Transcript Economic Systems without Picturesx

Economic Systems
3 Basic Economic Questions
 What to Produce?

A society cannot have everything its people want, so it must make decision
3 Basic Economic Questions
 How to Produce?
 Should it use more labor
intensive or capital intensive
production processes?
 Often determines efficiency
3 Basic Economic Questions
 For Whom to Produce?
 How are the resources distributed?
Soviet citizens lined up for free bread (left) vs. bread aisle at American grocery
store where prices are charged (right.)
Social Goals
 Economic Freedom
 Individuals making their own
decisions, pursuing own
desires
 Economic Equity
 “Fairness” in the marketplace
Social Goals
 Economic growth
 Long-term increase in
quantity available to
individuals
 Economic security
 Protection against
economic risks such as
inflation, unemployment,
poverty
Social Goals
 Economic efficiency
 Using least costly methods,
most productive use of
resources
 Environmental Quality
 Concern for environment
and natural resources
Social Goals
 When goals conflict, trade-offs must be made
Economic System
 Structures, methods,
and principles on
how a society will use
its scarce resources
to produce and
distribute goods and
services
Traditional
 Economic decisions
based on:



Ritual
Habit
Custom
Traditional
 Individuals’ economic
decisions


Not made freely
Defined by customs of
elders and ancestors
Traditional
 WHAT TO
PRODUCE:

One’s job may be
based primarily on
what ancestors or
parents did
Traditional
 HOW to produce:

Same way as previous
generations
 FOR WHOM:

Depends on the
tribe/society
African Mbuti tribe
Traditional
 Examples:




African Mbuti tribe
Australian
Aborigines
Indigenous peoples
Canadian Inuits
Australian Aborigines
Traditional Economy Example
 Inuits
 Fish
and hunt in harsh
climate
 Spoils of hunt shared
with the tribe
 Cut into equal parts
 Hunter responsible
got first choice,
respect of the
community
 But
not the entire kill
Traditional
 Disadvantages:


Discourages new ideas
Strict rules punish those
who act differently

Leads to little progress
Isolated Peruvian Mashco-Piro
Indians
Traditional
 Disadvantages:

Without progress,
standard of living
decreases relative to
societies that value
behaviors that lead to
progress
Traditional Economic Example in the U.S.
 Native American
reservations

Operates outside the
American free market
system
– Among the poorest sector
of American society
– Today, many tribes that
live on designated
reservations are
primarily reliant upon
U.S. government
assistance
Traditional
 “Any man who
thinks he can be
happy and
prosperous by letting
the government take
care of him better
take a closer look at
the American
Indian.”

Henry Ford
Centrally Planned Economy
 AKA – Command
Economy
 Government
bureaucracy decides:



What to produce
How to produce it
For whom to produce
Centrally Planned Economies
 Disadvantages:

Economically Inefficient
Lacks price signals to
indicate changing
economic conditions
 Lacks flexibility to quickly
adjust to consumer
demands

Centrally Planned Economies
 Disadvantages:

Economically Unfree
Individual rights sacrificed
to “greater good”
 Tens of millions executed
as political prisoners
 Millions more starved to
death due to government
resource mismanagement

Centrally Planned Economies
 Mao Zedong of China


Worked, starved, or beat
to death approximately
45 million from 19581962.
Called the “Great Leap
Forward”
Communism
 Centrally planned
economic system
 Single-party government
 Near-complete
government control of
political and economic
decisions
 Examples:
Soviet Union
 North Korea
 Cuba

Communism
 Government owns all
resources and means
of production

Concept of private
property considered
immoral
Socialism
 Centrally planned
economic system
 Democratic control of
government and political
institutions
 Multiple political parties
seek election to office
Socialist president Francois
Hollande of France
Socialism
•
Individuals usually have
more economic freedom
than in a communist
economy but much less than
under a capitalist economy
 Examples:


