumers 27% this year, J.P. Morgan calculates. Twenty years
ago, the shares were 23% and 29%, respectively.

"It's not too much of an exaggeration to say emerging-market consumers
did for the world in 2009 what U.S. consumers did in 1998 [during the
Asian financial crisis]," says J.P. Morgan economist Bruce Kasman.

Asia cannot propel world growth by itself, though. Its economies
remain dependent on exports, and that means they, too, are watching,
waiting and hoping for a revival of consumer spending and business
investment in the mature-economies recovery room.

Write to David Wessel at ***@wsj.com



Kimberly's US Economy Blog
By Kimberly Amadeo, About.com Guide to US Economy

My BioMy BlogMy ForumAdd to: iGoogleMy Yahoo!RSS.Can the Fed Really
Head Off Inflation?
Tuesday February 23, 2010
A reader asks:

How does the Federal Reserve's plan to reduce banks' reserve balances
affect the global demand for and price of oil, copper, grains,
sugar...all of which are limited, in-demand commodities. Global
population increases and expansion of the economies of China, India
and Indonesia (all with populations of a billion plus) will drive
demand and cause inflation. If the Fed raised interest rates high
enough to soak up global excess dollars, won't that choke American
consumers, too?

Oil and gas prices have little to do with monetary policy or supply
and demand. They have a lot to do with what investors/speculators
think other investors/speculators will do. Commodities prices will
careen wildly up and down as long as there is economic uncertainty,
which will be the case for quite a while, maybe years.

The Fed is pulling back all its programs to avoid raising the Fed
Funds rate, which will hurt the housing market, which is still weak.
The Fed funds rate itself is just a vehicle to make banks hold more or
less money in reserves. However, it has become kind of a celebrity
indicator, the one everyone watches. By affecting reserves directly,
the Fed hopes to avoid inflation by forcing banks to take money out of
circulation. By keeping the Fed funds rate at zero, the Fed is sending
a message that it will keep liquidity in the housing market.

It is all about sending the right messages to build confidence - upon
which the entire economy is based.


TEA Party folds when economy revives So says the Republican governor
of California, Arnold Schwarzenegger
Posted February 24, 2010 12:00 PM
by Mark Silva

The "TEA Party,'' that anti-tax, anti big-government movement of
people intent on turning out incumbents this year, will "disappear''
as the economy improves.

So says Gov. Arnold Schwarzenegger, the Republican governor of
California whom some in his own party view as a RINO. Whatever his own
situation may be, "Ahnold'' suggests that a movement without a leader,
such as the leaderless TEA Party, which offers no apparent agenda,
will dissolve as underlying economic unrest yields to recovery. With
midterm elections looming, that still could be a question of timing,

"The TEA Party is an expression of anger and of disappointment,''
Schwarzenegger said in an interview last night with Greta Van Susteren
on FOX News Channel's On the Record. "I'm just saying they're not
going anywhere with it because nobody is coming up and saying, 'Here's
our candidate, here's our solution, here's what we're going to do,'
and have a whole policy debate over the various different issues....

"So this is why I think, in the end, when the economy comes back, I
think that the TEA Party will disappear again,'' he said -- which begs
the question of how quickly the economy will offer any signs of real
recovery sufficient to quell that tea revolt.

With a new Congressional Budget Office report that the president's
economic stimulus bill has offered new jobs for as many as 2 million
people and added as much as 3.5 percentage points to the turnaround in
the nation's Gross Domestic Product, the Californian suffering perhaps
the worst state budgetary criris of any governor said this about the
stimulus: "I think that not only I like it, but I think there's a lot
of Republican governors that like it... I think that it has done great
things for the state of California.

""I'm happy about it, and I told this to the president and I tell this
to the world that during a time of crisis like this, anything is
helpful,'' he said. ""I think that having a job is just such a
fundamental and important thing because you feel productive. You make
money. You don't feel like a loser that you've lost your job, and all
those kind of things. I think it has been terrific. And you know,
like, it has been very helpful for us."

Chicago Tribune


Benedict Arnold the man elected to "save" California from the out of
control tax, tax, tax and spend liberals, once made these statements:

"From the time they get up in the morning and flush the toilet,
they're taxed. When they go get a coffee, they're taxed. When they get
in their car, they're taxed. When they go to the gas station, they're
taxed. When they go to lunch, they're taxed. This goes on all day
long. Tax. Tax. Tax. Tax. Tax." Candidate Arnold Schwarzenegger, 2003

"I am firmly opposed to raising taxes. Californians are already
overtaxed. California has one of the highest tax burdens in the
nation, and just about everything a Californian does today is subject
to one tax or another." Candidate Arnold Schwarzenegger, 2003

It’s unfair to accept the notion that hitting taxpayers up for more
money is the answer to our state’s budget and economic problems.
Politicians in Sacramento should find a better way to turn things
around-not simply shift the burden of their mistakes onto the backs of
taxpayers. - Campaign website, JoinArnold.com Aug 29, 2003

"I campaigned that I will not raise taxes and I say this again: I will
not raise taxes," Candidate Arnold Schwarzenegger, 2003

"I said it before that I will not raise taxes, and I will not raise
taxes" Candidate Arnold Schwarzenegger, 2003

"A lot of people say, 'Arnold, why don't you just raise taxes and be
done with it?' Well, as I said earlier, we don't have a revenue
problem. We have a spending problem. We could raise taxes by billions
but that would only further drive up spending by billions of dollars.
California would never come out ahead. Our economy would suffer, jobs
would be lost and the people would be punished. Unless we go to the
root of the problem and reform the system, the budget will continue to
be one big fight, year after year after year." - Governor Arnold
Schwarzenegger, 2005 State of the State address.

"I will not raise taxes on the people of California, period." Governor
Arnold Schwarzenegger, 2006

"Let’s not make the same mistakes of the past, to spend and spend and
spend when we really don’t have the money." Governor Arnold
Schwarzenegger, Speech & Q&A - Friday, January 6, 2006

Keep in mind when reading these that, on February 20, 2009, Governor
Schwarzenegger signed the largest state tax increase in U.S. history.

The TEA party has no "apparent agenda"? Arnold, the agenda is to rid
the nation of liars like you! Taxed Enough Already! Who do you think
elected YOU, you fool. You ran on lowering taxes and you were elected
in a RECALL election to replace the idiot liberal Gray Davis. You
betrayed the people that elected you Benedict Arnold. Enough of your
RHINO ways, get out.

Posted by: Free to Watch Liberals Meltdown | February 24, 2010 12:12

With all due respect, the Governator hasn’t had his ear to the ground
long enough to make these pronouncements. “Smaller government, less
spending and less taxation” is the Tea Party mantra. That’s not
exactly having no ideas or solutions. It’s the same chant with which
the Governator has been taunting the California State Legislature for
its unsustainable budgets. Methinks the Governator is just happy the
feds coughed up the dough to pull the state out of a hole, and he is
kissing up to the White House with the anti Tea-Party rhetoric as a
little political payback.

Posted by: John W. | February 24, 2010 12:32 PM

Arnold is a fool. People have awakened to the fact that dangerous
progressives will always try to get a foothold in this country and we
must be ever vigilant to preserve our freedoms. The tea party shall
never die!

Posted by: NH | February 24, 2010 12:35 PM

Arnold Schwarzenegger is correct that the Tea Party movement will
probably disappear when the economy goes into a full recovery. The
Teabaggers have many Populist traits and are angry and disappointed at
whats been happening in the country. Although the Republicans are
benefiting more than the Democrats from this movement it really is
more anti-incumbent rather than anti-Democrat. And like other such
movements in the past some of the Teabaggers better ideas will be
picked up by both the Republican and Democrat Political Parties.

Although the Stimulus probably saved some current jobs and provided
work for new or pork barrel projects the question remains when the
U.S. economy will be able to recover on its own without government
intervention? We have had two major stimulus bills passed in the fall
of 2008 during the Bush Administration and the one pushed by Obama
earlier this year to prop up the economy. Although those bills
probably saved the economy from getting much worse they have not been
able to bring about a strong recovery. But the question remains often
can the Federal Government afford to do this before harming the
general economy of the country?

Posted by: Depot- Jim | February 24, 2010 12:51 PM

It is more than just the economy. It's also about ridiculous spending,
a problem that will last far beyond whatever economic recovery there
might be. California and Ahhnold are great examples of spending
running amok.
It's about corruption and politicians spending lavishly on themselves.
People like Blago and even Hastert are prime examples.
It is about too much government, which doesn't seem to be going away
anytime soon.
It is about politicians not listening to the people.
It is about taxes and people being taxed too much.
It is about a wrong-headed health care plan that does nothing to solve
the problems.
It is about politicians putting other country's interests ahead of our
A lot depends on what happens in the next few years as to whether the
Tea Party movement continues or not.

Posted by: John D | February 24, 2010 1:32 PM

IF the economy recovers. With the democrats in power - that will just
be 3 years of making the problems worse.
Funny how the liberals made fun of Schwarzennegger but quote him like
he's some kind of authority when it suits their cause.
I know I'm not buying a thing except necessities until obama is out of
office. Let's hope all republicans do the same. Money talks and
democrats walk!
Democrats are parasites.
Why no articles about the Prime Minister of Canada going to Miami for
his medical care?

Posted by: worsethanbefore | February 24, 2010 1:38 PM

Imagine if Democrats held a conference (CPAC) where the sponsors,
speakers and attendees were a mix of people who thought Bush was born
in Africa, 9/11 was a government plot, people should be given
"literacy tests" before being allowed to vote, and that the government
was being controlled by foreign plots, would the corporate media call
it anything else than what it is? - a bunch of fanatical idiots that
do good to dress and feed themselves every day.

Posted by: Ybbob Eibbom | February 24, 2010 1:38 PM

The Republican party will eventually collapse under the weight of the
Tea Klux Klan wing of their party.

The few victories that they will win will backfire on them big time
once their hatred and racism is put on full display in congress for
everyone to see and be repulsed by. I don't care how much halfwit
right wing rubes like Sister Sarahcudda cheerlead for them, it will
eventually turn into a Epic Republican Fail.

Posted by: Steven Hall | February 24, 2010 1:41 PM

Unfortunately I thik that Gov Arnold is correct. There was no uprising
while the national debt doubled under W.

He inherited a surplus, albeit based on the economy of the tech boom
which largely vanished when W took office. W also reduced revenues by
cutting taxes, but didn't cut spending, especially when he instituted
the Medicare Part D Rx spending.

That doesn't excuse the large spending of the Obama administration,
but I think it too will drift away when the economy gets roaring

Posted by: Todd M | February 24, 2010 1:42 PM

We are seeing the re-emergence of the Republican Party's true self
(racisim, bigotry, homophobia). They are more than mere
obstructionists - although Sen Richard Shelby brings obstructionism to
a new high.

They are intent on realizing Grover Norquist's dream of reducing the
size of government so they can "drag it into the bathroom and drown it
in the bathtub."

Tancredo blames the election on the dumb electorate that doesn't see
the world through his prism, and wants to force out those who don't
follow his ideology. Ryan sees the wreckage that is Wall Street as the
salvation of Social Security, and the status quo health insurance
industry as superior to Medicare.

Democrats often talk about how Republicans don't care about promoting
the general welfare of the people. These recent examples bring hard
evidence to our words.

Lincoln spoke eloquently of a government by, of, and for the people.
But the Party of Lincoln has lost this view. Norquist's dream of
drowning the government is, in essence, a desire to drown the American
people. This desire manifests itself with the words of Tancredo and
the proposals of Ryan.

The Tea Party movement reveals itself to be not much more than
political varnish slapped on growing resentment at the erosion of
white privilege.

