ECONOMIC SYSTEMS• An organized approach to

producing and distributing goods and services.

• Purpose is to make important decisions about the use and distribution of resources.

• All economic systems deal with the same problem

SCARCITYunlimited wants

vs.Limited resources

Economic Systems answers the problem of scarcity.

Limited Resources > SCARCITY < Unlimited Wants

Scarcity forces us to make choices about…

• What to produce?• How to produce?• For whom to produce?

ECONOMIC SYSTEMS

•Market Economy/Private Enterprise•Command Economy/Centrally Planned Economy•Mixed Economy

MARKET ECONOMY(Capitalism)

• Decisions about scarcity should be made free from govt. control.

• Economic forces (price system/supply & demand) in the market should answer the three economic questions.

• In “laissez faire economics”, the government should adopt a “hands off” policy when it comes to economic decisions.

Decentralized

Private Enterprise

Free Enterprise

Laissez Faire

Pure Price System

Free Market

Market economy continued…

• Competition and profit motive find the most efficient and innovative methods of production.

• Values individualism and self-interest.

• Individuals can best achieve their goals if they are allowed to have private ownership.

• Dollar voting

Adam Smith• Father of the market system.• Published his ideas in his

book called “The Wealth of Nations”.

• Believed the economy would regulate itself if left alone. (Laissez Faire)

• Believed those that fail to compete fail to survive. (profit motive)

• The “invisible hand” – the market will solve all basic economic questions.

• If consumers are sovereign supply and demand will dictate the natural flow of the market.

SUPPLY & DEMAND• What happens when demand exceeds supply?• What happens when supply exceeds demand?• How does supply and demand affect choices

such as…– Careers– Types of cars– Types of restaurants/food(I.e. Lobster)

• What are some recent examples of instances where demand exceeded supply? What were the results?

Advantages• Market gives producer

incentive• Market provides incentive

to hire skilled labor• Wide variety of goods and

services are available.• Competition encourages

good quality goods.• Productivity is rewarded by

profits• Market economy fosters

self-reliance.• It is possible to become

rich.

• Consumers can be manipulated by advertising.

• Prices and incomes may not reflect what is best for society.

• Boom & bust cycle• Monopolies and

oligopolies can emerge• Extreme income

inequality can exist.• Environmental problems• Job security

Disadvantages

The Business Cycle • One of the major

problems capitalist nations must constantly deal with is an economic event known as the business cycle.

• This means that the economy will go through periods of boom (good times) and bust (bad times).

• In the United States there was a boom during the 1920s.

"BOOM" Characteristics

• full employment• high inflation• high investment• high demand

"BUST" Characteristics

• high unemployment• low inflation• low investment• low demand

Period of Economic Decline

Period of Economic Expansion

Bust (Depression)

Overall GNP

GNP: gross national product, the total value of all goods and services produced in a country in one year. It is hoped a steady moderate increase will occur in a given year.

Boom

PROSPERITY

DEPRESSION

Share Share prices fall - PANIC!

- PANIC!Less Trade

Less Money for Banks

Many Factories Close

High Unemployment

Less Spending Power Power

More Factories Close

Even More Unemployment

THE ROARING TWENTIES

• United States was the richest country in the world.(resources & population)

• After the war the U.S.A. became wealthy by mass producing consumer goods like radio’s and cars.

• Factory workers were paid well which meant they spent money on consumer goods.

THE WALL STREET CRASH

• As the 20’s progressed , more and more people were buying shares of companies “on margin” and these shares rose in price.

• By 1929 share prices were rising but profits for companies began to decline.

• In October of 1929 panic selling of shares forced the value of shares to drop drastically.(crashed)

• The stock market crash brought an end to prosperity in the U.S.A..

Other Causes of The Great Depression

• Demand for goods could not keep up with supply• Droughts• Wages did not increase• Farmers went bankrupt• Banks failed• Factories closed• Increase in unemployment• High rate of corporate fraud

THE “GREAT”DEPRESSION

• By 1931, unemployed people were lining up in breadlines since there was no unemployment insurance.

• By 1932, 12 million people were unemployed.

• In 1932, the American people voted for Franklin D. Roosevelt as president on a platform of government intervention to get the USA out of the Depression.

THE “NEW DEAL”

• Franklin D. Roosevelt’s program of government spending to help the people of the United States against the Depression.

• He wanted to “prime the pump”.

