The Transformation of Economic Systems

Preindustrial Societies: The Birth of Inequality

Pre-industrial typically have predominantly agricultural economies and limited production, division of labor, and class variation.

Learning Objectives

Discuss the different types of societies and economies that existed during the pre-Industrial age

Key Takeaways

Key Points

  • A hunter-gatherer society is one in which most or all food is obtained from wild plants and animals, in contrast to an agricultural society that relies mainly on domesticated species.
  • Feudalism was a set of legal and military customs in medieval Europe that flourished between the ninth and fifteenth centuries, and, broadly defined, was a system for structuring society around relationships derived from the holding of land in exchange for service or labor.
  • Manorialism, an essential element of feudal society, was the organizing principle of rural economy that originated in the villa system of the Late Roman Empire.

Key Terms

  • pre-industrial society: Pre-industrial society refers to specific social attributes and forms of political and cultural organization that were prevalent before the advent of the Industrial Revolution. It is followed by the industrial society.
  • manorialism: A political, economic, and social system in medieval and early modern Europe; originally a form of serfdom but later a looser system in which land was administered via the local manor.
  • feudalism: A social system that is based on personal ownership of resources and personal fealty between a suzerain (lord) and a vassal (subject). Defining characteristics of feudalism are direct ownership of resources, personal loyalty, and a hierarchical social structure reinforced by religion.

Pre-industrial societies are societies that existed before the Industrial Revolution, which took place in the eighteenth and nineteenth centuries. Some remote societies today may share characteristics with these historical societies, and may, therefore, also be referred to as pre-industrial. In general, pre-industrial societies share certain social attributes and forms of political and cultural organization, including limited production, a predominantly agricultural economy, limited division of labor, limited variation of social class, and parochialism at large. While pre-industrial societies share these characteristics in common, they may otherwise take on very different forms. Two specific forms of pre-industrial society are hunter-gatherer societies and feudal societies.

A hunter-gatherer society is one in which most or all food is obtained by gathering wild plants and hunting wild animals, in contrast to agricultural societies which rely mainly on domesticated species. Hunter-gatherer societies tend to be very mobile, following their food sources. They tend to have relatively non-hierarchical, egalitarian social structures, often including a high degree of gender equality. Full-time leaders, bureaucrats, or artisans are rarely supported by these societies. Hunter-gatherer group membership is often based on kinship and band (or tribe) membership. Following the invention of agriculture, hunter-gatherers in most parts of the world were displaced by farming or pastoral groups who staked out land and settled it, cultivating it or turning it into pasture for livestock. Only a few contemporary societies are classified as hunter-gatherers, and many supplement their foraging activity with farming or raising domesticated animals.

Feudalism was a set of legal and military customs in medieval Europe that flourished between the nineteenth and fifteenth centuries. Broadly speaking, feudalism structured society around relationships based on land ownership. Feudal lords were landowners; in exchange for access to land for living and farming, serfs offered lords their service or labor. This arrangement (land access in exchange for labor) is sometimes called “manorialism,” an organizing principle of rural economy that originated in the villa system of the Late Roman Empire. Manorialism was widely practiced in medieval western and parts of central Europe, until it was slowly replaced by the advent of a money-based market economy and new forms of agrarian contract.

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Feudal Manor: This painting from feudal time shows how fields surrounded the feudal manor where the noble who owned the farms lived–a good depiction of how society was oriented around the agricultural economy.

Feudal Systems: This video explains the basics of feudal societies in Europe.

Industrial Societies: The Birth of the Machine

During the Industrial Revolution (roughly 1750 to 1850) changes in technology had a profound effect on social and economic conditions.

Learning Objectives

Analyze the shift from manual to machine based labor during the First and Second Industrial Revolutions

Key Takeaways

Key Points

  • The First Industrial Revolution, which began in the 18th century, merged into the Second Industrial Revolution around 1850.
  • Great Britain provided the legal and cultural foundations that enabled entrepreneurs to pioneer the Industrial Revolution.
  • Starting in the latter part of the 18th century, there began a transition in parts of Great Britain’s previously manual labor and draft-animal-based economy towards machine-based manufacturing.
  • The introduction of steam power fuelled primarily by coal, wider utilization of water wheels, and powered machinery—mainly in textile manufacturing—underpinned the dramatic increases in production capacity.
  • The effects spread throughout Western Europe and North America during the 19th century, eventually affecting most of the world, a process that continues as industrialization today.

Key Terms

  • Industrial Revolution: The major technological, socioeconomic, and cultural change in the late 18th and early 19th century, resulting from the replacement of an economy based on manual labor to one dominated by industry and machine manufacturing.
  • steam power: Power derived from water heated into steam, usually converted to motive power by a reciprocating engine or turbine.
  • industrialization: A process of social and economic change whereby a human society is transformed from a pre-industrial to an industrial state

The Industrial Revolution was a period from 1750 to 1850 where changes in agriculture, manufacturing, mining, transportation, and technology had a profound effect on the social, economic and cultural conditions of the times. It began in the United Kingdom, and then subsequently spread throughout Western Europe, North America, Japan, and eventually the rest of the world. The Industrial Revolution marks a major turning point in history; almost every aspect of daily life was influenced in some way. Most notably, average income and population began to exhibit unprecedented sustained growth. In the two centuries following 1800, the world’s average per capita income increased more than tenfold, while the world’s population increased over sixfold.

