Economic Systems
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![Page 1: Economic Systems](https://reader033.fdocuments.net/reader033/viewer/2022061210/549041c5b47959b7768b4607/html5/thumbnails/1.jpg)
ECONOMIC SYSTEMSDale R. DeBoer
University of Colorado, Colorado Springs
2014
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What is an economic system?• “The system of production and consumption”
• Dictionary.com
• “The analysis of the causes and consequences of the significant institutional variety prevailing among all developed, developing, emerging, and transition economies, as well as attempts at and proposals for their reform.”• Economics Systems (journal)
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The basics• Scarcity
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The basics• Scarcity
• The need for allocative choices
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The basics• Scarcity
• The need for allocative choices
• The organizing structure guiding those choices
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Broad options• The price mechanism
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Broad options• The price mechanism
• Dumb luck
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Broad options• The price mechanism
• Dumb luck
• Equal distribution
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Broad options• The price mechanism
• Dumb luck
• Equal distribution
• Central authority• What is the goal of the authority?
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Examples• Capitalism
• Stakeholder vs. shareholder variants
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Examples• Capitalism
• Centrally planned
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Examples• Capitalism
• Centrally planned
• Islamic
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Examples• Capitalism
• Centrally planned
• Islamic
• Market socialist
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Examples• Capitalism
• Centrally planned
• Islamic
• Market socialist
• Statist
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Distinguishing between systems• Level of decision making
• Centralized or decentralized
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Distinguishing between systems• Level of decision making
• How is information obtained for decisions?• Plan or market
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Distinguishing between systems• Level of decision making
• How is information obtained for decisions?
• What is the incentive structure?• Moral or material
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Distinguishing between systems• Level of decision making
• How is information obtained for decisions?
• What is the incentive structure?
• What private property rights are allowed?• Consumption items vs. production items• Disposal, utilization, and output
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Guiding rubrics
Centralized Decentralized
Level of decisions
Sou
rce
of
info
rmat
ion Pla
nM
arke
t
Centrally planned
Capitalism
IslamicMarket
socialism
?
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Guiding rubrics
Moral MaterialIncentives
Sou
rce
of
info
rmat
ion Pla
nM
arke
t
Centrally planned
Capitalism
Statism
Market socialism
Islamic
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Guiding rubrics
Disposal Use Output
Capitalism X X X
Islamic X X X
Centrally planned
Market socialism X X
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Stylized “facts” of capitalism• Pro-growth
• Efficient
• Unstable
• Unequal final outcome
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The promise of socialism• What is socialism?
• State ownership of the means of production• Is that all?
• Fabian socialism• Creeping towards state control
• Anarcho-communism• Abolition of both state and private productive property rights
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The promise of socialism• What is socialism?
• A Marxian definition• Capitalism
• Exploitation of workers• Alienation of workers• Coercion of workers
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The promise of socialism• What is socialism?
• A Marxian definition• Capitalism• Socialism
• The state as the new agent of exploitation• Workers remain alienated• The state as the coercive agent
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The promise of socialism• What is socialism?
• A Marxian definition• Capitalism• Socialism• Communism
• The erosion of the state• The end of alienation• No coercive agent required
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The promise of socialism• What is socialism?
• A Marxian definition
• What would socialism offer?• A more stable outcome• A more equal outcome
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Putting socialism into practice• Two options
• No private property and a planning structure• No private property and a market
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The planned version of socialism• Enrico Barone
• The possibility of mathematically solving a general equilibrium
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The planned version of socialism• Enrico Barone
• Required information• Resource availability• Production functions• Demand characteristics
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The planned version of socialism• Enrico Barone
• Required information
• Advantages• No market adjustment time needed• Eliminates sub-optimal market outcomes
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The planned version of socialism• Enrico Barone
• Required information
• Advantages
• Core challenges• The problem of computation• Obtaining the required information• Motivating producers
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Computation• Difficulty rises exponentially with size
• Non-linear functions may not have a solution
• This is a resource using process• Market is free• Outcome cannot mimic market outcome
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Information and motivation• Demand characteristics
• How do markets obtain this information?• Revealed preference
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Information and motivation• Demand characteristics
• Production functions• Is engineering information enough?• The role of a profit motive
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Information and motivation• Demand characteristics
• Production functions
• Satisfaction behavior• Manager motivation under a plan
• Risk minimization or profit maximization
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Information and motivation• Demand characteristics
• Production functions
• Satisfaction behavior• Manager motivation under a plan• The logic of stock options in a market economy
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Planned socialism: the work around• Dichotomous replacement to the market
• Material balance approach• Price mechanism (and queuing) to determine final consumer sector
allocation
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Planned socialism: the work around• Dichotomous replacement to the market
• Material balances example• Resources
• L = 25
• Production coefficients• aM = 0.1
• aC = 0.5
• Material balance• 0.1QM + 0.5QC = 25
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Planned socialism: the work around• Dichotomous replacement to the market
• Material balances example• Resources• Production coefficients• Material balance• Targeted sector output
• Q1 = 100
• Final production solution (slack sector)• 0.1 x 100 + 0.5 x QC = 25
• QC = 2 x (25 – 10) = 30
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Planned socialism: the work around• Dichotomous replacement to the market
• Material balances example• Resources• Production coefficients• Material balance• Targeted sector output• Final production solution (slack sector)• Labor allocation
• LM = 0.1 x 100 = 10
• LC = 0.5 x 30 = 15
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Planned socialism: the work around• Dichotomous replacement to the market
• Material balances example
• Prices?• Targeted sector not needed• Inputs not needed
• Non-market allocation
• Residual sector?
