OUR ECONOMIC SYSTEM
1
Pure Capitalism
Type of economic system generally
characterized by:
 Limited involvement of the government
in the economy.
 Individual ownership of the factors of
production.
 Individuals pursue their own self interest
with few constraints.
2
What is an economic system ?
All of the institutional means
through which the FOP are used
to satisfy wants.
A representative democracy
facilitates the institution of a
capitalistic economy.
3
What is an economic system ?
By institution we mean principally
the laws of the nation and
cultural practices which control
the way in which individuals act.
A law is something that serves to
instruct.
4
What is an economic system ?
There are six basic criteria associated with
a pure capitalistic system:
 The institution of private property
 Free enterprise and free choice
 Self interest
 Competition and unrestricted markets
 The market system
 The limited role of government
5
The Institution of Private
Property
 Ownership
of most property is held by
individuals or groups of individuals
(corporations, partnerships, etc.).
 The
state is not the owner of productive
resources that are important forms of
property.
6
The Institution of Private
Property
 Private
property is controlled and
enforced through the legal framework of
laws, police, and courts.
 Therefore
one function of government is
the protection of private property rights.
7
The Institution of Private Property
 Individuals
are usually free to use their
private property as they choose, so long
as they do not infringe on the legal
property rights of others.
 Individuals
are usually allowed to enter
into private contractual agreements that
are mutually satisfying.
8
Free Enterprise and Free Choice
(An Extension of Property Rights)
 Exists
when private individuals are
allowed to obtain resources, to organize
those resources, and to sell the resulting
product in any way the individual
chooses.
 As long as their actions do not infringe
on the property rights of others
9
Free Enterprise and Free Choice
(An Extension of Property Rights)
– Assumes there are no artificial
restrictions that a government or
other producer can put up to
block a business's choice in the
matter of purchasing its inputs
and selling its outputs.
10
Free Enterprise and Free Choice
(An Extension of Property Rights)
– Assumes there are no artificial
restrictions that a government or
other producer can put up to
block a business's choice in the
matter of purchasing its inputs
and selling its outputs.
11
Free Enterprise and Free Choice
(An Extension of Property Rights)
 Workers
are free to enter any line of
work for which they are qualified, and
consumers can buy the desired basket of
goods and services that they feel is best
for them.
12
Free Enterprise and Free Choice
(An Extension of Property Rights)
The
ultimate voter is the consumer,
he/she votes with dollars, and
decides which product will survive
– This reasoning is known as consumer
sovereignty, where the ultimate
purchaser of goods and services
determines what is produced.
13
Free Enterprise and Free Choice
(An Extension of Property Rights)
The
ultimate voter is the consumer,
he/she votes with dollars, and
decides which product will survive
– This reasoning is known as consumer
sovereignty, where the ultimate
purchaser of goods and services
determines what is produced.
14
Self Interest
Normally implies the maximization of
profits or the minimization of losses.
 Consumers:
strive to maximize the
amount of satisfaction possible from
spending a given amount of money
income. (as little as possible!)
15
Self Interest
 Producers
: strive to maximize the
amount of net income possible from
selling commodities at the highest
possible price (get as much as possible!)
16
Self Interest
 Consumers:
strive to maximize the
amount of satisfaction possible from
spending a given amount of money
income. (as little as possible!)
 Producers : strive to maximize the
amount of net income possible from
selling commodities at the highest
possible price (get as much as possible!)
17
Self Interest
 Employees
(Workers): strive to obtain the
highest level of income possible for least
amount of work.
 Employers
:strive to obtain the most
amount of work from employees for the
least cost.
18
Self Interest
 Owners
of resources: strive to obtain the
highest possible price when that resource
is sold or leased.
 Users
of resources: strive to obtain the
lowest possible price for a resource so
that THEY can make the most profit.
19
Competition and Unrestricted
Markets
Competition
is Rivalry among
sellers who wish to attract customers
and rivalry among buyers to obtain
desired goods and services.
20
Competition and Unrestricted
Markets
 Competition
requires a minimum of two
conditions:
– A relatively large number of independently
acting sellers and buyers.
– Freedom of sellers and buyers to enter or
exit a particular industry without
restrictions (unrestricted markets).
21
Competition and Unrestricted
Markets
 Economic
competition imposes limits on
the self interest of buyers and sellers.
Competition is a regulating force in
capitalist systems.
– i.e. Raise prices
Consumers go to another
one of many sellers.
– Economic profit earned
New firms will
enter the industry.
22
Unrestricted Markets
– Economic profit earned
enter the industry.
New firms will
23
The Market System
An
–
–
–
–
institution that develops from the
Private Property Rights
Free Choice and Free Enterprise
Self-Interest
Competition and Unrestricted Markets
 Also
referred to as the “Price System”
24
The Market System
Capitalism
is a market economy.
