Economic Systems
Which is best?
Industrially advanced economies
differ on two key levels:
• Who owns the means of production?
• How is economic method coordinated and
directed?
Economic Questions:
– What will be produced?
– How will it be produced?
– Who will consume what is produced?
Pure Capitalism (laissez faire):
• An economic system (method of
organization) in which property resources
are privately owned and markets and
prices are used to direct and coordinate
economic activity.
– Voluntary Exchange
– Consumer Sovereignty
– Profit Motive
– Property Rights
– Entrepreneurship
The Command economy:
• An economic system (method of
organization) in which property resources
are publicly owned and Central economic
planning is used to direct and coordinate
economic activities.
Note: Traditional roles and Customs--The
Traditional Economic System
Mixed Systems
(a.k.a.--Mixed Capitalism, Modified Private
Enterprise System)
• An economy in which both government
and the private decisions determine how
resources are allocated.
Types of Economic Systems
Economic
System
Who owns
means of
production?
How is the
economic level
coordinated?
Pure
Capitalism
Resources
Privately
Owned
Markets and
Prices
Command
Economy
Resources
Publicly
Owned
Central
Economic
Planning
Mixed
Economy
Public and
Private
ownership
Markets and
Government
(Laissez Faire)
The Spectrum of Economic
Systems
Figure 18.1
Command Economies
Advantages
• Systems can change direction drastically
in a relatively short time
• Many health and public services are
available to everyone at little or no cost
regardless of income
Command Economies
Disadvantages
• Not designed to meet the wants of the
consumers, even though many basic
needs are provided for.
• The system gives no incentive to work
hard. Work ethic?
• A large decision-making bureaucracy.
• Inflexible in dealing with day-to-day
problems.
Communism
Ownership of Resources
• all productive resources are government
owned and operated.
Allocation of Resources
• Centralized planning directs all resources.
Role of Government
• Government makes all economic
decisions.
Capitalism
Advantages of Capitalism (pg.36-38)
– over time , it can adjust to change.
– It’s a high degree of individual freedom.
– Relatively small degree of government
interference.
– The decision making is decentralized, not
concentrated.
– Variety of goods and services available to
consumers.
– High degree of consumer satisfaction.
Capitalism
Disadvantage (pg.39)
• Does not provide basic needs of society.
• Does not provide service that people value
highly.
• High degree of uncertainty that workers face as
a result of change.
• It can fail if three conditions are not met.
– Competitive markets (See: Market Failure)
– Resources free to move from one activity to another
– Adequate/Equal Information
From Centrally Planned to
Freedom of Choice
• Transition: The process
of shifting from a centrally
planned economy toward
a mixed economic system
with markets playing a
greater role in the
economy.
• Privatizing: The process
of selling state firms to
individuals.
EXAMPLES:
• Current day Russia
• East/West German
Reunification
ISSUES:
• Unemployment
• Ethnocentrism
• Productivity
• Work Ethic
Socialism
Ownership of Resources
• basic productive resources are gov’t owned
and operated ; the rest are privately owned.
Allocation of Resources
• Government plans ways to allocate resources
in key industries.
Role of Government
• Government directs the completion of its
economic plans in key industries.
Economic and Social Goals
(pp. 41-43)
•
•
•
•
Economic Freedom
Economic Efficiency
Economic Equity
Economic Security
•
•
•
•
Full Employment
Price Stability
Economic Growth
Future Goals
•What are the Trade Offs (Opportunity cost) of using
the government to manipulate the economy?
•What is the sacrifice for promoting equity and/or
efficiency?
Roles of the Government
IN A MARKET BASED ECONOMY: (pp. 50-51)
Providing goods and services
• The government provides all sorts of goods and services, including streets
and highways, education, parks, public safety, national defense and space
exploration (i.e. Protector, Provider/Consumer and Promoter of National Goals).
Redistributing income—
• In a market-based economy, some people earn much more income than
others, and the government redistributes income to the poor (Provider)
Taxation—
• The government uses taxes on various goods and services to support its
spending programs.
Regulation of business practices—
• The government uses regulations to control pollution, encourage
competition among firms, and improve the safety of consumer goods.
Trade Policy—
• The government uses various policies to control international trade,
promoting some types of trade and restricting others. (i.e. Promoter of
National Goals)
(O'Sullivan & Sheffrin, 1998)