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
SCARCITY
unlimited 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
Pure Price System (Capitalism)
• Decisions about scarcity
should be made free from
Decentralized
govt. control.
Laissez Faire
• Economic forces (price
system/supply & demand)
in the market should answer
the three economic
questions.
• In “laissez faire economics”,
Free Enterprise
the government should
adopt a “hands off” policy
Free Market
when it comes to economic
decisions.
Private Enterprise
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.
Disadvantages
• 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
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
Boom
Period of Economic
Expansion
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.
Period of Economic
Decline
Bust (Depression)
PROSPERITY
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
DEPRESSION
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.
prosperity
FISCAL POLICY
Increase government $
FISCAL POLICY
Decrease taxes
Decrease government $
MONETARY POLICY
depression
Increase taxes
Increase $ supply
MONETARY POLICY
Decrease interest rates
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.
Supply-side theory states that if the private market is free to operate,
then wealth will trickle down to the general public.
• 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.
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
Reaganomics
Following 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 Created
by 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.
Marx’s Beliefs
• 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.”
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…
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–
–
–
–
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.
Ideas to Battle the Evils of the
Industrial
Revolution
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
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 & Regulations
Agriculture
Govt. 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. (neoconservatives)
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 Programs
Progressive 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.