Capitalism and Institutions
COMMON VOCABULARY
WHAT IS POVERTY?
INSTITUTIONS OF CAPITALISM
MARKET ECONOMIES
Key Vocabulary
 Poverty: Living on less than $1 a day- absolute
 Purchasing Power Parity- relative
 U.S. official poverty line= $13 a day
 Income=how much you make
 Wealth=stock measure
Key Vocab Cont’
 GDP- Gross Domestic Product= Dollar value of
goods & services produced in country
 GNI- Gross Nat’l Income= money earned by an
individual on commodities bought/sold
 GDP is misleading; only an average
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But…strong correlation to quality of life
Easier to measure than quality of water or air
Low, Middle, and High Income Nations
Poverty Lines, 2001
David Dollar, Development Research Group, World Bank. “Capitalism, Globalization and Poverty.” unpublished paper,
written for The Foundation for Teaching Economics, March, 2003, p. 25.
David Dollar, Development Research Group, World Bank. “Capitalism, Globalization and Poverty.” unpublished paper,
written for The Foundation for Teaching Economics, March, 2003, p. 25.
David Dollar, Development Research Group, World Bank. “Capitalism, Globalization and Poverty.” unpublished paper,
written for The Foundation for Teaching Economics, March, 2003, p. 24.
Number of People Living on Less Than $1/day
(millions)
1987
1990
1998
East Asia &
Pacific
417.5
452.4
267.1
Sub-Saharan
Africa
217.2
242.3
301.6
http://www.worldbank.org/poverty/data/trends/income.htm#table1
Avg.GNI per capita
lowest 10% share
lowest 20% share
Luxembourg
53290
4.0
9.4
Norway
36690
4.1
4.1
United States
36110
1.8
5.2
Switzerland
31840
2.6
6.9
Denmark
30600
3.6
9.6
Ireland
29570
2.5
6.7
Canada
28930
2.8
7.5
Austria
28910
4.4
10.4
Netherlands
28350
2.8
7.3
Belgium
28130
3.7
9.5
Australia
27440
2.0
5.9
Japan
27380
4.8
10.6
France
27040
2.8
7.2
Germany
26980
3.3
8.2
United Kingdom
26580
2.6
6.6
Italy
26170
3.5
8.7
Finland
26160
4.2
10.0
Sweden
25820
3.7
9.6
Spain
21210
2.8
7.5
New Zealand
20550
0.3
2.7
Israel
19000
2.8
6.9
Greece
18770
3.0
7.5
Total
625520
68.1
168
Avg (total / 22)
$28,433
3.1%
7.6%
Top quintile
of
nations
Average Income Shares of the Poorest 10% of Nation’s Population
Among Quintiles of World Nations Ranked by Index of Economic Freedom
Economic Growth
improves the lives of the poor by making the pie bigger
Bigger "slices" mean higher standards of living
Available to % of nonpoor people in U.S.
population
Available to % of
poor people in U.S.
population
Refrigerator
99.5
97.9
Stove
99.5
97.7
Color television
98.5
92.5
Telephone
97.2
76.7
Washing machine
92.7
71.7
Clothes dryer
87.3
50.2
Microwave
89.8
60.0
Dishwasher
58.3
19.6
Freezer
46.0
28.6
VCR
86.2
59.7
Air conditioner
71.9
49.6
Personal computer
28.3
7.4
Consumer durables
Institutions of Capitalism
 Institutions are “rules of the game”
 “rules of the game” are formal and informal
 Shape incentives and outline expected, accepted
forms of behavior
 4 Institutions:
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1. Private Property Rights
2. Markets
3. Rule of Law
4. Entrepreneurship
Private Property Rights
Definable, Enforceable & transferable
Right to freely use and transfer possessions
Defending property rights critical
10% of African land is definable and plotted
What isn’t owned by people simply “Uganda” or
“Kenya”
 Peru villages- Hernando De Soto- economistsomeone at home 24/7
 Prop. Rights lead to incentives- value in property
 Prop. Rights lead to investment- allows people to
obtain debt, collateral is great benefit
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Rule of Law
 Rule of Force= Anarchy
 Rule of Men= laws are enforced at goodwill of
enforcer (very few who can change laws)
 Rule of Law= both governed and governing are
subject to same set of laws
 Change in laws impact our vision of futurewillingness to invest
Markets: Good or Evil?
