Download Centrally Planned Economies

How is a Centrally planned Economy Organized?
• Direct contrast to free market
economy
• Central government answers key
economic questions
• Government owns factors of
production, set quotas on what to
produce
• Self interest and competition
absent from system
• There is no consumer sovereignty
Socialism and Communism
• Socialism political and social
philosophy based on belief that
democratic means should be used to
distribute the wealth
• Public controls centers of economic
power
• Government owns major industries
• Communism economic and political
power lies in the hands of the central
government
• Society can only change after a violent
revolution and all government is
authoritarian
The Former Soviet Union
• Russian Revolution in early 20th
century led to rise of communism and
central planning
• USSR concerned with status as world
power
• Allocated all factors of production and
put resources in hands of armed
forces, factories and agriculture
• Agriculture and industry established
quotas to and distribution systems
planned by central government
• Took away incentive for production,
quality and innovation
• Left consumers with low quality goods
because state had to buy them
• Makers of consumer goods and
consumers experienced the burden of
this opportunity cost
Problems with Centrally Planned Economies
• Can be used to jumpstart industries and guarantee jobs
and income
• Stalin had some success in USSR with heavy industry
Disadvantages
a. Lack of incentive can lead to poor quality goods and
diminishing production
b. Performance always falls short of ideals
c. Systems lack flexibility to meet consumer demands and
wants
d. Sacrifice individual freedom for societal goals
• Few countries have centrally planned economies
because experiment has failed
• Many countries are moving toward a mixed economy
The Rise of Mixed Economies
• Most contemporary economies are
mixed economies that blend the
market and government
intervention
Limits of Laissez Faire
• Smith thought free market
brought greatest benefit and raised
standard of living
▫ Laissez faire doctrine that
government should not interfere in
marketplace
• Over time market economies have
evolved, needs an wants of society
are difficult to meet in a totally
free marketplace
The Rise of Mixed Economies
• Governments create laws protecting property,
enforcing contracts and insisting on competition
• Provides incentive for innovation, and keeps one
firm from dominating marketplace
• Society has to assess values and prioritize
economic goals
• Some goals met better by market and some by
government
• Each nation decides opportunity cost to pursue
goals (what they have to give up)
Circular Flow of Mixed Economy
Government purchases land,
labor and capital from households
in the factor market (federal
employees)
Government purchases goods and
services in the product market
(office supplies)
Government provides goods and
services through combination of
factor resources (ex. roads)
Government collects taxes from
individuals, businesses and
transfers it across the economy
Comparing Mixed Economies
• Foundation of US economy is free market
(private ownership of capital goods) where
individuals make decisions rather than the state
• At one end lies North Korea at the other is Hong
Kong
Comparing Mixed Economies
• North Korea- almost totally
controlled by the government,
business owned by government
and imports banned
• China- economy is dominated by
government, many enterprises are
becoming owned by individuals
(privatization), China is a
transition economy
• Hong Kong- one of the worlds
freest markets, private sector rule
and there is rarely government
interference except to control some
rents and wages
American Free Enterprise
Tradition of Free Enterprise
• America considered “land of
opportunity”, can achieve
success through hard work
• Why has America had
economic success?
• Open land, natural resources,
open (?) immigration,
tradition of free enterprise
(commitment to giving people
freedom and flexibility to
compete in the marketplace)
Constitutional Protection
• Constitution guarantees rights
that allow people to engage in
business activities
• Property rights- 5th, 14th
Amendments
• 5th Amendment protects property
rights from government
interference, 14th amendment
limits state governments from
taking property
• Government must provide a fair
price for property that is taken
(imminent domain)
Constitutional Protection
• Taxation
• Constitution has basic rules to
tax individuals and businesses
• 16th Amendment (1913) gave
Congress power to tax based on
income
• Article I, Sec. 10 gives
businesses the right to make
contracts, term can’t be changed
by legislative action, political
process can’t be used to get out
of contracts
Basic Principles of Free Enterprise
• Key characteristics: profit motive,
open opportunity, legal equality,
private property rights, free contracts,
voluntary exchange, competition
• Profit Motive- force that encourages
improvement of material well being,
makes people responsible for their
own success and failure, rewards
innovation
• Open Opportunity- everyone can
compete in the marketplace, allows
economic mobility up and down
Basic Principles of Free Enterprise
• Economic Rights-
▫ legal equality everyone
has the same rights
▫ property rights right to
control property and
possessions
▫ free contract decide what
agreements we want to enter
into
▫ voluntary exchange
decide what we want to buy
and sell
▫ competition rivalry among
sellers and customers
Role of the Consumer
• Fundamental purpose is to give consumer
freedom to make economic choices
• Consumers can make wishes known by forming
interest groups to persuade public officials on
economic issues like taxation, land use, etc.
