Download Chapter 2

Economic Systems
Powerpoint produced by Rachel Farrell (PDST) & Aoife Healion (SHS, Tullamore)
Sources of information: SEC Marking Schemes, newspaper articles & documentaries
LC Economics Syllabus
Economic System & Economic Thought
 Brief historical outline of economic
thought – Smith, Marx, Keynes etc.
 Market, centrally planned and mixed
economies.
Exam Questions – Ord Level

Short
2011 Q 7 Match

Long
2011 Q 7 (c)
Exam Questions – Higher Level
Short
 2011 Q 2
 2009 Q 3
 2008 Q 5
Long
 2007 Q 4
An Economic System

1.
2.
3.
Is the institutional means through which
natural resources are used to satisfy
human wants by deciding;
What goods are to be produced.
How are these to be produced.
Who is to benefit from the production.
The three economic systems are:
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Free Enterprise/Market Economy
(Laissez Faire or Capitalism)
Centrally Planned/Command Economy
(Communism)
Mixed Economy
(Central planning & private enterprise)
Free Enterprise Economy
(Definition HL 2008 SQ 5 )
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Advocated by Adam Smith
The market mechanism operates.
The factors of production are privately
owned.
There is limited government interference.
Resources are allocated by a decentralised
decision making process.
Citizens are motivated by self-interest.
Characteristics of a
Free Enterprise Economy
(Eg. USA Capitalism )
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1. Market Mechanism:
Resources are allocated through the
market/price mechanism.
If there is a sufficient demand for a
product/service it will be supplied.
The higher the profit the more of a
good/service will be produced.
Profit motive

2. Ownership of the factors of production:
Nearly all of the factors of production are
privately owned.
Laissez Faire
3. Limited government interference:
 The government exists only to:
 Supply public goods eg. schools…..
 Provide a legal framework for citizens
 Prevent the creation of monopolies
4. Decentralised decision making:
 Decisions about:
 allocation of resources
 what to produce
 and who gets what
 are made by individuals/entrepreneurs.
5. Motivated by self-interest:
 Consumers want to maximise their utility
(satisfaction).
 Producers want to maximise their profits.
 Investors want to maximise their return.
Article re pole
Economic advantages
1. Choice:
 Consumers with income have a wide choice
of goods & services.
2. Efficiency:
 There is an incentive to be cost effective as
those who are not will go out of business.
3. Innovation:
 Producers who come up with new ideas
may be rewarded by increased sales &
profits.
4. Less bureaucracy:
 As decisions are made by individuals there
is less need for large expensive
administration.
Disadvantages
1. Unequal distribution of income & wealth:
 Individuals who cannot supply a factor of
production have no wealth.
2. Lack of essential public services:
 If an activity does not make a profit then it
may not be provided.
 Eg. education.
3. Social costs:
 Lack of government regulation leads to:
 Exploitation of labour
 Pollution
 Destruction of the environment
4. Vital services in private hands:
 It may not be desirable to have defence,
judiciary, police under private control.
5. Unemployment:
 Entrepreneurs try to keep costs down and
lay off workers.
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“…one of the great paradoxes of
modern history: that an economic
system designed to offer infinite
choice…has ended up homogenizing
humanity”.
Nial Ferguson “Civilization: The West & the Rest”.
“Banks
that think they’re casinos put us all at risk”.
Independent August 2011
“Corporate crime can inflict far more
damage on society than street crime”.
Anto Kerins Irish Times Magazine Jan 2011
Suggested Resources

The Corporation
Moral hazard
A person insulated from risk
behaves differently from how
they would behave if they were
Fully exposed to the risk.
For example, a person with
insurance against
car theft may be less cautious
about locking his or her car,
because the negative
consequences of vehicle theft
are (partially) the responsibility
of the insurance company.
So will the possibility of debt
Forgiveness make people less
Inclined to make an effort to pay
Their mortgage??
Independent 28/06/11
Moral
Hazard?
Naomi Klein vs. Alan Greenspan on
crony capitalism in the US

In the 1980’s Ronald Regan and Margaret Thatcher
were big fans of Milton Freidman and close friends
of General Augusto Pinochet, the Chilean dictator,
who allowed Chile to be a laboratory experiment for
Freidman’s free market economic policies in the
1970’s.
Suggested Resources

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Naomi Klein’s “The Shock Doctrine looks
at how the economic policies advocated
by Milton Freidman were imposed on
the people of Chile with the support of
the US government.
Youtube has clips of the film and
comments from Milton Freidman
The Shock Doctrine
Advisor to Nixon, Pinochet,
Thatcher, Regan & GW Bush Jnr
Are We Witnessing the Shock Doctrine in
Effect?
Milton Friedman debates Naomi Klein
Centrally Planned Economy
(Communism former USSR, China)

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This system was advocated by Karl Marx &
later Vladimir Lenin.
They asserted that government control of
all areas of economic activity is essential in
order to eliminate the inequalities of
capitalism.
Centrally Planned Economy
1. Planning Mechanism:
 Resources are allocated by the
state/government through a planning
mechanism.
 Planners try to predict consumers needs.
 They fix the price & quantities produced.
2. Factors of Production:
 The factors of production are owned by the
state.

Except for labour but this is directed by the
state.
3. Maximum government interference:
 The government exists to regulate all
economic activity.
4. Centralised decision making:
 All decisions are made by the government.
5. Motivated by the common good:
 Consumers, workers & government are
assumed to be selfless.
 They co-operate together for the common
good.
Economic advantages
1. Reduced inequalities
 The government may place a great
emphasis on providing all citizens with
a minimum standard of living.

