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ECONOMIC SYSTEMS The 3 Major Production Questions • What to produce? • How to produce? • For whom to produce? We will classify economic systems into categories, based on how each of them attempts to answer these three questions. Traditional Economy • The answers to the three major production questions are dictated by ritual, habit, or custom. Where might you find a Traditional Economy? Examples of Traditional Economies: • Inuit tribe • Some parts of South America • Some parts of Africa • Aboriginal tribes of Australia • Some island societies • All are remote Traditional Economies Advantages? Disadvantages? Traditional Economies Advantages? • Simple • Defined roles • Strong community • Self-sufficient • Specialization • • • • • Disadvantages? Less growth/wealth Less choice/variety Lack of motivation Uncertainty Resource Curse Command Economy • The answers to the three major production questions are given by some strong central authority (i.e. the government) • What is the “–ism” that comes to mind? • Communism – an economic system in which all factors of production are the property of the state. • Examples of Command Economies? Examples of Command Economies •Cuba - ?? Examples of Command Economies • North Korea Command Economies Strengths Weaknesses Command Economies Strengths • Able to plan • More equality(??) • Safety net • Can adjust quickly Weaknesses • Lack of incentive • …to work hard • …to innovate • • • • Low quality goods Less variety Corruption Difficult to plan successfully Market Economy • Businesses and individuals act in their own best interest to answer the three major production questions. • What is the “–ism” that comes to mind? • Capitalism – an economic system in which individuals and businesses compete, with a minimum of government interference • “Laissez-Faire” Market Economies Strengths Weaknesses Market Economies Strengths • Economic freedom • Efficiency • Strong incentives • …to work hard • • • • …to innovate • High quality goods • More variety • Weaknesses Unequal Consolidation of wealth/power Doesn’t provide for everyone No safety net Mixed Economies • Mixed-Market • Socialism • Economies in Transition Total Economic Freedom Little Economic Freedom Communism Total Government Control Socialism Mixed-Market Capitalism No Government Control 2009 Index of Economic Freedom: The Top 10 Rank Country Overall Change 1 Hong Kong 90.0 +0.3 2 Singapore 87.1 -0.2 3 Australia 82.6 +0.4 4 Ireland 82.2 -0.3 5 New Zealand 82.0 +1.2 6 United States 80.7 -0.3 7 Canada 80.5 +0.3 8 Denmark 80.0 +0.4 9 Switzerland 79.4 -0.1 10 United Kingdom 79.0 -0.5 http://www.heritage.org/Index/ 2014 Index of Economic Freedom: Bottom 7 Capitalism Communism Capitalism Communism “From each according to his ability, to each according to his needs!” •Karl Marx •Critique of the Gotha Programme, 1875 Communism 200 words - Communism: How/Why does it rise? How/Why does it fail? How could it succeed? Characteristic Capitalism Communism Primary Economic Goal Economic Freedom Economic Equality Basis of Economy Competition Cooperation / Collectivization Resource Allocation Supply & Demand Ownership of F.O.P. Private Property Public Property Profit Motive Patriotism: The Good of Community Motivation Government Government Planning Planning Why Doesn’t It Work? • Incentive Problem • Average Test Scores Example • Soviet Tanks • Coordination Problem • In one word, why doesn’t it work? GREED “As for me, I am not a Marxist.” Karl Marx When CAN It Work? Opt In Small Groups Role Players in the Mixed-Market Economy • Consumers • Producers • Government – What 5 roles does the government play in our economy? • Consumer • Producer • Protector • Regulator • Provider 7 Economic & Social Goals of MixedMarket Capitalism in the U.S. 1. 2. 3. 4. 5. 6. 7. Economic Freedom Economic Equality …of opportunity** Economic Security Economic Growth Economic Efficiency Price Stability inflation and deflation Full Employment Does this mean everyone has a job? No. There is a Natural Rate of Unemployment Characteristics of Free Enterprise Capitalism • Economic Freedom • Voluntary Exchange – who has more power, producers or consumers? • Consumer Sovereignty: The consumer drives the market – DOLLAR VOTES • “The customer is always right!” • Private Property Rights • The Tragedy of the Commons – solutions? • Profit Motive/Self-interest • Competition • Markets and Prices • Specialization/Division of Labor