The Role of Government
• Expect government to carry out duties
and protect Constitutional rights, and
business activities
• Information and free enterpriseconsumers expect basic information on
what we purchase, educated consumers
make market work more efficiently
• Protecting health, safety and
well-being- government regulates
industry, imposes various restrictions
(consumer protection laws,
environmental regulation)
• Negative effects of regulationprotections costly to implement and can
lead to higher prices, stifles competition
Promoting Growth and Stability
• American economy very big, armies of
economists predict whether business will
grow or shrink
• One way to measure economic trends is
calculate Gross Domestic Product
(GDP), total value of all goods and
services produced by economy
• GDP can predict business cycles
(periods of expansion followed by
contraction)
• Free enterprise subject to ups and downs
because economic decisions are made by
business and individuals acting in their
own self interest
Promoting Economic Strength
• Government makes public policy to stabilize economy
• Goals are high employment, steady growth and stable prices
• Unemployment- rate 4-6% is desirable, economic policy is
to create jobs
• Growth- Each generation wants higher standard of living
than previous generation, means economy must grow
• Stability- People want stable economy; government
promotes stability, keeps prices from sudden dramatic shifts
• Desire stable financial institutions, money protected from
fraud and mismanagement
• Governments regulate business and banks to insure stability
• Elective choices guide government economic policy
Technology and Productivity
• American have higher standard of living than most other
countries
• Factors- work ethic, technology
• Work ethic- Americans value work and purposeful
activity
• Technology- produces more output, allows economy to
operate efficiently and productively
• Gives US competitive advantages
The Government’s Role
• Government is engine of free enterprise
system
• Provides incentives for innovation
• Funds research and development through
universities, own research institutions
(NASA)
• Offers inventors possibility of making huge
profits through patent and copyright
grants
• Patent- exclusive right to produce and sell
product for 20 years
• Copyright- exclusive right to sell creative
works
• Copyrights and patents protected by
Constitution (Article1, Sec. 8)
Providing Public Goods
Public Goods
• Shared good or service for which it
would be impractical to make
consumers pay for individually or to
exclude non payers
• Making customers fund projects in
public interest is the reason behind
taxation
• To not exclude non-payers we believe
certain facilities and services should
be available to all
• Everybody should be able to use
public goods without reducing the
benefits to any single consumer
Costs and Benefits of Public Goods
• Cost critical in determining
whether something is produced as
public good
A.Benefit to each individual is less
than cost that each would have to
pay if it were provided privately
B. Benefits to society are greater
than cost
• Public goods financed by public
sector (part of economy that
involves transactions of
government)
Free Rider Problem
• Free rider- someone who
would not choose to pay for
something but would receive
benefits anyway, consume
what they do not pay for
• Fire protection, national
defense are examples
• Taxes are collected to reduce
this phenomenon
• All people are better off if
government provides service
Market Failures and Externalities
• Market failure situation in which market does
not distribute resources efficiently
• Markets operate on individual choice,
competition and self interest, distributes
resources unevenly
• Public ownership can produce positive and
negative side effects called externalities
• Externalities- economic side effect of a good
or service that generates benefits or costs to
someone other than the person deciding how
much to produce or consume (side effects of
economic decisions)
Positive and Negative Externalities
• Positive externalities- Public
goods that generate benefits to
many people
• Many believe that private sector can
generate positive externalities more
efficiently
• Negative externalities- cause
part of the cost to be paid by
someone other than the producer
• Government’s goals- encourage
creation of positive externalities
(ex. education), limit negative
externalities (ex. pollution)