Paul Ryan reveals that deficit hawkishness is nothing more than
handing over government to corporate America.

How THIS qualifies as a populist movement is beyond me. It sounds more
like a suicide pact.

Posted by: Laura Lexner | February 24, 2010 1:43 PM

WASHINGTON, D.C. -- Gallup's daily measure of U.S. employment reveals
that 19.9% of the U.S. workforce was underemployed during the month of
January, translating to close to 30 million Americans who are working
less than their desired capacity. Those who were underemployed
reported spending 36% less than those who were employed, $48 per day
versus $75 per day.
New home sales hit record low in January
New home sales plummet 11.2 percent in January to annual rate of
309,000, lowest on record

Posted by: Bobby Mobbie | February 24, 2010 1:44 PM


It's hard to say which was more disturbing: Tancredo's apparent call
for reinstituting laws that were a fundamental component of Jim Crow
in the post-Reconstruction South, or the massive round of applause he
received from the Teabaggers for saying it.


Posted by: Michael Kyler | February 24, 2010 1:47 PM

The Teabaggers (ordinary Republican voters) are nothing more than
corporate sponsored puppet sticks. "They" wouldn't exist if it were
not for Freedom Works Corp and Fox.

If Republicans ever get back into power, what's left of the Teabaggers
will get thrown under the bus so fast that they won't know what hit

Posted by: RyanR | February 24, 2010 1:52 PM


Back at Home, Congressional Republicans Praise Projects in Stimulus
Bill They Opposed

"Back in their home districts for the President's Day weekend recess,
congressional Republicans who voted against the stimulus bill are
singing the praises of projects in it."


Posted by: RickyBobbie Mobbie | February 24, 2010 2:13 PM

"By the end of the night, much of the room knelt in prayer – one of
the pastors, Rick Scarborough, went after homosexuals several times to
choruses of amens -- before watching a Tea Party video."
Read more:


Posted by: Crazy Teabaggers = Ordinary Republican Voters | February
24, 2010 2:17 PM

Arnold is right. The German rallies for Hitler were so
enthusiastically received in their day, and the footage of them is
such an utter humiliation to the civilized world of today. NOT
attempting to draw other analogies between Naziism and the Teabagger
movement; that would be dangerous business, indeed. Merely pointing
out that sometimes, all it takes is time for a political movement to
reveal itself for what it is, and to be widely put to shame.

Posted by: Ted Lindeen | February 24, 2010 2:30 PM

Want to bet California will be folding (bankrupcty) before the TEA
Party does.

Posted by: vla | February 24, 2010 2:36 PM

Let Obama and the loony liberals pass their shady healthcare bill and
you will see the Tea Party membership explode upward. How fast you
loony liberals forget that a few years ago you were calling what the
Democrats say they're going to do the nuclear option. Obama said at
the time "it's a abomination" and then Hillary said it was
"unconstitutional". I say do it because the bill will never make it
out of the courts before the midterm elections and at that time most
Democrats running for office will loose. And then once Obama only term
is over we can repeal this idiotic bribe filled bill. A any loony
liberal that thank this cannot happen just remember the Nebraska
Kansas Act of 1851. And anybody that is as stupid enough to forget
history is bound to repeat it. The passage of the Nebraska Kansas Act
of 1851 was the downfall for one political party and the birth of

Posted by: Crooks_In_DC | February 24, 2010 2:38 PM

""I'm happy about it, and I told this to the president and I tell this
to the world that during a time of crisis like this, anything is
helpful,'' , said the REPUBLICAN Capitalist who has experience in
running a business. Suck it you retarded TeaBaggers. You're toast.

Posted by: sensible | February 24, 2010 2:43 PM

You liberals don't have a clue. It's amazing. All you can do is think
of more and more ways to drain the life out of the economy with higher
taxes, and insane spending.

By the way the REAL underemployment rate in the Former Great State of
California is 23%. That's depression level. It is projected that the
housing prices won't come back to the higher levels of 2005 until
laugh. The state adds a whopping total of 3,000 green jobs a year;
meaning in about 150 years those green jobs will replace all the jobs
lost by the job killing liberals that make California the MOST
UNFRIENDLY state in the nation for business. STIMULUS = millions of
lies created.

Posted by: Free to Watch Liberals Meltdown | February 24, 2010 2:49

I've always wondered - how could "civilized" people do such horrible
things (Teabaggers)?

The short answer is fear.

The long answer is fear, roused by propaganda that plays on ignorance,
followed by a call to oppose (by arms or intransigence) the "other".

Only 20% of the country is in the Teabagger category. Far less than
that percentage are hardcore right wing nut jobs. Most of the
Teabaggers are just ignorant, alienated people afraid for their
(white) country.

Why they weren't afraid when the last administration ran up so much
debt and was really radical in its completely altered conception of
American Constitutional law is probably due to the fact that the
Teabagger crowd is so ignorant.

Wingnuts at their core are basically authority worshippers, so "might
makes right," and "the man with the gold, makes the rule," and
whatever. It's fine with them, they're too stupid to understand that
they are doing nothing but making their own situation worse.

Posted by: James Almberg | February 24, 2010 2:52 PM

Michael Kyler

Funny how a loony liberal blog would come up with that and even
funnier is your ignorance in buying it. America is a great country you
have to admit and a good example of that is that even someone as
idiotic as yourself can vote. Next time try to get a real news outlet.

RickyBobbie Mobbie

I have to agree that is a sleazy move by the Republicans about as
sleazy a move as the one the Democrats are trying to do saying that
the success in Iraq was because of Obama and the loony liberals in
Congress. When the majority of the people know that the timetable for
the pullout was already agreed to before the 2008 elections. And for
Obama to even say he played any role in it is a disgrace because the
record shows he voted against the Surge and that was the main reason
we are pulling out now.

Posted by: Crooks_In_DC | February 24, 2010 3:09 PM


Right why doesn't Arnold tell how many jobs they have lost since he
has been governor. How many jobs have moved to border states around
California. So please loony liberal propaganda is no longer working
for the majority of the voting population. I know my wife's company
moved over 500 of its positions to Texas a few years back. And these
were not your minimum wage nor even middle-class wages these were high-
paying technical medical device jobs. And I know of seven other
companies with similar positions that left California in a one-year
period within a few miles of my wife's old company location.

Posted by: Crooks_In_DC | February 24, 2010 3:24 PM

You liberals don't have a clue. It's amazing. All you can do is think
of more and more ways to drain the life out of the economy with higher
taxes, and insane spending.

Posted by: Free to Watch Liberals Meltdown | February 24, 2010 2:49

I find it amazing how middle class and poor right wing rubes like you
are always so willing to be rear-ended by multi-billionaires, big oil
and corporate America because you've been so thoroughly duped into
believing the Trickledown fantasy that your leadership sells you. It
would be hilarious if it wasn't so tragic.

When Republican President Bush Jr slipped into office and once again
applied the Neo-Con manta of the old trickle down tax model and
immediately created a need to raise the debt level to pay for an
unjustified tax cut in 2001. Predictably (and before 9/11) the nation
lost jobs and there were fewer new millionaires. Not learning from his
past mistakes, Bush pushed through yet more tax cuts in 2003, 2005 and
2006 -- all while expanding the military, the largest single component
of the budget. He and his lap dog Republican Congress never learned
from their mistakes. As a result, the national debt increased an
average of $1.5 billion per day since the beginning of 2002.

Posted by: Free to watch Repugs bow down to their Masters | February
24, 2010 3:51 PM

Michael KylerFunny how a loony liberal blog would come up with that
and even funnier is your ignorance in buying it.
Posted by: Crooks_In_DC | February 24, 2010 3:09 PM

Funny how you can't refute that so-called "liberal blog" but yet
you're still shooting your mouth off, don't ya think?

Posted by: HHH | February 24, 2010 3:55 PM


Bet "no one" ever saw this one coming....not.

"The Massachusetts man charged two weeks ago with stockpiling weapons
after saying he feared an imminent "Armageddon" appears to have been
active in the Tea Party movement, and saw Sarah Palin, who he said is
on a "righteous 'Mission from God,'" as the only figure capable of
averting the destruction of society."

"... found with a stash of military grade weapons, explosive devices
including tear gas and pepper ball canisters, camouflage clothing,
knives, handcuffs, bulletproof vests and helmets, and night vision
goggles, say police."

"But it appears that Girard had lately found a community with which to
share some of his growing fears. A "Greg Girard," listing his location
as Manchester, Mass., has a personal page on the "Patriots of America"
online network, a popular site affiliated with the Tea Party

So, what prompted Girard to stock up (and advise his wife to shoot
"traitors" in the head)? .....He was afraid President Obama was coming
for his guns.

Of course "no one" could have anticipated that anyone would try to act
on the unfounded fears that the Right Wing Noise Machine media whips
up about President Obama, right?

Posted by: Lester Poindexter | February 24, 2010 4:00 PM

“Smaller government, less spending and less taxation” is the Tea Party
mantra. That’s not exactly having no ideas or solutions.
Posted by: John W. | February 24, 2010 12:32 PM

and I'm for feeding the starving and world peace........I guess I have
as good a chance as the tea baggers.

Posted by: bill r. | February 24, 2010 4:22 PM

Yep, Jobs, business and taxpayers are fleeing The Former Great State
of California as fast as they can. Great job liberals of ruining the
former 5th largest economy on the planet. The nation is next...and
then the world. Stop voting for these fools.

Posted by: Free to Watch Liberals Meltdown | February 24, 2010 4:25

The economy will come back when the government slashes spending and
cuts taxes.

Then the tea party will have accomplished its mission.

Posted by: Chris | February 24, 2010 4:39 PM

Yep, Jobs, business and taxpayers are fleeing The Former Great State
of California as fast as they can. Great job liberals of ruining the
former 5th largest economy on the planet. The nation is next...and
then the world. Stop voting for these fools.

Posted by: Free to Watch Liberals Meltdown | February 24, 2010 4:25

Yeah Biff,
And that's exactly why Cali needs to get rid of their 2/3's law, the
one that has been allowing the MINORITY REPUGS to obstruct any and
every way that the state has been going about in an effort to fix
things, because the ultimate Repug goal is to "drown gov't in a bath


Posted by: Free to Watch Repugs bow down to their Masters | February
24, 2010 4:50 PM

and I'm for feeding the starving and world peace........I guess I have
as good a chance as the tea baggers.

Posted by: bill r. | February 24, 2010 4:22 PM

Are you a former Miss America contestant? If you look up some stats
you might learn that Americans (that would include those who are
"rich") freely give more to charity than anyone else in the world.
And, nobody WANTS war.

I am for butterflies and daisys and quiche for everyone. Geez.

Posted by: Free to Watch Liberals Meltdown | February 24, 2010 4:54

* * * * *
Posted by: bill r. | February 24, 2010 4:22 PM
That’s very funny, bill. Very funny. But, in the context of the
California budget crisis, the Tea Party mantra is actually a concrete
solution. California never had a problem with revenue; at least, not
before the recession. Revenue had increased steadily over the years.
The problem is the Democrat dominated California Legislature. Its
members have always found new and interesting ways to spend everything
in sight and then dig us deeply into debt. The common-sense notion
that one shouldn’t spend more than one has in the bank has apparently
never crossed their minds. If the Legislature just abided by a
moratorium on new spending for a while, rolled back some of the less
essential funding, and, perhaps, renegotiated some of the state
employee contracts, we might actually have a chance to close the
budget gap. None of that is going to happen in the near future until
some of that Tea Party mantra is applied.

Posted by: John W. | February 24, 2010 5:05 PM

“that a movement without a leader”
http://www.iamtheteapartyleader.com/ The leader(s)

which offers no apparent agenda
http://www.teapartynation.com Read what it’s about, there's the agenda

“The TEA Party is an expression of anger and of disappointment”
How can Schwarzenegger even express this when he doesn’t even
understand it?

