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Intro4.1 Glob11.1: Economy

Lecture on economy.

Piotr Konieczny

on 2 November 2017

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Transcript of Intro4.1 Glob11.1: Economy

Most of the profit in today's manufacturing chain goes to the retailer.
Consumption: how economy impacts our lives?
The big picture
COGNITIVE SURPLUS is a term coined by Clay Shirky. Shirky argues is that people are now learning how to use more constructively the free time afforded to them since the 1940s for creative acts rather than consumptive ones, particularly with the advent of online tools that allow new forms of collaboration.
Videos for discussion
The world's richest countries populations are aging rapidly.
A worrisome trend for the future
Economics is the social science that analyzes the production, distribution, and consumption of goods and services.

Economy is just one of a number of forces affecting the society, our behavior and our lives.

It is, however, one of the most important of those forces.
Economics vs sociology
The economists focus on understanding how different forces affect the economy.
The sociologists focus on understanding how different forces, including the economy, affect the society.
Capitalism is characterized by:
* pursuit of personal profit (PROFIT MOTIVE)
* little governmental intervention in the economy (FREE MARKET)
The modern world economy is primarily capitalist

South Korean economic growth has been among the most impressive worldwide

The South Korean economy grew almost non-stop from near zero to over a trillion dollars in less than half a century
For example, sociologists would like to understand why some societies value environment more than economy, and vice versa.
Microsociologists study economic institutions just like they study all other institutions in society.
Macrosociologists study how different economies arrive at different solutions to the common human problem or providing for members of society.

They compare pre-industrial economies, industrial economies and post-industrial economies
Macrosociologists also study the operation of the world-economy as a whole.
Many macrosociologists focus on understanding the overall structure of the world economy.
A major theory of world economy from the sociological perspective is the WORLD SYSTEM THEORY.

WORLD-SYSTEM refers to the inter-regional and transnational DIVISION OF LABOUR, which divides the world into core countries, semi-periphery countries and the periphery countries.
Core countries focus on higher skill, capital-intensive production, and the rest of the world focuses on low-skill, labor-intensive production and extraction of raw materials. This constantly reinforces the dominance of the core countries.
Nonetheless, the system is dynamic, in part as a result of revolutions in transport technology, and individual states can gain or lose the core (semi-periphery, periphery) status over time.
For a time, some countries become the world hegemon; throughout last few centuries during which time the world system has extended geographically and intensified economically, this status has passed from the Netherlands, to the United Kingdom and most recently, to the United States.
Core countries economy is capital-intensive, high-wage, high-tech, and is based upon exploitation of periphery economies for low-cost labor and resources.
Periphery economies are labor-intensive, low-wage, low-tech, and focus on labor exploitation and coercion.
Semi-periphery countries are transitioning from periphery to core and have qualities of both.
The major economic factors of production are capital, labor, technology and entrepreneurship.
CAPITAL is the sum total of all of the implements of economic production.

Capital includes land, buildings, machines, inventories, etc.

It also includes FINANCIAL CAPITAL: the money necessary to support production.

HUMAN CAPITAL (skills, know-how, experience, etc.) may also a form of capital (sociologist can disagree on this).
LABOUR is the human effort that goes into production.
TECHNOLOGY is the stock of common (not person-specific) knowledge that goes into production.
Macrosociologists and economic sociologists also study how the global economy changes over time.
For example, they want to understand the history of GLOBALIZATION.
We talk about increasing globalization, but throughout history there have been periods when globalization have been reversed.
What may cause reduction in globalization (trade and contacts between different countries)?
Of course there are many definitions of globalization.
Turner (2006:379) defines it as "process whereby most nations of the world are connected by communication and transportation technologies and market relations."
Another example considers archaic globalization - the big economy crisis of the 14th century, when the Black Death devastated most countries of Euroasia and caused a massive and long term reduction of the nascent international trade.
Source: Wikipedia http://en.wikipedia.org/wiki/File:Archaic_globalization.svg
For more on this theory, read Janet Abu-Lughod Before European Hegemony: The World System A.D. 1250–1350
Source: Wikipedia http://en.wikipedia.org/wiki/File:World_trade_map.PNG
Source based on data presented in Chase-Dunn et al. (2000). Trade Globalization since 1795: waves of integration in the world-system http://www.irows.ucr.edu/cd/appendices/asr00/asr00app.htm
Broad economic history
Agricultural revolution (or Neolithic Revolution) occurred roughly 12,000-3,000 years ago and saw the rise of agricultural economies which begun steadily replacing the hunter-gatherer societies.
HUNTER/GATHERER SOCIETIES had only rudimentary levels of capital goods, such as grinding stones and arrow heads.
Differences in capital intensity also led to differences in SOCIAL STRATIFICATION systems.
Hunter/gatherer societies had LOW levels of income and wealth stratification. Most stratification was WITHIN the household.
Stratification was based primarily on gender and age.
Modern industrial societies have economies based on inorganic sources of energy.
The output of agricultural societies is limited by the available energy inputs from human and animal muscle power.
Industrial societies, based on inorganic sources of energy (mostly fossil fuels), can produce a very high quantity of goods.
Urbanization began to increase with the industrial revolution.


