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Capitalism Has Changed | Here’s Why
Capitalism - is it good or bad? It’s a war of ideologies, sure. Common statements parried back and forth such as ‘capitalism is in crisis’ or ‘capitalism creates jobs’ are not exactly rare.
But what exactly is capitalism?
Scottish economist, Adam Smith, explains why in his work An Inquiry into the Nature and Causes of the Wealth of Nations, published in the 18th century.
Smith says that capitalism is a system of natural liberty, where the central aims of political and economic system is the accumulation of profit. One of Smith’s key insights was his connection between increased productivity and the division of labour.
A famous example of Smith’s was when he examined a pin manufacturing firm. He said that a pin worker’s specialisation gave him the skills and experience to work more productively.
Adam Smith said he visited a pin factory employing 10 men who produced 48,000 pins per day. If ten workers did every step themselves, they could each produce 10 or 20 pins per day. So the pin factory replaces up to 4,800 pin makers. The increase in labor productivity (output per person per day) is as high as 50 times that of individual pin makers.
It’s true. Specialisation and division of labour have dramatically increased productivity and trade
It’s these sorts of ideas that have heralded Smith’s book as a groundbreaking description of capitalist economics. The influence of this is still felt today. However, a lot has changed since the 18th century!
Economic agents (households, firms and governments) are very different today than in Smith’s time. For example, businesses were then owned by individuals, rather the MNCs today who are put on the stock market for public trading of shares. Back then, business owners were often personally involved in the production process e.g. a village blacksmith or cobbler
The MNCs of today, while large, experience a divorce of ownership from control. The owners of the company often know nothing about the company itself, nor are they experts in the industry they are invested in. This can lead to dramatic inefficiencies.
Markets are also markedly different. In Smith’s time, markets were local or regional. Today, markets are global. We even have firms offering to blast people into space for a holiday. A lot has changed to say the least.
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