“I'm just saying they're not going anywhere with it because nobody is
coming up and saying”
'Here's our candidate’
-It’s not a political party, it’s a MOVEMENT
‘here's our solution’
-Less government intervention, lower taxes, less spending,
constitutional integrity…. Need I say MORE? Pretty simple.

‘here's what we're going to do’
-Campaign & vote for anyone who holds the ‘solution’ as their goal
foundation of holding office

Get a clue Schwarzenegger.

Posted by: MAJMark | February 24, 2010 5:12 PM

Are you a former Miss America contestant? If you look up some stats
you might learn that Americans (that would include those who are
"rich") freely give more to charity than anyone else in the world.
And, nobody WANTS war. I am for butterflies and daisys and quiche for

Posted by: Free to Watch Liberals Meltdown | February 24, 2010 4:54

Really Biff?

Nobody wants war? I think your Bushco Republican heroes and their pals
in the Military Industrial Complex would beg to differ with you.
America wouldn't have that problem if right wing morons like you would
quit freely passing out butterflies, daisys and quiche in the form of
multibillion dollar tax payer funded contracts to them all the time.

Posted by: Free to Watch Repugs bow down to their Masters | February
24, 2010 5:30 PM

The TEA Party is an expression of anger and of disappointment”
Posted by: MAJMark | February 24, 2010 5:12 PM

Private Mark,
The Tea Klux Klaner's are a bunch racist tools who were created out of
thin air by corporate lobbying groups like Freddom Works and the
Republican propaganda channel, Fox.

If any of these low IQ simpletons were really angry about 'big
guvmint" and "spending" they would have been holding their little Klan
pep rallies when Bush was busy doubling our national debt in only
eight years and warmongering on the side. But no, they waited until
the black guy Democrat became president to be fake outraged, and that
is why these Teabagger cretins have no credibility.

Posted by: GENRipper | February 24, 2010 5:43 PM

Yes, keep reading those leftist conspiracy blogs. They are so true.
The government introduced AIDS, and crack cocaine and Bush himself
blew up the dikes around New Orleans, and of course Cheney hired the
9/11 hijackers.

And those mean old wasty Wepublicans just won't allow the loony tune
liberals in Caweeforwa to waise taxes.

The state just had the biggest increase in history! And it's still
broke and its losing its tax base because business and the "rich" are
voting with their feet.

Posted by: Free to Watch Liberals Post Nonsense | February 24, 2010
6:03 PM

* * * * *
And that's exactly why Cali needs to get rid of their 2/3's law, the
one that has been allowing the MINORITY REPUGS to obstruct any and
every way that the state has been going about in an effort to fix
things, because the ultimate Repug goal is to "drown gov't in a bath
* * * * *
Posted by: Free to Watch Repugs bow down to their Masters | February
24, 2010 4:50 PM
That is absolutely the DUMBEST thing I have ever seen posted here in
the Swamp, bar none.
In the first place, the “MINORITY REPUGS” in the California
Legislature aren’t the ones voting to raise taxes and spend more every
In the second place, the two-thirds rule doesn’t prevent the
California Legislature from fixing anything. It simply prevents the
Legislature from voting for more taxes and higher spending without a
two-thirds vote. The only thing that has done has been to keep the
Spendocrat dominated State Legislature from spending us into oblivion
and driving all industry and business out of State. The Spendocrats
have done a darn good job of the latter even with the two-thirds rule
in place.
In the third place, good luck getting rid of the two-thirds rule. It’s
not just a law; its part of the California Constitution. It cannot be
repealed by the State Legislature. It would take either a new ballot
initiative or a state constitutional convention to get rid of that
rule. Fat chance of that happening anytime soon. Californians are
rather hostile to the idea of allowing the State Legislature out of
its cage. They have resisted ballot measure after ballot measure
designed to allow the Legislature more leeway in raising taxes to
balance the budget. Don’t hold your breath on this one.

Posted by: John W. | February 24, 2010 6:17 PM

Listen to the piglicans squeal like, well, like stuck piglicans when
Arnold actually tells the truth.

Maybe he's do an Arlen Specter and change parties.

Run for Senate as a Dem.

Is it too late for that?

Posted by: ornery | February 24, 2010 6:26 PM

Yes, keep reading those leftist conspiracy blogs. They are so true.
The government introduced AIDS, and crack cocaine and Bush himself
Posted by: Free to Watch Liberals Post Nonsense | February 24, 2010

Is that the best you've got, Biff?


Posted by: Free to Watch Wingnutters Post Nonsense | February 24, 2010
7:12 PM

That is absolutely the DUMBEST thing I have ever seen posted here in
the Swamp, bar none. In the first place, the “MINORITY REPUGS” in the
California Legislature aren’t the ones voting to raise taxes and spend
Posted by: John W. | February 24, 2010 6:17 PM

Exactly what excess spending is going on in Cali right now, Bircher

NONE! Because MINORITY REPUBLICANS have managed to get a law passed in
Cali that makes it require 3/4 of their Legislature to vote on
ANYTHING relating to public funding (like TAXES!). They WANT gov't to
fail. Go ask your hero Grover Norquist about it, he'll tell you what
you already know and SUPPORT, you hypocrite.

That person who died and told you you were the smartest person on
earth, lied.

Posted by: huh? | February 24, 2010 7:25 PM

GEMLICKER- you just keep smoke'n that BS the left keeps stuffing in
your pipe and drinking the tainted Kool-Aid.
You don't even have a clue what is coming......

Posted by: MAJMark | February 24, 2010 7:50 PM

Fitting that you liberals like Benedict Arnold. He SHOULD crossover
and become a Dem. He fits right in: He's a liar, he says one thing and
does the opposite. He has no integrity; he betrays the trust of the
voters. He's a gutless egomaniac who can't stand it when someone asks
a tough question. Barry and Arnie should make a movie: Twins II.

And the number ONE reason Arnie should be a Democrat candidate (he
already is) is his approval rating.

It's UP from 13% to 19%.


Posted by: Free to Watch Liberals Meltdown | February 24, 2010 11:06

Triple H.

I did refute it by simply pointing out what it was a liberal blog. You
do have a short memory span don't you. I say the same thing to
somebody trying to use a conservative blog. Get a real news source.
You do make a fool of yourself in most of your posts but, once you
grow up it will happen less often.

Posted by: Crooks_In_DC | February 25, 2010 12:06 AM

* * * * *
Posted by: huh? | February 24, 2010 7:25 PM
You are desperately ignorant, mentally challenged, or simply lying to
gainsay my point. I think it’s a combination of all the above.
1. The 2/3rds rule was passed in 1978 by popular vote in a statewide
ballot initiative (as opposed to some law, as you suppose), along with
a number of other rules to amend the state constitution, thus limiting
the State Legislature’s ability to raise taxes and go on spending
sprees. It wasn’t enacted recently as part of some Tea-bagger
conspiracy to “drown government in a bathtub.”
huh? 0 Common sense and intelligence 1
2. On February 20, 2009, the Governator signed into law an increase in
state sales and income tax to cover yet another budget deficit.
(Which, BTW, is already about $20 billion this year so far.) The bill
was supported by the Democrats and largely opposed by the Republicans.
It was stalled in the State Senate until the minimum number of
Republicans crossed party lines and cast the deciding votes in favor
of the bill. This kind of undercuts your assumption that the 2/3rds
rule prevents increases in taxation and spending. It doesn’t. It
huh? 0 Common sense and intelligence 2
3. Over the past 10 years state spending from state sources has more
than doubled in nominal terms (not adjusted for inflation), and in a
manner that cannot be explained on the basis of an increased
population. Just during the Governator’s tenure, state spending from
state sources has risen almost 40 percent. (Spending: Fiscal year
1907-98: $68.5 billion; Fiscal Year 2003-2004: $104.2 billion; Fiscal
Year 2007-2008: $141.8 billion.) And why did California have such
incredible spending increases? You guessed it. The DEMOCRATS that
controlled the California Legislature and Governor’s office from the
late ‘90s until the early 21st Century were on a spending binge. They
handed out massive pay increases to state employees and guaranteed
them lavish retirement pensions of the kind the private sector could
only dream of. As the Governator stated during his 2005 State of the
State address (quoted above):

“A lot of people say, ‘Arnold, why don't you just raise taxes and be
done with it?’ Well, as I said earlier, we don't have a revenue
problem. We have a spending problem. We could raise taxes by billions
but that would only further drive up spending by billions of dollars.
California would never come out ahead. Our economy would suffer, jobs
would be lost and the people would be punished. Unless we go to the
root of the problem and reform the system, the budget will continue to
be one big fight, year after year after year.”
These FACTS (which you can look up) entirely destroy your claim that
the 2/3rds law, enacted by the People of California in 1978, could
come close to prevent the Democrats from spending us into oblivion
well into the 21st Century.
huh? 0 Common sense and intelligence 3
4. The problem facing the State of California now is largely due to
all those long term commitments that the Democrats in the State
Legislature obligated the state to pay. Republican’s may sometimes
(but not always) keep the Democrats from spending a lot more. However,
as the minority party, the Republicans have no ability to undo all the
damage caused by the Democrats’ for having to pay all those long term
commitments. It would take the Democrats to undo their own damage, and
they aren’t willing to do that.
huh? 0 Common sense and intelligence 4
Read ‘em and weep, you boob.

Posted by: John W. | February 25, 2010 3:57 AM

Read ‘em and weep, you boob.

Posted by: John W. | February 25, 2010 3:57 AM

Without a doubt, one of the most brilliant dissections of the sheer
lunacy and incredible ignorance that is the Loony Left.
Facts and common sense are two distinct traits that are not part of
the Left's DNA.

Posted by: John D | February 25, 2010 9:18 AM

John D

It was called Proposition 13. And it deals with mostly with property
taxes that is the reason why the California school system has taken a
nose dive since it became law. History is a funny thing.

Posted by: Crooks_In_DC | February 25, 2010 1:21 PM

Crooks, gotta disagree with you here. Prop 13 only froze property
taxes. The California school system is not hurting because of money.
The teachers union and other public employee unions run the state
government. The rot of the school system is the fault of liberal
education agendas, more and more administration, and the unions taking
money out of the system in Guaranteed contracts, including Guaranteed
retirement benefits in a down market. The teachers have been crying
for the last 60 years about overcrowded class rooms. We had larger
class rooms (I'm talking 32 per class) when I went to school and they
actually managed to teach students to read and write. Now they can't
even graduate students with enough skills to attend college. And
speaking of college, there are classes with 100-200 students and they
manage to learn, AND they pay a hefty tuition to attend.

Taxes and funds have been poured into the black hole of the Ca school
system with one result: Total failure.

Posted by: Free to Watch Liberals Meltdown | February 25, 2010 3:59

Free to Watch Liberals Meltdown

I get your point but, Proposition 13 is also playing a role in
education in California. You cannot raise the percentage of taxes on
your property tax bill that go for individual items without a two
thirds majority. For while this was a problem for school funding but,
it seems every time there is a raise in property tax for the schools
it ends up going to the teachers and not solving any real problems.
When teachers make more than police officers or firefighters something
is not right. Remember property taxes are what pay for school systems
in most areas and I know it did at one time in California. I believe
if you link the money to the student while giving them the choice to
choose which school they go to education would improve. It's Economics
101 competition breeds excellence in most areas of the economy. But
the teachers unions with the lunatic fringe do not want this to happen
because it would highlight their inadequacies.

