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Slide 2 Slide 3 A. Traditional Custom rules B. Command Government rules C. Market Individuals rule D. Mixed 1.) Capitalism 1.) Capitalism 2.) Communism 2.) Communism 3.) Democratic Socialism 3.) Democratic Socialism Slide 4 Survival for any society depends on its ability to provide food, clothing, and shelter for its people. The Economic System is the organized way a society provides for the wants and needs of its people. Slide 5 FREEDOM OF ENTERPRISE & CHOICE PRIVATE PROPERTY ROLE OF SELF-INTEREST COMPETITION Slide 6 MARKETS & PRICES FREEDOM OF ENTERPRISE & CHOICE ACTIVE, BUT LIMITED,GOVERNMENT ROLE OF SELF-INTEREST COMPETITION PRIVATEPROPERTY Slide 7 Freedom of Enterprise (business) & Choice 2. Freedom of Enterprise (business) & Choice Can move within the economy to any job, to buy or sell property, or start a business. consumer is sovereignking The consumer is sovereign (king) in the economy. His dollars vote as it is he who decides what gets produced. 100,000 business failures The U.S. has over 100,000 business failures each year. Private Property 1. Private Property the right of individuals to exercise control over things owned. Freedom to negotiate binding legal contracts. legally bindingoral or written Contracts are legally binding in oral or written form. [A verbal agreement is binding only if it involves a small sum of money over a short period of time and does not involve real estate purchases.] Role of Self-Interest 3. Role of Self-Interest each producer or consumer best for themselves tries to do what is best for themselves. Self interest- profit motive profit motive is the main force driving the economy. Producersmaximum profits Producers aim for maximum profits. Consumerslowest prices & highest quality Consumers seek the lowest prices & highest quality. K-Mart? Slide 8 And an appendage to be named later, like a - Competition Competition and self-interest self-interest are like invisible hand. an invisible hand. Monopolies can charge an arm and a leg. invisible hand So, the invisible hand refers to the way a market economy manages to harness the power of self-interest for the good of society. A monopolys attitude is: W e d ont care. We dont have to. Were a monopoly! Competition 4. Competition economic rivalry of a large number of buyers & sellers. [central mechanism of market economy] Monopolies become fat & unresponsive Monopolies become fat & unresponsive to consumers higher prices & fewer choices (higher prices & fewer choices). Competition prevents one seller from controlling the market. Monopolies are price makers price takers price makers. It is better to have price takers mercy of the market. who are at the mercy of the market. Slide 9 Markets & prices 5. Markets & prices. Markets bring the buyers and sellers into contact. High pricesincrease Prices send signals. High prices send signals to increase production enter the market production and for other producers to enter the market. Low pricesdecrease production Low prices send signals to decrease production exit the market and for producers to exit the market. Limited Government Intervention 6. Limited Government Intervention in the economy. laissez faire.hands off The role of government was one of laissez faire. [hands off] government should not interfere with In the words of Adam Smith, the government should not interfere with the operation of the economy except serve as an arbitrator in settling disputes disputes. governments role The governments role: (according to Smith) a. provide defense, b. administer justice, and c. maintain certain public institutions. 1/3 of economic activity The government controls about 1/3 of economic activity. Arbitrator [settling disputes] We have Market Inventors like AL GORE!!! Slide 10 Protector The government makes and enforces laws against: False advertising, unclean food, pollution & unsafe products They enforce laws against discrimination in the work place. The government enforces contracts. Provider and Consumer P rovides products & services that businesses dont provide, like: public schools, roads, an army, and welfare. The government is also a consumer because it buys things from businesses, like: fighter jets, aircraft carriers, submarines and tanks. Regulator The government regulates or makes rules for businesses to follow. For example, the government decides which frequency radio stations can broadcast on. The government also makes rules for running nuclear power plants & so on Slide 11 Reliance on Technology and Capital Goods Use of Money Specialization and Efficiency Slide 12 1. Reliance on Technology and Capital Goods and Capital Goods RoundaboutProduction Assembly line [roundabout production] results in more efficient production and more output. Farmers are more efficient using capital goods [plows & tractors] instead of their hands. Slide 13 1. Reliance on Technology and Capital Goods and Capital Goods 2. S pecialization and E fficiency Makes Use of Differences in Ability Makes Use of Differences in Ability Fosters Learning by Doing Fosters Learning by Doing Saves Time Saves Time and a fast person can be a hunter] [A slow person can fish Slide 14 [when bilateral trade is not beneficial] Texas Rangers Three-wayExchange Slide 15 Crusoe would get coconuts 52. Crusoe would get