Download Economic Systems

Economic Systems
• There are several types of economic systems
All economic systems have to address
SCARCITY
• Scarcity is the economic problem of how to address
unlimited wants with limited resources
• Scarcity will cause all economic systems to….
…to make choices about
• What to produce?
• Consumer goods or social programs?
• How to produce?
• Labour intensive or capital intensive?
• For whom to produce?
• Individuals who can afford to purchase
• or to all citizens?
Adam Smith and Capitalism
• In the 17th and 18th century as global trade increased between the
European powers and their overseas colonies, and as a result of the
beginning of the Industrial Revolution; new theories to replace
mercantilism began to emerge…
• …as stated in Adam Smith’s book The Wealth of Nations published
in 1776.
Adam Smith believed two things…
• Laissez Faire [leave alone]: the viewpoint that the government
should not be involved in the economy
• Invisible Hand: economic self-interest and self-reliance will
eventually contribute to the benefit of all society.
Capitalism: basic beliefs
• Capitalism [private enterprise, market economy,] stresses economic
freedom and the importance of the individual.
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Price system based on supply and demand
Limited government intervention in the economy
Private property
Competition
Profit motive
Freedom to buy and sell
Inequalities of wealth
Capitalism: features
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Competition
Consumer sovereignty
Private ownership of resources
Prices and profit motive determine output
Distribution depends on the ability to earn income
Capitalism: advantages
• The market gives producers an incentive [profit motive] to produce
goods and services that the public wants
• The market provides an incentive to acquire new skills
• A wide variety of goods and services is available
• There are incentives to use resources efficiently
• Competition encourages good quality and lower prices
• Productivity is rewarded by higher profits
• The market economy fosters self-reliance
• It is possible to become very wealthy
Capitalism: disadvantages
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Consumers may be manipulated by advertising.
Prices and incomes do not reflect what is best for society.
Monopolies and oligopolies can control the market.
There are many boom and bust cycles in the economy.
Extreme income inequality can result
Industry cost-cutting can lead to environmental problems
It is difficult to break out of a cycle of poverty
Insecurity is always present
Capitalism and Scarcity
What to produce
– consumer goods, what people want is produced
• How to produce
– By supply and demand, private ownership, individual decision making
• For whom to produce
– Individuals who can afford goods and services
Things to know about Capitalism
Profit
Motive
Provides the
incentive for
all production
Intervention Planning
Social
Programs
Minimal
government;
Only in areas
of law and
order, and
some utilities
Minimal.
The individual
is responsible
for their own
welfare
Little or no
formal govt
planning.
Each
individual
responsible for
own planning
Things to know about Capitalism
Competition
The motivating
factor is to
produce quality
products at the
lowest price
possible
Private
Ownership
Pricing
Nearly 100%
Determined by
the market
through supply
and demand
If Capitalism is so good….
• …then why did it come to a crashing halt in 1929?
Karl Marx and the Planned Economy
• “The Industrial Revolution had spread from England to Belgium,
France, and then Germany. Its abuses were even worse on the
continent, and it was there that the young Marx first came into
contact with the cruellest features of capitalism. The Communist
Manifesto, urging the overthrow of capitalism, was the result of his
observations. In 50 years, socialist thought, spurred by worsening
conditions in the cities, had moved from urging mild reforms in the
system to advocating a complete overthrow of government.”
Quotes from: The Communist Manifesto
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"A spectre is haunting Europe: the spectre of Communism" (78)
"The history of all hitherto existing society is the history of class struggles" (79)
"Society as a whole is more and more splitting into two great hostile camps, into two great classes directly
facing each other: Bourgeoisie and Proletariat" (80).
"The executive of the modern state is but a committee for the managing of the common affairs of the whole
bourgeoisie" (82).
"[The bourgeoisie] is unfit to rule because it is incompetent to assure an existence to its slave within his
slavery, because it cannot help letting him sink into such a state, that it has to feed him, instead of being fed
by him. Society can no longer live under this bourgeoisie, in other words, its existence is no longer
compatible with society" (93).
"What the bourgeoisie, therefore, produces, above all, is its own grave-diggers. Its fall and the victory of the
proletariat are equally inevitable" (94).
"The immediate aim of the Communists is the same as that of all the other proletariat parties: formation of
the proletariat into a class, the overthrow of the bourgeois supremacy, conquest of political power by the
proletariat" (95).
"...the theory of the Communists may be summed up in the single sentence: Abolition of private property"
(96).
"Communism deprives no man of the power to appropriate the products of society; all that is does is to
deprive him of the power to subjugate the labour of others by means of such appropriation" (99).
"In place of the old bourgeois society, with its classes and class antagonisms, we shall have an association,
in which the free development of each is the condition for the free development of all" (105).
