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 Eight Lecture Slides Source: Chapter 3 (pp 72-91) & Jackie

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. Participatory or Cooperative Economy • Labor–Management Economy • A third way of doing things • Characteristics • A board of workers hires managers • Income sharing • Your income may not only depend on your productivity but other workers’ productivity too. • Capital must be rented (not owned by workers) • Market or indicative planning (no command) • Note: indicative planning • planning based on forecasts done by various agencies • to minimize information asymmetry • to establish various targets (output, employment,…etc.) • Workers choose where to work

4. Participating or Cooperative Economy • Advantages • No class struggle • But…Can labor exploit management? • More equal distribution of income? • But…Can labor exploit management? • Increases worker motivation and productivity • Worker owners will make sure that there is a hard budget constraint

5. Participating or Cooperative Economy • Disadvantages • Tendency to hire fewer labor; why? • To maximize per capita income of workers • May supply less as price goes up P S Backward bending supply curve P3 P2 P1 Q2 Q Q1 Q3

6. Disadvantages ofParticipating or Cooperative Economy • Or, there may be an upward sloping supply curve that is very inelastic (quantity supplied is insensitive to changes in price) • Which supply is less elastic? • S • What does it mean? • Economic Growth? S P S’ P2 P1 Q2 Q Q’2 Q1

7. Disadvantages ofParticipating or Cooperative Economy 2. Tendencies to form monopolies • To maximize labor income 3. Tendencies to disregard externalities • To maximize labor income 4. Tendencies not to re-invest part of profits • To maximize current labor income • Result less growth

8. Recall • Marshall Titio (1892-1980) • Leader of Yugoslavia • Developed Worker-Management Market Socialism • How did it work? • There were monopolies • Low labor mobility • Unemployment rose • Output fell • Hyperinflation • Income inequality rose

9. But the capitalistic version of Cooperative Economy • Such as • Employee stock ownership plans • Profit sharing • Is still popular

10. Transition from socialism to capitalism • Began in 1989: The fall of Berlin Wall • http://www.youtube.com/watch?v=s5JdY8ENfVg&feature=PlayList&p=497C1FEC171B0B2A&playnext=1&playnext_from=PL&index=7

11. Steps (not necessarily in this order!!!) • Privatize state-owned enterprises • Replace command with market mechanism • Freeing prices • Dangers: • inflation, why? • Price ceiling and rationing is removed • Not enough output, high demand • Rise in unemployment, why? • Productivity matters; cost minimization matters • Rise in income inequality, why? • Productivity matters • Liberalize political system

12. Transition form socialism to capitalism • Difficulties • Undeveloped banking system • Undeveloped accounting system • Undeveloped stock market • No anti-trust laws monopolies • No corporate laws the rules of the game are not defined • Trade rapid increase in imports due to high domestic prices • Quick change (Shock therapy) has not been very successful • corruption, stagflation, underground activities • Gradual change has been more successful

14. When is the transition finished? • Different opinions • Mostly market economy; more than one political party; mostly private ownership of resources • When country faces the same problems as market economies • When country joins EU (if European) • When country joins WTO (China?)

15. Traditional Economy (Chapter 4) • Re-embedding religion into economic decision-making • We will go over only those aspects of religions that have to do with economics

16. As we cover characteristics of various religions, think of their economic consequences such as • Income distribution • Efficiency • Growth • Market or planned? • Labor productivity • Technological advancement • Resource allocation • Others?

17. 1. Buddhist Economics • Influenced economic systems of • China, Japan, Sri Lanka, Burma, Thailand, Laos, Cambodia • Goals (Steph asked) • harmony of humanity and nature • Equal distribution of income? • de-emphasis on consumption • Wants versus needs? • