Basic Economic Systems:

1. Basic Economic Systems: Economics and Culture

2. Three Basic Economic Systems • There are three basic types of economic systems (Robert L. Heilbroner): • Traditional • Decisions are based on what has always been done in the past (until recently, the most common). • Command • Central authority answers the four basic economic questions. • Market • Rely on exchange, barter, or a network of prices. • Every economy is a mixture of all three systems.

3. Traditional Economic Systems • Often the dominant economic system in lesser-developed countries • Methods developed long ago by trial and error • Specific gender roles are assigned

4. Traditional Systems (Cont’d) • Skills and techniques are maintained and passed down through generations – importance of ancestral heritage • Change comes very slowly and is often met with resistance

5. Examples of Traditional Societies • Bushmen of Namibia • North American Eskimo • Yanomami Indians of the Amazon (Brazil) • Kyrgyz of Kyrgyzstan Bushmen Alaskan Inuit Yanomami

6. Factors for Change • These often bring change for traditional societies: • Wars • Climate Changes • Other outside forces (i.e. competition, disease, etc.) • Economic choices are limited in a traditional system • Things are done “the way they are supposed to be done,” because that is how their society survived.

7. Command Economic Systems • Has anyone ever told you what to do? • Have you ever experienced an authority controlling your plans and important decisions? • A group of central planners answers the four basic economic questions. • Example of Soviet Workers

8. Command Systems (Cont’d) • Command economies answer “what to produce” in several ways. Leaders may decide: • To produce what they want for themselves. • To produce what they believe is good for the people. • To produce what they think the people want.

9. Leaders answer the “how to produce” question: • Central planners decide how many people will work, which will get jobs, and where they will work. • Example – Gosplan (U.S.S.R.)

10. Command Systems (Cont’d) • Leaders answer the “for whom” question: • Wages are set • Prices are set and productions goals fixed • Planners can control who is able to buy goods and services

11. Pros: Able to act quickly – can adjust to changing economic conditions Can jumpstart industries and guarantee jobs and income Can be effective toward explicitly stated goals Cons: Predicting the level of demand Frequent surpluses and shortages Worker dissatisfaction Poor quality of goods and services Diminishing production Does not reward innovation Cannot meet consumers’ needs or wants Pros & Cons of Command Economies

12. Democratic Government Planning • Command systems can exist in either a democracy or dictatorship • The difference between a democracy and dictatorship is NOT an economic one – it is political

13. Examples of Democratic Government Planning in the U.S. • Price, wage, and production control during wartime (i.e. New Deal& World War II) • Zoning laws to restrict use of private property • Government regulation of business • Anti-pollution & environmental laws for businesses

14. Socialism • Socialism • “A social and political philosophy based on the belief that democratic means should be used to distribute wealth evenly through a society.” • A New View of Society by Robert Owen(1813) • Political equality can only exist with economic equality (Che Guevarra). • Government owns major industries to achieve central planning goals of equality • Socialism exists to varying degrees in different nations – can exist in democracies

15. Communism • Communism • The Communist Manifesto by Karl Marx & Friedrich Engels (1848) • “A political ideology relying on a command economic system.” • All political and economic power rests in the hands of the central government • Socialist society can ONLY come about through violent revolution • Authoritarian – requires strict obedience and does not allow for freedom of judgment and action • The dangers of Communism • The failure of Communism

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20. Market Economic Systems • Do you make decisions on the basis of PRICE, QUALITY, or PERSONAL PREFERENCE? • What do the following have in common? • Farmers’ Market • Wal-Mart • New York Stock Exchange • Penny Saver Ad

21. Market Economy Organization • The basic economic questions are answered by the exchange of buyers and sellers. • The interaction of two components: • Supply – The quantity of a good or service that a producer will provide at each of its possible prices. • Demand – The quantity of a product consumers want at each of its possible prices. • The guiding principle of market systems is self-interest. • Capitalism - A type of market system in which private individuals own most of the resources.

22. Adam Smith • The Wealth of Nations (1776) • Everyone makes decisions based on self-interest • Competition between producers and consumers results in the best interests of society being met

23. The Invisible Hand (Adam Smith) • “The Invisible Hand” • The best interests of a society usually are met when people compete to achieve individual self-interests.

24. The Invisible Hand (Cont’d) • Trust in the invisible hand – lack of government involvement in the economy is best. • Laissez Faire – “Let them do as they please.” • No government involvement in the economy. • The economy is self-regulating when self-interest, competition, and the invisible hand interact.

25. Market System Characteristics • Requirements (Mandatory) • Private Property • Freedom of Exchange • Competition • Profit Motive – The desire to make money

26. Advantages of the Market System • Economic Efficiency – Because of its self-regulating nature, the market responds efficiently to changing conditions • Economic Freedom • Economic Growth – Competition encourages innovation and promotes growth • Additional Goals – It offers a wide variety of goods and services • Consumer Sovereignty – Consumers decide what gets produced

28. SOCIALISM vs. CAPITALISM • EQUALITY • EFFICIENCY • INCENTIVE • PROFIT MOTIVE – ENTREPRENEURSHIP • COMPETITION • PRIVATE PROPERTY • EQUAL OPPORTUNITY

29. The Goals of the United States • Accomplished or Philosophy? • Full Employment • Economic Growth • Price Stability • Economic Freedom • Economic Security • Equity • Efficiency • What’s the most important? • Does the accomplishment of one goal help others to be met?