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When the Market Was Not Free Economics E. Napp Name: __________________ Date: __________________ Economic Concepts Needed for This Lesson: Traditional Economy: a) A traditional economy relies on habit, custom, or ritual to decide what to produce, how to produce, and for whom to produce. b) In a traditional economy, sons learn the same jobs as their fathers. c) Traditional economies do not encourage innovation or change. Prove that a modern economy is not a traditional economy. ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ Command or Centrally Planned Economy: 1) Government officials decide what to produce, how to produce, and for whom to produce. Identify one society that currently has or had a command or centrally planned economy. State one disadvantage of this economic system. ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ Free Market: a) In this economy system, economic decisions are made by individuals. 1- Individuals are free to buy and free to sell. b) The government does not regulate or intervene in the market. 1- This concept is best summarized by the French term “Laissez-faire” or “Let them do as they please”. State two ways a free market differs from a traditional economy. ________________________________________________________________________ ________________________________________________________________________ ________________________________________________________________________ Reading: Excerpted and Adapted from The Worldly Philosophers by Robert L. Heilbroner “Since he came down from the trees, man has faced the problem of survival, not as an individual but as a member of a social group…Over the centuries man has found only three ways of guarding against the calamity of a community breaking down. 1- He has ensured his continuity by organizing his society around tradition, by handing down the varied and necessary tasks from generation to generation according to custom and usage: son follows father, and a pattern is preserved. In ancient Egypt, says Adam Smith, ‘every man was bound by a principle of religion to follow the occupation of his father, and was supposed to commit the most horrible sacrilege if he changed it for another.’ Similarly in India, until recently, certain occupations were traditionally assigned by caste; in fact, in much of the unindustrialized world one is still born to one’s métier [occupation]. 2- Or society can solve the problem differently. It can use the whip of authoritarian rule to see that its tasks get done. The pyramids of ancient Egypt did not get built because some enterprising contractor took it into his head to build them, nor did the Five Year Plans of the Soviet Union get carried out because they happened to accord with hand-me-down custom or individual self-interest. Both Russia and Egypt were authoritarian societies; politics aside, they ensured their economic survival by the edits of one authority and by the penalties that supreme authority saw fit to issue. [For countless centuries man dealt with the problem of survival according to one or the other of these solutions. And as long as the problem was handled by tradition or command, it never gave rise to that special field of study called ‘economics.’] 3- For the economists waited upon the invention of a third solution to the problem of survival. They waited upon the development of an astonishing arrangement in which society assured its own continuance by allowing each individual to do exactly as he saw fit – provided he followed a central guiding rule. The arrangement was called the ‘market system,’ and the rule was deceptively simple: each should do what was to his best monetary advantage. In the market system the lure of gain, not the pull of tradition or the whip of authority, steered everyone to his (or her) task. And yet, although each was free to go wherever his acquisitive nose directed him, the interplay of one person against another resulted in the necessary tasks of society getting done. It was this paradoxical, subtle, and difficult solution to the problem of survival that called forth the economists. For unlike the simplicity of custom and command, it was not at all obvious that with each person out only for his own gain, society could in fact endure. It was by no means clear that all the jobs of society – the dirty ones as well as the plush ones – would be done if custom and command no longer ran the world. When society no longer obeyed a ruler’s dictates, who was to say where it would end? It was the economists who undertook to explain this puzzle. But until the idea of the market system itself had gained acceptance, there was no puzzle to explain. ” Questions: 1- How is tradition or custom used to organize a society and ensure that the needs of the society’s members are met? ________________________________________________________________________ ________________________________________________________________________ 2- According to Adam Smith, how did the religion of Ancient Egypt ensure that tradition dictated a person’ occupation? ________________________________________________________________________ ________________________________________________________________________ 3- What institution in India ensured that tradition dictated a person’s occupation? ________________________________________________________________________ ________________________________________________________________________ 4- What do the pyramids of ancient Egypt and Stalin’s Five-Year-Plans have in common? ________________________________________________________________________ ________________________________________________________________________ 5- How does an authoritarian society address the needs of the community? ________________________________________________________________________ ________________________________________________________________________ 6- Why were economists NOT needed before the rise of a market economy? ________________________________________________________________________ ________________________________________________________________________ 7- What is a unique feature of a market economy? ________________________________________________________________________ ________________________________________________________________________ 8- How does self-interest benefit the individual but also the society? ________________________________________________________________________ ________________________________________________________________________ 9- What ensures that all jobs are done in a market economy? ________________________________________________________________________ ________________________________________________________________________ 1- A centrally planned economy is A) Always the most efficient economic system. B) An economic system in which the government makes all the decisions about production and consumption of goods and services. C) A form of free enterprise with minimal government involvement. D) An economic system that has no government involvement. 2- In a centrally planned economy, the three key economic questions are answered by the A) Central government alone. B) Central government with input from industry. C) Marketplace alone. D) Marketplace with some government involvement. 3- In the study of economics, the definition of a market is A) The concentration of the productive efforts of individuals and firms on a limited number of activities. B) An arrangement that allows buyers and sellers to exchange things. C) A place to buy groceries and other household items. D) A place where producers display their wares for sale 4- Something, like a reward or bonus, that encourages people to behave in a certain way could be called A) An incentive. B) Self-interest. C) Competition. D) Laissez faire. 5- Why do markets exist? A) Because people are not selfsufficient and need goods and services produced by others B) Because people are naturally competitive C) Because everyone enjoys trade and business D) Because most people are entrepreneurial 6- Authoritarian means A- Requiring strict obedience to an authority, such as a dictator. B- Ruling authority is granted to individuals by the government. C- Requiring acknowledgment of authorship. D- Ruling by aristocracy. 7- Laissez faire is A- The doctrine that states that government generally should not intervene in the marketplace. B- A period of change in which an economy moves away from a centrally planned economy toward a market-based system. C- A social and political philosophy characterized by its fair distribution of wealth. D- A philosophy that states that government should control the marketplace. 8- In a traditional economy, economic decisions are based largely on A- Custom. B- Science. C- Socialism. D- Technology. Analyze the following images: Why do you think most modern economies today are mixed economies? Support your answer with specific examples about why sometimes government preferences or consumer preferences should determine decisions regarding production and consumption. ____________________________ ____________________________ ____________________________ ____________________________ ____________________________ ____________________________ ____________________________ ____________________________ ____________________________ ____________________________ ____________________________ ____________________________ Analyze the following image: Explain the meaning of this post-Soviet cartoon. ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________