Download Unit 1 Command and Market Economy

How do we evaluate the market economy?
0.
1.
Allocation of resources occurs as a result of freely determined interactions between buyers and sellers
of goods and services in markets by means of the price mechanism.
Five characteristics of a market economy
 Freely determined prices serve four specific functions
 signaling
 allocating
 incentive
 rationing
 Markets are open and competitive
 Voluntary exchange
 product market / factor market
 many buyers and sellers / no one dominates
 Property rights are clearly defined and protected:
 Military, police, fire
 Court system to decide competing claims
 Entrepreneurship is fostered by incentives to invent, innovate and produce
 Copyright / patent laws
 profit incentive motivates quantity, quality and efficiency
 A limited role for government
i. Protective Role
 Enforce laws and contracts: legal framework for “rules of law” against force,
fraud, coercion; copyrights; labor legislation
 Maintain competition: monopolies, anti-trust
ii. Corrective Role
 Redistribute income. Provide a safety net: taxation to help poor (welfare),
handicapped, elderly (medicaid, SS), natural disasters
 Provide public goods
 Correct market failures
iii. Stabilizing Role
 Fight unemployment
 Encourage price stability
 Promote economic growth
Command Economy ------------------------------------ Mixed --------------------------------------- Free Market
N. Korea
China
Sweden
United States
How do we evaluate the command economy?
0.
Command Economy / Centrally Planned Economy
i. What were some things that stood out in your reading last night about the command
economy?
ii. Allocation of resources occurs through economic decisions made on behalf of the public
by planners who determine what sorts of goods and services to produce and how they are
to be allocated. The state allocates resources, and sets production targets and growth
rates according to its own view of people’s wants. State controls all factors of
production: LLCE
iii. Common in eastern Europe from end of WWII until 1989. Still found in China, Cuba,
some East Asian and African nations. Focused on conversion from a backward
agricultural economy to a developed industrial one. Success due to utilizing
underutilized natural resources. But the command economy could not deliver continued
investment or productivity gains.
iv. T-Chart Advantages:
 The government can harness land, labor, and capital to serve the economic objectives
of the state (which, in turn, may be decided by the people through a democratic
process).
 Consumer demand can be restrained in favor of greater capital investment for
economic development in a desired pattern. For example, many modern societies fail
to develop certain medicines and vaccines which are seen by medical companies as
being unprofitable, but by social activists as being necessary for public health. The
state can begin building a heavy industry at once in an underdeveloped economy
without waiting years for capital to accumulate through the expansion of light
industry, and without reliance on external financing.
 A planned economy can maximize the continuous utilization of all available
resources. Under a planned economy, neither unemployment nor idle production
facilities should exist beyond minimal levels, and the economy should develop in a
stable manner, unimpeded by inflation or recession.
 A planned economy can serve social rather than individual ends: under such a
system, rewards, whether wages or perquisites, are to be distributed according to the
social value of the service performed.
 A planned economy eliminates the dependence of production on individual profit
motives, which may not in themselves provide for all society's needs
v. T-Chart Disadvantages:
 lack of competition = lack of investment = lack of incentive to productivity; success
meant meeting the planned target
 waste of resources: resources diverted to planning, not producing; bureaucracy:
Gosplan (USSR state planning org) employed 18 million people = 1/6 of entire labor
force. Calculates 12 million prices and planned 24 million products.
 over-regulation and inflexibility: cannot adjust to changing circumstances; shortages;
no outlets for initiative and ingenuity; price system does not give info
 requires high intervention in personal lives of citizens: where to live, what job to
have
 Corruption, favoritism, parallel markets: strict control created incentive to avoid it;
markets are created wherever wants are unsatisfied, someone will find a way to
satisfy them
vi. “Because the State says to do it this way…”