Economic Systems. Powerpoint produced by Rachel Farrell (PDST) & Aoife Healion (SHS, Tullamore ) Sources of information: SEC Marking Schemes, newspaper articles & documentaries. LC Economics Syllabus. Economic System & Economic Thought
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Economic Systems Powerpoint produced by Rachel Farrell (PDST) & AoifeHealion (SHS, Tullamore) Sources of information: SEC Marking Schemes, newspaper articles & documentaries
LC Economics Syllabus Economic System & Economic Thought • Brief historical outline of economic thought – Smith, Marx, Keynes etc. • Market, centrally planned and mixed economies.
Exam Questions – Ord Level Short Long 2011 Q 7 (c) • 2011 Q 7 Match
Exam Questions – Higher Level Short Long 2007 Q 4 • 2011 Q 2 • 2009 Q 3 • 2008 Q 5
An Economic System • Is the institutional means through which natural resources are used to satisfy human wants by deciding; • What goods are to be produced. • How are these to be produced. • Who is to benefit from the production.
The three economic systems are: • Free Enterprise/Market Economy (Laissez Faire or Capitalism) • Centrally Planned/Command Economy (Communism) • Mixed Economy (Central planning & private enterprise)
Free Enterprise Economy(Definition HL 2008 SQ 5 ) • Advocated by Adam Smith • The market mechanism operates. • The factors of production are privately owned. • There is limited government interference. • Resources are allocated by a decentralised decision making process. • Citizens are motivated by self-interest.
Characteristics of a Free Enterprise Economy(Eg. USA Capitalism ) 1. Market Mechanism: • Resources are allocated through the market/price mechanism. • If there is a sufficient demand for a product/service it will be supplied. • The higher the profit the more of a good/service will be produced. Profit motive
2. Ownership of the factors of production: • Nearly all of the factors of production are privately owned.
Laissez Faire 3. Limited government interference: • The government exists only to: • Supply public goods eg. schools….. • Provide a legal framework for citizens • Prevent the creation of monopolies
4. Decentralised decision making: • Decisions about: • allocation of resources • what to produce • and who gets what • are made by individuals/entrepreneurs.
5. Motivated by self-interest: • Consumers want to maximise their utility (satisfaction). • Producers want to maximise their profits. • Investors want to maximise their return.
Article re pole Ind August 2011
Economic advantages 1. Choice: • Consumers with income have a wide choice of goods & services. 2. Efficiency: • There is an incentive to be cost effective as those who are not will go out of business.
3. Innovation: • Producers who come up with new ideas may be rewarded by increased sales & profits. 4. Less bureaucracy: • As decisions are made by individuals there is less need for large expensive administration.
Disadvantages 1. Unequal distribution of income & wealth: • Individuals who cannot supply a factor of production have no wealth. 2. Lack of essential public services: • If an activity does not make a profit then it may not be provided. • Eg. education.
3. Social costs: • Lack of government regulation leads to: • Exploitation of labour • Pollution • Destruction of the environment
4. Vital services in private hands: • It may not be desirable to have defence, judiciary, police under private control. 5. Unemployment: • Entrepreneurs try to keep costs down and lay off workers.
“…one of the great paradoxes of modern history: that an economic system designed to offer infinite choice…has ended up homogenizing humanity”. • Nial Ferguson “Civilization: The West & the Rest”.
“Banks that think they’re casinos put us all at risk”. Independent August 2011
“Corporate crime can inflict far more damage on society than street crime”. Anto Kerins Irish Times Magazine Jan 2011
Suggested Resources • The Corporation
Moral hazard A person insulated from risk behaves differently from how they would behave if they were Fully exposed to the risk. For example, a person with insurance against car theft may be less cautious about locking his or her car, because the negative consequences of vehicle theft are (partially) the responsibility of the insurance company. So will the possibility of debt Forgiveness make people less Inclined to make an effort to pay Their mortgage??
Independent 28/06/11 Moral Hazard?
In the 1980’s Ronald Regan and Margaret Thatcher were big fans of Milton Freidman and close friends of General Augusto Pinochet, the Chilean dictator, who allowed Chile to be a laboratory experiment for Freidman’s free market economic policies in the 1970’s.
Suggested Resources • Naomi Klein’s “The Shock Doctrine looks at how the economic policies advocated by Milton Freidman were imposed on the people of Chile with the support of the US government. • Youtube has clips of the film and comments from Milton Freidman
The Shock Doctrine Advisor to Nixon, Pinochet, Thatcher, Regan & GW Bush Jnr
Are We Witnessing the Shock Doctrine in Effect? Milton Friedman debates Naomi Klein
Centrally Planned Economy(Communism former USSR, China) • This system was advocated by Karl Marx & later Vladimir Lenin. • They asserted that government control of all areas of economic activity is essential in order to eliminate the inequalities of capitalism.
Centrally Planned Economy 1. Planning Mechanism: • Resources are allocated by the state/government through a planning mechanism. • Planners try to predict consumers needs. • They fix the price & quantities produced.
2. Factors of Production: • The factors of production are owned by the state. • Except for labour but this is directed by the state.
3. Maximum government interference: • The government exists to regulate all economic activity. 4. Centralised decision making: • All decisions are made by the government.
5. Motivated by the common good: • Consumers, workers & government are assumed to be selfless. • They co-operate together for the common good.
Economic advantages 1. Reduced inequalities • The government may place a great emphasis on providing all citizens with a minimum standard of living. • Eg. subsidising essential food.
2. Provision of essential services • The state provides vital services. • Eg. healthcare, education.
3. Economies of scale • The government may be more efficient in the production of goods & services that need large amounts of capital. • Large scale production leads to lower costs per unit. • Eg. energy generation
4. Full employment* • Historically centrally planned economies were able to achieve full employment while some “free enterprise economies” suffered from unemployment. • *All those who are willing to work at existing wage levels are employed.
Economic disadvantages 1. Shortages of goods & services • The state may limit prices causing excess demand. • Shortages develop. • Goods allocated by a queuing system.
2. Restricted choice and freedom • Consumers have little say in what is produced. • What is available might be restricted. • Eg. Denim jeans banned as they were a symbol of Western capitalism
3. Inefficiency • No profit motive. • Therefore no incentive for enterprise and innovation. • Therefore individuals and firms are not encouraged to take risks, work hard or innovate.
4. Low economic growth • As individuals are not motivated by self-interest this may result in reduced economic activity and poor economic growth.
The rise & fall of Communism • Excesses of the Industrial Revolution. • Led to inequality and poverty. • No social welfare. • Capitalism condemned by Marx. • It contained the seeds of it’s own destruction. • Communism would replace capitalism, leading to a socialist state where all means of production would be publicly owned.
In the early 20th century under the control of the Bolshevik Party, a communist government seized power during the Russian revolution, leading to the creation of the Soviet Union, the world’s first Marxist state.
During ensuing decades, communist governments took power in many parts of the world through conquest, including most of eastern Europe, eastern Asia and parts of Africa. • During the late 1980s and early 1990s most of these communist regimes collapsed and adopted capitalistic economic policies. • Today, communist governments control China, Cuba, Laos, Vietnam, and North Korea.