Posted by: Crooks_In_DC | February 25, 2010 4:19 PM


...and I am Sid Harth
2010-02-26 13:48:07 UTC

Corn Rises as Dollar Slide May Boost Demand for U.S. Supplies
February 26, 2010, 7:18 AM EST

(Bloomberg) -- Corn rose in Chicago on speculation that a weaker
dollar will boost demand for crops from the U.S., the biggest exporter
of the grain, and on concern that spring floods will delay planting in
the country.

The U.S. Dollar Index, a six-currency gauge of the greenback’s
strength, fell for a third day as a struggling labor market clouded
the outlook for the economic recovery. The U.S. economy requires low
interest rates to encourage demand, Federal Reserve Chairman Ben S.
Bernanke said.

“The commodities market is closely responding to the dollar because
little fundamental news has changed elsewhere,” Chen Baomin, analyst
at Jilin Grain Group Co., said by phone from Dalian. As the dollar
weakens, demand for grains and other commodities climbs, he said.

Corn futures for May delivery gained 1.2 percent to $3.8775 a bushel
in electronic trading on the Chicago Board Trade at 1 p.m. Paris time.

Snow persists in Iowa, the top corn-growing state, and soils are
frozen though a deep layer, agricultural meteorologist Gail Martell
said in a report on her Web site yesterday. Once the snow melts,
“weeks of warmth and sunshine” will be needed for fields to warm up,
she said.

Soybean Acreage

“The inevitable spring rains and the snow melt may work against corn
acreage and work toward soybean acreage, for soybeans can be planted
several weeks later than corn,” said economist Dennis Gartman, editor
of the daily Gartman Letter.

Soybean futures for May delivery rose 0.2 percent to $9.52 a bushel.
The oilseed has dropped this year as countries including China, the
biggest buyer, switched to buying a record harvest in Brazil and
Argentina, the largest exporters behind the U.S.

Wheat for May delivery advanced 0.5 percent to $5.0625 a bushel.
Milling wheat for delivery in May traded on NYSE Liffe in Paris fell
0.4 percent to 124.75 euros ($169.55) a metric ton.

European Union soft-wheat export licenses dropped 44 percent in the
seven days through Feb. 23 to 319,000 tons, down from 568,000 tons in
the previous week and below the average weekly sales for the year that
started July 1.

--With assistance from Rudy Ruitenberg in Paris and Jae Hur in Tokyo.
Editor: Ravil Shirodkar

To contact the editors responsible for this story: James Poole at

Dispatch from Copenhagen: Secretary Locke Worries That U.S. Companies
Could Fall Behind
Posted by: John Carey on December 11, 2009

If the climate talks now going on in Copenhagen lead to binding limits
on greenhouse gas emissions, the resulting transformation to a greener
energy system will be good for business, argues Gary Locke, Secretary
of the U.S. Commerce Department. “If we take serious action, we will
be laying the foundation for future prosperity,” he says. “It could
spur one of the greatest economic opportunities of the 21st century.”
GE, for instance, is looking to sell everything from wind turbines and
energy efficient locomotives to technology for making the electricity
grid smarter and more efficient.

Locke is leading a delegation of U.S. companies, including GE, in
Copenhagen, hoping to ensure that American business snares a big share
of those opportunities. But he worries that the U.S. in danger of
falling behind. American researchers invented solar panels, but now
the leading manufacturer of solar panels is China. “Three years from
now, we will wake up and ask how Brazil or Singapore, or others became
the Silicon Valley of green energy,” Locke frets.

The problem? U.S. companies are hampered by the lack of a clear energy
and climate policy at home, Locke says. Countries like Germany and
Spain have nurtured strong home-grown renewable industries through
such policies as feed-in tariffs, in which utilities must pay a
premium for electricity from renewable sources. Meanwhile, China has
invested heavily in technologies like solar and wind. In the U.S.,
companies are still waiting for similar incentives, such as a national
policy requiring a certain percentage of renewable power, or limits on
carbon that raise the price of using fossil fuels and make renewables
and energy efficiency steps more cost competitive. “I’ve heard from so
many companies and investors that they are sitting on the sidelines
until the rules are clear,” says Locke. “The longer we wait the
further other countries will move ahead. That’s why it’s so important
for Congress to pass energy legislation as quickly as possible.”


BusinessWeek correspondents John Carey and Mark Scott, cover the green
scene, keeping on top of the business aspects of energy, the
environment and climate change, as well as the technologies, policies,
markets and people that are shaping how the earth's resources will be
used in the century ahead.


Future of Tech February 25, 2010, 5:00PM EST text size: TT

And Google Begat...

The search giant's former employees are seeding tech startups—and
shaping another wave of innovation

Infographic by Ronald Plyman

By Spencer E. Ante and Kimberly Weisul

This Issue
March 8, 2010

Hold For Mr. Buffett Please

During the holidays last year, Aydin Senkut and Elad Gil gathered 50
of their friends at a health-food restaurant in Palo Alto. Over turkey
burgers and tofu wraps, they talked about tech trends and how to get
rich. Or, more precisely, how to get richer.

Senkut, Gil, and their dining circle are alumni of Google (GOOG), one
of the greatest engines of wealth creation the U.S. has ever known.
Since going public six years ago, Google has generated more than $170
billion for its employees and investors. Many of the millionaires the
company has produced are young, wired into the latest developments in
tech, and at ease with risk. Which explains why so many Google alums—
including many of those at Senkut and Gil's gatherings—are active
angel investors, attempting to add another zero to their bank accounts
and another innovative company to their list of accomplishments. "I
feel like we have such a strong network, it's almost like we've
recreated Google outside of the Google walls," says Andrea Zurek, a 39-
year-old backer of 26 startups.

More than 40 ex-Googlers have invested in about 200 fledgling
companies since 2005, according to the research firm YouNoodle and
reporting by Bloomberg BusinessWeek. At least a half dozen current
Google executives, including CEO Eric Schmidt and co-founders Larry
Page and Sergey Brin, are also financing young companies. Numerous
angel-watchers say the Google group has more in common than just
pedigree. Unlike many venture capitalists, the Googlers like to swap
investment ideas and back startups together. They're also willing to
take big chances. "[They're getting into] very risky deals that can be
extremely rewarding," says Jeff Clavier, a veteran venture capitalist
who founded Palo Alto-based SoftTech VC in 2004. "They have been very
active as a group over the past two to three years."


The results have been impressive. Companies backed by Googlers include
Twitter, Tesla Motors, and gamemaker Tapulous. "As Google matures, its
alums are continuing to have a huge impact on Silicon Valley and the
tech industry," says Ron Conway, one of the Valley's most active angel
investors, who has backed 190 companies, including Google, Facebook,
and Twitter.

One reason for their success is that Google's angels have more to
offer struggling entrepreneurs than just money. Bart Decrem, a
Stanford University law grad, turned to the Google network when he was
starting Tapulous in 2008. The company's Tap Tap Revenge game requires
players to tap on-screen balls to the beat of a song—not exactly a
sure thing of an idea. But Decrem thought the game might become a
substantial business by selling it on Apple's (AAPL) iPhone. He raised
$500,000 from a dozen angels, including Senkut and Zurek, who advised
on strategy, connected the company with new partners in Asia, and
helped it explore platforms for mobile phones that use Google's
Android software. Today, Tap Tap games have been downloaded more than
25 million times and Tapulous is solidly profitable, with $1 million
in revenues a month.

Google's Angels dabble in a wide variety of businesses. Zurek has
money in a premium vodka maker and a South Korean frozen yogurt
emporium. Yet the angels tend to concentrate their cash in what they
know—search technology, mobile computing, and the consumer Internet.
Already, Twitter, backed by former Google executive Chris Sacca, is
the hottest startup in Silicon Valley, pioneering a new field of real-
time communications. The online personal finance service Mint.com,
with money from Senkut, proved so popular that market leader Intuit
(INTU) bought it for $170 million last year and made founder Aaron
Patzer one of its top execs. Search provider Powerset, backed by
Senkut, was acquired by Microsoft (MSFT) in 2008, and its technology
became a key part of the Bing search engine.

Future of Tech February 25, 2010, 5:00PM EST

And Google Begat...

This Issue
March 8, 2010

Hold For Mr. Buffett Please

The most active Google angel thus far is Senkut, a 40-year-old native
of Turkey who has invested between $25,000 and $150,000 in more than
60 startups. Senkut joined Google in 1999 as its 63rd employee. He
left in 2005 and promptly took his mother to Paris for her 60th
birthday, purchased two multimillion-dollar homes in the Bay Area, and
treated himself to a Lamborghini.

With that out of his system, he set about becoming a full-time angel.
Senkut is often the first investor behind an idea, and to date 11 of
the startups he helped fund have been bought by companies including
Google, AT&T (T), and Microsoft. Senkut also fosters the investment of
others by organizing two regular events for alums, one for angels and
entrepreneurs, and another for all ex-employees, at spots such as the
Calafia Café in Palo Alto, owned by Google's first in-house chef.
Senkut is raising money for his firm, Felicis Ventures, according to
two angel investors, and could not comment on his investments for this
story. (Securities laws prevent the public solicitation of funds.) In
an interview last October, though, before four of his companies were
sold, Senkut said his investments had produced double-digit annualized
returns and that, at the time, he was being pitched new business ideas
several times a day.

If Senkut is the established star among the Google angels, Chris Sacca
is the up-and-comer. The 34-year-old Georgetown University law grad
joined Google in 2003 and left in 2007. Of the 31 startups he's
backed, his biggest hit is Twitter, in which he invested $50,000 just
as it was getting started in 2007.

Working out of a 3,000-square-foot home in Truckee, Calif., a small
ski town near Lake Tahoe, Sacca hikes and snowshoes most mornings
before breakfast and commutes to San Francisco for three days every
two weeks. It's an unconventional way to supervise investments, but
Sacca has an unconventional approach to investing, period.

One Friday night in December 2008, he posted a message on Twitter
asking if any startups were working late. "We tweeted back, 'we're
FanBridge and we work hard every Friday night,'" says Spencer
Richardson, its 25-year-old co-founder. FanBridge makes software that
helps musicians manage marketing and relationships with their fans. A
few weeks later, Sacca flew to New York and met with the company's
founders. "They had day jobs and built this site that had 20 million
users, adding 100,000 users a day," says Sacca. "It was a no-

Over the next few months, Sacca invested $50,000 and pulled in several
hundred thousand dollars from other angels. Last year, FanBridge's
founders considered offering their products to authors, comedians, and
other artists; Sacca advised them to stay focused on the music
industry. Today, FanBridge is profitable and used by 55 million music
fans. "The feedback from him was, 'start by being the best at
something, then branch out,'" says Richardson.

The Google Angels may have several more breakout companies developing
in their portfolios. Sacca has invested in Lookout, a promising
developer of security software for mobile phones. Several ex-Googlers
and current Vice-President Marissa Mayer are behind Square, which aims
to displace credit-card swiping machines with a cheaper payment system
that works through smartphones. And current Google exec Joshua
Schachter helped finance Foursquare, a mobile phone service that lets
friends share tips on local hotspots and is being used more than a
million times a week. "What drives us is the innovation, the
excitement of working with people we like," says Zurek.

Paul Graham, who co-founded the startup incubator Y Combinator,
believes the tech industry has just begun to appreciate that Google's
wealthy ex-employees may have not just a single innovative second act,
but potentially hundreds of them. "When people write the history of
Silicon Valley 20 years from now," says Graham, "the true impact of
Google could come more from all the things that Google people go on to
do after they leave Google."

Who are the top angel investors? To find out, go to www.businessweek.com/go/10/angels

Ante is an associate editor for BusinessWeek. Kimberly Weisul is
editor of BusinessWeek SmallBiz .