Private services
Government services
Economic growth is usually most rapid when countries advance from agriculture to manufacturing, then slows.
Labor productivity tends to be highest in manufacturing. Moving workers from agriculture to manufacturing increases overall labor productivity. This results in rapid economic growth per capita.
POST-INDUSTRIAL societies are characterized by a concentration of the population in the tertiary (service) sector of the economy.
Why Koreans and Poles value the environment less than Americans, Australian, Chinese or Japanese?
For example, microsociologist would try to understand how corporate culture shapes companies.
Hofstede's cultural dimensions theory would classify corporate culture along five different axis, such as "power distance" - how much inequality in power do members of an organization accept as normal.
Can you question an order from a superior?
This map could be disputed, of course.
Some economists and sociologists predict that in the near future, China may replace United States as the world's economic power.
Do you think this may happen?

AGRICULTURAL SOCIETIES represented the first significant accumulations of capital in human history. People owned land, houses, equipment, tools. Those societies first applied capital intensively to the production of food in surplus quantities.
Agricultural societies were much more complex than hunter-gather, and growing complexity led to major changes in our society (Durkheim).
SOCIAL STRATIFICATION is the classification of people into groups based on shared socio-economic conditions.
lower class
middle class
higher class
Horticultural and agricultural societies had HIGH levels of income and wealth stratification. Most stratification was BETWEEN households
Slavery, serfdom, and wage-labor existed side-by-side. Gender and age stratification were still high, but income and wealth stratification were even higher.
Industrial Revolution led to a new major change in economy, as the agriculture gave way to industry.
Industrialization saw
* mass production led to a major increase in the availability of material goods;
* wage labor - before that time, most people were not payed wages; much of the trade was done in barter, without currency;
* centralization of work in factories;
* urbanization.
Coal, oil, and natural gas provided 79.6% of primary energy production during 2002
Source: Wikipedia
It is estimated that world's supply of oil will run out within about 50 years. What consequences may it have on our society?
GDP per capita
GDP growth
South Korea
United States
Source: http://en.wikipedia.org/wiki/List_of_countries_by_real_GDP_growth_rate_%28latest_year%29 and http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28PPP%29_per_capita
So did world's population.

We are currently living through the Information Revolution.

It involves a transformation into a POST-INDUSTRIAL economy.
The service sector includes any economic activity that does not involve the production of physical goods.
Retail is a service: the selling of goods, as opposed to production of goods. The professions are services: law, medicine, education. Finance, insurance, and real estate are services. Governments provide services (police, fire, regulation).Even the military is a form of service industry, though usually counted separately.
Ideas are products.
Mechanical skills are less important then literacy skills.
3D printing promises to redistribute production across the world.
Population of many countries, such as of South Korea, are bound to shrink.
Estimates for South Korea (2011) are:

Agriculture: 6.4%, industry: 24.2%, services: 69.4%
Is Korea a post-industrial society?
If the current rich countries are aging, and their population will decrease, how can it affect the world society in few decades?
Many sociologists like Marx critique capitalism.
Capitalism has existed only for several centuries, and has replaced previous economies (such as FEUDALISM).
There is no reason to assume capitalism will last forever.
From the FUNCTIONALIST perspective,
economy has the function of securing and distributing resources.
ENTERPRENEURSHIP (management, leadership & business skill) is the way in which all elements of an economy are organized.
Some scholars also distinguish the horticultural societies as an intermediate step between hunter-gatherers and agricultural societies.

