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Welcome to ECON 372:

Comparative Economic Systems

By: Dr. Jacqueline Khorassani

Week Six Lecture SlidesSource: Chapter 2 & Jackie

(pp 43-)

Marietta College, Spring 2011

What is coming up? Team 1 paper is on Japan, Sweden

and France and is due on Monday, February 28– Presentation: Monday, March 14

Team 2 paper is on Germany, Russia & another country of their choice and is due on Monday, March 14– Presentation: Monday, March 21

Exam 2: Wednesday, March 16

  

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Macroeconomic Instabilities of Market Capitalism (pp 43-48) Market economy may result in a

higher unemployment rate than a planned economy– Why?

Private firms need to make profit to continue producing

– Need to minimize cost when possible1. If no demand for output, then no demand for labor

unemployment2. Substitute a cheaper input for labor when possible

unemployment

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Why unemployment is less of a problem in planned economy?

An state owned enterprise can afford to operate at loss for longer time than a privately owned business.– They are less likely to lay off workers

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Up until the Great Depression

The general belief was that–The invisible hand would work

What is the role of the invisible hand? Markets (including the labor market

clear quickly)–Recession (and the resulting

unemployment) is temporaryAs soon as the unemployed workers

lower their wage expectations, they will find employment

–This is the Classical view

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Classical ViewWage

Labor

D2

S10

1512

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Price level

RGDP

LRAS1

SRAS1

AD1

100

LRAS2

SRAS2

1) 15 workers are hired and RGDP = 100 (full employment)2) If for some reason AD drops to AD23) Demand for labor drops to D2 4) At a wage = 10 , surplus of labor wage drops no unemployment 5) SRAS increases (due to lower wage) 6) LRAS decreases (due to smaller work force (12 instead of 15) which lowers the capacity to

produce)

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D1AD2

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But the invisible hand did not work very quickly in 1930s

Labor market did not clear. Why?

1. Labor unions would not let wage rate drop (Classical View)

2. Firms did not invest (despite low interest rates) because of their pessimistic views about future sales (Keynesian View)

– No investment = no hiring

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Keynesian view on recession The invisible hand needs a push

sometimes In times of recession government

should conduct expansionary fiscal and monetary policy

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Fiscal Policy What is it?

– Using taxation or government spending to

Decrease unemployment Decrease inflation

What are the fiscal policy tools?1. Government spending (G)2. Taxes (T)

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Types of fiscal policy1. Contractionary

– When is it implemented? When there are inflationary pressures in

economy Graph

– Reduce G or increase T What if G goes down? What if T goes up?

2. Expansionary– When is it implemented?

When there are recessionary pressures in economy

Graph– Increase G (especially investment spending) or

decrease T What if G goes up? What if T goes down?

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Monetary Policy What is it?

– Decrease (expansionary) or increase (contractionary) in interest rates

– Tools? Open market operation, discount rate,

reserve requirement

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Expansionary monetary policy?When?

– When the economy is in recessionHow?

– Decrease interest rates– Firms and households borrow more– Buy more– Invest more– AD goes up Production and employment goes up

Contractionary monetary policy?When?

– In case of inflationary pressuresHow?

– Increase interest rates– Firms and households borrow less– Buy less– Invest less– AD goes down price goes down

Note Both fiscal and monetary policies

are demand side policies.– Their immediate effect is on AD

There also supply side policies– To shift the SRAS

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Chapter 3: Socialism What is it?

– Collective ownership of resources How does this system answer the

economic questions?1. What to produce?

More public goods2. How to produce?

input-output; material balances 3. For whom to produce?

Everybody (equity)

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Causes of socialism•A reaction to deficiencies in the capitalist system▫Which deficiencies?

Insufficient production of public good and goods with external benefits

Monopolies But mostly the unequal distribution of income

• It has its origins in religion

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Theoretical Foundations

•Plato’s Republic▫Where there is socialism but also slavery

▫Do you see a problem with this?

•Millennarian tradition▫Christianity + Socialism

•Saint Thomas More’s Utopia (1500s)▫An island where everybody shared and was equal

▫Any problems?

Plato

More

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Theoretical Foundations Thomas Munzer (1500s)

– Collective sharing– Problems?

Jean-Jacques Rousseau (1700s): – Earth belongs to no one, its fruits to

all.– Individuals must join together

through the social contract and make the laws

– Government is charged with implementing and enforcing the law.

– He disagreed with the idea that the people should exercise sovereignty via a representative assembly.

Any problems?

Munzer

Rousseau

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Theoretical Foundations

• Francois “Gracchus” Babeuf (l800s)▫Founder of modern communism▫Called for abortion of private property▫“Society must be made to operate in

such a way that it eradicates once and for all the desire of a man to become richer, or wiser, or more powerful than others.” Any problems?

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Theoretical Foundations

Charles Fourier(1800s)– A society that cooperates will see an

immense improvement in their productivity levels.

– Self-sufficient communities based on team work (phalansteries (Grand Hotels)) must be built.

Four level apartment complexes where the richest had the uppermost apartments and the poorest enjoyed a ground floor residence.

Workers would be recompensed for their labors according to their contribution.

Wealth would be determined by one's job jobs would be assigned based on the

interests and desires of the individual. There would be incentives: jobs people

might not enjoy doing would receive higher pay.