Cover Story February 25, 2010, 5:00PM EST

When CEOs Have Warren Buffett in Their Boardroom

What's it like to have America's greatest investor as your
shareholder? Buffett's biographer talks to CEOs who know By Alice

March 8, 2010

Hold For Mr. Buffett Please

Who wouldn't love to pick up the phone and ask Warren Buffett for
advice? People have spent more than $1 million just to have lunch with
the man. He was voted the most admired corporate director in America
by Directorship magazine in 2008. Chief executives of companies he has
a stake in laud his patience, foresight, and ability to capture the
essence of a complex financial situation in just a few words. They
also like the fact that he usually leaves them alone as long as
they're getting the job done.

Sometimes Buffett emerges from behind his desk and shows a side of
himself that's far less familiar. When he sees something he doesn't
like in a company whose shares he owns, the famously passive investor
can swing into action to protect his investment—jawboning behind the
scenes, scolding, cutting opportunistic deals, even hiring and firing
CEOs. For some of those on the receiving end of his activism, it can
feel a bit like being attacked by Santa Claus.

Buffett's virtues and philosophy are well known, and at 79, his
ability to spread them throughout the business world has never been
greater. In mid-February, his holding company, Berkshire Hathaway,
(BRK.A) was listed for the first time on the Standard & Poor's 500-
stock index, and the stock price and volume jumped as investors rushed
in. His annual letter to shareholders, to be released on Feb. 27, is
always one of the most parsed memos of the year. Berkshire's purchase
of Burlington Northern (BNI) in November 2009—a self-described all-in
bet on America—and its $5 billion stake in Goldman Sachs (GS) make
Buffett a major stakeholder in the global economic recovery, with
tentacles that span from coal to collateralized debt obligations. And
his now infamous dressing down of Kraft (KFT) CEO Irene Rosenfeld over
Kraft's purchase of Cadbury (CBY) proved that behind that Cherry Coke
smile, there's still plenty of bite.

In speaking with CEOS for this story, and in writing the 2008
biography The Snowball with Buffett's cooperation, I learned a great
deal about the way he manages the people he counts on to make money
for him and his shareholders. He is, in many cases, just as genial and
supportive as his persona would lead you to believe. "First my mother
and then I have been able to call and ask his advice on matters
affecting the company, large and small," says Donald E. Graham, CEO of
Washington Post Co (WPO). "His advice has been worth billions to our
not-so-large company."

During the credit crunch of March 2008, American Express (AXP) CEO
Kenneth I. Chenault had to ask for help from Buffett at a moment when
Berkshire's stake in American Express had lost $8 billion because of
credit losses and concerns the company could not borrow to fund its
operations. One might think Chenault had reason to fear the call.
Instead, he knew Buffett, whose company owns 13% of American Express,
would be his "confidence booster." Even in the highly charged
atmosphere of a financial meltdown, his style is unwavering
—"objective, direct, and he knows what he believes," Chenault says.
The CEO felt fortunate that Buffett was indifferent to the market
pressure on American Express.

At the time, Chenault faced intense pressure to cut the company's
payout to investors, as his peers had done. Buffett "understood the
reputational reasons why American Express should not cut the
dividend," he says, and backed the decision to maintain it. Since the
crisis, Berkshire's investment has recovered $4 billion of its value.

When other CEO friends got into trouble during the downturn, Buffett
offered them more than advice. William C. Foote, head of wallboard and
gypsum product maker USG (USG), first met the investor before
Berkshire backstopped a USG stock offering in 2006, buying a 17% stake
in the company. Foote tried to impress his new shareholder by reciting
housing statistics from the 1960s to the 1980s—and was shocked when
Buffett immediately responded with data from the 1940s and 1950s.

Although USG was struggling through bankruptcy, Buffett treated Foote
with the benevolent neglect he generally displays toward managers
whose companies are cruising. Foote would call occasionally and
traveled to Omaha two or three times a year, spending a couple of
hours chatting in Buffett's office before eating a steak at one of his
favorite restaurants. He "doesn't offer suggestions as much as answer
questions and provide perspective," Foote said.

The USG chief found the advice valuable and enjoyed the feeling that
Buffett had enough confidence in him not to meddle. Then the housing
market imploded and demand for wallboard collapsed. Buffett leaped
into the fray in a way that benefited both Berkshire and USG.
Berkshire took $300 million of a $400 million issuance of 10% notes
convertible until 2018 at Berkshire's discretion into stock at $11.40
per share. (USG was trading at around $5.66 before the deal and is now
at about $13.40, meaning the conversion feature is in the money). The
equity sweetener effectively raised the cost of the notes, while
limiting the impact on USG's income statement to its $30 million
annual cash interest tithe to Berkshire, helpful at a time when USG is
losing hundreds of millions of dollars a year.

When Buffett is unhappy with a CEO, you can tell mostly from what he
doesn't say. "He criticizes by omission and faint praise," says former
Wells Fargo (WFC) Chairman Richard M. "Dick" Kovacevich, a longtime
friend and world-class manager whom Buffett has compared to Wal-Mart
(WMT) founder Sam Walton. "If you are a close observer of him, it's
not hard to figure out."

To be publicly criticized by Buffett, even subtly, might send a shiver
through any executive who does business with him. It happened to Irene
Rosenfeld on Jan. 21, after Kraft agreed to buy the iconic British
candy company Cadbury for $13.17 a share. Berkshire is Kraft's biggest
shareholder, with a 9.4% stake. Buffett had opposed an earlier version
of the deal but said if Kraft put up more cash in a revised deal that
didn't "destroy value," he would approve.

Kraft's share price rose because the remarks seemed to indicate that a
modestly higher bid could meet his terms as long as it contained less
stock. When Rosenfeld carried out a version of the plan, agreeing to
pay $7.74 in cash and offer 0.1874 new Kraft shares for each share of
Cadbury, investors assumed the two had worked out a deal. On the day
it was announced, William Ackman of hedge fund Pershing Square Capital
Management appeared on CNBC and predicted the investor would support

Instead, minutes later, Buffett turned up on CNBC and called
Rosenfeld's agreement with Cadbury a "bad deal" for Kraft shareholders
and a "big mistake." His televised griping stunned observers because
it was so uncharacteristic. "You would think he would have been happy—
she did what he wanted," says a major shareholder who asked not to be
named because he values his relationship with both CEOs. "He reversed

Buffett made it clear he thought the revised bid "destroys value." He
seemed especially irate that Kraft had sold its profitable frozen
pizza business to Nestlé (NSRGY) to raise cash for the Cadbury
acquisition (and take its rival out of the bidding for the
confectioner). He described the sale price of the pizza business as a
cheap nine times earnings (a good deal for a unit that reported
significant margin and sales growth during the recession). To avoid a
$1 billion tax bill, he argued that Rosenfeld should have spun the
unit off tax-free instead. Buffett also seemed to covet the business
himself, saying, "I wish I would have bought the pizza business at
nine times pretax earnings."

Kraft Senior Vice-President Perry Yeatman says the company respects
Buffett and expects him to see the wisdom of the deal someday. Other
defenders of Rosenfeld say Buffett's TV appearance was mainly to
distance himself from the deal because he didn't get his way. Asked
twice by CNBC whether he would sell his Kraft stock, he ducked the

Buffett, who did not respond to questions for this article, denied
there is a personal rift between him and Rosenfeld; he told CNBC that
he likes Rosenfeld, considers her straightforward, and would even have
her as a trustee of his will. James M. Kilts, who ran Kraft when it
was part of Philip Morris and was CEO of Nabisco before serving as
chief of Gillette from 2001 to 2005, is a longtime friend of both.
Kilts had no comment on the supposed rift but noted that with Buffett,
"It's always business. It's never personal." Buffett's own summation,
too, was financial, and he expressed his disappointment in the
simplest terms. "I feel poorer," he said.


Buffett's vocal treatment of Kraft is poles apart from his handling of
most companies in which Berkshire invests. Usually he is warm,
helpful, and waits to be asked for his opinion. Despite receiving $600
million from the Troubled Asset Relief Program, M&T Bank (MTB),
another Berkshire investment, remained relatively stable during the
credit crisis. Instead of leaning heavily on Buffett, CEO Robert G.
Wilmers spent much of his time the past two years sitting in Buffalo
and scooping up other distressed banks. Buffett has always had kind
things to say about M&T, partly because Wilmers makes sound
acquisitions. He mostly talks with Buffett on the phone. "Eighty or
90% of the time it's on my nickel," he says. He thinks of the investor
as a "priceless" sounding board who gives superb advice. In one
memorable instance, Wilmers turned to him while being pressured by
regulators and investment bankers to participate in the first Chrysler
bailout in 1979. Buffett's pithy advice: "Those who won't fill your
pocket will fill your ears."

This is how Buffett has typically viewed investment bankers: as
useless, self-serving windbags, which is why he doesn't waste time
befriending them. His one early effort to profit from investing in
Wall Street came to tears when he put $700 million of Berkshire's
money into Salomon Brothers in 1987. Buffett was a passive board
member until he had to personally rescue Salomon after one of its
traders defrauded the government in treasury bond auctions and the
firm nearly failed. Then he waged a bitter fight over severance with
ousted Salomon boss John Gutfreund. Managing an investment bank that
was teetering on the brink of bankruptcy for nine months was a
miserable experience. Buffett later said an important lesson from
Salomon was that he had mistakenly trusted the bank's management.

Given that history, investors were shocked when Buffett poured $5
billion of Berkshire's money into Goldman during the depths of the
financial crisis. Goldman is the one firm that Buffett has traded with
throughout his career, ever since Goldman banker Byron Trott, who has
since left the firm, won his trust around 2002 by finding companies
for Berkshire to buy.

As a 10-year-old in 1940, Buffett once told me, he met Goldman senior
partner Sidney J. Weinberg during a tour of the New York Stock
Exchange (NYX). ("What stock do you like, Warren?" Weinberg asked
him.) Until the financial crisis, though, Buffett had never shaken
hands with Goldman CEO Lloyd C. Blankfein. Days after the collapse of
Lehman Brothers, when it appeared that all major U.S. banks could
fail, it was Trott who approached the investor on Goldman's behalf
with a deal richer than that offered by any other company. Berkshire
paid $5 billion for 10% perpetual preferred shares of Goldman with
attached warrants at $115 at a time when the stock was trading at $125
per share, meaning the warrants were already "in the money." If
Berkshire had exercised them immediately, it would have netted $10 per
share. Buffett's reputation helped Goldman raise another $5 billion of
capital, twice as much as it originally sought.

A few days after, Buffett and Blankfein met for the first time and
shared a jovial moment at a conference. Buffett later took steps to
protect his investment, first by using his personal capital as
America's most trusted investor to publicly defend the federal bailout
of Wall Street, then—after Goldman fueled public anger by setting
aside billions for employee bonuses—by teaming with its management to
put up $500 million to assist small businesses.

Buffett, an outspoken critic of CEO greed, pays himself $100,000 a
year. He has nearly all the managers of Berkshire's wholly owned
businesses set their own pay, and in light of his tiny compensation,
they usually err on the low side, too. When it comes to the companies
in which Berkshire invests, though, he takes a broader view. Wells
Fargo's Kovacevich reaped tens of million from stock options but
opposed reporting them as company expenses. Buffett was a vocal
advocate of expensing them, but that didn't hurt their relationship in
the least.

On the same day that Buffett pummeled Rosenfeld on CNBC, he praised
Blankfein to Bloomberg News. "I don't think anybody could have done a
better job at Goldman Sachs than Lloyd Blankfein," he said. "I give
him enormous credit for how he's run Goldman. You've got to expect
vilification of banks." Rosenfeld made Buffett feel poorer. Blankfein
is making him noticeably richer.