That is, buyers and sellers relate
their opinions by expressing how
much they are willing to pay for, or
how much they demand of goods
and services.
25
The Market System
 Prices
are used to signal the value of
individual resources and commodities.
Therefore, prices provide valuable
information to consumers and
producers.
 Prices
are the "guiding light" to which
resource owners, businesses, and
consumers follow when economic choices
must be made.
26
The Market System
 Therefore,
we can say that the market
system (price system) IS the organizing
force in capitalist systems.
– Organization is the coordination of
individuals in the furtherance of a common
goal.
27
The Market System
 Resources
tend to flow where they yield
the highest rate of return or highest
profit.
28
The Market System
 Prices
generate the signals for resource
movements, provide information cheaply
and quickly, and affect incentives.
– i.e. The current movement of resources out
of the farming sector and into the
ornamentals, landscape and turf sectors.
29
Real Net Farm Income, N.C.
(Millions $)
3000
2500
2000
1500
1000
500
98
96
94
92
90
88
86
84
82
80
78
76
74
72
0
Year
30
Ag. Institute Fall Enrollment
99
96
93
90
87
84
81
78
75
72
500
450
400
350
300
250
200
150
100
50
0
31
3000
2500
2000
1500
1000
500
98
96
94
92
90
88
86
84
82
80
78
76
74
72
0
99
96
93
90
87
84
81
78
75
72
500
450
400
350
300
250
200
150
100
50
0
32
Percentage of Students Enrolled
In Livestock Mgmt. & Tech
35
30
25
20
15
10
5
98
96
94
92
90
88
86
84
82
80
78
76
74
72
0
33
Percentage of Students Enrolled
In Field Crops Technology
25
20
15
10
5
0
72
74
76
78
80
82
84
86
88
90
92
94
96
98
34
Percent of Students Enrolled in
General Agricutlture
98
96
94
92
90
88
86
84
82
80
78
76
74
72
20
18
16
14
12
10
8
6
4
2
0
35
Percentage of Students Enrolled
in Ornamentals & Landscape
30
25
20
15
10
5
98
96
94
92
90
88
86
84
82
80
78
76
74
72
0
36
Percentage of Students Enrolled
in Turfgrass Management
40
35
30
25
20
15
10
5
98
96
94
92
90
88
86
84
82
80
78
76
74
72
0
37
Percentage of Students Enrolled
in Traditional Agriculture Curr.
70
60
50
40
30
20
10
98
96
94
92
90
88
86
84
82
80
78
76
74
72
0
38
Percentage of Students Enrolled
in Orn. & Land., and Turf
70
60
50
40
30
20
10
98
96
94
92
90
88
86
84
82
80
78
76
74
72
0
39
96
94
92
90
88
86
84
96
94
92
90
88
86
84
82
72
82
0
80
10
80
20
78
30
78
40
76
50
76
60
74
70
74
72
70
60
50
40
30
20
10
0
40
Average Starting Salaries, May
1992 and 1995 Graduates
$20,400
$21,000
AA
$22,183
$22,000
BS
1995
1992
MS
Ph.D
$0
$10,000
$20,000
$30,000
$40,000
$50,000
41
Average Starting Salaries of Ag.
Inst. Graduates, 1993, 1994, 1995
Gen. Ag.
Turfgrass
Orn. & Land.
1995
1994
1993
Livstk. Mgmt.
Field Crops
Ag. Pest
Ag. Bus.
All Majors
$0
$5,000 $10,000 $15,000 $20,000 $25,000 $30,000
42
Average Starting Salaries of Ag.
Inst. Graduates, 1996, 1997, 1999
Gen. Ag.
Turfgrass
Orn. & Land.
1999
1997
1996
Livstk. Mgmt.
Field Crops
Ag. Pest
Ag. Bus.
All Majors
0
5000 10000 15000 20000 25000 30000 35000
43
The Limited Role of Government
 Someone
or some entity has to define and
enforce private property rights.
– The government protects the rights of
individuals and business persons to
keep private property private, and
keep the control of that property
vested with the owners.
44
The Limited Role of Government
Reconcile
Negative Externalities
through Legislative Action or
Civil Process to Settle Disputes
Judicially
45
The Limited Role of Government
Eliminate
monopolies that would
restrain trade,
 Issue money,
Prescribe a standard of weights
measures,
46
The Limited Role of Government
Raise
funds through taxation and
other means (BORROW) for public
goods such as national defense.
Therefore,
government is
essential to the existence of a
pure capitalist economic system.
47
Public Goods
COLLECTIVE CONSUMPTION:
 Many people can consume the same
units of a good or service simultaneously.
 consumption
of the good by one person
does not diminish the amount available
for anyone else.