Eg. subsidising essential food.
2. Provision of essential services
 The state provides vital services.
 Eg. healthcare, education.
3. Economies of scale
 The government may be more efficient
in the production of goods & services
that need large amounts of capital.
 Large scale production leads to lower
costs per unit.
 Eg. energy generation
4. Full employment*
 Historically centrally planned economies
were able to achieve full employment
while some “free enterprise economies”
suffered from unemployment.

*All those who are willing to work at
existing wage levels are employed.
Economic disadvantages
1. Shortages of goods & services
 The state may limit prices causing
excess demand.
 Shortages develop.
 Goods allocated by a queuing system.
2. Restricted choice and freedom
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Consumers have little say in what is
produced.
What is available might be restricted.
Eg. Denim jeans banned as they were a
symbol of Western capitalism
3. Inefficiency
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No profit motive.
Therefore no incentive for enterprise
and innovation.
Therefore individuals and firms are not
encouraged to take risks, work hard or
innovate.
4. Low economic growth

As individuals are not motivated by selfinterest this may result in reduced
economic activity and poor economic
growth.
The rise & fall of Communism
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Excesses of the Industrial Revolution.
Led to inequality and poverty.
No social welfare.
Capitalism condemned by Marx.
It contained the seeds of it’s own destruction.
Communism would replace capitalism, leading
to a socialist state where all means of
production would be publicly owned.
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In the early 20th century under the control
of the Bolshevik Party, a communist
government seized power during the
Russian revolution, leading to the creation
of the Soviet Union, the world’s first Marxist
state.
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During ensuing decades, communist governments
took power in many parts of the world through
conquest, including most of eastern Europe,
eastern Asia and parts of Africa.
During the late 1980s and early 1990s most of
these communist regimes collapsed and adopted
capitalistic economic policies.
Today, communist governments control China,
Cuba, Laos, Vietnam, and North Korea.
Animated map of Communism (1910- 2000)
3rd secret of Fatima; Consecration of Russia
The cartoon version of
George Orwell’s “Animal Farm”
Mixed Economy
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An economy that has a mix of both
central planning & private enterprise in
its economic system.
Eg. Ireland.
Examples of
Mixed Economy Economic Activity
1. Existence of Social Partnership
 Negotiation between the government and
other social partners to set and achieve
targets over a specified time.

Eg. “Towards 2016”. The government
meets with IBEC, ICTU, IFA … to set
targets for taxation and job creation.
2. Existence of semi-state bodies and private
enterprise
 There are both government and privately
owned businesses providing goods and
service.
 Eg.
 RTE – government own TV station
 TV3 – privately owned TV station
3. Government departments
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Regulate economic activity through their
actions.
Eg. The financial services regulator
ensures that banks work within the law.
4. Legislation
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The government introduces laws which
affect economic activity.
Eg.
Minimum Wage Act 2000
Companies Act 1990
Planning Laws
5. Use of taxation & gov spending
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The use of fiscal policy* by the
government affects economic activity and
can alter market outcomes.
Eg. Increasing PRSI will make it more
expensive to hire workers and may cause
unemployment.
* (any action taken by the government which
alters current revenue & expenditure) .
Economic advantages
1.
2.
3.
4.
Benefits from efficiency encouraged by free
enterprise with regulation form central
government.
Enterprise is encouraged.
Ensures a fair distribution of wealth (tax).
Provision of essential services (health).
Economic disadvantages
1.
2.
3.
Gov may have to support unsuccessful
enterprise (eg banks).
State intervention may result in higher
taxes.
A large public & private sector may be
divisive (private sector workers critical of
the job security of public sector workers).
John Maynard Keynes
(1883-1946)
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Keynes lived during an era of great economic
change and upheaval – the post-war changes
in the 1920’s and the depression of the
1930’s, when there was a loss of faith in
classical economic doctrine.
A new approach was sought by many
governments and economists.
Keynes provided this alternative which has
resulted in the modern mixed economy such
as exists in Ireland and the UK today.
Privatisation of SSB
Eg. Eircom & Aer Lingus
Public/private partnership
To build schools & hospitals
Signs that Ireland
is moving towards a
Free Enterprise Economy
Deregulation of markets
Allowing competition into power
generation industry.
Eg.
Encouraging enterprise
By;
Gov agencies such as
County Enterprise Boards &
Low CPT & lower PRSI,
Nationalisation of Banks
Eg. Anglo Irish Bank
Increased legislation
Eg.
Introduction of minimum wage
Signs that Ireland
is moving towards a
Centrally Planned Economy
Establishing tribunals
Tribunals of enquiry to
examine the abuses of the
free market system
“Nanny State”
Some say the government
is interfering too much?
Eg. smoking laws
Suggested Resources
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Print out this pp and cut into 6 pieces to
use for “My Little Book” methodology.
Cloze tests
Crosswords
Matching exercises
Wordwall games (Powerpoint)
Exam question templates
1. Competition
2. Science
6. Work (ethic)
6 “killer aps”
3. Property
5. Consumption
4. Medicine
Suggested Resources

Niall Ferguson’s 6 part documentary
explores the rise of Western civilization due
to 6 “killier aps” and asks
“Is the West history?”.
Suggested Resources
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Capitalism a Love Story
Michael Moore’s documentary explores
the down side of capitalism and the
alternatives.
Clips available on Youtube
Suggested Resources

The Corporation
Suggested Resources
The cartoon version of
George Orwell’s “Animal Farm”

The Shock Doctrine
Advisor to Nixon, Pinochet,
Thatcher, Regan & GW Bush Jnr