coconuts from (Friday/Saturday). coincidence of wants 53. There (is/is no) coincidence of wants between any 2 states. Money would flow 54. Money would flow (clockwise/counterclockwise). coincidence of wants 55. The coincidence of wants problem means each transactor (must/must not) have a product which the other wants. S aturday Has surplus bananas Wants fish Wants fish Friday Has surplus coconuts Wants bananas C rusoe C rusoe Has surplus fish Wants coconuts Slide 16 1. Reliance on Technology and Capital Goods and Capital Goods 2. Specialization and Efficiency Division of Labor Division of Labor Slide 17 1.Reliance on Technology and Capital Goods and Capital Goods 2. Specialization and Efficiency Geographic Specialization Geographic Specialization TexasFloridaNebraska Slide 18 3. Use of Money 1. Reliance on Technology and Capital Goods and Capital Goods 2. Specialization and Efficiency As a Medium of Exchange As a Medium of Exchange Slide 19 3. Use of Money 1. Reliance on Technology and Capital Goods and Capital Goods 2. Specialization and Efficiency Money Eliminates Barter System Difficulties Money Eliminates Barter System Difficulties Slide 20 Index of Economic Freedom [Ranking of 157 countries for 2010] 1. Hong Kong 3. Ireland 5. United States 20. Belgium 31. Spain 48. France 101. Brazil 126. China 146. Russia 148. Venezuela 156. Cuba 179. North Korea FREE MOSTLY FREE MOSTLY UNFREE REPRESSED Slide 21 NS 50-51 unique to capitalist ideology 50. The following is unique to capitalist ideology: (use of money/ specialization/private ownership of property). Roundabout productionassembly line 51. Roundabout production [assembly line] leads to: (use of fewer capital goods/greater production). Slide 22 Basic Economic Choices What to produce How to produce Who receives What, how, & for whom. Answers Determine The Type of Economic System MarketTraditionalCommand Slide 23 Three Basic Questions... The Three Basic Questions... Whathowfor whom What, how, & for whom 1. What will be produced? Slide 24 The Three Basic Questions... 2. How will the goods be produced? 1. What will be produced? Slide 25 The Three Basic Questions... 2. How will the goods be produced? 1. What will be produced? 3. Who will get the goods & services? Slide 26 The Case for the Market System invisible hand Adam Smith said the invisible hand determines what gets produced, how, & for whom. It is the invisible hand moves us along the PPC that moves us along the PPC. The invisible hand is now market mechanism called the market mechanism. Its essential feature is price signal the price signal. Smith is saying that participants in the economy are motivated by self-interest invisible hand self-interest & that the invisible hand of the marketplace guides promoting general economic well-being this self-interest into promoting general economic well-being. Slide 27 Most needy or most money LimitedResources UnlimitedWants Choices WHAT G/S to produce? WHO will receive the G/S produced? [Eskimo/pygmy] Answers to the above determine: ECONOMIC SYSTEMS 3 BASIC ECONOMICQUESTIONS TRADITIONAL FREE MARKET COMMAND HOW will the G/S be produced? Slide 28 A. Traditional Custom rules B. Command Government rules C. Market Individuals rule D. Mixed 1.) Capitalism modified free enterprise 1.) Capitalism modified free enterprise 2.) Communism command w. some market 2.) Communism command w. some market 3.) Democratic Socialism socialist democracies 3.) Democratic Socialism socialist democracies 1. Theres no unemployment, but nobody actually works. 2. No one works, but everyone gets paid. 3. Everyone gets paid, but theres nothing to buy with the money. 4. No one can buy anything, but everyone owns everything. 5. Everyone owns everything, but no one is satisfied. 6. No one is satisfied, but 99% of the people vote for the system. Slide 29 1.Traditional 2.Pure Command 3.Pure Market 4.Mixed a. Capitalism b. Democratic Socialism c. Authoritarian Socialism [Communism] The way the 3 basic questions are answered determines an economic system. 1.Traditional-[where CUSTOM RULES] A. What, how, and for whom are answered by tradition B. Change is resisted, no technology [clashes with tradition] C. Heredity and caste system limit the economic role of individuals. D. The Pygmies of the Ituri Forest, in the Congo, are an example. E. Men hunt & women/children gather/prepare food. F. Wear loincloths from bark of fig trees [PYGLER or PYBUGLE Boy] G. Eat mushrooms, berries, roasted grasshoppers, monkeys, & plantain H. Eat bone marrow & everything else in an elephant. PYGACHE loincloths, LARDACHE. I. Used to be PYGACHE loincloths, big Pygmies, had to wear LARDACHE. the way society produces products Im amused by this technology but we are not going to incorporate this into our way of living. Slide 30 Economic activity is based on ritual, habit and custom. Strengths Everyone knows their role. Little uncertainty over what to produce or how to produce. The question of For Whom to produce is answered by custom. Life is generally stable, predictable, and continuous. Weaknesses Tends to discourage new ideas. Lack of progress leads to lower standard of living. Slide 31 Government rules. Economic decisions are made at the top and the people are expected to go along with choices their leaders make. Strengths Change direction drastically in a relatively short