Buffett is fascinated with executives who display unusual mastery at
operating a profitable business. He appreciates the nuances of the
craft the way an art patron enjoys watching a sculptor at work. Wells
Fargo's Kovacevich is one of his favorite CEO artisans, yet Kovacevich
calls Buffett "more hands-off than any investor." He says the two have
had, at most, 20 conversations in 10 years, even though the bank is
one of Berkshire's most important investments. Kovacevich was CEO of
Norwest bank when it acquired Wells Fargo in 1998, and at the time
Buffett insisted that Kovacevich not tell him anything that would make
him an insider, because that would preclude Berkshire from buying or
selling the stock.

When Buffett met Jim Kilts in 2001, he told Fortune that Kilts—who had
turned around Nabisco—"made as much sense in terms of talking about
business in general as anybody I've ever talked to." Kilts came out of
retirement that year to rescue Gillette, doing so partly because he
wanted to work with Buffett, since Berkshire owned 9% of the company.
The Omaha investor's fondness for him grew rapidly as Gillette's
performance rebounded.

At the time, Gillette was suffering from the multibillion-dollar
blunder of overpaying for battery maker Duracell. It had also promised
investors unrealistic 15% to 20% annual earnings growth, and was
channel-stuffing product to its distributors to meet projections. To
Buffett's applause, Kilts dropped the practice of issuing earnings
guidance entirely. He cut thousands of jobs, closed plants, paid off
debt, and shifted resources into new products and advertising.

Even so, Kilts says he tried not to bother Buffett. "It would be so
easy to misuse the fact that he was available," Kilts says, "because
he would be obligated to talk to me if I picked up the phone."
Buffett, he says, was a quiescent board member, but when he did speak
"he had such power and weight and clarity that it was memorable." At
one board meeting, Kilts proposed increasing directors' pay. Two other
directors spoke passionately against the move. Buffett quickly shut
down the discussion while saving face for the dissenters by saying,
"Well, I'll just take your increase, then."

After the Gillette turnaround, Buffett paid what Kilts considered the
ultimate compliment by withdrawing entirely; he resigned from the
board. "If you've got the right person running the business," he said
at the time, "you don't need me."


Few companies need Buffett more than Moody's (MCO), the troubled
credit-rating agency. Moody's and its peers have been blamed as
enablers of the financial crisis because they inflated the credit
ratings of dubious mortgage-backed securities. In March 2009,
Berkshire owned more than 20% of Moody's. Why, several former ratings
analysts ask, didn't the investor light a fire under the board to
tighten the company's standards, or speak out? Surely he was as
obliged to denounce flawed ratings that endangered the global
financial system as he was to offer an opinion of how much Kraft paid
for Cadbury.

A former Moody's employee with intimate knowledge of the executive
suite there describes Buffett as "not a very engaged investor." (Like
most Moody's sources, he asked not to be identified in light of
ongoing investigations into the company.) Another insider confirms
that senior management of Moody's, including CEO Raymond W. McDaniel
Jr., "doesn't have regular conversations with" Buffett nor does it
"seek advice from him on corporate governance or business strategy."
Moody's declined to comment.

Moody's and Buffett had reason to keep their distance; it's a conflict
of interest for the agency to rate a major investor such as Berkshire.
Analysts who review a company are supposed to be free of thoughts of
what a downgrade might mean to their personal net worth. Moody's
discloses the Berkshire conflict in a Securities & Exchange Commission

Even so, one former Moody's analyst describes e-mailing Buffett in
2007 to warn that rating securitized products was a ticking time bomb,
and to ask whether he wanted more information. His e-mailed response,
says this analyst, said he was a passive investor with a hands-off
approach to Moody's. Buffett didn't respond to requests for comment
about the e-mail.

It is impossible to quantify the cost of Buffett's disengagement from
the rating agency under these unusual circumstances. Moody's stock has
since declined more than 50% and investors in asset-backed securities
have lost billions. The agency downgraded Berkshire's top AAA rating
by one notch in April 2009; Buffett began to sell in July 2009 and has
since disposed of about one-third of Berkshire's holdings.


If Moody's is an illustration of what it means to have Buffett's money
but not his engagement, Coca-Cola (KO) is a portrait of the investor
exploring virtually every kind of relationship with management. For
years, Buffett admired Coca-Cola's revered CEO, Roberto Goizueta, and
never meddled; Goizueta did not want advice. When the beverage giant
began to falter after Goizueta's unexpected death from cancer in 1997,
Buffett helped force the early departure in 1998 of Goizueta's
successor, M. Douglas Ivester. That year, Coca-Cola stock was at a
peak and Berkshire's stake was worth $17 billion. For the next few
years, the company meandered further off course, and as it did,
Buffett became increasingly involved in trying to set things right. In
2000, Ivester's successor, Douglas N. Daft, proposed buying Quaker
Oats for its Gatorade brand. Buffett quashed the idea at a special
board meeting, using a trademark one-liner: "We would have given up 2
billion cases a year of Coca-Cola to get something like 400 million
cases a year of Gatorade." PepsiCo (PEP) subsequently bought Quaker
Oats in a deal that is widely regarded as successful, and the wisdom
of Coca-Cola in passing up the opportunity has been debated far and
wide. What is not debated is Buffett's influence.

Buffett became deeply disturbed by Coca-Cola's chaotic culture and
poor earnings, but few people knew how upset he was because he said
little in public. Daft retired in February 2003, citing health
reasons. Buffett became directly involved in the CEO search. He tried
to charm Kilts into taking the job. When Kilts said no, he tried to
recruit former General Electric (GE) CEO Jack Welch. Eventually,
Buffett signed off on bringing former Coca-Cola executive E. Neville
Isdell out of retirement to stabilize the company. When Isdell
retired, he was succeeded by Muhtar Kent, who has offset declines in
domestic sales with growth in emerging markets. As Coke's fortunes
improved, Buffett's relationship with its CEOs grew more cordial. He
withdrew from his activist role, resigning from the board in 2006.
Berkshire still owns 200 million shares and 8.6% of Coca-Cola, a stake
now worth $11 billion.


In April 2008, Buffett took a hamburger- and jellybean-fueled trip on
a vintage railcar from Kansas City, Mo., to Chicago with Matthew K.
Rose, CEO of Burlington Northern Santa Fe (BNI). They used the 430-
mile journey to talk over Rose's plans to move the railroad's recent
turnaround into high gear. Rose showed his guest Burlington's Chicago
intermodal freight yard, which handles containers that move among
ships, trains, and trucks without being unloaded. Buffett eventually
increased Berkshire's ownership of Burlington to 22%.

In 2009, Rose agreed to sell the rest of the railroad to Berkshire for
$26 billion, giving Buffett what he calls his "choo-choo." Buffett
described this as an "all-in wager on the economic future of the U.S."
He's betting that rail traffic will grow, and imports from Asia will
continue to dominate as the economy mends. Burlington is the nation's
biggest coal hauler—coal transport represents more than a fifth of its
revenues—so he's assuming the world will keep using coal even if the
U.S. switches to cleaner energy sources. Lastly, Burlington could be a
big winner if railroad rights-of-way become power corridors to conduct
energy from wind farms.

Buffett always likes a sweetener, and Burlington gives him one in the
form of information. He learns about wallboard demand from USG and
consumer-credit trends from American Express, but Rose has called the
railroad a kaleidoscope of the economy. Rail traffic patterns are a
window on commodity, wholesale, consumer, and international trade
flows. Buffett is adding this kaleidoscope to what his other CEOs tell
him about the "reset of the consumer" to a lower level of spending.
They feed him data from Berkshire's portfolio of companies—sales of
building materials, jewelry, furniture, real estate, credit,
fractional jets, vacuum cleaners, fabricated steel, newspaper ad
lineage, and other products and services. He may now command as much
information about the state of the U.S. economy as anyone, including
the Federal Reserve—and probably gets his faster.

This should go a long way toward maintaining Rose's relationship with
his new boss. What else can he expect now that he works for Buffett?
He can call whenever he wants and get the best advice in corporate
America, and Buffett will put on events to boost his employees'
morale. In return, Rose, who declined comment, needs to make money for
Buffett. If he does, he will be celebrated at Berkshire's annual
meeting in Omaha—where Buffett sells all of his products to the 35,000
investors who come for the show—and cheered in Berkshire's shareholder
letter, Buffett's annual report card on his managers, in which he
praises loudly or faintly, or punishes with silence.

There is only one way for a company that's wholly owned by Berkshire
to make money for Buffett—by earning it. Berkshire can't offer high-
priced deals like USG's and Goldman's to its own businesses when
something goes wrong because the proceeds would come straight out of
its vault. So Rose's No. 1 job is to keep Burlington out of trouble.

Buffett is betting that Rose can do it. He bought Burlington partly
out of confidence in the executive. If all goes right, their dealings
will be long, friendly, and mutually profitable. As former Gillette
CEO Kilts says, "We had a warm, close, personal relationship, but at
the end of the day, I knew it was business."

For more about the unique way Warren Buffett interacts with CEOs of
companies he invests in, check out our Behind The Cover Story podcast
with Buffett biographer Alice Schroeder at http://www.businessweek.com/go/10/buffett

Schroeder is a reporter for Bloomberg News.


Varun Arora

Feb 26, 2010 6:30 AM GMT
Excellent story, and yet another example of why professional media
cannot be swept aside by UGC / blogs. On a separate note, what would
be truly awesome is if Mr Buffett would decide to spend some time each
month with a collection of startups such as ourselves, helping shape
the "engines of tomorrow". What say, Mr Buffett? :-) - Varun Arora
Founder, HomeCamera www.homecamera.com


Cover Story February 25, 2010, 5:00PM EST

What I Learned from My Dad

When his youngest son decided to become a musician, Buffett offered
moral but not financial support By Peter Buffett

March 8, 2010

Hold For Mr. Buffett Please

One of my father's often-quoted tenets is that a parent, if he has the
means to do so, should give his children "enough to do anything, but
not enough to do nothing." A head start is fine; a free pass is often
a crippling disservice. When I turned 19, I received my inheritance—
proceeds from the sale of a farm, which my father converted into
Berkshire Hathaway (BRK.A) stock. At the time I received them, the
shares were worth roughly $90,000. It was understood that I should
expect nothing more.

So—what to do with the money? I was a student at Stanford University;
there were no strings attached. Fortunately, I'd had the advantage of
seeing my older siblings burn through most of their cash; I didn't
want to follow down that path. At the other extreme, I might have done
absolutely nothing with that stock—just left it in an account and
forgotten about it. If I'd picked that option, my shares would now be
worth around $72 million. But I didn't make that choice, and I don't
regret it for a second. People think I'm either lying or crazy when I
say this, but it happens to be true, because I used my nest egg to buy
something more valuable than money: I used it to buy time.

My inheritance came to me around the time I was finally committing to
the pursuit of a career in music. As a pragmatic Midwesterner with a
very limited nest egg, I knew that I would have to find a way to turn
my creative impulses into a livelihood. But how did one do that? How
would I find an audience, or clients, or a way to sell what I'd
written and produced? I didn't have a clue, but it was becoming clear
to me that I wasn't going to figure it out by staying in a

I decided to leave Stanford and use my inheritance to buy the time it
would take to figure out if I could make a go of it in music.

With help from my father, I worked out a budget that would allow me to
conserve my capital as long as possible. I moved to San Francisco,
where I lived very frugally—small apartment, funky car. My sole
extravagance was in expanding my recording equipment. I played the
piano, wrote tunes, experimented with electronic sounds. Then I put a
classified ad in the San Francisco Chronicle, offering to record all
comers in my studio.