"Let the ruling classes tremble at a Communistic revolution. The proletarians have nothing to lose but their
chains. WORKING MEN OF ALL COUNTRIES, UNITE!" (120).
Karl Marx: theory of the decline of capitalism
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Historical Materialism
– Economic forces determine all events and institutions of history
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Surplus Value
– the value of goods produced rests solely on the human labour that goes
into the production. The value of the goods produced is higher than the
wages paid for the labour; the difference [surplus] is retained by the
capitalist owner as profit. This process allows for the rich to increase
their wealth and the poor become poorer.
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Stages of Economic Development
– There are five stages of development.
– Primitive, slave, feudal, capitalist, and socialist.
– Each stage of economic development [exploiter and exploited] is a
negation of the previous stage.
Karl Marx: theory of the decline of capitalism
• Class Struggle
– “The history of all existing society is the history of class struggle.”
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There is a continuous struggle between the Proletariat [the wage earners] and the
Bourgeoisie [those who control the means of production]
• Use of Force
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The Proletariat will be forced to use violence to overthrow the exploitation imposed upon
them by the Bourgeoisie and seize control of the country.
• Dictatorship of the Proletariat
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A temporary period in which the proletariat rules with dictatorial power until all opposition is
eliminated.
Class distinctions will be abolished, and a classless society will emerge
Karl Marx: theory of the decline of Capitalism
• The establishment of communism
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The state will wither away under the dictatorship of the proletariat and communism will be
established.
There will be public ownership of the means of production, distribution, and consumption.
There will be no class struggles, or exploitation, as there will be no class distinctions.
“From each according to their ability, to each according to their need.”
• …and what do you receive with this Marxist philosophy?
Karl Marx: highlights of Marxist philosophy
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A centrally planned economy
Increasing economic production
Increasing economic equality
A gradual disappearance of classes
Distribution of income according to work performed
Increasing desire to work for the good of society rather than for
personal profit
• Distribution of goods based on the motto: “From each according to
his ability, to each according to his need.”
T-Rex explains Communism
Planned Economy: Scarcity
• What to produce
– Essential services; what society believes is essential is produced first
– What people want may not be produced
• How to produce
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Central planning [GOSPLAN]
Public ownership
Direct control of all resources [Land, Labour,
and Capital]
• For whom to produce
– Society in general with essential services for all
Lenin and Stalin
• Lenin: 1917 -1924
– War communism
– New Economic Plan
• Stalin: 1924/6 - 1953
– abolished the New Economic Plan
– Created the Five Year Plans
– Forced Collectivization of the Kulaks
Planned Economy: advantages
• Planning [Gosplan] encourages high rates of economic growth [Five
Year Plans].
• Planning helps to reduce wastage of resources.
• The distribution of income is more equal.
• Esential goods are produced before less essential goods.
• Planned economies do not suffer from unemployment and inflation
related to the business cycles.
Planned Economy: disadvantages
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Planned economies are inflexible and bureaucratic
There is little incentive for efficient management or work
The system stifles individual effort
Freedom of choice is restricted
The quality, quantity, and variety of goods are limited
…and in the end
• …the Planned Economy and communism
died.
Smith vs. Marx
System
Capitalism/private enterprise
Marxism/Communism
Planned economy
Works:
The Wealth of Nations
Das Kapital
The Communist Manifesto
Ownership of means of
production
Private Property
Public Ownership
Government’s role in economy.
Class structure
No intervention
Yes
Government planning
No
Decision-making
Supply and demand
Society’s decision
Production/profits
For individuals
Shared equally
View of human nature
Self-reliance/inequality
Cooperation/equality
Income
Based on ownership of
resources
According to work or need
Things to know about the Planned Economy
Profit Motive
Profits are used for
reinvestment.
Intervention
Total government
involvement.
State owns all.
No individual profits
Tight regulation
through central
planning.
Planning
Social Programs
Centralized planning
sets targets, quotas,
and allocates all
resources and sets
all prices.
Extensive universal
services, provided
by and paid for by
the government.
Things to know about the Planned Economy
Competition
Very little competition, not
even for labour or resources
because these are allocated
by Gosplan
Results in low quality
products
Private Ownership
Almost none [less than 3
per cent in USSR]
Pricing
The prices are set prior to
production by a prices
committee of Gosplan.
The Business Cycle
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In a model capitalist system, the market is driven by the upward and downward cycles of the
Business Cycle.
The upward [recovery/boom] stage and downward [recession/bust/depression] stage of a Business
Cycle is a natural economic movement affected by time, consumer confidence in the economy,
money supply, investor confidence, production levels, supply and demand, speculation,
climatic conditions, trade agreements, trade embargos, and political events.
The parts of the Business Cycle are:
1.