48
Public Goods
NON-EXCLUSION PRINCIPLE:
 There is no technology available to
prevent people who do not pay for the
good or service from consuming it,
OR
the costs of exclusion are prohibitively high
relative to the commodity's benefit.
49
Public Goods
NON-EXCLUSION PRINCIPLE:
 There is no technology available to
prevent people who do not pay for the
good or service from consuming it,
OR
the costs of exclusion are prohibitively high
relative to the commodity's benefit.
50
Quasi-Public Goods
 These
are goods and services provided by
government that could be exclusive.
 In
other words, these goods and services
could be provided by the private sector
rather than government
 Examples: Education, fire and police
protection, highways, etc.
51
Public Production vs.
Public Provision
 Public
Production:
– government actually produces public goods
using government employees and other
government owned resources
– For example: DOT production of streets, roads,
highways, and associated services
52
Public Production vs.
Public Provision
 Public
Provision:
– Government uses subsidies, contracts with
private firms, and administrative regulations
and codes to enhance production of public and
quasi-public goods and services to a point
deemed optimum.
– For Example: the government does not produce
aircraft carriers or submarines, the government
contracts with private firms to produce these.
53
Privatization
 Privatization:
the shifting of actual
government production of quasi-public
goods to the private sector.
– Volunteer fire departments in North Carolina
often negotiate contracts with municipalities to
provide fire protection.
– Garbage collection has been contracted out
– Prison management has been contracted
54
THE MIXED ECONOMIC
SYSTEM
Pure Capitalism is only one extreme type
of social organization for the
production and distribution of
commodities.
– The other extreme is a political system
whereby the government, or a central
decision making body, controls all
productive resources.
Alias: COMMUNISM
55
MIXED ECONOMIC SYSTEM
 In
reality, most economic systems are a
combination of market and political
systems.
56
MIXED ECONOMIC SYSTEM
 In
the US, we have a hybrid economic
system.
– Some decisions are made by the government
directly.
» Movement of resources has been strongly
influenced by government through our tax
system
– Most decisions, however, are made in the
market by businesses (producers) and
consumers.
57
Economic Systems
Market Economies
Mixed Economies
Pure Capitalism
Socialism
Command Economies
Pure Marxist
Communism
Hong Kong
Singapore
United States
Canada
Japan
W. Germany
58
Economic Systems
Market Economies
Pure Capitalism
Mixed Economies
Command Economies
Socialism
Pure Marxist
Communism
Cuba
North Korea
Great Britain
France
Sweden
China
Former USSR
59
MIXED ECONOMIC SYSTEM
Therefore,
our system is a mixed
economic system that leans heavily
towards pure capitalism.
60
MIXED ECONOMIC SYSTEM
 After World
War II, the role of the US
government in our economic system
expanded.
– Government stepped in to help out
(subsidize) certain industries and
individuals.
61
MIXED ECONOMIC SYSTEM
 loan
guarantees to Lockheed and
Chrysler,
 protective
tariffs on textiles, automobiles,
beef, and peanut imports,
 price
support programs for many
agricultural commodities,
62
MIXED ECONOMIC SYSTEM
 expanded
social welfare programs. Tax
dollars are redistributed to those whom
the government deems to be needy,
 Social
Security and Medicare Programs
 Medicaid Program
63
MIXED ECONOMIC SYSTEM
 and
tax other industries and individuals.
– windfall profit tax on the oil companies,
(Carter Administration 1976-1980)
– luxury taxes on expensive boats and
automobiles, (10% tax under Bush
Administration, Democratic Congress)
– repeal of capital gains exclusion in the tax
code (Reagan Administration, Democratic
Congress.).
64
MIXED ECONOMIC SYSTEM
 Restrictions
on the agricultural sector by
means of quotas or allotments.
– e.g. peanuts, tobacco, milk, and certain
fruits
 Restrictions
on production and
procurement of resources due to
environmental concerns.
65
Government Intervention
 Whether
this government intervention is good
or bad is a decision you must make.
 Once you decide, you must voice your opinion
at the voting booth.
 To make objective decisions, you must have
information.
 This course is designed to provide information
for the decision making you will have to
undertake in the course of your career.
66
CONCLUSIONS
 CAPITALISM:
An economic system in which individuals
privately own productive resources and
possess the right to use these resources in
what ever manner they choose subject to
certain (minimal) legal restrictions.
67
CONCLUSIONS
 A pure
capitalist system works within the
institution of private property that is
controlled and enforced through the legal
framework of laws, courts, and police.
68
CONCLUSIONS
 It
is a system of free enterprise, where
producers freely choose the resources
they use in the production process.
 Consumers
have freedom of choice also,
as do workers and owners of resources in
general.
69
CONCLUSIONS
 Individuals
and producers express their
desires through the market system where
 prices
are signals about the relative
scarcities of different goods, services, and
resources.