 Market: institution most associated w/ capitalism; also vilified as
exploitive
 Although impersonal (business is cut-throat, profit driven) not
necessarily exploitive
 Paul Heyne argues in his work, “Moral Criticisms of Markets” in 1995
that although Capitalism may produce have and have-nots there is
not a better alternative- Excerpt below:
“There have in fact been massive experiments in this century with
societies committed to the abolition of . . . production through the
impersonal transactions of the market system. If history ever
pronounces ‘final verdicts,’ it pronounced one in 1989 on these
experiments. Market systems do not produce heaven on earth. But
attempts by governments to repress market systems have produced
something in the 21st century something very close to hell on earth.”
Competition
 Competition: profit driven; scarcity of goods leads to
interaction between buyer and seller
 Adam Smith “Invisible Hand”- competition is positive for
buyer and seller
 Critics argue it expands the claws of rich at expense of poor
 Heyne argues that competition would exist in any form of
economic institution

Scarcity will always exist; competition exists because of scarcity
 “Another common moral objection to market systems is the objection to competition,
usually thought of by the critics as an interpersonal struggle for superiority. . . . [It is
instead]. . . a process – often completely impersonal . . . – of trying to satisfy whatever
criteria others are using to allocate scarce goods. Scarcity means that it is not possible
for everyone to have as much as they would choose to have if they were not required to
make any sacrifice to obtain it. Scarcity therefore necessitates rationing, which means
allocation by some set of discriminatory criteria. It follows that competition is the
unavoidable accompaniment of scarcity and will consequently be found in every
human society, whatever the form of its economic organization.
 The question is not whether we shall have competition, but what forms it will take
(emphasis added). That will be determined by the criteria used to allocate scarce
goods. . . . [The]. . . criteria in a market system are usually monetary: people compete
largely by offering to pay more money for what they want to obtain and by agreeing to
accept less money for what they are trying to supply.
 When governments . . . set up alternative systems for allocating scarce goods,
competition does not stop. It merely takes new and almost always more destructive
forms. . . . Even a transformation of human nature would not eliminate competition. If
everyone in the society became a saint, competition would still exist because the saints
would be committed to different charitable projects, and they would consequently have
to devise some (saintly) way to decide how many resources to allocate to each project.
Nothing can abolish competition except the abolition of scarcity. “ (Heyne 3-5)
Voluntary Exchange
 Market transactions entered freely by buyer and
seller
 Exchange is by choice (except in cases of fraud,
deception or buyer mistake)- both parties better off
 Each has given up something of lesser value
(personal) to obtain something of greater value
Market Competition Variables
 # of firms in the market
 Degree to which different products from different
producers are regarded by consumers- good or
bad
 Relative ease and availability of gathering
information about market
 Relative ease and exit from market
 Grain
market highly competitive- many growers,
many buyers
 Diamond market not highly competitive
Competitive Market Economies
 Best option at reducing poverty
 Goods & services available at lower prices
 Goods are of better quality- competition forces
improvement of products
 Competition leads to more innovation; more innovation
leads to cheaper costs (technology)
 Producers seek lower-cost methods of production
 Goods less expensive, people/consumers work less to pay
for each item
 What was luxury 20 years ago- more available today; cell
phone costs 2% labor time as opposed to 1984
Source: W. Michael Cox and Richard Alm, "Time Well Spent." 1997 Annual Report of the Federal Reserve Bankof
Dallas. http://www.dallasfed.org/fed/annual/1999p/ar97.pdf (accessed October, 2003)
Production & Job Openings
 Increase in production leads to more jobs
 More opportunity for poor to increase incomes as
workers
 As economies grow, so to does labor needs
 Labor needs leads to higher wages (supply and
demand)- producer needs more, must pay higher wages
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Sharp decline of child labor as family income increases
Children in developing world can go to school
1993 survey: income of poorest 10% of people in Vietnam
increased 50%
Led to increase in school enrollment & decrease in child labor
What does it all mean?
 You are ultimately the judge of the good and bad of
globalization.
 Do you look at the merits of competitive balance,
open markets and increased production as a positive
construct of society or do you view it as exploitation?