Horticultural societies had no knowledge of plow or domestication of animals. Discovery of those technologies marks the difference between horticultural and agricultural societies.
Industrial Revolution begun in England in the 18th century with the James Watt invention and spread of coal-powered steam engine.
All of this occurred only within the last 250 years.
Modern educational system was created because factories needed educated workers. Post-industrial economy needs even more skilled workers.
Supporters of capitalism argue that it promotes growth.
Environmentalists have argued that capitalism requires continual economic growth, and will inevitably deplete the finite natural resources of the earth, and other broadly utilized resource.

In practice, however, any form of economic growth, whether capitalistic, communist or otherwise is likely to damage the environment.
Socialism has been the most popular alternative proposed by critics of capitalism.

Economic function #1:
production of resources

Economic function #2:
distribution of resources

Social democrats propose selective nationalisation of key national industries in mixed economies, while maintaining private ownership of capital and private business enterprise. Social democrats also promote tax-funded welfare programs and regulation of markets. Many social democrats, particularly in European welfare states, refer to themselves as socialists, introducing a degree of ambiguity to the understanding of what the term means.
COMMODIFICATION (or commoditization) is the transformation of goods, ideas, or other entities that may not normally be regarded as goods into a commodity.
Has Valentine's Day commodified love?
Cost analysis of iPhone and iPad
Source: Kraemer et al. 2011, Capturing Value in Global Networks: Apple’s iPad and iPhone

Prezi by Piotr Konieczny
licensed under CC-SA-BY 3.0

Source: http://en.wikipedia.org/wiki/File:World_system_sphere.png
How has this changed Korea? "Old Korea vs New Korea" - are we seeing a generational gap or gaps?
Listen to Shirky talk about his idea: http://www.ted.com/talks/clay_shirky_how_cognitive_surplus_will_change_the_world.html
Do you agree with his idea that our society is now having a cognitive surplus, and with it, the unprecedented ability to express ourselves and change the world?
Listen to the talk at http://www.ted.com/talks/yochai_benkler_on_the_new_open_source_economics.html
Yochai Benkler explains how collaborative projects like Wikipedia and Linux represent the next stage of human organization.

Yochai Benkler has been called "the leading intellectual of the information age." He proposes that volunteer-based projects such as Wikipedia and Linux are the next stage of human organization and economic production.
How is the Internet changing our economy?
Listen to http://www.ted.com/talks/don_tapscott_four_principles_for_the_open_world_1.html
The recent generations have been bathed in connecting technology from birth, says futurist Don Tapscott, and as a result the world is transforming into one that is far more open and transparent. In this inspiring talk, he lists the four core principles that show how this open world can be a far better place.

Don Tapscott can see the future coming ... and works to identify the new concepts we need to understand in a world transformed by the Internet
Others: http://www.ted.com/talks/clay_shirky_on_institutions_versus_collaboration.html
Source: http://www.clearlycultural.com/geert-hofstede-cultural-dimensions/power-distance-index/
Power distance around the world
in South Korea, the value is 60
International trade and contacts have long history
because it was needed for
See also: http://en.wikipedia.org/wiki/List_of_largest_cities_throughout_history
Only recently most of the world became urbanized
source: http://en.wikipedia.org/wiki/File:Percentage_of_World_Population_Urban_Rural.PNG
As economies become more developed, they tend to focus more on the provision of services.
Moving workers from manufacturing to services reduces overall labor productivity. This results in slower economic growth per capita.
Service economies tend to grow more slowly, but from a higher base -- they are generally much richer than manufacturing economies!

Will 3D Printing Change the World? | Off Book | PBS
Is this fair?
Listen to http://www.ted.com/talks/james_b_glattfelder_who_controls_the_world.html
to do:
*discuss monopoly and similar conceps

Urbanization is the physical growth of urban areas as a result of rural migration and even suburban concentration into cities
In the USA, the term socialist is abusive: most people are afraid of being labeled a socialist.

In Europe, there are many socialist politicians (often known as SOCIAL DEMOCRATS), and major socialists parties, which have won elections in many European states. A famous example of a major European party embracing the socialist principle is the British Labour Party.
Nick Hanauer "Rich people don't create jobs"
Could globalization collapse again?
Wars are unlikely, but how about a new plague?
Lisa Harouni: A primer on 3D printing

CDC Threat Report: ‘We Will Soon Be in a Post-Antibiotic Era’ (2013)
Source: http://en.wikipedia.org/wiki/File:Hadazbe_returning_from_hunt.jpg
Two Hadza men return from a hunt. The Hadza are one of the few contemporary African societies that live primarily by foraging.