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, while T. S. Ashton held that it occurred roughly between 1760 and 1830.

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Savery Engine: The Savery Engine, invented in 1698, was one of the first steam engines available commercially. It dramatically changed how the economic system functioned.

Great Britain provided the legal and cultural foundations that enabled entrepreneurs to pioneer the Industrial Revolution. Starting in the later part of the 18th century, there began a transition in parts of Great Britain’s previously manual labor and draft-animal-based economy toward machine-based manufacturing. It started with the mechanization of the textile industries, the development of iron-making techniques and the increased use of refined coal. Trade expansion was enabled by the introduction of canals, improved roads and railways. With the transition away from an agricultural-based economy and toward machine-based manufacturing came a great influx of population from the countryside and into the towns and cities, which swelled in population.

The introduction of steam power fuelled primarily by coal, wider utilization of water wheels, and powered machinery—mainly in textile manufacturing —underpinned the dramatic increases in production capacity. The development of all-metal machine tools in the first two decades of the 19th century facilitated the manufacturing 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 industrialization today. The impact of this change on society was enormous.

Postindustrial Societies: The Birth of the Information Age

In the “Information Age,” individuals can transfer and have instant access to information, leading to a profound economic transformation.

Learning Objectives

Examine the impact the Information Age has on the accessibility and breadth of information available to society

Key Takeaways

Key Points

  • The Information Age formed by capitalizing on the computer microminiaturization advances, with a transition spanning from the advent of the personal computer in the late 1970s to the Internet reaching a critical mass in the early 1990s.
  • Though the Internet itself has existed since 1969, it was the invention of the World Wide Web in 1989 by British scientist Tim Berners-Lee and its implementation in 1991 that allowed the Internet to truly became a global network.
  • In the latter decades of the 20th century, the industrial world has been shifting into a service economy, where an increasing number of people hold jobs as clerks in stores, office workers, teachers, nurses, etc.

Key Terms

  • service economy: Service economy refers to the increased importance of the service sector compared to the manufacturing sector. The service economy in developing countries is mostly concentrated in financial services, hospitality, retail, health, human services, information technology, and education.
  • the internet: A global system of interconnected computer networks that use the standard internet protocol suite (often called TCP/IP, although not all applications use TCP) to serve billions of users worldwide. It is a network of networks that consists of millions of private, public, academic, business, and government networks, of local to global scope, that are linked by a broad array of electronic, wireless, and optical networking technologies.
  • Information Age: The current era, characterized by the increasing importance and availability of information (especially by means of computers), as opposed to previous eras (such as the Industrial Age) in which most endeavors related to some physical, man-made process or product.

The Information Age is a concept that characterizes the current age by the ability of individuals to transfer information freely and have instant access to information that would have been difficult or impossible to access in the past. The idea is linked to the concept of a digital age or digital revolution, as most of this information is instantaneously available online. It carries with it the ramifications of a shift from an industrialized economy to an economy based on the manipulation of information, or an information society.

The Information Age formed by capitalizing on computer microminiaturization advances. The transition spans from the advent of the personal computer in the late 1970s to the Internet reaching a critical mass in the early 1990s, with the public’s adoption of the Internet in the two decades following 1990. The Information Age has allowed rapid global communications and networking to shape modern society due to the fast evolution of technology use in daily life.

Though the Internet itself has existed since 1969, it was the invention of the World Wide Web in 1989 by British scientist Tim Berners-Lee and its implementation in 1991 that allowed the Internet to truly became a global network. Today, the Internet has become the ultimate platform for accelerating the flow of information and is the fastest-growing form of media.

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Internet Usage: This graph shows the drastic increase in Internet usage, indicative of the pervasiveness of the Information Age.

Concurrently, during the 1980s and 1990s in the United States, Canada, Australia, New Zealand, and Western Europe, there was a steady trend away from people holding Industrial Age manufacturing jobs. An increasing number of people held jobs as clerks in stores, office workers, teachers, nurses, etc. Many argue that jobs traditionally associated with the middle class (assembly line workers, data processors, foremen, and supervisors) are beginning to disappear, either through outsourcing or automation. Individuals who lose their jobs must either move up, joining a group of “mind workers” (engineers, attorneys, scientists, professors, executives, journalists, consultants, etc.), or settle for low-skill, low-wage service jobs.

Capitalism in a Global Economy

Some thinkers argue that in the last few decades trends associated with globalization have increased the mobility of people and capital.

Learning Objectives

Analyze the shift in the job market and increase in international trade due to an increase in globalization

Key Takeaways

Key Points

  • The world economy generally refers to the economy based on the national economies of all of the world’s countries.
  • 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.
  • The global financial system is the financial system consisting of institutions and regulators that act on the international level, as opposed to those that act on a national or regional level.
  • Globalization refers to the increasing global relationships of culture, people, and economic activity.
  • The establishment of the WTO in 1995 led to an anti-globalization movement that was primarily concerned with the negative impact of globalization in developing countries.
  • Critiques of economic globalization typically look at both the damage to the planet as well as the human costs.

