ECONOMIC SYSTEMS
The 3 Major Production Questions
• What to produce?
• How to produce?
• For whom to produce?
We will classify economic systems
into categories, based on how each
of them attempts to answer these
three questions.
Traditional Economy
• The answers to the three major production questions are
dictated by ritual, habit, or custom.
Where might you find a Traditional
Economy?
Examples of Traditional Economies:
• Inuit tribe
• Some parts of South America
• Some parts of Africa
• Aboriginal tribes of Australia
• Some island societies
• All are remote
Traditional Economies
Advantages?
Disadvantages?
Traditional Economies
Advantages?
• Simple
• Defined roles
• Strong community
• Self-sufficient
• Specialization
•
•
•
•
•
Disadvantages?
Less growth/wealth
Less choice/variety
Lack of motivation
Uncertainty
Resource Curse
Command Economy
• The answers to the three major production questions are
given by some strong central authority (i.e. the
government)
• What is the “–ism” that comes to mind?
• Communism – an economic system in which all factors of
production are the property of the state.
• Examples of Command Economies?
Examples of Command Economies
•Cuba - ??
Examples of Command Economies
• North Korea
Command Economies
Strengths
Weaknesses
Command Economies
Strengths
• Able to plan
• More equality(??)
• Safety net
• Can adjust quickly
Weaknesses
• Lack of incentive
• …to work hard
• …to innovate
•
•
•
•
Low quality goods
Less variety
Corruption
Difficult to plan
successfully
Market Economy
• Businesses and individuals act in their own best interest to
answer the three major production questions.
• What is the “–ism” that comes to mind?
• Capitalism – an economic system in which individuals and
businesses compete, with a minimum of government
interference
• “Laissez-Faire”
Market Economies
Strengths
Weaknesses
Market Economies
Strengths
• Economic freedom
• Efficiency
• Strong incentives
• …to work hard
•
•
•
• …to innovate
• High quality goods
• More variety
•
Weaknesses
Unequal
Consolidation of
wealth/power
Doesn’t provide for
everyone
No safety net
Mixed Economies
• Mixed-Market
• Socialism
• Economies in Transition
Total Economic
Freedom
Little Economic
Freedom
Communism
Total
Government
Control
Socialism
Mixed-Market
Capitalism
No
Government
Control
2009 Index of Economic Freedom:
The Top 10
Rank Country
Overall Change
1
Hong Kong
90.0
+0.3
2
Singapore
87.1
-0.2
3
Australia
82.6
+0.4
4
Ireland
82.2
-0.3
5
New Zealand
82.0
+1.2
6
United States
80.7
-0.3
7
Canada
80.5
+0.3
8
Denmark
80.0
+0.4
9
Switzerland
79.4
-0.1
10
United Kingdom 79.0
-0.5
http://www.heritage.org/Index/
2014
Index of
Economic
Freedom:
Bottom 7
Capitalism
Communism
Capitalism
Communism
“From each according
to his ability, to each
according to his
needs!”
•Karl Marx
•Critique of the Gotha
Programme, 1875
Communism
200 words - Communism: How/Why does it rise?
How/Why does it fail?
How could it succeed?
Characteristic
Capitalism
Communism
Primary
Economic Goal
Economic
Freedom
Economic
Equality
Basis of
Economy
Competition
Cooperation /
Collectivization
Resource
Allocation
Supply &
Demand
Ownership of
F.O.P.
Private Property
Public Property
Profit Motive
Patriotism: The
Good of Community
Motivation
Government
Government
Planning
Planning
Why Doesn’t It Work?
• Incentive Problem
• Average Test Scores Example
• Soviet Tanks
• Coordination Problem
• In one word, why doesn’t it work?
GREED
“As for me, I am not a
Marxist.”
Karl Marx
When CAN It Work?
Opt In
Small
Groups
Role Players in the Mixed-Market
Economy
• Consumers
• Producers
• Government – What 5 roles does the government play in
our economy?
• Consumer
• Producer
• Protector
• Regulator
• Provider
7 Economic & Social Goals of MixedMarket Capitalism in the U.S.
1.
2.
3.
4.
5.
6.
7.
Economic Freedom
Economic Equality …of opportunity**
Economic Security
Economic Growth
Economic Efficiency
Price Stability
 inflation and deflation
Full Employment
 Does this mean everyone has a job?
 No. There is a Natural Rate of Unemployment
Characteristics of Free Enterprise
Capitalism
• Economic Freedom
• Voluntary Exchange – who has more power, producers or
consumers?
• Consumer Sovereignty: The consumer drives the
market – DOLLAR VOTES
• “The customer is always right!”
• Private Property Rights
• The Tragedy of the Commons – solutions?
• Profit Motive/Self-interest
• Competition
• Markets and Prices
• Specialization/Division of Labor