Download Unit 3 - Lesson 1A - Types of Economic Systems

Grade 12 Canada and World Issues – Unit 3 Lesson 1
Types of Economic Systems
In general terms, economic systems can be classified in four terms. The four terms and
their definitions are noted in Table 1.
Table 1. Types of Economic Systems
Definition
Terms
Practice
Market Economy
An economic system in which
individuals own and operate
the factors of production.
Free enterprise
Capitalism
United States
Great Britain
Japan
Command
Economy
An economic system in which
the government owns and
operates the factors of
production.
Socialism
Communism
Cuba
China
Laos
Traditional
Economy
An economic system based
upon customs and traditions.
Economy is based upon
agriculture and hunting.
NonIndustrialized
Agrarian
societies
Chad
Haiti
Rwanda
Mixed Economy
An economic system that has
features of both market and
command economies.
In reality, there are no pure market economies or pure command economies. For
example, free enterprise reigns in the United States, yet the government plays a major
role in the USA economy. Minimum wages, social security, and regulatory policies are
examples of government involvement.
In China, some private ownership of businesses is allowed, however the government still
maintains tight control over the factors of production and prices.
While the United States and China are mixed economies because they contain both
market and command economic features, this statement may be misleading because the
role that the respective governments play in the economy are quite different.
Our economic system is often referred to as a Market Economy. A Market is defined as
any place a buyer or consumer can meet with a seller or provider of a good to determine
the price and quantity of a good. Thus, a yard sale or Internet purchases qualify as a
“market.” The Market Economy is based on certain fundamental beliefs.
Private Property - Labor resources, natural resources, capital resources (e.g., equipment
and buildings), and the goods and services produced in the economy are largely
owned by private individuals and private institutions rather than by government.
This private ownership combined with the freedom to negotiate legally binding
contracts permits people, within very broad limits, to obtain and use resources as
they choose.
Freedom of Enterprise and Choice - Private entrepreneurs are free to obtain and
organize resources in the production of goods and services and to sell them in
markets of their choices. Consumers are at liberty to buy that collection of goods
and services that best satisfies their economic wants. Workers are free to seek
any jobs for which they are qualified.
Motive of Self-Interest – This is the "Invisible Hand" that is the driving force in a market
economy: each individual is promoting her/his self-interest. Consumers aim to
get the greatest satisfaction from their budgets; entrepreneurs try to achieve the
highest profits for their firms; workers want the highest possible wages and
salaries; and owners of property resources attempt to get the highest possible
prices from the rent and sale of their resources.
Competition - Economic rivalry means that buyers and sellers are free to enter or leave
any market and that there are buyers and sellers acting independently in the
marketplace. It is competition, not government regulation, that diffuses economic
power and limits the potential abuse of that power by one economic unit against
another as each attempts to further its own self-interest.
System of Markets and Prices - Markets are the basic coordinating mechanisms in our
type of economy, not central planning by government. A market brings buyers
and sellers of a particular good or service into contact with one another. The
preferences of sellers and buyers are registered on the supply and demand sides
of various markets, and the outcome of these choices is a system of product and
resource prices. These prices are guideposts on which participants in markets
make and revise their free choices in furthering their self-interests.
Limited Government - A competitive market economy promotes the efficient use of its
resources. As a self-regulating and self-adjusting economy, no significant
economic role for government is necessary. However, a number of limitations
and undesirable outcomes associated with the market system result in an active
but limited economic role for government.
The Causes of Economic Growth
Economic Growth is caused by improvements in the quantity and quality of the factors of
production that a country has available i.e. land, labour, capital and enterprise.
Conversely economic decline may occur if the quantity and quality of any of the factors
of production falls.
Improving the Quantity and Quality of Land Resources
Increases in the quantity of land available for agriculture will increase economic
growth. However, the extent to which this happens is limited to the extent to which
unused land can be converted to agricultural land. Land, as an economic resource, is
scarce. Land has an opportunity cost. Land converted for agricultural purposes is no
longer a habitat for wildlife.
The scarcity of land in the face of a growing population means that the law of
diminishing returns might become relevant. The law predicts that an increasing
amount of labour applied to a fixed quantity of land will cause the productivity of the
labour to fall. To prevent this loss in productivity the quality of the land must be
improved (e.g., improved irrigation, fertilizers, pest control).
Improving the Quantity and Quality of Human Resources
Increases in the supply of labour can increase economic growth. Increases in the
population can increase the number of young people entering the labour force.
Increases in the population can also lead to an increase in market demand and
stimulate production. However, if the population grows at a faster rate than the level
of GDP, the GDP per capita will fall.
The quality of that labour also impacts economic growth. Improving the skills is seen
important key. Many LDC work to provide universal primary education. As more and
more capital is used, labour has to be better trained in the skills to use them, such as
servicing tractors and water pumps, running hotels and installing electricity.
Education spending is also an opportunity cost, and it is often referred to as
investment spending on human capital.
Improving the Quantity and Quality of Capital Resources
It is important to distinguish between:
Directly productive capital (e.g., plant and equipment, factories)
Indirectly productive capital (e.g. infrastructure, roads and railways).
The process of acquiring capital is called investment. The opportunity cost of capital
investment is the current consumption foregone. The level of investment and the quality
of investment will directly affect the level of economic growth. The efficiency of the
labour force and the other factors of production will depend upon the amount and quality
of capital. In LDCs, some investment comes from abroad in the form of foreign direct
investment. There has been criticism of some investment in LDCs as to whether it is
appropriate. If production moves from being labour intensive to capital intensive,
unemployment and poverty increases.
The Quantity and Quality of Enterprise Resources
The level of economic growth may be slowed down if there is a lack of
entrepreneurial and risk taking managers. For growth to take place inventions and
innovations must be encouraged. Again the role of education is seen as being
essential here. Multinational enterprises also can provide training in management
skills.
In countries where government has taken a considerable role in production, there
might be a lack of enterprise culture. In addition, where traditional agriculture has
been communally organized, the move towards a private sector profit-making culture
is likely to be slow.
Grade 12 World Issues - Unit 3 Lesson 1 - Challenges to Diversity
Economic Theories – Wallerstein’s Core and Periphery
The Core and Periphery Theory was developed by Immanuel Wallerstein. Wallerstein examined
the development and change in post-colonial Africa, and between 1974 and 1989, he wrote a
three-volume theory regarding global economics called The Modern World System.
Wallerstein rejected the idea of a Third World. Rather, he suggested there is only one world
connected by a complex network of economic exchanges (i.e., a World System). This system
originates in 16th Century Europe giving the politically and economically modernizing countries
such as Britain and France an initial capital or economic advantage over other parts of the world.
The advantage expands through industrialization in the 20th Century so that every part of the
world is incorporated into a global capitalist economy. However, the distribution of capitalism is
not homogeneous; rather, it differs due to civilization development. These differences give rise
to an economic core and periphery.
Wallerstein’s theory has the following main features.
Countries in Western Europe form an “economic core” around which the rest of the world
developed.
Western European countries shared these common characteristics:
Strong central government
Large public service
Effective and well equipped armies
Capital concentrated in urban centres
Expanding economy
The periphery countries include Asia, Africa, Eastern Europe and Latin America.
The periphery countries typically were controlled by the core countries. The periphery feeds
materials, natural resources and labour to the core.
The theory has four country categories:
Core
Semi-periphery – manufacture goods with high value, exist outside of core but
exploit the periphery
Periphery – owned by the core, supplies and all surpluses to the core, weak or
no central government, cheap labour
External – outside world economy, isolated
The Core will continue to dominate. The Core may shift geographic location, but its function
does not change. As well, rich and poor sectors will continue to grow (i.e., the Core will get
richer while the Periphery becomes poorer). This gap serves the needs of the Core (e.g.,
Periphery is source of cheap labour).
An effect of the Core’s shift and expansion is everything is turned into a commodity,
including human labour. As a commodity, the economic market dictates their value, and as
such, the intrinsic value given to human relationships, labour, natural resources and land is
removed.
Although criticized by conservatives and neo-liberals because it downplayed the role of culture,
many anti-globalization use Wallerstein’s ideas to advocate for “non-system approaches” to world
development.
NOTE: The UN Development Program suggests the difference between the bottom 20% (poor)
and the top 20% (rich) is increasing. The ratio of poor to rich has increased from 30:1 in 1960 to
over 60:1 in 2000.
Economic Theories - Rostow’s Modernization Theory
The Five Stages of Economic Growth
W.W. Rostow. 1960. The Stages of Economic Growth: A Non-Communist Manifesto. Cambridge.