Key Terms

  • global financial system: The global financial system is the financial system consisting of institutions and regulators that act on the international level, as opposed to those that act on a national or regional level. The main players are the global institutions, such as International Monetary Fund and Bank for International Settlements, national agencies and government departments, e.g., central banks and finance ministries, private institutions acting on the global scale, e.g., banks and hedge funds, and regional institutions, e.g., the Eurozone.
  • WTO: The World Trade Organization (WTO) is an organization that intends to supervise and liberalize international trade. It officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade (GATT), which commenced in 1948. It deals with regulation of trade between participating countries and provides a framework for negotiating and formalizing trade agreements and for resolving disputes.
  • globalization: A common term for processes of international integration arising from increasing human connectivity and interchange of worldviews, products, ideas, and other cultural phenomena. In particular, advances in transportation and telecommunications infrastructure, including the rise of the Internet, represent major driving factors in globalization and precipitate the further interdependence of economic and cultural activities.

The term “world economy” refers to the economic situation of all of the world’s countries. It is common to limit discussion of world economy exclusively to human economic activity. World economy is typically judged in monetary terms, even in cases in which there is no efficient market to help valuate certain goods or services, or in cases in which a lack of independent research or government cooperation makes establishing figures difficult.

The global financial system is the financial system consisting of institutions and regulators that act on the international level, as opposed to those that act on a national or regional level. The main players are global institutions, such as International Monetary Fund, World Bank, and the Bank for International Settlements; national agencies and government departments (e.g., central banks and finance ministries); private institutions acting on the global scale (e.g., banks, hedge funds), and regional institutions such as the Eurozone.

Although international trade has always existed, some thinkers argue that a number of trends associated with globalization have caused an increase in the mobility of people and capital since the last quarter of the 20th century. Today, these trends have bolstered the argument that capitalism should now be viewed as a true world system, given that all national economies trade with capitalist states and are therefore influenced by capitalist policies.

Globalization refers to the increasing global relationships of culture, people, and economic activity. It is generally used to refer to economic globalization: the global distribution of the production of goods and services, through reduction of barriers to international trade such as tariffs, export fees, and import quotas; and the reduction of restrictions on the movement of capital and on investment. Globalization may contribute to economic growth in developed and developing countries through increased specialization and the principle of comparative advantage.

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Globalization: Singapore embraced globalization and became a highly developed country

Global Trade: Inequalities and Conflict

Global trade (exchange across international borders) has increased with better transportation and governments adopting free trade.

Learning Objectives

Analyze the impact of global trade on society and industry, ranging from mercantilism to free trade orientation

Key Takeaways

Key Points

  • While international trade has been present throughout much of history, its economic, social, and political importance has been on the rise in recent centuries as free trade has overtaken mercantilism and governments have reduced tariffs and other barriers to trade.
  • Traditionally, trade was regulated through bilateral treaties between two nations, but it is increasingly regulated by multilateral agreements and international bodies, such as the World Trade Organization.
  • Free trade is on the rise, but most countries maintain some level of protectionism in the form of subsidies or tariffs to protect industries considered essential to national security or national economies (e.g., food and steel production ).
  • Arguments against free trade criticize the assumptions of economic theories underlying it and its possible social and political effects, including inequality and cultural homogenization.
  • In the last few decades, fair trade has been proposed as an alternative to free trade.
  • Economic arguments against free trade criticize the assumptions or conclusions of economic theories.
  • Sociopolitical arguments against free trade cite social and political effects that economic arguments do not capture.
  • An alternative concept to free trade in the last decades has been become fair trade.

Key Terms

  • protectionism: A policy of protecting the domestic producers of a product by imposing tariffs, quotas, or other barriers on imports.
  • World Trade Organization: An international organization designed by its founders to supervise and liberalize international trade.
  • free trade: international trade free from government interference, especially trade free from tariffs or duties on imports

Global trade is the exchange of money, goods, and services across international borders. As transportation has improved, global trade has increased, and businesses have pressured governments to relax restrictions on trade. In most countries, global trade now accounts for many of the goods and services bought or sold, and many companies earn profits from global trade.

For centuries, governments restricted international trade based on the principles of mercantilism, which maintained that countries were all competing to maximize their stores of gold. Accordingly, governments imposed high tariffs to limit imports and promoted exports in order to sell their goods in exchange for more gold. But in the nineteenth century, especially in the United Kingdom, mercantilism gradually gave way to a belief in free trade.

Free Trade: Economist Milton Friedman explains the importance of free trade.

Following a free trade orientation, governments do not discriminate against imports by imposing tariffs or promoting exports with subsides. Since the mid-twentieth century, nations have increasingly reduced tariff barriers and currency restrictions on international trade. But even though many countries have moved toward free trade, other trade barriers remain in place: import quotas, taxes, and diverse means of subsidizing domestic industries can all hinder trade.

As global trade has grown, governments have faced the problem of regulating trade that originates or ends outside their jurisdiction. Traditionally, governments regulated international trade through bilateral treaties that were negotiated between two nations. But as trade has become more global and more complex, trade negotiations have expanded to include more countries. Now, trade is regulated in part by worldwide agreements, such as the General Agreement on Tariffs and Trade (GATT), a multilateral agreement that went into effect in 1948. In 1995, GATT was replaced by the World Trade Organization ( WTO ), an international body that supervises global trade.

Most countries in the world are members of the WTO, which limits in certain ways but does not eliminate tariffs and other trade barriers. Most countries are also members of regional free trade areas that lower trade barriers among participating countries. Trade agreements are negotiated by independent nations with their own interests and values in mind, which often include values and interests other than maximum global output. As a consequence, some level of protectionism is used by almost every nation, in the form of subsidies or tariffs to protect industries a nation considers essential, such as food and steel production.