Source: http://en.wikipedia.org/wiki/File:Maler_der_Grabkammer_des_Sennudem_001.jpg
Source: http://www.globalchange.umich.edu/globalchange2/current/lectures/human_pop/human_pop.html
Physical strength of men explains their dominant status over women in the societies of the past
This is known as the "three sector theory"
Source: https://commons.wikimedia.org/wiki/File:Economic_sectors_and_income.JPG
Source: https://commons.wikimedia.org/wiki/File:The_distribution_of_the_workforce_among_the_three_sectors.png
The historical distribution of the workforce among the three sectors progresses through different stages

The figure illustrates that countries with higher levels of socio-economic development tend to have less of their economy made up of primary and secondary sectors and more emphasis in tertiary sectors. The less developed countries exhibit the inverse pattern.
In modern economy, the percentages of a country's economy made up by different sectors is based on its level of income or development.
Source: https://commons.wikimedia.org/wiki/File:McKinley_Prosperity.jpg
Source: https://commons.wikimedia.org/wiki/File:Pyramid_of_Capitalist_System.png
Critique of economic (power) inequality and social stratification in capitalism (1911)
Source: https://commons.wikimedia.org/wiki/File:Societal_development.png
The origins of modern markets can be traced back to the Roman Empire and the Islamic Golden Age and Muslim Agricultural Revolution where the first market economy and earliest forms of merchant capitalism took root between the 8th–12th centuries
Muslims invented many concepts such as contracts, bills of exchange, long-distance international trade, the first forms of partnerships, and the earliest forms of credit, debt, profit, loss, capital, cheques, promissory notes, trusts, banking, accounting and commercial lawsuits.
A system known as capitalism emerged in Europe around 16th-19th centuries (scholars differ on exact period). Most agree that it until old, feudal prohibitions on trading land and labour were lifted in 19th century, we can only speak of limited capitalism (MERCANTILISM).
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. 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 is when the CORPORATIONS and the STOCK MARKET evolved.
Individuals are divided into:
*WORKERS (laborers)
*OWNERS (investors)
In addition, we are all CONSUMERS
OWNERS own BUSINESSES (firms, companies, etc.).
Most of the profit belongs to OWNERS and BUSINESSES which own the FACTORS OF PRODUCTION
MARKET - a central exchange through which people are able to buy and sell goods and services
FREE MARKET - one with as few regulations as possible impeding people's ability to engage in said buying and selling



Increase in global GDP over time coincides with the emergence of the modern world capitalist system.
World GDP per capita between 1500 and 1998 expressed in the 1990's international dollars.
Source: https://commons.wikimedia.org/wiki/File:Gdp_chart.png
World's GDP per capita shows exponential growth since the beginning of the Industrial Revolution
Some scholars (Hayek, Frieman, Keynes, Rand) also argue that the economic freedom of capitalism is a requisite of political freedom (i.e. capitalism promotes liberal democracies).

This view is not universally shared; for example modern China is an example of country embracing capitalist competition with little political freedom.
Capitalism does nothing to address unfair distribution of wealth and power and in fact is often said to increase it.
Major elements of the critique of capitalism include:
* profit motivation supports unethical behavior - profit maximization have been used to justify criminal behavior, slavery, wars or environmental degradation
* cultural exploitation and commodification impoverishes and corrupts our cultural heritage
* it strengthens the unequal distribution of wealth and power
Profit motivation supports unethical behavior - profit maximization have been used to justify criminal behavior, slavery, wars or environmental degradation
Much criminal behavior has been motivated by desire for profit.
Slavery is now illegal (through still occurs), but it was legal in the past. The major reason for slavery was the exploitation of workers and treatment of human beings as property.
Many wars, particularly in the modern era, were motivated by desire for profit. Part of the reason behind Nazi Germany and Japanese aggression in World War II was the desire to secure land and natural resources for continued economic expansion.
Many ideas of socialist and communist thinkers have been incorporated into modern capitalism:
* pensions for old people
* rents for disabled workers
* free or subsidized education for the young
* prohibition of child labor
Socialism as an economic system is characterized by:
Under socialism, the economy is not driven by the profit motivation, but by the needs of the society, as defined by the government, which represents the people.
Extreme implementations of socialist ideas in the economy, usually focused on planned economy, have been called COMMUNISM and are acknowledged as a failure.
In practice, the decisions of owners and businesses on what to produce, guided by the logic of supply, demand and competition, have been much more efficient than decisions of central planners.
We should distinguish the usage of the words COMMUNIST and SOCIALIST in economy, politics and everyday (mis)use.
The word communist should not be used in politics, but it is commonly used in everyday speech to describe some countries whose political system is not communist (since no political system can be communist) but which are ruled by a group calling themselves a COMMUNIST PARTY.