In 1960, Walt Whitman Rostow suggested that economic development within a country moves
along five identifiable stages of growth. NOTE: Rostow was a strong anti-communist and a
strong advocate of capitalism and free market enterprise. His theory is seen as part of the
framework for the Modernization Theory of world development.
According to Rostow, development or the movement from an early stage to a later stage requires
substantial investments of capital. Moreover the right conditions for investment need to be
established for change to occur. Thus, foreign aid or direct investment in a country is only
effective if the conditions of the prior stage have been met. For example, aid for a Stage 3-type
development would be premature if the Stage 2 requirements have not been reached. In this
case, it would be better to invest in Stage 2-type actions to ensure a more rapid rate of change.
Like Wallerstein, Rostow’s approach was centred in Western culture and tended to ignore
regionally differences. As well, it may be difficult to distinguish between stages as change
occurs. Regardless, Rostow’s Five Stages of Economic Growth highlighted the need for
investment, economic development and targeted foreign aid.
Stage 1 Traditional Society - The economy is dominated by subsistence activity. Output is
consumed by producers; it is not traded. Trade is barter where goods are exchanged
directly for other goods. Agriculture is the most important industry. Production is labour
intensive using only limited quantities of capital. Technology is limited, and resource
allocation is determined very much by traditional methods of production.
Stage 2 Transitional Stage (Preconditions for Takeoff)
Increased specialization generates surpluses for trading. There is an emergence of a
transport infrastructure to support trade. Entrepreneurs emerge as incomes, savings and
investment grow. External trade also occurs concentrating on primary products. A strong
central government encourages private enterprise.
Stage 3 Take Off
Industrialization increases with workers switching from the agricultural sector to the
manufacturing sector. Growth is concentrated in a few regions of the country and within one
or two manufacturing industries. The level of investment reaches over 10% of GNP. People
save money. The economic transitions are accompanied by the evolution of new political and
social institutions that support industrialization. The growth is self-sustaining as investment
leads to increasing incomes in turn generating more savings to finance further investment.
Stage 4 Drive to Maturity
The economy is diversifying into new areas. Technological innovation is providing a diverse
range of investment opportunities. The economy is producing a wide range of goods and
services and there is less reliance on imports. Urbanization increases. Technology is used
more widely.
Stage 5 High Mass Consumption
The economy is geared towards mass consumption, and the level of economic activity is very
high. Technology is extensively used but its expansion slows. The service sector becomes
increasingly dominant. Urbanization is complete. Now, multinationals emerge. Income for
large numbers of persons transcends basic food, shelter and clothing. Increased interest in
social welfare.
Grade 12 World Issues - Unit 3 Lesson 1
World Economic Systems
http://www.dogchurch.com/dogpac/weconomics.html
Here is a practical…if not funny…way of thinking about political and economic systems.
FEUDALISM - You have two cows. Your lord takes some of the milk.
PURE SOCIALISM - You have two cows. The government takes them and puts them in
a barn with everyone else's cows. You have to take care of all the cows. The
government gives you as much milk as you need.
BUREAUCRATIC SOCIALISM - You have two cows. The government takes them and
puts them in a barn with everyone else's cows. They are cared for by ex-chicken
farmers. You have to take care of the chickens the government took from the chicken
farmers. The government gives you as much milk and eggs as the regulations say you
should need.
FASCISM - You have two cows. The government takes them both, hires you to take
care of them and sells you the milk.
PURE COMMUNISM - You have two cows. Your neighbors help you take care of them,
and you all share the milk.
RUSSIAN COMMUNISM - You have two cows. You have to take care of them, but the
government takes all the milk.
CAMBODIAN COMMUNISM - You have two cows. The government takes both and
shoots you.
DICTATORSHIP - You have two cows. The government takes both and drafts you.
PURE DEMOCRACY - You have two cows. Your neighbors decide who gets the milk.
REPRESENTATIVE DEMOCRACY - You have two cows. Yours neighbors pick
someone to tell you who gets the milk.
BUREAUCRACY - You have two cows. At first the government regulates what you can
feed them and when you can milk them. Then it pays you not to milk them. Then it takes
both, shoots one, milks the other one and pours the milk down the drain. Then it requires
you to fill out forms accounting for the missing cows. In triplicate.
PURE ANARCHY - You have two cows. Either you sell the milk at a fair price or your
neighbors take the cows and kill you.
CAPITALISM - You have two cows. You sell one and buy a bull.
SURREALISM - You have two giraffes. The government requires you to take harmonica
lessons.