Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani

1. Marietta College, Spring 2011 Welcome to ECON 372: Comparative Economic SystemsBy: Dr. Jacqueline Khorassani Week SixLecture Slides Source: Chapter 2 & Jackie (pp 43-)

2. What is coming up? • Team 1 paper is on Japan, Sweden and France and is due on Monday, February 28 • Presentation: Monday, March 14 • Team 2 paper is on Germany, Russia & another country of their choice and is due on Monday, March 14 • Presentation: Monday, March 21 • Exam 2: Wednesday, March 16

3. Macroeconomic Instabilities of Market Capitalism (pp 43-48) • Market economy may result in a higher unemployment rate than a planned economy • Why? • Private firms need to make profit to continue producing • Need to minimize cost when possible • If no demand for output, then no demand for labor  unemployment • Substitute a cheaper input for labor when possible  unemployment

4. Why unemployment is less of a problem in planned economy? • An state owned enterprise can afford to operate at loss for longer time than a privately owned business. • They are less likely to lay off workers

5. Up until the Great Depression • The general belief was that • The invisible hand would work • What is the role of the invisible hand? • Markets (including the labor market clear quickly) • Recession (and the resulting unemployment) is temporary • As soon as the unemployed workers lower their wage expectations, they will find employment • This is the Classical view

6. LRAS1 Price level LRAS2 Wage SRAS1 • Classical View 1 S 10 2 SRAS2 8 3 4 D1 D2 AD1 AD2 Labor 15 100 RGDP 12 95 • 15 workers are hired and RGDP = 100 (full employment) • If for some reason AD drops to AD2 • Demand for labor drops to D2 • At a wage = 10 , surplus of labor wage drops no unemployment • SRAS increases (due to lower wage) • LRAS decreases (due to smaller work force (12 instead of 15) which lowers the capacity to produce)

7. But the invisible hand did not work very quickly in 1930s • Labor market did not clear. Why? • Labor unions would not let wage rate drop (Classical View) • Firms did not invest (despite low interest rates) because of their pessimistic views about future sales (Keynesian View) • No investment = no hiring

8. Keynesian view on recession • The invisible hand needs a push sometimes • In times of recession government should conduct expansionary fiscal and monetary policy

9. Fiscal Policy • What is it? • Using taxation or government spending to • Decrease unemployment • Decrease inflation • What are the fiscal policy tools? • Government spending (G) • Taxes (T)

10. Types of fiscal policy • Contractionary • When is it implemented? • When there are inflationary pressures in economy • Graph • Reduce G or increase T • What if G goes down? • What if T goes up? • Expansionary • When is it implemented? • When there are recessionary pressures in economy • Graph • Increase G (especially investment spending) or decrease T • What if G goes up? • What if T goes down?

11. Monetary Policy • What is it? • Decrease (expansionary) or increase (contractionary) in interest rates • Tools? • Open market operation, discount rate, reserve requirement

12. Expansionary monetary policy? • When? • When the economy is in recession • How? • Decrease interest rates • Firms and households borrow more • Buy more • Invest more • AD goes up Production and employment goes up • Contractionary monetary policy? • When? • In case of inflationary pressures • How? • Increase interest rates • Firms and households borrow less • Buy less • Invest less • AD goes down price goes down

13. Note • Both fiscal and monetary policies are demand side policies. • Their immediate effect is on AD • There also supply side policies • To shift the SRAS

14. Chapter 3: Socialism • What is it? • Collective ownership of resources • How does this system answer the economic questions? • What to produce? • More public goods • How to produce? • input-output; material balances • For whom to produce? • Everybody (equity)

15. Causes of socialism • A reaction to deficiencies in the capitalist system • Which deficiencies? • Insufficient production of public good and goods with external benefits • Monopolies • But mostly the unequal distribution of income • It has its origins in religion

16. Theoretical Foundations Plato • Plato’s Republic • Where there is socialism but also slavery • Do you see a problem with this? • Millennarian tradition • Christianity + Socialism • Saint Thomas More’sUtopia (1500s) • An island where everybody shared and was equal • Any problems? More

17. Theoretical Foundations • Thomas Munzer (1500s) • Collective sharing • Problems? • Jean-Jacques Rousseau (1700s): • Earth belongs to no one, its fruits to all. • Individuals must join together through the social contract and make the laws • Government is charged with implementing and enforcing the law. • He disagreed with the idea that the people should exercise sovereignty via a representative assembly. • Any problems? Munzer Rousseau

18. Theoretical Foundations • Francois “Gracchus” Babeuf (l800s) • Founder of modern communism • Called for abortion of private property • “Society must be made to operate in such a way that it eradicates once and for all the desire of a man to become richer, or wiser, or more powerful than others.” • Any problems?

19. Theoretical Foundations • Charles Fourier(1800s) • A society that cooperates will see an immense improvement in their productivity levels. • Self-sufficient communities based on team work (phalansteries (Grand Hotels)) must be built. • Four level apartment complexes where the richest had the uppermost apartments and the poorest enjoyed a ground floor residence. • Workers would be recompensed for their labors according to their contribution. • Wealth would be determined by one's job • jobs would be assigned based on the interests and desires of the individual. • There would be incentives: jobs people might not enjoy doing would receive higher pay. • Poverty (not inequality) is the principal cause of disorder in society. • Must be eliminated by sufficiently high wages and by a "decent minimum" for those who were not able to work.