Recession/slump/bust
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Trough/depression
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Recovery/expansion
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Peak/boom
The Business Cycle: characteristics
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Recession:
– Overproduction of goods will result in increased unemployment
– Consumer confidence and spending is reduced
– Economic speculation leads to decreased investment
– Production layoffs begin
– Wage reductions
Trough
– Highest level of unemployment
– Decreased prices for goods/services
– Profits levels decrease
– Reduced production
– Wages are lowest levels
Recovery
– Expanding production and sales
– Employment begins to increase
– Prices and wages gradually increase
Peak
– Production returns to large output
– Economic investments are at high levels
– Wages and incomes are higher
– Low unemployment
The Business Cycle: detailed
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Different parts of the economy are affected at different times in the Business Cycle:
Causes of the Great Depression and the end of Capitalism
Causes of the Great Depression
Causes of the Great Depression of 1929 and the end of Capitalism
Stock Market Crash of 1929
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The stock market crash that occurred on Black Tuesday, October 29, 1929 was
the beginning of the causes of the Great Depression. Two months after the
original crash in October, stockholders had lost more than $40 billion dollars.
Even though the stock market began to regain some of its losses, by the end of
1930, it just was not enough and the USA truly entered what is called the Great
Depression.
Bank Failures
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Throughout the 1930s, over 9,000 banks failed. Bank deposits were uninsured
and as the banks failed, the people lost all of their savings. Banks that had
survived, unsure of the economic situation and concerned for their own corporate
survival, stopped lending money and began to call in loans.
Causes of the Great Depression and the end of Capitalism
Reduction in Purchasing Across the Board [Overproduction]
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With the stock market crash and the fears of further economic woes, individuals from
all classes stopped purchasing items. This then led to a reduction in the number of
items produced and thus a reduction in the workforce. As people lost their jobs, they
were unable to keep up with paying for items they had bought through instalment
plans and their items were repossessed. More and more inventory began to
accumulate. The unemployment rate rose above 25% which meant, of course, even
less spending to help alleviate the economic situation.
American Economic Policy with Europe
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As businesses began to fail, the USA government reacted by passing legislation
designed to restrict foreign imports in favour of domestic production. These high
taxes against imports led to reduced trade between the USA and other nations, and
resulted in similar legislation passed in European nations against imports.
Causes of the Great Depression and the end of Capitalism
Drought Conditions
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While not a direct cause of the Great Depression, the drought that occurred in the
Mississippi Valley in 1930 was of such proportions that many could not pay taxes or
other debts and were forced to sell their farms at no profit to themselves. The Dust
Bowl of the mid-west region of the USA and into parts of western Canada had a
serious impact on the grain industry which had also suffered from decreasing prices
and reduced markets overseas.
Big Picture: Great Depression era
Brother, Can Your Spare a Dime?
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"Brother, Can You Spare a Dime," lyrics by Yip Harburg, music by Jay Gorney (1931)
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They used to tell me I was building a dream, and so I followed the mob,
When there was earth to plow, or guns to bear, I was always there right on the job.
They used to tell me I was building a dream, with peace and glory ahead,
Why should I be standing in line, just waiting for bread?
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Once I built a railroad, I made it run, made it race against time.
Once I built a railroad; now it's done. Brother, can you spare a dime?
Once I built a tower, up to the sun, brick, and rivet, and lime;
Once I built a tower, now it's done. Brother, can you spare a dime?
• Once in khaki suits, gee we looked swell,
• Full of that Yankee Doodly Dum,
• Half a million boots went slogging through Hell,
• And I was the kid with the drum!
Say, don't you remember, they called me Al; it was Al all the time.
Why don't you remember, I'm your pal? Buddy, can you spare a dime?
• Once in khaki suits, gee we looked swell,
• Full of that Yankee Doodly Dum,
• Half a million boots went slogging through Hell,
• And I was the kid with the drum!
Say, don't you remember, they called me Al; it was Al all the time.
Say, don't you remember, I'm your pal? Buddy, can you spare a dime?
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The need for government intervention
• The spiral impact on the domestic and international economy
Business Cycle: detailed
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The market responds at different times to different segments of the economy.
The Business Cycle: Capitalist optimistic perspective!
The perspective in a model free enterprise is that the market is self-correcting.
The beginning of the Mixed Economy
• The impact of the Great Depression, the rise of fascism as a political
alternative to democracy, the reality of the Soviet Union and
communism, and the need for democracy to respond to the needs of
its citizens helped the transition from capitalism to mixed economy.
• The economic theory of John Keynes was instrumental in
introducing government intervention in the economy to restore public
confidence and economic stability.
Government involvement in the economy
Contemporary Examples:
How Scarcity is address in the Mixed Economy
• What to produce:
– Essential goods, consumer goods
– Attempts to produce what people want and society believes is essential.
• How to produce:
– Public and private enterprise
– Direct and indirect controls
– Indicative planning
• For whom to produce:
– Individuals and society
– Essential services for all