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Planned socialism: the work around• Advantages
• Reduced information set required• Easier linear system of equations to solve
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Planned socialism: the work around• Advantages
• Remaining concerns• How are production coefficients determined?
• Is engineering data sufficient?
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Planned socialism: the work around• Advantages
• Remaining concerns• How are production coefficients determined?• How do ensure compliance with production coefficients?
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Incentives and planning• Are moral incentives enough?
• Is this socialism or communism?
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Incentives and planning• Are moral incentives enough?
• Implementing material incentives• Judgment criteria
• Quantity goals• Quality goals
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Incentives and planning• Are moral incentives enough?
• Implementing material incentives• Judgment criteria• Monitoring bureaucracy • Reward structure
• Monetary rewards and the problem of inflation• Will this work?
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Incentives and planning• Are moral incentives enough?
• Implementing material incentives• Judgment criteria• Monitoring bureaucracy • Reward structure
• Monetary rewards and the problem of inflation• Non-monetary rewards and shortages
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A missing signal and planning• János Kornai
• Capitalism• The cost minimization/profit maximization dual• Impact of a declining resource on production decisions?
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A missing signal and planning• János Kornai
• Capitalism• Planning mechanism
• Input mix• Historical accident• Difficulty of altering the input coefficient
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A missing signal and planning• János Kornai
• Capitalism• Planning mechanism
• Input mix• No input price signal• Production rigidity and “inevitable” shortages
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Assessing socialism• Data limits
• The environmental problem• Time period: 1965-1988
• Countries for comparison• Capitalist
• US• W. Germany• Japan• UK• Canada
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Assessing socialism• Data limits
• The environmental problem• Time period: 1965-1988
• Countries for comparison• Capitalist• Socialist
• USSR• Hungary• Bulgaria• Romania
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Assessing socialism: growth
1965-1980 1980-1988
-1%
0%
1%
2%
3%
4%
5%
6%
Capitalist
Planned
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Assessing socialism: stability
1965 to 1980 1980 to 19880.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
Capitalist
Planned
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Assessing socialism: inequality
19900.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
Capitalist
Planned
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Assessing socialism: other measures
Literacy
Life expectancy
Greenhouse
Workweek
Maternal m
ortality
0
10
20
30
40
50
60
70
80
90
100
CapitalistPlanned
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The market version of socialism• Ward-Vanek version
• Worker self management
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The market version of socialism• Ward-Vanek version
• A change to property rights• Each employee has equal ownership share• No right of disposal
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The market version of socialism• Ward-Vanek version
• A change to property rights
• Stylized characteristics• Worker management board replaces board of directors• Prices/wages set by market
• Inequality remains (but mitigated)
• Firms maximize and keep profits• Each worker earns equal profit share
• No employment coercion• No stock market
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The market version of socialism• Ward-Vanek version
• A change to property rights
• Stylized characteristics
• Does it work?• Employment-equality trade-off• Will it spur greater worker effort?
• Logic of stock options
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Islamic economics• System focus
• Capitalism• Profits (?)
• Socialism• Equality (?)
• Islamic
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Islamic economics• System focus
• Role of the Quran
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Islamic economics• System focus
• Role of the Quran
• Systemic differences• Property rights
• Moral precept to protect natural world• Leads to prohibitions rather than market based solutions
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Islamic economics• System focus
• Role of the Quran
• Systemic differences• Property rights• Incentives
• Hadiths require “reasonable wages” and “fair prices”
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Islamic economics• System focus
• Role of the Quran
• Systemic differences• Property rights• Incentives• Prohibition of “riba”
• Murabaha• Ownership and resale
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Islamic economics• System focus
• Role of the Quran
• Systemic differences• Property rights• Incentives• Prohibition of “riba”
• Murabaha• Mudaraba
• Partial ownership
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Islamic economics• System focus
• Role of the Quran
• Systemic differences
• Source of conflict?
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Capitalist variants
Source: http://www.economist.com/node/15954434
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Capitalist variants• Shareholder capitalism
• US/UK variant• Emphasis on shareholder return• Bias towards limited government interference with business
activities
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Capitalist variants• Shareholder capitalism
• Stakeholder capitalism• Emphasis on stakeholders
• Business• Consumer• Community• Labor
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Capitalist variants• Shareholder capitalism
• Stakeholder capitalism• Emphasis on stakeholders• Questions
• What is maximized?• Whose interests take precedence?
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Capitalist variants• Shareholder capitalism
• Stakeholder capitalism• Emphasis on stakeholders• Questions• Example
• Mitbestimmungsgesetz (Codetermination Act)• 2000+ employees• ½ of supervisory board of directors worker representatives
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Capitalist variants• Is the difference real?
• Growth and Stability Pact (1997)• National Debt < 60%• Budget Deficit < 3%• Inflation < 3.2%
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Capitalist variants• Is the difference real?
Source: Google Public Data/World Bank
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Capitalist variants• Is the difference real?
Source: Google Public Data/World Bank
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What distinguishes systems today?• Government role in correcting market failures
• Response to imperfect competition• Response to asymmetric information problems• Response to externalities
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What distinguishes systems today?• Government role in correcting market failures
• Government role in macroeconomic stabilization
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What distinguishes systems today?• Government role in correcting market failures
• Government role in macroeconomic stabilization
• Government role in social welfare protections