20. Theoretical Foundations of socialism • Robert Owen (1800s, term socialism was originated) • Successful capitalist; owned a textile company • no child labor, shorter hours, higher pay, education, housing. • Leader of the first national labor union in Britain • He believed that competition of human labor with machinery causes stress and the only effective remedy was the “united action of men, and the subordination of machinery”.

21. Theoretical Foundations • Saint Simon (French--1800s) • Father of Constructivism • Social engineering • Advocate a social hierarchy in which each man shall be placed according to his capacity and rewarded according to his works. • Government has a spiritual or scientific role.

22. Theoretical Foundations • Marx and Engels (1800s) • Criticized Utopian socialist • Called for a more scientific and fundamental change in societies Engels Marx

23. Karl Marx • 1818-1883 • Born in Germany • Studies philosophy in Berlin • Radical journalist • Spent time in exile in London • Collaborated with Friedrich Engels to develop the MARXIAN WORLD VIEW

24. What influenced Marxian Theory? • German political philosophy • rational is real (as opposed to real is rational) • If the reality is not rational, it should be changed. • French political sociology • French revolution was a conflict between socioeconomic classes • Conflict between bourgeoisie (capitalists) and proletariat (workers) • Social classes and property ownership would disappear automatically and naturally  communism

25. What influenced the Marxian theory? 3. British political economy • David Ricardo’s labor theory of value • Classical economics • Value of a good = Price and it is determined by supply and demand forces • Ricardo (British, 1772-1823) • Value of a good is determined by the amount of socially necessary labor time it takes to produce it.

26. Marxian Theory • Land and capital are productive but do not contribute to the value of a good • Return to land is zero • Capital is the product of past labor • W= c + v + s • W = value of a good • c= value of fixed capital (measured by labor time to produce it) • v= value of variable capital (labor) • s= surplus value (created by workers but taken by capitalist (profit) exploitation)

27. Marxian Theory • Organic compositing of capital, q • q=c/(c+v) • q=dead capital/ (living + dead capital) • Firms compete to increase q (key assumption) • How can q go up? • Invest in creating more capital, c • Hold v (value of labor) constant or decrease it • Rate of exploitation, s’ • s’=s/v • How can it go up? • If v is constant and s (profit) goes up, exploitation goes up • Or, if s is constant and v goes down, exploitation goes up

28. Marxian Theory • Rate of profit, p’ • p’= s/(c+v) • p’=profit as a percentage of cost • If c rises and s and v are constant, p’ declines • Since competition among capitalist result in increased c then • Either capitalism is destroyed • Or need to drop v for p’ to stay the same or go up • Labor is worse off  class conflict rises and system collapses

29. But what Marx predicted did not happen in Germany • Capitalism did not collapse • Real wages were rising • So, Marxists came up with Revisionism • No drastic changes • Just gradual reform (via parliamentary democracy) to improve the welfare of workers.

30. Another reason why capitalism did not collapse? • Imperialism View • Advanced capitalist countries avoided class conflict by • engaging in conquest of less developed nations (especially African nations) • Got inexpensive raw material Lenin

31. Deficiencies in Marxian analysis (Can you thing of more?) • Applied mostly to the manufacturing rather than the service industry • Service industry is more labor intensive than manufacturing industry • Value of a good was determined based on supply side (cost) factors only. • Because profits depend on productivity of labor and productivity of labor depends on how happy he/she is, firms (owners of capital) would not have an incentive to maximize the exploitation of labor.

32. Marxism-Leninsim (1870-1924) Doctrine • The idea is that • workers in developed nations with colonies will not be exploited (due to ability of firms to make high profits because of their access to low cost of raw material in colonies) • But workers in less developed nations (China, Cuba..) with no colonies will be exploited by capital owners (firms). • Need dictatorship in those nations

33. More radical views • Anarchism & Syndicalism • State should be abolished (Anarchism = more violent ideas) • No government • Consistent with Utopian socialism and modern libertarianism • Any connections to communism? • Proudhon (French 1809-1865, the first individual to call himself an "anarchist“) • Says yes to this question

34. Any connections between Anarchism and Marxism? • Marx says no.

35. More on Syndicalism • Trade unions (workers) should run the society • Influenced Russian Bolshevik (Meaning "majority" in Russian) Party in Russia in 1917(revolution)) • Lenin (the main leader of the party) • Crushed the syndicalist uprising • In favor of state power

36. Other Views • Trotskyism • Leon Trotsky (Russian, 1879-1940) • A member of the Mensheviks Party (minority party split from the Bolsheviks in 1903). • True socialism must be achieved internationally (Can’t do it in isolation)

37. Other Views • Titoism • Marshall Titio (1892-1980) • Leader of Yugoslavia • Developed Worker-Management Market Socialism • Quasi – Syndicalist • One party • Little central planning • Market forces • Management appointed by workers

38. Other Views • Maoism • Mao (1893-1976) • Chinese Marxist military and political leader, who led the Chinese Communist Party • Emphasis on rural agricultural development • Moral incentives • But to succeed we need to destroyfirst • Cultural Revolution • we have to destroy an old system of production, an old ideology and old customs first.