• He believed that putting money into people’s pockets was like pouring gas into an engine to get it started.

SOCIAL SECURITY

Social Security Act (1935)• Gave government

pensions to those who could not provide for themselves.

• Unemployment insurance was introduced.

• Taxed workers to provide money for social security.

LABOUR LAWS

FAIR LABOUR

STANDARDS ACT (1938)• Set out the maximum

hours of work and minimum wage laws.

Effect of WWII

• Job creation for war goods (Lend Lease Act)

• Increase in American GNP

Demand Side Economics (Keynesian)

John Maynard Keynes (Keynesian Theory)

• Capitalism tends to move through cycles– Prosperity– Recession– Depression– Recovery

• It is therefore necessary for governments to regulate the economy by spending money temporarily “priming the pump” during recession or depression.

depression

prosperity

FISCAL POLICY

Increase government $

Decrease taxes

MONETARY POLICY

Increase $ supply

Decrease interest rates

FISCAL POLICY

Decrease government $

Increase taxes

MONETARY POLICY

Decrease $ supply

Increase interest rates

Deficit financing

Supply Side Economic (Reaganomics)

• Supply-siders dislike government involvement in the economy and emphasize greater reliance on private enterprise.

• The economic theory that Reagan followed was previously known as supply-side economics which is a theory some proponents claim was first described by Adam Smith.

• Supply-siders emphasize the production side of the market.

• They feel that rather than the government spending money to stimulate the economy, it should lower taxes (both business and personal), lower interest rates, and sell government-owned enterprises which would encourage business expansion.

Supply-side theory states that if the private market is free to operate, then wealth will trickle down to the general public.

In Times Of Recession…

• Reduce corporate taxes– Creates more profit– Acts as incentive to enter business

• Reduce public income tax– Increases public’s incentive to work– Provides more money to spend– Increased production creates demand

• Supply-siders insist that increased demand for goods and services must come from the private sector, not from government spending.

In Times of Inflation…

• The unrestricted market will eventually bring inflation under control

Reaganomics in Action

ReaganomicsFollowing 1981 the Reagan administration put in action the following policies…

• Tax cuts primarily for corporations and the wealthy• Cut income tax 25%

• Government spending cuts in social services• Welfare subsidies, Medicaid, food stamps

• A stable money supply• Deregulation of the economy

• Reduced environmental, health, & safety regulations

• An aim to balance the budget.

• When President Reagan took office, he was interested in tax reform, reasserting American global economic leadership, and subduing inflation.

• Reagan pointed out that the national debt was too high and he wanted tax cuts to stimulate the economy.

• The benefits of more people working and having more money to spend would trickle down to the less fortunate

• He promised a balanced budget but instead added greatly to the nations debt. Much of what he added to the debt came from his defense buildup

Planned Economy(Command Economy)• Economy directed by the

government• All means of production

(land, labor, capital) are state owned and controlled.

• The government makes all economic choices of what to produce, how to produce, how to distribute.

Rise of the Planned Economy• People believed that other

economic systems were exploiting the working class.

• Came as a response to the industrial revolution.

• Some people believed that if the government controlled the economy and chose what should be produced, how and for whom; there would be greater economic equality.

Problems Createdby the

Industrial Revolution• Low wages• Long hours• Urbanization

– Crime– Poverty– Disease– Pollution

• Unfair labor practices• Unsafe working conditions

Elements of a Planned Economy• Cooperation• Public ownership• Equality as incentive• Central planning

– A group of economic experts carry out the goals of the government.

– See “Corkscrews vs Bottle Openers” page 325 Ideologies

Advantages of the Planned Economy

• Income & wealth more evenly distributed• Little unemployment• Experiences fewer booms and busts in

economy• Profits used to expand production• Production of goods and services is planned

to meet society’s needs• Consumers receive basic necessities.

Disadvantages of the Planned Economy• Lack of incentive

• Lack of technological progress

• Bureaucracies (planning creates inflexibility)

• Black markets• Loss of individuality• Inefficient and widespread

waste of resources.

Father of Communism• Karl Marx was the most well

known advocate of the planned economy.

• Wrote the Communist Manifesto & Das Kapital (with Engels)

• Moved by the problems of the industrial revolution.

• Did not believe in gradual change rather REVOLUTION.

• Believed workers (proletariat) must replace the ruling class(bourgeoisie) through revolution.