Communist economist system is based on the principle of "from each according to his ability, to each according to his need". In the fully communist state there would be no money, no classes, no market and no state. Everybody would have equal (and close to unlimited) resources. Such a "paradise" system is known as a UTOPIA.

No country has ever tried to implement "upper stage communism". It is not possible with the modern level of technology. The lower stage "planned economy" socialism, i.e. commonly if incorrectly referred to as communism, has been tried by many countries and has proved inefficient.
Government in countries that have tried the planned socialist economy have been dominated by a small group, "the communist party". Such governments are not democratic but autocratic and are known as COMMUNIST STATES.
In theory, nothing prevents a democratic state from trying to implement a communist "planned economy" system. In practice, this has never happened, through many democratic countries, which are described as capitalist, have a number of socialist elements in their economies (free education, pensions and rents, laws against child labor, etc.).
Criticism of socialism
Socialism is usually criticized as * economically inefficient
* infringing upon people's liberties due to the requirement for governmental interventions
Criticism of communism
In addition to similar criticism as that of socialism, communism is usually criticized as a utopian system which can never be realized in practice. Critics say that it is impossible to eliminate inequality and provide all humans with all resources they require (SCARCITY of resources).
Some scholars argue that improvements in technology, such as development of 3D printers, may result in a POST-SCARCITY ECONOMY.
Social ownership may refer to cooperative enterprises, common ownership, state ownership, citizen ownership of equity, or any combination of these. In either form, this refers to a significantly higher role of the government in the economy.
* social ownership of the means of production
* replacement of profit motivation by the needs of the society
The upper stage becoming possible only after the socialist stage further develops economic efficiency and the automation of production has led to a superabundance of goods and services. Such technology, however, does not yet exist (through we are slowly moving closer to it by creating richer and more abundant societies).
A common error is comparing socialism and communism to democracy. It is like comparing apples to oranges. Communism and socialism are economic systems and can be compared to capitalism. Democracy is a political system and can be compared to autocracy or monarchy.
If government is significantly involved in directing what is to be produced, such a system is known as a PLANNED ECONOMY,
But leaving the government out of the loop can produce monopolies, and other abuses (of environment and labor). In other words, some form of governmental intervention in the form of laws is needed for the capitalism system not to go out of control.
Communist parties that tried to implement planned economies have failed due to insufficient technology, and usually restorted to oppressive, coercive methods of staying in power once people realized that the utopian communism is not likely to be achieved anytime soon.
North Korean "communism" known as JUCHE serves to legitimize the dictator position of the "great leader".
Similarly, Chinese and Soviet communism served to strengthen the power of the members of their corresponding communist parties.
Chinese, Soviet and North Korean leaders and communist party members/elites have prospered (became very rich), while the inefficient planned economy prevented other citizens from improving their lives.
European mixture of socialism and capitalism, often referred to as SOCIAL MARKET ECONOMY, or MARKET SOCIALISM has proven to be as efficient in generating wealthy and liberal societies as American capitalism - and is often seen as producing more equal societies less affected by certain social problems like high levels of crime.
Will this make utopian communism (a world were all people are equal and rich) real?
Simply put, the social market economy / market socialism ideas try to combine socialist and capitalist models. They are usually characterized by
* acceptance of profit motivation, moderated by significant levels of government intervention
* acceptance of both private and social ownership of the means of production
Unlike communism (and its planned economy), many elements of socialism have been successfully implemented in democratic societies.
MIXED ECONOMY opposes the excesses of capitalism such as inequality, poverty, and oppression of various groups, while rejecting both a totally free market (extreme capitalism) or a fully planned economy (communism).
This is known as MIXED ECONOMY.
Common social democratic policies include advocacy of universal social rights to attain universally accessible public services such as education, health care, workers' compensation, and other services, including child care and care for the elderly.
Microsociology vs Macrosociology
Urbanization ratio for Korea is now around 82.5% (2017).
1940 - 11.6%
1960 - 28%
1965 - 33%
1970 - 41%
1975 - 48.5%
1980 - 57%
1985 - 65%
1990 - 74%
1995 - 78.5%
2000 - 80%
2005 - 81.5%
What about Korea?
Rest of the world
Full transcript