time (The USSR went from an agrarian to industrial nation in a very short time). Weaknesses Not designed to meet the wants and needs of individuals. Lack of incentives to work hard leads to unexpected results. Large bureaucracy for economic planning. Not flexible in dealing with minor day to day problems. People with new or unique ideas are stifled. Fidel Castro Karl Marx Slide 32 mixed economy both market signals and government directivesA mixed economy is one that uses both market signals and government directives to allocate goods & resources. combination market signals and governmentMost economies use a combination of market signals and government directives to select economic outcomes. Adam Smith 1723-1790 Individualsfirmscontrol all resources Individuals & firms control all resources. The government has no say. WHAT, HOW and FOR WHOM are decided by individuals. Slide 33 [LAISSEZ-FAIRE HANDS OFF] The role of government [LAISSEZ-FAIRE HANDS OFF] is limited to national defense, public education, maintaining the infrastructure, and enforcing contracts. Smith said the market system was best because it encouraged specialization, resulting in increased output & more economic growth. INVISIBLE FOOTgovernment action Government was like an INVISIBLE FOOT government action Keynes Gpressure to benefit particular groups. Keynes will say the G can act as a pressure gauge active gauge, letting off excess steam or building it up as needed. [ active -not all inclusive role] WEALTH OF NATIONS 1776 [explained the free market concept] INVISIBLE HAND The INVISIBLE HAND when individual consumers/ producers compete to achieve their own private self-interest. attack on mercantilism Smiths book was an attack on mercantilism. accumulation of gold and silver Wealth doesnt come from an accumulation of gold and silver but more productive people from more productive people. A nation is wealthier if its citizens produce products Are more productive. It is the ability of people to produce products trade in free markets that creates a nations wealth and trade in free markets that creates a nations wealth. Mercantilism So mercantilism died as economic theory as economic theory. My name is mercantilism. No G In loving memory of mercantilism Slide 34 Smith said that we constantly try to make ourselves better off. It is self interest that makes us work hard, take risks, & in the end benefit others thru our activities. If people want to serve their own self interest, they had to serve others first. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to our own interest. In other words, the butcher, brewer, and baker do not give us our dinner because they love us or because they want to assist us. They give us our dinner because they cannot get what they want from us until they first give us what we invisible hand want. Smith said we are led by an invisible hand to do good for others. In the most famous passage in The Wealth of Nations, he says: Every individualneither intends to promote the public interest, nor knows how much he is promoting ithe intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Karl Marx self interest as hurting others Of course, Karl Marx saw self interest as hurting others. He capitalists exploited the workers believed capitalists exploited the workers by paying them far less what they were worth. Slide 35 Adam Smith Scotland 1723-1790 Father of Economics [Adam Smith] Laissez Faire Economics (No government intervention) Specialization The Wealth of Nations Self Interest The Invisible Hand 1776 Slide 36 People and firms act in their own best interest to answer economic questions. Markets allow buyers and sellers to come together in order to exchange goods and services. Markets can adjust over time. Freedom exists for everyone involved. Relatively small degree of governmental influence. Decision making is decentralized. Variety of goods and services are produced. High degree of consumer satisfaction. Strengths Adam Smith Invisible hand Slide 37 The primary weakness is deciding for whom to produce. The young, sick and old would have difficulty in a pure market environment. Markets sometimes fail. Competition (monopolies may develop) Resource mobility (resources are sometimes hindered from moving about) Availability of information (producers often have more information than do consumers, which gives them an advantage) Slide 38 [1 man = 10 pins] One man could do maybe 10 pins per day [1 man = 10 pins] Now if there is specialization 1 man draws the wire out 1 man straightens the wire 1 man cuts the wire 1 man sharpens the point 1 man flattens the head 18 distinct operations There are 18 distinct operations - some perform 2 or 3 operations 10 people48,000day 10 people do 48,000 pins per day 1 man = 4,800 pins per day Three circumstances come from this specialization Three circumstances come from this specialization. dexterity 1. Increased dexterity (learning by doing) Saving time 2. Saving time (lose time when you move to different operations) inventiveness 3. Invention of machines (fosters inventiveness) Slide 39 You are free to: Choose your occupation Choose where and when you work Work for yourself or someone else Leave your job and to move to another job Businesses are free to: Choose which workers they want Choose where and how they produce Slide 40 The End