Venezuela
France
Former socialist president, the late
Hugo Chavez of Venezuela
Authoritarianism
 Limit individual
freedoms and require
strict obedience
 All communist countries
have been authoritarian,
but not all authoritarian
countries are communist
 All deprive citizens of
political control
 Some take a hands-off
approach to the economy

Chile under Pinochet
Former Chilean leader Agosto Pinochet
overthrew democratically-elected socialist
Salvador Allende and transformed its
economy into a prosperous market economy.
Karl Marx (1818-1883)
 German command
economic philosopher
 Marxism

Term for his collective
thoughts on economic
philosophy and society
 Said human societies
advance through class
struggle

Conflict between ownership
class that controls
production and a laboring
class that creates production
Karl Marx (1818-1883)
 Advocated for working
classes to carry out an
organized revolution to
end capitalism and bring
about socio-economic
change.

A combination of social
(status) and economic
(wealth) factors
Karl Marx (1818-1883)
 Economic thinker
behind the Russian
Revolution

Bolsheviks over threw
the Czars, creating the
communist Soviet Union
 Books:


Communist Manifesto
Das Kapital
Karl Marx (1818-1883)
 Advocated for
communism (in which
people had no say in
government) until it was
universally accepted

Otherwise the rich
(“bourgeoisie”) would
undermine it
 Then socialism
Karl Marx (1818-1883)
 Famous Quotes

“From each according to
his abilities, to each
according to his needs.”
Karl Marx (1818-1883)
 Famous Quotes:

“The production of too
many useful things results
in too many useless
people.”
Karl Marx (1818-1883)
 Famous quotes:

“There is only one way to
kill capitalism – by taxes,
taxes, and more taxes.”
John Maynard Keynes (1883-1946)
 British founder of
modern macroeconomics
 Keynesianism

School of thought based
upon his ideas
 Major Book: The General
Theory of Employment,
Interest, and Money
John Maynard Keynes (1883-1946)
 Saw increasing a
democratic government’s
control of economy as a
solution to rising tide of
authoritarianism in early
to mid 1900s.



Communist Soviet Union
(Lenin & Stalin)
Nazi Germany (Hitler)
Fascist Italy (Mussolini)
John Maynard Keynes (1883-1946)
 Thought state
intervention was
necessary to moderate
“boom and bust” cycles
of economic activity

Governments should
“spend against the wind”
(spend in bad times, save
in good times)
John Maynard Keynes (1883-1946)
 Advocated using
government spending
policies and
manipulating the money
supply to reduce effects
of recessions and
depressions

Tolerate inflation to drive
down unemployment
John Maynard Keynes (1883-1946)
 Downplayed criticisms of
the long-term effects of
his policies

“In the long run, we’re all
dead.”
Market Economy
 Most resources owned by private citizens
 Citizens own businesses, keep earned profits
Market Economy
 Private individuals,
without government
interference, decide:



What to make
How to make it
For whom to make it
Price system
 Those willing and able to
buy

Voluntary Exchange
 Buyers and sellers freely and willingly engaging in
market transactions

Only happens if both are better off
Voluntary Exchange
 Fundamental
assumption of market
economics


Market economic theories
assume mutual benefit
Command economic
theories assume
exploitation
Capitalism
 Market economic system
 Features:

Capital accumulation



Investible money and
other things of value
Competitive markets
Wage labor

Workers selling labor to
employer under a formal
or informal employment
contract
Adam Smith (1723-1790)
 Scottish market
economic
philosopher
 Famous book:
An Inquiry into
the Nature and
Causes of the
Wealth of
Nations
Adam Smith (1723-1790)
 The invisible
hand of the
market


Describes selfregulating
behavior of the
market
Markets
automatically
channel selfinterest toward
socially desirable
ends
Adam Smith (1723-1790)
 Invisible hand of the market
 Example:
AT&T wants to make $
 People want to communicate
 AT&T provides communication
services
 People give AT&T $
 If AT&T is corrupt, unethical,
provides bad service, or does
anything else bad then
customers will substitute
towards competitors (Verizon,
Sprint)
 Competitive pressure makes
AT&T behave

