3 Basic Economic Systems in the World?

Let’s Name Them!

What kind of an economy is it?

Capitalism

SocialismCommunism

None of these is pure!!!- a mixture of all 3 in each one.

What is an economic system?• Economic system is more than simply a

way to make a decision• It is a way of life.• Differs among societies and reflects a

wide variety of values for individuals.• One value cannot prove superior to others

as a general rule. Values are set in cultures and cultures set by economic system.

Check it out!Economy of EuropeEconomy of ChinaEconomy of Middle EastEconomy of AfricaEconomy of America

TRADITION ECONOMICS

Very common in underdeveloped countries• All countries have a touch of tradition still

today.• Oldest way to cope with an economic

problem• Problems solved by guidelines suggested by

social customs, religious traditions, and morals

• Fruits of production are distributed by age,sex, - something unrelated to productivity.

• Birth is a dominant factor- sets the status for life.

What is Capitalism?Economic system based on free marketProfit motivePrivate propertyOpen competitionProductive labor (work for wages)Accumulation of financial capitalAccumulation of factors of production

3 Basic Freedoms Capitalism Depends On

• Private property- we are protected by our Constitution to own property.

• Private enterprise- we can go into business if we desire.

• Freedom of choice- jobs, school, businesses, production, consumption,

Private Property – bank balances, dogs, houses, gardens, tools, earth’s minerals, Property represents Wealth

Economic Freedom –(political freedoms) buy any good, start a business, use technology, invest, quit your job

Economic Incentive –better life, work harder, go to school, receive rewards for work- punishments also

Competitive markets –supply/demand/individual preferences.Exercise choice. Markets and prices*** key

Limited Role of Government –2 roles (rule-maker, and umpire).Allows individuals equal opportunities- Rule of Law is enforced.

Five Features of FE Economy

Freedom is Not Really Free!In our political and economic system… the

powers of government have been entrusted to the people.

It is not possible to separate political and economic freedoms…

What Changes our Capitalism into Socialism?

Economic system mixed with government involvement/regulation

• U.S. Postal Service• Amtrack• Medicare, Medicaid• AFDC• Social Security• Unemployment Compensation• FTC• EPABRINGS US TO A MIXED CAPITALIST SYSTEM

What is SOCIALISM?Many varieties here – depends on

whether citizens in a community make decisions or central planners.

In England – vote the party in for economic choice (many parties to choose from.)

In China – the government is a republic (people vote, but one party- the Communist party)

– A Socialist economy has 3 basic characteristics:

1.State owns major factors of production2.Central planners determine many of the three

basic questions3.There is an attempt to distribute income

equally.As in all 3 basic economies… socialism is

determined by degrees…explain!

• Socialists believe that capitalism can exist in socialistic state.

• Again – who is the decision maker?• Could be state socialism (China) ,

cooperative socialism (government and business making decision – Japan) or common ownership (group decision-making)

Degrees of Socialism-Just like degrees of Capitalism.

Freedoms measured by economies

CAPITALISM SOCIALISM

Most Reduced Quasi-Balanced Increased Least

COMMUNISM

Freedom measured by degrees

Overview of Socialism Began with utopia Fueled by working conditions in factories,

exploitation by capitalists Search for a better quality of life for everyone Level out disparities (income, living condition,

property, possessions) Government should make economic decisions in

the market rather than the market making decisions. (i.e. re-distribution of wealth)

Masses closer to same throughout society. Europe emphasis on change through elections.

Summary Socialism

• State ownership of means for producing goods and services

• Major industries often controlled by government. BBC… British Airlines…Coal Mines… Steel Mills. Venezuela today nationalizing industries.

• Private ownership of secondary institutions.• Personal freedoms do exist- but to lesser degree than

market economy.• Allocation of resources not efficient…massive

government “bog-down” “featherbedding” etc.• Not a lean/mean economy…. Very heavy government.

MARXIAN SOCIALISM Movement to overthrow capitalism by force is traced to Marx.

Marx disturbed by living conditions of working class- in 1848 wrote Communist Manifesto- urged “workers to unite, you have nothing to lose but your chains.”

In major work Das Kapital, Marx forecast the end of capitalism. Doomed cause based on inequality. Capitalists vs Prolitariat. Capitalists controlled factors which gave them power and control.

Capitalists gained profit at expense of workers – Theory of Labor value suggested by Marx.

North Korea still operating as Communist country

MARXISM Dictatorship would rule working class-become central planners-

making all economic decisions.

Through socialism people’s material and spiritual well-being would improve. A true classless society would come into existence.

All property would be owned collectively

“From each according to his ability to each according to his need.”

All people would work to the best of their abilities to produce goods and services.

People would consume only what they need

Religion is the opiate of the masses- people would worship the State..

China today• China is a republic• Communist party adds whatever capitalism

they think will benefit the state.• They are now buying up properties and

businesses in the U.S. to help them learn about our production methods and to control that industry.

• Doing business in China has been attractive because of the vast market, but dealing with govt not so easy.

Summary Command

• Relatively small amount of personal freedom-very restricted.

• Lower standard of living for all except political leaders.

• Only one political party runs government• Production and distribution of goods in hands of

government (extreme poverty exists)• Change through revolution (often bloody-Russia,

China)• Private business can exist- state controlled• Master plan of government is key to economic

success. If plan fails, economy fails.

REMINDER

There are no pure economic systems anyplace in the world.

Because we began civilization as clans, tribes, etc…. Traditional was prevelent

Moved to Kings, Sovereigns, benevelent and non-benevelent rulers (but…. Combined the political with the economic)

Europe had strong mercantilist economy for over 300 years.

Capitalism vs Communism

http://www.youtube.com/watch?v=pNHuJ8ZUoKs

So how unusual it was for a new nation to actually want to self-rule and establish a market economy.

HOW ON EARTH COULD THE CANDLES BE MADE, THE BREAD BAKED, THE BUSINESSES ESTABLISHED????

Invisible Hand concept – Mr. Adam Smith.

• Beauty here is that in 1776- political and economic leaders had faith in the people.

• Also, listened to the people (even though there was not uniform agreement about direction of America..)

• Took a chance and created a new type of government AND a new type of economy.

I know of no safe depository of the ultimate powers of society but the people themselves, and if we think

them not enlightened enough to exercise their control with a wholesome discretion, the remedy is not to take it

from them but to inform their discretion by education.

Thomas Jefferson