Economic arguments against free trade criticize the assumptions or conclusions of economic theories. Critics note that free trade may exacerbate inequality among countries and within them. Free trade may favor developing nations in certain areas, may benefit only the wealthy within countries, may increase offshoring, and may destabilize financial markets. Sociopolitical arguments against free trade cite social and political effects that economic arguments do not capture, such as political stability, national security, human rights, and environmental protection. Critics note that free trade undermines cultural diversity, causes dislocation and pain, and undermines national security. In response, fair trade, or an economic system that emphasizes living wages for the producers of goods, has developed as an alternative to free trade in the last several years.

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Fair Trade: Fair trade products are slightly more expensive but certify that the excess cost is passed along to the workers to ensure better living and working conditions.

Microfinancing

Microfinance is usually understood as the provision of financial services to micro-entrepreneurs and small businesses.

Learning Objectives

Examine the use of microfinance and microcredit for industry, including the benefits and criticisms

Key Takeaways

Key Points

  • The modern use of the expression “microfinancing” has roots in the 1970s. At this time, organizations such as the Grameen Bank of Bangladesh, led by Muhammad Yunus, were starting to shape the modern microfinance industry.
  • Microfinance is a broad category of services, one of which is microcredit. Microcredit is the provision of credit services to poor clients. Although microcredit is only one of the aspects of microfinance, conflation of the two terms is endemic in public discourse.
  • An important source of detailed data on selected microfinance institutions is the MicroBanking Bulletin, which is published by Microfinance Information Exchange.
  • Most criticisms of microfinance are actually just criticisms of microcredit. Other microfinance services, like savings, remittances, payments, and insurance, are rarely criticized. For example, many have criticized the high interest rates microfinance charges to borrowers.

Key Terms

  • microfinance: finance that is provided to unemployed or low-income people or groups
  • microcredit: the practice of making very small loans, especially to poor people to promote self-employment; microlending
  • Grameen Bank: The Grameen Bank, a microfinance organization and community development bank started in Bangladesh, makes small loans (known as microcredit or “grameencredit) to the impoverished without requiring collateral.

Microfinance

In microfinance, financial services are provided to micro-entrepreneurs and small businesses, many of whom lack access to banking services because of the high transaction costs associated with serving these types of clients. There are two main mechanisms for delivering microfinance services. Relationship-based banking deals with individual entrepreneurs and individual businesses. In group-based models, several entrepreneurs unite to apply for loans and services as a group.

Microcredit

Microfinance is a broad category of services that includes microcredit. Microcredit is the provision of credit services to poor clients. Although microcredit is only one type of microfinance, conflation of the two terms is endemic in public discourse. Critics often attack microcredit while referring to it indiscriminately as either ‘microcredit’ or ‘microfinance’. Due to the broad range of microfinance services, some argue that it is difficult to objectively assess its impact. Very few studies have tried to assess its full impact, although there have been several studies that examined particular cases.

The History of Microfinance

The history of microfinance dates back to the middle of the 19th century, when Lysander Spooner, a theorist, argued that entrepreneurs and farmers could be raised out of poverty if they were given small credits. Independently of Spooner, around this time, Friedrich Wilhelm Raiffeisen established the first cooperative lending banks to support rural German farmers.

The modern use of the term “microfinancing” dates back to 1970s. At this time, organizations such as the Grameen Bank of Bangladesh, led by Muhammad Yunus, were beginning to shape the modern microfinance industry.

An important source of detailed data on microfinance institutions is the MicroBanking Bulletin, which is published by the Microfinance Information Exchange. At the end of 2009, this organization was tracking 1,084 microfinance initiatives that were serving 74 million borrowers ($38 billion in outstanding loans) and 67 million savers ($23 billion in deposits).

Criticisms of Microfinance

Most criticisms of microfinance are actually just criticisms of microcredit. Other microfinance services, like savings, remittances, payments and insurance, are rarely criticized. For example, many people have criticized the high interest rates microfinance charges to borrowers. In 2006, in a sample of 704 microfinance institutions that voluntarily submitted reports to the MicroBanking Bulletin, the real average portfolio yield was 22.3% annually. That being said, the annual rates charged to clients were higher, because these rates included local inflation and the bad debt expenses of the microfinance institution. Recently, Muhammad Yunus has tried to react to this point. In his latest book, he argues that microfinance institutions should face penalties if they are found to be charging more than 15% above their long-term operating costs.

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Community-based Savings Bank in Cambodia: This is a photograph of a community-based savings bank in Cambodia. There is a rich variety of financial institutions which serve micro-entrepreneurs and small businesses.

The Changing Face of the Workplace

Industry has become more information driven and less labor intensive, leading to a polarization between high- and low-skilled jobs.

Learning Objectives

Examine the impact of the Information Age on the workforce, from automation to polarization

Key Takeaways

Key Points

  • The Information Age has impacted the workforce in several ways. This poses problems for workers in industrial societies, which are still to be solved.
  • Jobs traditionally associated with the middle class are beginning to disappear, either through outsourcing or automation.
  • Individuals who lose their jobs due to automation or outsourcing must either move up, joining a group of “mind workers,” or settle for low-skill, low-wage service jobs.
  • Another way the Information Age has impacted the workforce is that automation and computerization have resulted in higher productivity but that is coupled with net job loss.
  • Industry is becoming more information-intensive and less labor and capital-intensive. This trend has important implications for the workforce; workers are becoming increasingly productive as the value of their labor decreases.