Frederic Bastiat (1801-1850)
 French market economic
philosopher
 Developed the concept of
opportunity cost
 Said sole legitimate
government use of force
was to defend an
individual’s life, liberty,
and property
Frederic Bastiat (1801-1850)
 If government interferes
in the economy for any
other reason it is
“legalizing plunder”

Stealing from some on
behalf of others
Bank and automotive
bailouts of 2008/2009
examples of rich using
gov’t to plunder the poor
 Welfare example of poor
using gov’t to plunder
the rich

Frederic Bastiat (1801-1850)
 Encourages other
groups to organize to
elect politicians to enact
laws to help them
plunder others
 Therefore government
should not take from
anyone to give to
anyone

Stop plundering for
anyone
Frederic Bastiat (1801-1850)
 Supported voluntary
charity but opposed
government forcing
people to be charitable

Is “forced charity” even
charity?
 Famous book: The Law
Frederic Bastiat (1801-1850)
 Famous quote:

“The state is that great
fiction by which
everyone tries to live at
the expense of everyone
else.”

State = government
Friedrich von Hayek (1899-1992)
 Austrian market
economist
 Keynes’ contemporary
and intellectual rival
 Said eliminating inflation
is the only goal of
monetary policy

Keynes approved
tolerating moderate
inflation to combat
unemployment
Friedrich von Hayek (1899-1992)
 Described how changing
prices communicate
information, allowing
people to coordinate
plans


If the price of wood goes
up, people may start using
plastic mechanical pencils
Spontaneous order
Friedrich von Hayek (1899-1992)
 Valued individual
political and economic
freedom over all else


Rejected Keynes’
compromise of economic
freedom in order to
preserve political freedom
In Chile, preferred
authoritarian dictator
Augusto Pinochet over
democratically-elected
Socialist president
Salvador Allende because
people had more freedom
under Pinochet.
Friedrich von Hayek (1899-1992)
 Said socialism required
central economic
planning which
inevitably leads to
totalitarianism

Loss of political freedom
as well as economic
freedom
Friedrich von Hayek (1899-1992)
 Major book: The Road to
Serfdom
Milton Friedman (1912-2006)
 American market
economist
 University of Chicago
professor
 Proved that increasing
the money supply faster
than the economy was
growing is the only factor
that causes inflation

Rise in prices caused by
money’s loss of value
Milton Friedman (1912-2006)
 Accurately predicted that
Keynesian policy
tolerating moderate to
high inflation to fight
unemployment would
eventually lead to high
levels of both inflation and
unemployment

Stagflation
Milton Friedman (1912-2006)
 Group of Chilean
students of his put
together an economic
program implemented by
General Augusto Pinochet
that transformed Chile
from a poor country into
the only developed
(wealthy) economy in
Latin America

“The Chicago Boys”
Milton Friedman (1912-2006)
 Famous Quotes: “There’s
no such thing as a free
lunch.”
Milton Friedman (1912-2006)
 Famous Quotes:

“Underlying most
arguments against the free
market is a lack of belief in
freedom itself.”
Left-Right Economic Spectrum
 The more command features an economy has, the
more it is considered to be to the “left.”
 The more market features an economy has, the more it
is considered to be to the “right.”
Mixed Economy
 Share attributes of
command and market
economies
State Capitalism
 Mixed economic system
 Combines capitalist wage
and pricing mechanisms
with state ownership
 Private ownership of
means of production
(natural & capital
resources) allowed, but
under tight government
control
State Capitalism
 Critics call it “venture
socialism”

Venture capital =
financial capital
provided in early
development of startup companies with
high growth potential
State Capitalism
 Examples:




China
Russia
Brazil
United States taking
controlling stake in
GM in the auto
bailout?
Price Floor
 A price control or limit on how low a price can be
charged for a product, usually imposed by the
government
 Usually produces surpluses.
Price Ceiling
 A price control or limit on how high a price can be
charged for a product, usually imposed by the
government
 Usually produces shortages.