70
CONCLUSIONS
The
role of government is limited to
the
– protection of private property rights,
– provide an environment favorable to
competition, and
– provide public goods.
71
CONCLUSIONS
Reconcile Negative Externalities through
Legislative Action or Civil Process
 Provide for national defense,
 eliminate monopolies that would restrain
trade,
 issue money,
 prescribe standards of weights measures,
 raise funds by taxation and other means
(BORROW) for public goods, and settling
disputes judicially

72
Circular Flow Model
$ COSTS
$ INCOMES
RESOURCE
MARKET
RESOURCES
INPUTS
BUSINESSES
HOUSEHOLDS
GOODS &
SERVICES
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
Copyright McGraw-Hill, Inc. 1999
$ CONSUMPTION
73
THE CIRCULAR FLOW REVISITED
$ COSTS
$ INCOMES
RESOURCE
MARKET
RESOURCES
BUSINESSES
INPUTS
GOVERNMENT
GOODS &
SERVICES
HOUSEHOLDS
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
Copyright McGraw-Hill, Inc. 1999
$ CONSUMPTION
74
THE CIRCULAR FLOW REVISITED
$ COSTS
NET TAXES FLOW
RESOURCE
TO GOVERNMENT
MARKET
FROM BUSINESSES
RESOURCES
BUSINESSES
GOVERNMENT
GOODS &
SERVICES
$ INCOMES
INPUTS
HOUSEHOLDS
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
Copyright McGraw-Hill, Inc. 1999
$ CONSUMPTION
75
THE CIRCULAR FLOW REVISITED
$ COSTS
RESOURCE
GOVERNMENT
GOODS & SERVICES MARKET
FLOW TO BUSINESSES
RESOURCES
BUSINESSES
GOVERNMENT
GOODS &
SERVICES
$ INCOMES
INPUTS
HOUSEHOLDS
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
Copyright McGraw-Hill, Inc. 1999
$ CONSUMPTION
76
THE CIRCULAR FLOW REVISITED
$ COSTS
RESOURCE
MARKET
RESOURCES
BUSINESSES
GOVERNMENT
GOODS &
SERVICES
$ INCOMES
NET TAXES FLOW
TO GOVERNMENT
FROM HOUSEHOLDS
INPUTS
HOUSEHOLDS
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
Copyright McGraw-Hill, Inc. 1999
$ CONSUMPTION
77
THE CIRCULAR FLOW REVISITED
$ COSTS
$ INCOMES
RESOURCE
MARKET
RESOURCES
BUSINESSES
GOVERNMENT
GOODS &
SERVICES
GOODS & SERVICES
FLOW TO HOUSEHOLDS
FROM GOVERNMENT
INPUTS
HOUSEHOLDS
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
Copyright McGraw-Hill, Inc. 1999
$ CONSUMPTION
78
THE CIRCULAR FLOW REVISITED
$ COSTS
$ INCOMES
EXPENDITURES
FLOW TO
ACQUIRE RESOURCES
RESOURCES
BUSINESSES
RESOURCE
MARKET
INPUTS
GOVERNMENT
GOODS &
SERVICES
HOUSEHOLDS
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
Copyright McGraw-Hill, Inc. 1999
$ CONSUMPTION
79
THE CIRCULAR FLOW REVISITED
$ COSTS
$ INCOMES
RESOURCE
MARKET
RESOURCES
BUSINESSES
GOVERNMENT
GOODS &
SERVICES
RESOURCES
FLOW TO
INPUTS
GOVERNMENT
HOUSEHOLDS
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
Copyright McGraw-Hill, Inc. 1999
$ CONSUMPTION
80
THE CIRCULAR FLOW REVISITED
$ COSTS
$ INCOMES
RESOURCE
MARKET
RESOURCES
BUSINESSES
INPUTS
GOVERNMENT
GOVERNMENT
EXPENDITURES
GOODS &
FLOW
TO
SERVICES
PRODUCT MARKET
HOUSEHOLDS
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
Copyright McGraw-Hill, Inc. 1999
$ CONSUMPTION
81
THE CIRCULAR FLOW REVISITED
$ COSTS
$ INCOMES
RESOURCE
MARKET
RESOURCES
BUSINESSES
INPUTS
GOVERNMENT
HOUSEHOLDS
GOODS & SERVICES
FLOW TO
GOODS
&
GOVERNMENT
SERVICES
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
Copyright McGraw-Hill, Inc. 1999
$ CONSUMPTION
82
THE CIRCULAR FLOW REVISITED
$ COSTS
$ INCOMES
RESOURCE
MARKET
RESOURCES
BUSINESSES
INPUTS
GOVERNMENT
GOODS &
SERVICES
HOUSEHOLDS
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
Copyright McGraw-Hill, Inc. 1999
$ CONSUMPTION
83