And I waited until a very important bit of good luck tracked me down
one day in 1981, as I stood at a San Francisco curbside washing my
crummy old car. A neighbor with whom I'd had nothing more than a
nodding acquaintance happened by and asked what I did for a living.
When I told him I was a struggling composer, he suggested I get in
touch with his son-in-law, an animator who was always in need of
music. I followed up, and the son-in-law did have work for me. He'd
been commissioned to create 10-second "intersticials"—quick ads meant
to flash a logo and establish a brand ID for a newly conceived cable

I took the work. And the cable channel more than launched; it rocketed
to the moon. It was called MTV. Soon many TV outlets wanted to look
and sound like MTV. I no longer had to take on unpaid work.

My inheritance was relatively modest, but it was more than most young
people receive to get a start in life. Having that money was a
privilege, a gift I had not earned. If I'd faced the necessity of
making a living from day one, I would not have been able to follow the
path I chose.

Would my father have helped me get started if I'd chosen a career on
Wall Street? I'm sure he would have. Would he have given me a job at
Berkshire Hathaway if I'd asked for one? I suppose so. But in either
of those cases, the onus would have been on me to demonstrate that I
felt a true vocation for those fields, rather than simply taking the
course of least resistance. My father would not have served as an
enabler of my taking the easy way out. That would not have been an
exercise of privilege, but of diminishment.

Adapted from Life Is What You Make It by Peter Buffett, © 2010 Peter
Buffett. Reprinted by permission of Harmony Books, an imprint of the
Crown Publishing Group.


...and I am Sid Harth
2010-02-26 14:44:13 UTC
Simon Johnson
MIT Professor and co-author of 13 Bankers

Posted: February 25, 2010 09:47 AM BIO Become a Fan Get Email Alerts
Bloggers' Index

Should We Fear China?

This post is taken from testimony submitted to U.S.-China Economic &
Security Review Commission hearing on "US Debt to China: Implications
and Repercussions" -- Panel I: China's Lending Activities and the US
Debt, Thursday, February 25, 2010. (Caution: this is a long post,
around 1500 words; a summary of some key points will appear on the
NYT's Economix this morning.)

China is the largest holder of official foreign currency reserves in
the world, currently estimated to be worth around $2.4 trillion -- an
increase of nearly $500 billion in the course of 2009 (on the back of
a current account surplus of just under $300 billion, i.e., 5.8
percent of China's GDP, and a capital account surplus of around $100
billion). These reserves are accumulated through arguably the largest
ever sustained intervention in a foreign exchange market -- i.e.,
through The People's Bank of China buying dollars and selling
renminbi, and thus keeping the renminbi-dollar exchange rate more
depreciated than it would be otherwise.

China is also currently the second largest holder of US Treasury
Securities -- at the end of December 2009, it held $755.4 billion --
just behind Japan (which had $768.8 billion).

The US Treasury data almost certainly understate Chinese holdings of
our government debt because they do not reveal the ultimate country of
ownership when instruments are held through an intermediary in another

For example, UK holdings of US debt rose during 2009 from $130.9
billion to over $300 billion, despite the fact that the UK ran a
substantial current account deficit last year. A great deal of this
increase may be due to China placing off-shore dollars in London-based
banks (Chinese, UK, or even US), which then buy US securities. China
may also purchase US securities through other routes.

China is presumed by most observers to hold the majority of its
incremental reserve accumulation in US Treasuries -- this makes sense
given that the other potential reserve currencies (euro, yen, and
pound) all have serious issues - but according to the official US
data, Chinese holdings peaked at $801.5 billion in May 2009 and fell
by about $50 billion during the remainder of the year. A modest fall
in true Chinese Treasury holdings -- given slower reserve accumulation
in December and the likely desire to diversify -- is not completely
implausible. But there are no indications that China is moving out of
Treasuries in any large scale manner.

While the exact amount is not knowable based on publicly available
information, a reasonable working assumption would be that China owns
close to $1 trillion of US Treasury securities, i.e., perhaps half of
the stock of treasuries in the hands of "foreign official" owners,
which was $2.374 trillion (at the end of 2009, with the important
caveat that other governments may also hold Treasuries through
circuitous routes) and just under 1/7 of all US government securities
outstanding ($7.27 trillion, of which $3.614 trillion was held by all
foreign owners, official and private, at the end of 2009).

There is a perception that China's large dollar holdings confer upon
that country some economic or political power vis-à-vis the United
States and, in particular, that Chinese reserves prevent us from
putting pressure on that country's authorities to revalue (i.e.,
appreciate) the renminbi. This view is incorrect and completely
misunderstands the situation.

It is in the interests of both the United States and global economic
prosperity that China discontinues its massive intervention in the
market for renminbi. This intervention is a breach of China's
international commitments (as a member of the International Monetary
Fund) and constitutes a form of unfair trade practice.

If China were to end its intervention, the renminbi would appreciate
substantially - likely in the region of 20-40 percent. China would
also stop accumulating dollars (and other foreign assets).

The primary effect would therefore be an effective depreciation of the
US dollar against the Chinese renminbi -- and against all other
countries' currencies that are implicitly pegged to the renminbi (more
precisely, to the dollar rate with an eye on China's competitiveness).
On a trade-weighted basis -- and in real effective terms (despite the
fact that the currencies of our other major trading partners float
freely) -- the dollar would also likely fall in value.

Such a movement in the dollar would help expand our exports and
improve our ability to compete against imports; this would aid in the
process of recovery, job creation, and broader adjustment in the US
economy. Even a substantial movement in the dollar -- e.g., a 20
percent depreciation in real effective terms, which is most unlikely
-- would have no noticeable effect on inflation and therefore would
not force the Federal Reserve to increase interest rates. The "hard
landing" scenario for the dollar -- feared by analysts since the
traumatic experiences of the 1970s -- is unlikely for the US today,
given the low level of inflation expectations and the high "output
gap" (reflected in measured unemployment near 10 percent and true
unemployment of at least 15 percent).

The effect on short-term US interest rates would therefore likely be
minimal or nonexistent, particularly as the Federal Reserve currently
aims to keep rates close to zero. The effect on longer-term US
interest rates would also be small -- and could be offset by the
Federal Reserve, as it currently seeks to limit all benchmark interest
rates (most recently affirmed by Chairman Bernanke this week).

In fact, the current stance of monetary policy -- and the low, stable
level of inflation expectations in the United States -- makes this an
ideal moment at which to press China to revalue its currency.

In another potential scenario, there is concern that China would
threaten to reduce its purchases of US government securities without
allowing its currency to appreciate. But if China continues to
intervene to maintain its currency peg, it will accumulate foreign
reserves -- so they need to hold increasing amounts of foreign assets
of some kind. What else would the Chinese authorities buy?

If they buy other dollar denominated assets issued by US entities,
this would push down spreads on those assets relative to Treasuries.
This would directly help private US borrowers - thus stimulating
growth in the US.
If they directly buy dollar denominated assets issued by non-US
entities, this will still reduce spreads more broadly and help US
borrowers -- as there is a global market for dollar assets and there
is not much high grade non-US dollar debt available for sale.
If they buy dollar equities -- which is most unlikely -- this would
help the stock market, household balance sheets, and firms' access to
funding (as well as helping to shift our economy from debt to more
equity financing, which would a desirable move in any case.)
If they buy non-dollar assets, given that the Fed will keep interest
rates near to zero, this will push down the value of the US dollar and
help boost US growth. Such a move would produce protests from the
eurozone and Japan, but this change in currency value would be solely
China's responsibility.
If China stops buy foreign assets altogether, this would of course be
equivalent to ending foreign exchange intervention. This is exactly
the policy change that we should be seeking.

In addition, there are significant potential losses -- in terms of net
foreign assets -- for China if their authorities sell Treasuries or
otherwise undermine the value of the dollar (or intentionally roil
markets) with negative comments. A depreciation of the dollar directly
reduces the value of their foreign holdings and does not, under
current circumstances, pose any kind of threat to the US.

There is still an open question of how best to push China to revalue
the renminbi.

Bilateral negotiations, as championed for example by former Treasury
Secretary Paulson, have achieved essentially nothing since 2002. This
is not a promising way forward.
The International Monetary Fund (IMF) has proved itself incapable of
calling China to account. The IMF's much vaunted "Surveillance
Decision" is a failure and the general Fund mandate of "multilateral
surveillance" has (again) proved to be a paper tiger. Working with the
IMF on this issue is not worth any additional effort by the US
China is obviously a currency manipulator and should be so labeled by
the US Treasury in its next report to Congress. China's threat to
react by selling Treasuries is - as explained above - at worst a bluff
and at best a way to help the US with a depreciation of the dollar.
This bluff should be called.
This, of course, raises the issue of what the US should do beyond
applying labels. Bilateral trade sanctions are never a good idea and
can easily get out of hand. Given the failure of the existing
multilateral mechanisms around the IMF, the US should take up this
issue at the level of the G20 - there are two summits of leaders this
year and plenty of support around the world for addressing China's
exchange rate.

The most plausible proposal is to expand the mandate of the World
Trade Organization - which should operate in this respect without the
involvement of the IMF - in assessing exchange manipulation on the
same basis as it deals with unfair trade practices (as proposed by
Mattoo and Subramanian). While full implementation for such a
rearrangement of responsibilities would take some years, concrete
moves in this direction would concentrate the minds of the Chinese
authorities in a potentially constructive manner.


The remainder of this testimony deals with our broader economic
baseline. Exchanges with Joe Gagnon were most helpful in preparing all
this material.

Cross-posted from The Baseline Scenario.



PRECIOUS-Gold ticks higher after 1 pct rise; eyes U.S. data
Fri Feb 26, 2010 2:02am EST

Stocks SPDR Gold Trust: SPDR Gold Shares
GLD$108.31+0.95+0.88%12:00am EST

* Gold ticks up as euro holds gains, awaits U.S. data * Oil bounces
higher, ETF holdings unchanged

(Adds quotes) By Lewa Pardomuan SINGAPORE, Feb 26 (Reuters) - Gold
ticked higher on Friday