– Poverty (not inequality) is the principal cause of disorder in society.

Must be eliminated by sufficiently high wages and by a "decent minimum" for those who were not able to work.

Theoretical Foundations of socialism

Robert Owen (1800s, term socialism was originated)– Successful capitalist; owned a

textile company– no child labor, shorter hours,

higher pay, education, housing.– Leader of the first national labor

union in Britain He believed that competition

of human labor with machinery causes stress and the only effective remedy was the “united action of men, and the subordination of machinery”.

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Theoretical Foundations Saint Simon (French--

1800s)– Father of Constructivism

Social engineering– Advocate a social hierarchy

in which each man shall be placed according to his capacity and rewarded according to his works.

– Government has a spiritual or scientific role. 21

Theoretical Foundations Marx and Engels (1800s)

– Criticized Utopian socialist– Called for a more scientific and

fundamental change in societies

22Marx Engels

Karl Marx 1818-1883 Born in Germany Studies philosophy in Berlin Radical journalist Spent time in exile in London Collaborated with Friedrich Engels

to develop the MARXIAN WORLD VIEW

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What influenced Marxian Theory?

1. German political philosophy◦ rational is real (as opposed to real is

rational) If the reality is not rational, it should be

changed.2. French political sociology

◦ French revolution was a conflict between socioeconomic classes

◦ Conflict between bourgeoisie (capitalists) and proletariat (workers)

◦ Social classes and property ownership would disappear automatically and naturally communism 24

What influenced the Marxian theory?

3. British political economy David Ricardo’s labor theory

of value◦ Classical economics

Value of a good = Price and it is determined by supply and demand forces

◦ Ricardo (British, 1772-1823) Value of a good is determined by

the amount of socially necessary labor time it takes to produce it.

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Marxian TheoryLand and capital are productive but do

not contribute to the value of a good◦Return to land is zero◦Capital is the product of past labor

W= c + v + s◦W = value of a good◦c= value of fixed capital (measured by

labor time to produce it)◦v= value of variable capital (labor)◦s= surplus value (created by workers but

taken by capitalist (profit) exploitation)26

Marxian Theory Organic compositing of capital, q

– q=c/(c+v)◦ q=dead capital/ (living + dead capital)

– Firms compete to increase q (key assumption)

How can q go up?– Invest in creating more capital, c– Hold v (value of labor) constant or decrease it

Rate of exploitation, s’– s’=s/v– How can it go up?

If v is constant and s (profit) goes up, exploitation goes up

Or, if s is constant and v goes down, exploitation goes up

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Marxian TheoryRate of profit, p’

◦p’= s/(c+v)◦p’=profit as a percentage of cost◦If c rises and s and v are constant, p’ declines

◦Since competition among capitalist result in increased c then Either capitalism is destroyed Or need to drop v for p’ to stay the same

or go up Labor is worse off class conflict rises and system collapses

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But what Marx predicted did not happen in Germany

Capitalism did not collapse Real wages were rising So, Marxists came up with Revisionism – No drastic changes– Just gradual reform (via

parliamentary democracy) to improve the welfare of workers.

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Another reason why capitalism did not collapse? Imperialism View

– Advanced capitalist countries avoided class conflict by

engaging in conquest of less developed nations (especially African nations)

– Got inexpensive raw material

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Lenin

Deficiencies in Marxian analysis (Can you thing of more?)

1. Applied mostly to the manufacturing rather than the service industry

◦ Service industry is more labor intensive than manufacturing industry

2. Value of a good was determined based on supply side (cost) factors only.

3. Because profits depend on productivity of labor and productivity of labor depends on how happy he/she is, firms (owners of capital) would not have an incentive to maximize the exploitation of labor.

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Marxism-Leninsim (1870-1924) Doctrine The idea is that

– workers in developed nations with colonies will not be exploited (due to ability of firms to make high profits because of their access to low cost of raw material in colonies)

– But workers in less developed nations (China, Cuba..) with no colonies will be exploited by capital owners (firms).

Need dictatorship in those nations

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More radical viewsAnarchism & Syndicalism

◦State should be abolished (Anarchism = more violent ideas)

◦No government Consistent with Utopian

socialism and modern libertarianism

◦Any connections to communism? Proudhon (French 1809-1865,

the first individual to call himself an "anarchist“) Says yes to this question 33

Any connections between Anarchism and Marxism?

Marx says no.

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More on SyndicalismTrade unions (workers) should run the society

Influenced Russian Bolshevik (Meaning "majority" in Russian) Party in Russia in 1917(revolution))◦Lenin (the main leader of the party)

Crushed the syndicalist uprising In favor of state power

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Other Views Trotskyism

– Leon Trotsky (Russian, 1879-1940) A member of the Mensheviks Party

(minority party split from the Bolsheviks in 1903).

True socialism must be achieved internationally (Can’t do it in isolation)

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Other Views Titoism

– Marshall Titio (1892-1980) Leader of Yugoslavia Developed Worker-Management Market

Socialism– Quasi – Syndicalist– One party– Little central planning– Market forces– Management appointed by workers

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Other Views Maoism

– Mao (1893-1976) Chinese Marxist military

and political leader, who led the Chinese Communist Party

Emphasis on rural agricultural development

Moral incentives But to succeed we need to

destroy first– Cultural Revolution

we have to destroy an old system of production, an old ideology and old customs first.

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