Key Terms

  • mind workers: A term for Information Age workers such as engineers, attorneys, scientists, professors, executives, journalists, and consultants.
  • automation: The act or process of converting the controlling of a machine or device to a more automatic system, such as computer or electronic controls.
  • Information Age: The current era, characterized by the increasing importance and availability of information (especially by means of computers), as opposed to previous eras (such as the Industrial Age) in which most endeavors related to some physical, man-made process or product.

The Information Age has impacted the workforce in several ways. First, it has created a situation in which workers who perform easily automated tasks are being forced to find work that is less automated. Secondly, workers are being forced to compete in a global job market. Thirdly, workers are being replaced by computers that can do the job more effectively and faster. This poses problems for workers in industrial societies which are still to be solved. Solutions that involve having the workers work less hours are usually met with high resistance from the workers.

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Automation: As industry has become increasingly automated, it has become more cost-effective for companies to use robot labor rather than manpower. Thus, many people lose their jobs to robots.

Jobs traditionally associated with the middle class (assembly line workers, data processors, foremen, and supervisors) are beginning to disappear, either through outsourcing or automation. Individuals who lose their jobs must either move up— joining a group of “mind workers” (engineers, attorneys, scientists, professors, executives, journalists, consultants)— or settle for low-skill, low-wage service jobs. The “mind workers” form about 20 percent of the workforce. They are able to compete successfully in the world market and command higher wages. Conversely, production workers and service workers in industrialized nations are unable to compete with workers in developing countries. They either lose their jobs through outsourcing or are forced to accept wage cuts.

There is another way in which the Information Age has impacted the workforce: automation and computerization have resulted in higher productivity. In the United States for example, from Jan 1972 to August 2010, the number of people employed in manufacturing jobs fell from 17,500,000 to 11,500,000 but manufacturing value rose 270 percent. It initially appeared that job loss in the industrial sector might be partially offset by the rapid growth of jobs in the IT sector. However, after the recession of March 2001, the number of jobs in the IT sector dropped sharply and continued to drop until 2003. Even the IT sector is not immune to this problem.

Industry is becoming more information-intensive and less labor and capital-intensive. This trend has important implications for the workforce; workers are becoming increasingly productive as the value of their labor decreases. However, there are also important implications for capitalism itself. Not only is the value of labor decreased, the value of capital is also diminished. In the classical model, investments in human capital and financial capital are important predictors of the performance of a new venture.

The polarization of jobs into relatively high-skill, high wage jobs and low-skill, low-wage jobs has led to a growing disparity between incomes of the rich and poor. The United States seems to have been more impacted than most countries with income inequality beginning to rise in the late 1970s, and the rate of disparity continuing to rise sharply in the twenty-first century.

Deindustrialization

Deindustrialization occurs when a country or region loses industrial capacity due to relocation or increased efficiency.

Learning Objectives

Analyze the impact of deindustrialization on both a global and regional scale, as well as the role technology plays in deindustrialization

Key Takeaways

Key Points

  • The term ” deindustrialization crisis” has been used to describe the decline of manufacturing in a number of countries and the flight of jobs away from cities.
  • Detroit and the American automobile industry are regarded as the prototypical examples of how deindustrialization can negatively impact an area and population. They are by no means the only examples of this phenomenon.
  • In the U.S., the population of the great manufacturing cities of the Midwest and Northeast has declined significantly due to deindustrialization. Manufacturing jobs have been eliminated or relocated to the Southeast and Southwest, where labor is cheaper.
  • Due to increasing efficiency and productivity, manufacturing today makes up a smaller share of the U.S. workforce than it has at any time in the past hundred years.
  • The population of the great manufacturing cities of the northeast has declined significantly: Detroit, Cleveland, Pittsburgh, St. Louis, and Buffalo, NY, have all lost half their population or more in the past half-century.
  • The widespread perception of deindustrialization in the United States is due to shifting patterns in the geography and political geography of production: from the heavily unionized Northeast and Midwest towards the right-to-work states of the Southeast and the high supply of workers willing to accept low wages in the Southwest.

Key Terms

  • Detroit: the largest city and former capital of Michigan, a major port on the Detroit River, known as the traditional automotive center of the U.S.
  • right-to-work states: Right-to-work states have passed laws that prohibit union security agreements, or agreements between labor unions and employers that govern the extent to which an established union can require employees’ membership, payment of union dues, or fees as a condition of employment, either before or after hiring. Right-to-work laws exist in twenty-three U.S. states, mostly in the southern and western United States.
  • deindustrialization: The loss or deprivation of industrial capacity or strength.

Deindustrialization

Deindustrialization occurs when a country or region loses industrial capacity, especially heavy industry or manufacturing industry. This process is often attributed to off-shoring, which is itself a consequence of increased global free trade. Deindustrialization is, in a sense, the opposite of industrialization, and, like industrialization, deindustrialization may have far-reaching economic and social consequences. The term “deindustrialization crisis” has been used to describe the decline of manufacturing in a number of countries, including the U.S., which have lost large numbers of urban manufacturing jobs since the 1970s.

