“Economics is the study of how people in society choose to employ scarce resources to

produce goods and services and distribute them among various

persons and groups in society.”

Waud Principles of Economics

Key Economic IssuesMotivation

Property

Direction &CoordinationResourceAllocationPoliced by

Government

Adam Smith

Institutions of CapitalismMotivation Self-Interest

Property Private

Direction &Coordination

FreeEnterprise

ResourceAllocation

FreeMarket

Policed by Competition

Government Limited

Comparative Economic Systems

Institutions Capitalism Communism Socialism

Motivation Self-Interest Community/ Equality

Tempered Self-Interest (income taxes)

Property Private State

Mixed (infrastructure, large employers, natural resources)

Direction & Coordination

Free Enterprise

Planned Bureaucratic Controls (licensing, incentives)

Resource Allocation

Free Market

State Supervised Markets (Excise Taxes, Tariffs)

Policed by Competition State Constrained Competition (industry regulations, controls, and limits)

Government (in economy)

Limited: Laissez faire

Totalitarian Has a Role to Play Planning, and guiding

Every man is no doubt, by nature, first and principally recommended to his own care; and as he is fitter to take care of himself than of any other person, it is fit and right that it should be so. Every man, therefore, is much more deeply interested in whatever immediately concerns himself than in what concerns any other man.

Adam Smith TMS

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

Adam Smith WoN

He generally, indeed, neither intends to promote the public interest nor knows how much he is promoting it….he intends only his own security; and by directing [his] industry in such a manner as its produce may be of the greatest value, he intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

Adam Smith, WoN

Self Interest is the motivation in Capitalism, but it is not a

justification for immoral behavior. It gives us a reason to work hard not an

excuse to do whatever we like.

How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it. Of this kind is pity or compassion…. Adam Smith TMS p. 9

There can be no proper motive for hurting our neighbour, there can be no incitement to do evil to another, which mankind will go along with…. To disturb his happiness merely because it stands in the way of our own, to take from him what is of real use to him merely because it may be of equal or of more use to us, or to indulge, in this manner, at the expense of other people, the natural preference which every man has for his own happiness above that of other people, is what no impartial spectator can go along with.

Adam Smith TMS

One individual must never prefer himself so much even to any other individual, as to hurt or injure that other, in order to benefit himself, though the benefit to the one would be much greater than the hurt or injury to the other.

Adam Smith TMS

Self Interest

Hence arises the Universality of these Desires of Wealth and Power, since they are the means of gratifying all other Desires. “How foolish then is the Inference, some would make, from the universal prevalence of these desires, that human nature is wholly selfish, or that each one is only studious of his own advantage.” Hutcheson, Essay 3 p. 19-20

Self InterestHow weak also are the reasonings of some

recluse Moralists who condemn in general all pursuits of wealth or power, as below a perfectly virtuous character: since wealth and power are the most effectual Means, and the most powerful Instruments, even of the greatest Virtues , and most generous actions? The pursuit of them is laudable when the Intention is virtuous: and the neglect of them, when honourable opportunities offer is really a weakness. Hutcheson, Essay 3 p. 19-20

Comparative Economic Systems

Institutions Capitalism Communism Socialism

Motivation Self-Interest Community/ Equality

Tempered Self-Interest (income taxes)

Property Private State

Mixed (infrastructure, large employers, natural resources)

Direction & Coordination

Free Enterprise

Planned Bureaucratic Controls (licensing, incentives)

Resource Allocation

Free Market

State Supervised Markets (Excise Taxes, Tariffs)

Policed by Competition State Constrained Competition (industry regulations, controls, and limits)

Government (in economy)

Limited: Laissez faire

Totalitarian Has a Role to Play Planning, and guiding

Comparative Economic Systems

Institutions Capitalism Communism Socialism

Motivation Self-Interest Community/ Equality

Tempered Self-Interest (income taxes)

Property Private State

Mixed (infrastructure, large employers, natural resources)

Direction & Coordination

Free Enterprise

Planned Bureaucratic Controls (licensing, incentives)

Resource Allocation

Free Market

State Supervised Markets (Excise Taxes, Tariffs)

Policed by Competition State Constrained Competition (industry regulations, controls, and limits)

Government (in economy)

Limited: Laissez faire

Totalitarian Has a Role to Play Planning, and guiding

Assumptions of Capitalism• Rational self-interested Consumer• Full and Accurate Information• Costs/Benefits Contained in

Transaction• Meritocracy (Opportunities and Income

Fairly Distributed)• Institutions Functioning as Designed:

(Implicit Assumption)

Assumptions of Capitalism

• Rational Consumer– Not choosing the best product for the best

price (e.g., impact of advertising)

– Choosing things that are bad for us and/or society (e.g., drugs, fortified wine, gambling, pornography, cigarettes,…)

– -Non-rational choices

Assumptions of Capitalism

• Full and Accurate Information– Crucial to the proper functioning of

markets

– Information Asymmetries (Seller has an inherent advantage.

Assumptions of Capitalism

• Costs/Benefits Contained in Transaction -- no negative externalities– Costs of production that are borne not by

the enterprise that causes them but by society. (p. 288)

– E.g., Pollution

Assumptions of Capitalism• Meritocracy: Opportunities and

Income Fairly Distributed– Wealth – impact on choices

• Theory of the Leisure Class, Thorstein Veblen

– Inheritance – non contributory wealth• The Acquisitive Society, R.H. Tawney

– Opportunities• The Myth of Meritocracy

Assumptions of Capitalism

• Institutions Functioning as Designed: (Implicit Assumption)

Motivation Self-Interest

Property Private

Direction &Coordination

FreeEnterprise

ResourceAllocation

FreeMarket

Policed by Competition

Government Limited

Assumptions of Capitalism

• Rational Consumer

• Full and Accurate Information

• Costs/Benefits Contained in Transaction

• Meritocracy: Opportunities fairly distributed

• Institutions Functioning as Designed: (Implicit Assumption)