as the euro extended gains against the dollar and oil prices
rebounded, but investors were cautious ahead of potentially
market-moving U.S. economic data. Gold regained the psychological
$1,100 level on Thursday on
bargain hunting and an unverified report that China would buy
IMF gold. But the author of the report later told Reuters she
did not have official sources for her story. [ID:nTOE61P03N] Gold XAU=
hit an intraday high of $1,109.75 an ounce and
was at $1,108.95 by 0631 GMT, up $4.25 from New York's notional
close on Thursday -- still below a 1-month high of around
$1,130 hit on Monday but about 6 percent above a 3-month low
struck in early February. "Gold has moved higher but only what you'd
expect with
movements in euro-dollar. I don't believe it makes sense for
China to make such a big public purchase of the remaining
gold," said David Barclay, commodity strategist at Standard
Chartered in Hong Kong. "You can see the impact when India bought,
prices went on
to rally substantially after that. China has added sensitivity
over the fact that it's got such large dollar holdings." Rough &
Polished, a Moscow-based industry website, reported
China had "confirmed its decision to acquire 191.3 tonnes of
gold auctioned by the International Monetary Fund". Contacted by
Reuters, the author of the article, Nadezhda
Shagrova, who works as a tour guide and journalist in Shanghai,
said she did not have any official information to back up her
story. "The source for the story? Well, that's been written about
in lots of places. I mean, Xinhua news agency wrote about that
and other official Chinese sources, lots of them. Why are you
asking?" The IMF has said it would soon begin sales of 191.3 tonnes
of gold to raise cash for lending programmes -- nearly four
months after India purchased 200 tonnes of gold. Traders have
speculated Asian central banks would be likely buyers.
[ID:nSGE61H00R] China, with about $1.6 trillion in reserves, is a
of gold and unlikely to buy the IMF supplies, the official
China Daily reported on Wednesday. [ID:nTOE61N01L] The euro EUR= edged
up to $1.3594, although dealers said
sentiment on the single currency is negative because of debt
problems in the euro zone. [USD/] Investors turn their attention to
U.S. economic reports on
fourth-quarter gross domestic product, consumer sentiment for
February and existing home sales for January, which could set
the tone for the dollar. U.S. data of late has been on the softer
side. On Thursday,
it showed core durable goods unexpectedly fell in January,
while applications for jobless benefits rose again last week,
putting pressure on the dollar. [ID:nN2597849] Spot trading was muted
in Asia, with dealers discounting
talk about China's purchase of the IMF gold. "When you talk about the
Chinese, they will buy spot gold
at the lower end, although I don't really see any fixed
pattern," said a trader in Singapore, who deals with trading
houses and banks in China. "The euro has rebounded a bit, so that
could be the reason
why gold is up now. But even if price goes up, it's still not
out of the range yet," said the dealer, referring to $1,100 to
$1,130 an ounce. U.S. gold futures for April delivery GCJO barely
at $1,108.9 an ounce, having settled 1 percent higher on
Thursday. The world's largest gold-backed exchange-traded fund, SPDR
Gold Trust (GLD), said its holdings stood at 1,106.987 tonnes
as of Feb. 25, unchanged from the previous business day.
[GOL/SPDR] Oil prices rebounded above $78 a barrel on Friday after
sliding more than 2 percent the day before, lifted by a weaker
dollar, but worries over the U.S. economy weighed on the
market. [O/R]
Precious metals prices at 0631 GMT
Metal Last Change Pct chg YTD pct chg
Spot Gold 1108.95 4.25 +0.38 1.21
Spot Silver 16.18 0.14 +0.87 -3.86
Spot Platinum 1531.75 2.75 +0.18 4.41
Spot Palladium 424.25 4.25 +1.01 4.62
TOCOM Gold 3198.00 48.00 +1.52 -1.87
TOCOM Platinum 4405.00 81.00 +1.87 0.55
TOCOM Silver 47.20 1.10 +2.39 -8.70
TOCOM Palladium 1216.00 18.00 +1.50 4.38
Euro/Dollar 1.3586
Dollar/Yen 89.34
(Additional reporting by Tom Miles and Zhou Xin; Editing by
Himani Sarkar)


Sino-American Economic Power: A Mexican Standoff
Posted by Jacob Stokes

Former IMF chief economist Simon Johnson over at Baseline Scenario has
an important post that squashes the notion, which has become
conventional wisdom, that China’s reserves of US debt take away
American leverage in US-China relations.

“There is a perception that China’s large dollar holdings confer upon
that country some economic or political power vis-à-vis the United
States and, in particular, that Chinese reserves prevent us from
putting pressure on that country’s authorities to revalue (i.e.,
appreciate) the renminbi. This view is incorrect and completely
misunderstands the situation.”
Johnson goes on to explain how the US-China debt relationship—much
pointed at as an example of waning US power—is a two-way street. In
other words, while America needs anxious buyers like China to purchase
its debt in order to do things like fund the war in Afghanistan, China
needs debt to buy. That’s because China must stock up on assets in
foreign currencies to keep its currency value low so that its export-
driven economy can thrive. This purposeful manipulation is of course
bad for the American economy, particularly the ailing US manufacturing

But what options or leverage do we have? America needs to the money.

Well yes, but China also has an export-driven economy that requires a
cheap currency to thrive. In other words, in order to maintain its low
currency value China needs us to issue debt as much as we need them to
buy it. Even if China decides to change its mind and invest somewhere
else, any option other than buying US debt, from purchasing US stock
to buying foreign currencies, would help stimulate the US economy in
other ways. Which would be a good thing. (Johnson explains this in
more detail.)

And if China decides to start plowing money into its domestic economy,
it will force China to push up the value of its currency or have its
economy overheat. This will make American exports relatively cheaper
and more competitive. Johnson says in fact that this is the policy we
should be aiming for.

The bottom line on this rather wonky subject is that the Sino-American
relationship is not one where China is holding a debt gun to America’s
head, forcing an emasculated America to do China’s bidding. It’s more
like a Mexican standoff: only by slowing lowering our guns—or, in this
case, rebalancing our trade and monetary postures—can we both resolve
the situation in a way that benefits both parties.

In order to do this, America should do all it can to put pressure on
China to slowly but steadily let its currency appreciate so that
American exports can be more competitive. It should also reduce it
foreign currency reserves and push its citizens to consume more. The
renewed vigor in the US economy created by this rebalancing would help
erase the need to sell our debt in the first place—making a measured,
incremental rebalancing good for everyone.

February 25, 2010 at 05:59 PM | Permalink


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Will China Dump U.S. Debt?
Posted by Michael Schuman Friday, February 26, 2010 at 12:34 am

One of the big worries Americans have about China's rising economic
power concerns its immense holdings of U.S. government debt. The fear
is that Chinese actions regarding these holdings could end up
destabilizing the U.S. economy, or that they could be used as a
political tool to influence American policy. If China, let's say, got
angry at Washington over its support for Taiwan or the Dalai Lama,
Beijing could retaliate by dumping U.S. Treasury bills. Or perhaps
China would sell Treasuries as part of a no-confidence vote on the
future of the U.S. economy. By selling American debt, China would
weaken the value of the dollar, damage investor sentiment towards the
U.S. economy and make it harder for Washington to finance its giant
budget deficits.

Very scary stuff indeed. But how realistic is such a scenario? Will
China ever really dump U.S. debt? That's the ultimate question. It's
especially relevant to ask right now since Chinese purchases of U.S.
government debt have been tapering off. In December, China was
actually a net seller of U.S. Treasuries, reducing its holdings by $34
billion to a total of $755 billion. That decline dropped China to
second place on the list of the largest foreign owners of U.S.
sovereign debt. (Japan reclaimed the No.1 spot.)

What does that sell-off mean? No one really knows. The problem with
analyzing Chinese attitudes towards its dollar holdings is that the
necessary data isn't available. The government doesn't break down the
country's reserves by type of currency. That leaves us guessing about
what Beijing might be up to. China could simply be making a
financially sound decision to shift out of low-yielding U.S.
Treasuries into some other dollar-denominated investments with a
better return. If that's the case, the impact on the U.S dollar would
be nil. Or China could be diversifying into other currencies, perhaps
in a very minor way. Jing Ulrich, chairman of China equities &
commodities at JPMorgan in Hong Kong, speculated in a recent report

China could be more actively diversifying its currency reserves away
from U.S. Treasuries, and we expect the country might be marginally
shifting some exposure to other currencies.

The conventional wisdom is that China would never just dump U.S.
Treasury bills since it would end up boomeranging right back on
Beijing. By selling off U.S. debt, China would depress the value of
its own national wealth and undermine its most important trading
partner. But Eswar Prasad, a very smart economist at Cornell
University and a senior fellow at the Brookings Institution, submitted
some very interesting testimony to the U.S.-China Economic and
Security Review Commission on Feb. 25 regarding the implications of
China's U.S. debt holdings. You can read his entire statement here,
but here are a few crucial takeaways. Prasad believes a Chinese threat
to dump Treasuries carries some weight, since the costs of doing so
aren't as large as many analysts believe. Here's what he says:

Many analysts argue that any threat by China to shift a large portion
of its reserves out of U.S. government paper is just bluster as such a
move would impose huge costs on China itself. But these costs tend to
get overstated in popular discussions of the matter…Any Chinese threat
to move aggressively out of Treasuries is a reasonably credible threat
as the short-term costs to the Chinese of such an action are not
likely to be large.

Prasad also addresses the key question: How important is China to U.S.
deficit financing anyway? China's share of total outstanding U.S.
government debt (held by the public) is now at 10%, he notes. Even if
you estimate, as some analysts do, that China's holdings might be
higher than the reported U.S. data suggests, Prasad says China has “a
significant but not overwhelming share.”

Still, that doesn't mean China's decisions regarding its U.S. debt
purchases wouldn't have a meaningful impact. Prasad says:

But can China make a big difference to U.S. interest rates given that
its share of the financing of the U.S. budget deficit has fallen over
time? The answer lies not in the absolute amounts of financing that
China brings to the table, but in how its actions could serve as a
trigger around which nervous market sentiments could coalesce. Given
that there are no clear prospects of reining in exploding deficits and
debt in the U.S., especially if one factors in rising health care and
entitlement costs, changes in availability of deficit financing at the
margin can have potentially large consequences.

But Prasad also adds a word of caution, noting that there are real
financial constraints on China that limit its flexibility on U.S. debt

The reality is that, so long as China continues to accumulate reserves
at a pace of around $400 billion a year, there are few relatively safe
investments other than U.S. government bond markets that are deep and
liquid enough to absorb a significant portion of such massive inflows.

My own view is that China would lose more than it would gain by any
dramatic shift out of U.S. Treasuries. At least at this moment. But as
China continues to strive for ways to diversify its currency reserves
and investment holdings, combined with its (slow-moving) efforts to
internationalize its own currency (the yuan), the risk that would come
with a decision to dump Treasuries looks likely to decrease over time.


The Curious Capitalist Favorite Links

Adam Lashinsky http://features.blogs.fortune.cnn.com/category/go-west/
Barry Ritholtz http://www.ritholtz.com/blog/
Brad DeLong http://delong.typepad.com/
Calculated Risk http://www.calculatedriskblog.com/
Econbrowser http://www.econbrowser.com/
Econlog http://econlog.econlib.org/
Epicurean Dealmaker http://epicureandealmaker.blogspot.com/
Ezra Klein http://voices.washingtonpost.com/ezra-klein/
Felix Salmon http://blogs.reuters.com/felix-salmon/
Floyd Norris http://norris.blogs.nytimes.com/
Greg Mankiw http://gregmankiw.blogspot.com/
Growthology http://www.growthology.org/
James Pethokoukis http://blogs.reuters.com/great-debate/author/jamespethokoukis/
John Gapper http://blogs.ft.com/gapperblog/
Justin Fox http://blogs.hbr.org/fox/
Marginal Revolution http://www.marginalrevolution.com/
Mark Thoma http://economistsview.typepad.com/
Matt McAlister http://www.mattmcalister.com/blog/
Megan McArdle http://www.theatlantic.com/megan-mcardle
Michael Mandel http://www.businessweek.com/the_thread/economicsunbound/
Mike Moffatt http://economics.about.com/
Nicholas Carr http://www.roughtype.com/
Paul Kedrosky http://paul.kedrosky.com/
Paul Krugman http://krugman.blogs.nytimes.com/
Philip Coggan http://www.economist.com/blogs/buttonwood/
Planet Money http://www.npr.org/blogs/money/
Roger Parloff http://features.blogs.fortune.cnn.com/category/legal-pad/
Ryan Avent http://www.ryanavent.com/blog/
The Stash http://www.tnr.com/blogs/jonathan-chait

Read more: http://curiouscapitalist.blogs.time.com/2010/02/26/will-china-dump-u-s-debt/#ixzz0geOedJMu


Thursday, February 25, 2010

"Nascent" Recovery or "Nascent" Economic Collapse?

Fed Chairman Ben Bernanke is one of the best contrarian indicators one
could possibly find. Yesterday, Bernanke told the House Financial
Services Committee that the U.S. economy is in a “nascent” recovery.

Given his historical track record of complete failure on matters like
housing, the recession, and jobs, his yapping about the “nascent”
recovery suggests the very best we can expect is for the recovery to
stall, and more likely enter a double dip recession if not completely