American Deindustrialization

The city of Detroit, and the U.S. automobile industry, are regarded as the prototypical examples of deindustrialization’s negative effects, but Detroit is not an isolated example. The population of the United States has nearly doubled since the 1950s, adding approximately 150 million people. However, during this same period (1950–2007), the population of the great American manufacturing cities declined significantly. Detroit, Cleveland, Pittsburgh, St. Louis, and Buffalo have all lost half their population or more in the past half-century. Baltimore lost almost a third of its population, and Philadelphia lost nearly a quarter of its own.

Regional Deindustrialization

In the United States, the deindustrialization of Midwestern and Northeastern cities has occurred in response to shifting patterns in the geography of production. Just as many American companies have moved their manufacturing operations to developing nations, where they can hire workers for far lower wages, so too have manufacturers in the United States relocated from the heavily unionized Northeast and Midwest toward the Southeast and Southwest. In these areas, right-to-work states limit the power of unions to raise wages. Additionally, the high supply of workers forces those workers who are employed to accept low wages.

The Impact of Technology

In order to save costs, manufacturers have done more than merely relocate. They have also eliminated jobs, as technological innovation has reduced the demand for manual labor. Though total industrial employment has been relatively stable over the past forty years, the overall U.S. labor force has increased dramatically, resulting in a massive reduction in the percent of the labor force that is engaged in industry. While 35% of workers were involved in industry in the late 1960s, under 20% are today. Manufacturing is thus less prominent in American life and the American economy now than it has been at any other point for hundreds of years.

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The Decline of the Manufacturing Industry: This graphic shows the decline of the manufacturing industry relative to other industries over the course of the past sixty years.

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Detroit: This map depicts the economic ramifications of deindustrialization in the Detroit area. The Detroit neighborhoods closest to the city center who were the most dependent upon manufacturing jobs are the most blighted.

Corporations and Corporate Power

Corporations have powerful legal rights, and some have revenues that exceed the revenues of sovereign nations.

Learning Objectives

Analyze the structure and function of corporations within society

Key Takeaways

Key Points

  • Despite being unlike natural persons, corporations are recognized by the law to have rights and responsibilities like natural persons. For example, corporations can exercise or be responsible for human rights. They can even be convicted of criminal offenses, such as fraud and manslaughter.
  • Multinational corporations are important factors in the processes of globalization. A Transnational Corporation (TNC) differs from a traditional MNC in that it does not identify itself with one national home.
  • The rapid rise of multinational corporations has been a topic of concern among intellectuals, activists, and the public who perceive them as threatening basic civil rights like privacy.
  • Methods for attracting foreign investment have be criticized as a race to the bottom. They have also been described as a push, by corporations, for greater autonomy.
  • Because of their size, multinationals can have a significant impact on government policy, primarily through the threat of market withdrawal.

Key Terms

  • corporation: A group of individuals, created by law or under authority of law, having a continuous existence independent of the existences of its members, and powers and liabilities distinct from those of its members.
  • globalization: A common term for processes of international integration arising from increasing human connectivity and interchange of worldviews, products, ideas, and other cultural phenomena. In particular, advances in transportation and telecommunications infrastructure, including the rise of the Internet, represent major driving factors in globalization and precipitate the further interdependence of economic and cultural activities.
  • Multinational corporations: A multinational corporation (MNC) is a corporate enterprise that manages production or delivers services in more than one country.

Corporations

The word corporation is widely used to describe incorporated entities, especially those that have a large number of shareholders. Despite not being natural persons, the law recognizes corporations as having rights and responsibilities like natural persons. Corporations can exercise human rights against real individuals and the state, they can be responsible for human rights violations, and they can even be convicted of criminal offenses, such as fraud and manslaughter. Once incorporated, a corporation has artificial personhood everywhere it operates, until the corporation is dissolved. Often, a corporation is legally a citizen of the state (or other jurisdiction) in which it is incorporated.

Multinational and Transnational Corporations

A multinational corporation (MNC) is a corporation that either manages production or delivers services in more than one country. Some multinational corporations are very large, with revenues that exceed some nation’s national revenues. Multinational corporations can have a powerful influence on both local economies and the world economy. They play an important role in international relations and globalization. A transnational corporation (TNC) differs from a traditional MNC in that it does not identify itself with a single national home. While traditional MNCs are national companies with foreign subsidiaries, TNCs spread out their operations in many countries. This allows them to sustain high levels of local responsiveness.

The rapid rise of multinational corporations has been a topic of concern among intellectuals, activists and laymen, who perceive it as a threat to basic civil rights like privacy. Scholars have pointed out that multinationals have had a long history of interference in the policies of sovereign nation states. Anti-corporate advocates express the commonly held view that corporations answer only to shareholders, and give little consideration to human rights, environmental concerns, or other cultural issues.

Corporations and Governments

Multinational corporations are important factors in the processes of globalization. National and local governments often compete against one another to attract MNC facilities, with the expectation of increased tax revenue, employment, and economic activity. To compete, political entities may offer MNCs incentives such as tax breaks, governmental assistance, subsidies, or lax environmental and labor regulations. Because of their size, multinationals can have a significant impact on government policy, primarily through the threat of market withdrawal. Confrontations between corporations and governments have occurred when governments have tried to force MNCs to make their intellectual property public. This is a state effort to transfer technology to local entrepreneurs.