• The bourgeoisie exploited the workers by forcing them to create goods and services with a greater value than the wages received.

• Capitalism would bring itself to ruin– Economic depression– Imperialism– Wars– Revolution by the proletariat.

• After a series of revolutions capitalism would be eliminated and people would live in a cooperative and voluntary society.

• Production would be distributed by the motto…“from each according to his abilities, to each according to his needs.”

Marx’s Beliefs

The Ideal Marxist Society

• Individual differences would still exist but no one could amass enormous wealth while others lived in poverty.

• Equal opportunity (classless society)• Abolish private property and profit motive (public

ownership)• With the existence of surplus goods crime and

greed would not exist.• Common Good

Capitalism (Laissez Faire)Laissez faire (Adam Smith) was used to describe the belief that the government should keep their hands off the economy.

• Supported by liberals who believed “there were bound to be poor people in society”.

• Typical laissez faire factory…– Means of production owned by capitalists– Owners want to maximize production

• Low wages• Expensive product• If there is an excess of labor people are fired

– Workers are seen as a piece of machinery

Ideas to Battle the Evils of the Industrial Revolution

Democratic Socialism• Turned against Laissez Faire policies and urged government

reform to help the long suffering workers.• Typical factory run by the beliefs of a democratic socialist…

– Means of production still owned by capitalists– Minimum wage laws would be passed to create higher wages– Reduction in working hours– Safety conditions in factories– Labor unions allowed to operate in the interest of the workers, etc.

• They believe that while everyone may not be born with equal abilities, all are equal as human beings and should therefore be guaranteed the basic necessities of life.

Communism• Communists believe that the inequality capitalism should be

overthrown by workers (proletariat) in a violent revolution.• Ultimately capitalists are out to exploit the “proletariat” to

make a profit.• Factory run by the beliefs of a Communist…

– Workers would overthrow the bourgeoisie (owner)– Temporary dictatorship is set up to create stability– Once the stability exists the government “withers away” and society

becomes a workers paradise.• State owns the factory• No profits simply make what you need• Workers are all paid equally. (From each according to their ability, to each

according to their need – Karl Marx)• Karl Marx : The Communist Manifesto

Ideas to Battle the Evils of the Industrial Revolution

MIXED ECONOMIES (CANADA)

Look at some of the programs run by governments in Canada today:

• stabilization of the economy to prevent booms and busts (Monetary Policy)– control of bank interest rates– Control $ supply

(Fiscal Policy)– increase or decrease taxes– increase or decrease government

spending

BANK OF CANADA

Government Laws & RegulationsAgricultureGovt. marketing boards• Influence prices• Crop controls• Quotas to limit production• Food inspection• Negotiate sales of wheat to foreign

nations

Regulation of the market• quality controls• some price controls

• prevention of monopolies to

preserve competition

Deregulation• A reduction of govt. restrictions on

business enterprises. (neo-conservatives)

Redistribution of wealth to provide security

• old age pension• unemployment insurance• child tax credit• welfare

Provision of financial support to businesses

• subsidies to failing businesses

Provision of public services (universality)

• schools• Police• fire control• Hospitals• parks

Transfer ProgramsProgressive tax systems

Government Owned Business

Crown Corporations (nationalized industry)• CBC Radio and TV• Royal Canadian Mint• Canada Post Corporation

Reasons…• Control an area of the economy which is vital to

general welfare of nation.• To provide goods/services private entrepreneurs

are unable to provide.• Earn income for the government.• To rescue companies from bankruptcy.• Help stabilize economy.

Privatization• Keynesian Methods (deficit financing) created a $580 billion dollar

deficit by 1996.• Canadian govt. began cutting social programs.• Selling of state owned companies to private industry.

(Thatcherism/Reaganomics)• Create more efficiency in govt.• Cut bureaucracy in govt.Mulroney 1984-1992• Privatized 39 crown corps.Prov. Govt. Alberta• Liquor• Licensing• Telephone

Direct Taxes: those paid by citizens. (GST/Income tax)

Indirect Taxes: hidden in the price of goods. (excise tax)

• There are many direct and indirect controls over our economic system.

• The good news is that these many government programs and regulations have provided us with increased stability, security, and equality.

• The bad news is that we have lost some individual freedoms and that the cost to taxpayers is high.

Canada's debt is the sum our federal government owes in total. As you can see from the graph below, Canada has continued to have annual deficits that add to our accumulated national debt every year.