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The Spectrum of Economic Systems

The Spectrum of Economic Systems . Capitalism . The means of production are privately owned Supply and demand determine prices Business are free to direct resources into profitable activities . Advantages Efficiency Freedom Decentralization A smaller role for government

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The Spectrum of Economic Systems

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  1. The Spectrum of Economic Systems

  2. Capitalism • The means of production are privately owned • Supply and demand determine prices • Business are free to direct resources into profitable activities

  3. Advantages Efficiency Freedom Decentralization A smaller role for government High degree of consumer satisfaction Disadvantages Does not provide for the production of many public goods Produces only for those who have the resources to pay for products and services Often uncertain and unstable Capitalism

  4. Socialism • Government owns and runs the basic productive resources in order to distribute output to meet social goals

  5. Advantages: Distribution of benefits throughout a society People using their electoral power to influence economic decisions Disadvantages: Lower efficiency High taxes Government substituting its judgment for the judgment of the market Tendency for special interest to become entrenched Socialism

  6. Communism • Theoretically: communism is a selfless society in which the needs of the individual are subservient to the needs of society (for the greater good) • Reality: rigid command-type economy in which the state owns all economic goods • State officials answer: WHAT, HOW, and FOR WHOM?

  7. Communism • Disadvantages: • Individual freedom is lost • Incentive for people to work hard • Fails to meet the needs and wants of consumers • Centralized planning = inefficient • Lacks the flexibility to deal with day to day changes

  8. Rise and Fall of Communism

  9. Lenin Took large estates from the rich and gave them to the poor Outlawed private property Turned factories over to workers No skills to manage reintroduced some capitalist methods Stalin Five-Year Plan Centralized economy to achieve rapid industrialization Collectivization: forces common ownership of all enterprises The Economy Under Lenin and Stalin

  10. After WWII • Economic Plans concentrated on: • Defense Building • RED SQUARE REVIEW • Space Exploration • Production of some consumer goods

  11. Soviet Economy After Stalin • Real Force was the Communist Party • Gosplan: central planning authority • Local plant managers and workers had no say in how things were done • Agricultural: • Made up of collective state farms • Major problem • Government had problems with efficiency

  12. Soviet Economy Collapses • Industrialization: • made progress but never caught up with US • Lagged behind in consumer goods • Incentive Programs • Unrealistic goals • Poor quality of work • Quotas • Failed • Worsened the economy’s reputation for producing poor goods

  13. Soviet Economy Collapses • 1970’s-1980’s • People inpatient for more consumer goods and unwilling to accept sacrifices • Gorbachev: • Introduced Perestroika: restructuring of economy and government • Did not see his plans realized • The economy collapsed

  14. Transitions to Capitalism

  15. Problems of Transitions • Privatization • Conversion of state-owned factories and property to private ownership • Accomplished using vouchers • Communist Party lost power (other countries retained power) • Have not developed automatic stabilizers and social welfare nets that cushion the instabilities of capitalism • Learn to live with new incentives

  16. Countries and Regions in Transition • Russia: well underway • Poland, Hungary, the Czech Republic, Baltic States moving toward capitalism • Mexico: rapidly moving toward capitalism and open markets • China • Great Leap Forward: disastrous • Gov’t introduced privatization of industries and market reforms

  17. The Various Faces of Capitalism

  18. Gov’t very involved in the day to day activities of the private sector Economic crisis has tested the close employee-employer relationship Success = ability and willingness to develop new technology Government: Limited foreign competition in the domestic market Economy partially closed to products of foreign produces Need to institute reforms and redefine role of the gov’t in the economy Japan

  19. The Asian Tigers • Hong Kong: developed efficient manufacturing based economy using technology other countries developed • Singapore: Generous tax breaks; government subsidies, government-sponsored training employees to develop technology • Taiwan: development based on gov’t intervention in various markets in order to direct the flow of resources • South Korea: New economic growth depends on the private economy’s adapting to competition and reducing the support from the political sector

  20. Sweden • Not model of PURE socialism • has considerable amount of private enterprise • Government owned some basic industries and used steep taxes to pay for welfare state benefits • Heavy tax burden has cut into their growth • Free-market gov’t elected in 1991 has reduced the role of the public sector

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