Ominous Trends in the U.S.

Recently, industry has become more information-intensive, which has led to higher productivity but also higher unemployment and inequality.

Learning Objectives

Examine how the Information Age is leading to higher productivity but fewer jobs, which lead to polarization between incomes of the rich and poor

Key Takeaways

Key Points

  • Industry is becoming more information -intensive, less labor-intensive, and less capital-intensive. Jobs traditionally associated with the middle class are beginning to disappear, either through outsourcing or automation.
  • Automation and computerization have resulted in higher productivity, but they have also led to higher unemployment and a net job loss.
  • Individuals who lose their jobs can respond in several ways. They can either specialize, and join a group of “mind workers,” or settle for low-skill, low-wage service jobs. The resulting polarization has led to a growing disparity between incomes of the rich and poor.
  • Jobs traditionally associated with the middle class are beginning to disappear, either through outsourcing or automation.
  • Individuals who lose their jobs must either move up, joining a group of “mind workers,” or settle for low-skill, low-wage service jobs.
  • There is another way in which the Information Age has impacted the workforce: automation and computerization have resulted in higher productivity coupled with net job loss.

Key Terms

  • mind workers: A term for Information Age workers such as engineers, attorneys, scientists, professors, executives, journalists, and consultants.
  • automation: The act or process of converting the controlling of a machine or device to a more automatic system, such as computer or electronic controls.
  • Information Age: The current era, characterized by the increasing importance and availability of information (especially by means of computers), as opposed to previous eras (such as the Industrial Age) in which most endeavors related to some physical, man-made process or product.

Industry in the Information Age

In general, industry is becoming more information-intensive, less labor-intensive, and less capital-intensive. These trends have led observers to call the modern era the information age. The trend toward an information-based economy has important implications for the workforce. While productivity stands to increase dramatically, unemployment is also rising, and jobs are increasingly polarized into the following two categories: high-skill, high-wage jobs, and low-skill, low-wage jobs. Additionally, for the first time, workers are being forced to compete in a global job market, in which jobs tend to be attracted by countries with lower wages.

The Disappearance of Manufacturing Jobs

As technology advances, workers are becoming increasingly productive, but the value of labor, and the demand for labor, are both decreasing. Workers who perform easily automated tasks are being replaced by technology that can do the work faster, cheaper, and more efficiently. As a result, automation and computerization have led to both higher productivity and a net job loss. In the United States, from January, 1972 to August, 2010, the number of people employed in manufacturing jobs fell from 17,500,000 to 11,500,000. During the same time period, the value of production from manufacturing increased 270%.

In general, jobs that are traditionally associated with the middle class (assembly line workers, data processors, foremen, and supervisors) are beginning to disappear due to automation. They are also disappearing because of outsourcing, which has become more common in an era of global free trade. Production and service workers in industrialized nations are unable to compete with workers in developing countries, who are willing to tolerate much lower wages. As a result, in industrialized nations like the U.S., those working in production have either lost their jobs or been forced to accept wage cuts.

“Mind Workers”

Individuals who lose their jobs can respond in several ways. They can either settle for low-skill, low-wage jobs, or they can move up, joining a group called “mind workers. ” This category includes engineers, attorneys, scientists, professors, executives, journalists, and consultants. Currently, these “mind workers” form about 20% of the workforce. They are able to compete successfully in the world market and command high wages. Increasingly, jobs in countries like the United States are polarized into low-skill, low-wage jobs or the high-skill, high-wage jobs of these “mind workers. ” Because of this polarization, there is a growing disparity between the incomes of the rich and poor. In the United States, income inequality began to rise in the 1970s and has increased even more quickly during the 21st century.

Colonialism, Decolonization, and Neo-Colonialism

After WWII, decolonization ended formal colonialism, but economic inequality has given rise to neocolonialism.

Learning Objectives

Explain the concepts of colonialism, decolonization and neocolonialism in terms of society and economic impact

Key Takeaways

Key Points

  • Colonization was motivated by economics. European powers sought to expand their markets and acquire raw materials overseas.
  • Decolonization occurred in response to independence movements in colonized territories when European powers determined that the benefits of maintaining colonies was not worth the costs.
  • Neocolonialism is the practice of using capitalism, globalization, and cultural forces to control a country in lieu of direct military or political control.
  • Neocolonialism is motivated by economics. Countries and corporations seek to achieve favorable economic policies overseas and do so by pinning loans to particular actions on the part of African states.
  • The dependency principle refers to the claim that post-colonial states have no choice but to accept Western conditions for loans, because they desperately need the money to support their own domestic policies.

Key Terms

  • dependency principle: The notion that resources flow from a “periphery” of poor and underdeveloped states to a “core” of wealthy states, enriching the latter at the expense of the former. It is a central contention of the dependency theory that poor states are impoverished and rich ones are enriched by the way poor states are integrated into the “world system. “
  • colony: A territory under the immediate political control of a ruling state.
  • metropole: The parent-state of a colony.

When speaking of colonialism, most people imagine the European colonization of Africa. Historically, the period of colonization tends to refer to the era from the sixteenth century until the mid-twentieth century, during which ships from Europe were actively seeking out new territories, new peoples, and new markets to acquire. However, colonialism has been practiced throughout history and all over the world. In general, colonialism occurs when people from one territory establish or acquire, maintain, and expand colonies in another territory. In colonialism, the metropole or colonizing power claims sovereignty over the colony.

