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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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