Often, colonization is driven by a desire for economic expansion. In the sixteenth century, European colonization of Africa contributed significantly to European economic development. European colonization intensified because Europeans had just developed galleons or ships that could navigate more easily all the way to Africa. Easier access to foreign lands encouraged European nobles and merchants to seek out new territories in an effort to acquire raw materials and develop new markets. Extracting raw materials from foreign lands provided the fuel for the Industrial Revolution, and the practice of slavery provided Europeans with a new source of labor power.

At the same time that colonialism benefited European economies, it had devastating consequences for African economies. Colonized territories were forced to depend on colonizers for trade. Local institutions and political structures were dismantled and replaced with ones imposed by colonial powers.

After World War II, colonial systems were dismantled in a process referred to as decolonization. Decolonization refers to the undoing of colonialism, or the claim of a formerly colonized people for independence and self-determination. In part, decolonization was the result of independence movements in colonized territories. In part, it was also the result of an calculated economic decision made by colonial powers. The cost of maintaining colonial empires had begun to exceed their value for the European powers.

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The State of Colonialism, 1945: This map shows the metropoles and their colonies in 1945.

Decolonization has had a significant impact on the economies of the newly formed states. First and foremost, newly independent African states had to develop an economic system. Moreover, even though the former colonies were now formally independent, they were still rather dependent on the West for assistance in developing economic and political structures. Thus, Western corporations still had a significant amount of control over the new states. Newly independent states borrowed money from the West in order to fund their own development, resulting in a new system of debt. For decades, this debt has been politically impossible for many countries to pay off and still exists.

Although decolonization ended formal colonialism, unequal economic relationships between the developed West and newly independent states had set up a system referred to as neocolonialism. Neocolonialism is the practice of using capitalism, globalization, and cultural forces to control a country in lieu of direct military or political control. External forces exert power in Africa in two ways. First, multinational corporations (MNCs), or companies with operations in multiple countries, apply pressure for certain political behaviors to suit their own interests. For example, if an American company wants to farm in Ethiopia, the company can apply pressure on the Ethiopian government to grant them certain conditions in exchange for the investment in the land. This function operates because of the dependency principle. In other words, many African countries are so desperate to bring in revenue to support their domestic agendas that it is in their interests to accept unsavory conditions from foreign companies. In this way, foreign companies exert significant influence over post-colonial states. The combination of the degree of the influence and the dependency principle creates a situation that in many ways mirrors colonialism. Second, foreign countries can exert influence over post-colonial states by only offering loans under certain conditions. This, again, invokes the dependency principle and mirrors colonialism.

Neocolonialism: Some argue that the financial institutions of the post-World War II world are themselves instruments of neocolonialism.

Trade Blocs and Common Markets

A trade bloc is an agreement where regional barriers to trade are reduced or eliminated among the participating states.

Learning Objectives

Key Takeaways

Key Points

  • Trade blocs can be stand-alone agreements between several states, such as the North American Free Trade Agreement (NAFTA) or part of a regional organization, such as the European Union.
  • A single market is a type of trade bloc that is composed of a free trade area for goods, with common policies on product regulation, as well as freedom of movement on capital, labor, enterprise, and services.
  • A common market is a first stage towards a single market, and may be limited initially to a free trade area with relatively free movement of capital and of services, but not so advanced in reduction of the rest of the trade barriers.

Key Terms

  • North American Free Trade Agreement (NAFTA): An agreement signed by the governments of Canada, Mexico, and the United States, creating a trilateral trade bloc in North America. It came into force in 1994.
  • Common market: A common market is a first stage towards a single market, and may be limited initially to a free trade area with relatively free movement of capital and of services, but not so advanced in reduction of the rest of the trade barriers.
  • trade bloc: A trade bloc is a type of intergovernmental agreement, often part of a regional intergovernmental organization, where regional barriers to trade, (tariffs and non-tariff barriers) are reduced or eliminated among the participating states.

A trade bloc is a type of intergovernmental agreement, often part of a regional intergovernmental organization, where regional barriers to trade are reduced or eliminated among the participating states. Trade blocs can be stand-alone agreements between several states, such as the North American Free Trade Agreement (NAFTA) or part of a regional organization, such as the European Union.

A single market is a type of trade bloc that is composed of a free trade area for goods, with common policies on product regulation, as well as freedom of movement on capital, labor, enterprise, and services. According to the principles of capitalism, a single market has many benefits. With full freedom of movement for all the factors of production between the member countries, the factors of production become more efficiently allocated, further increasing productivity. However, entering a trade bloc also strengthens ties between member parties. In so doing, member parties not only share each others’ strengths but also each others’ weaknesses.

Economist Jeffrey J. Scott argues that for a trade bloc to be successful, members must share four common traits: similar levels of per capita national income, geographic proximity, similar or compatible trading regimes, and a political commitment to regional organization. For better or for worse, trade blocs are prevalent. Since 1997, more than 50% of all world commerce was conducted under the auspices of regional trade blocs, such as NAFTA.

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NAFTA: NAFTA is an agreement between the US, Mexico and Canada, as represented by the 3 flags in its logo.

A common market is a first stage towards a single market, and may be limited initially to a free trade area with relatively free movement of capital and of services, but not so advanced in reduction of the rest of the trade barriers.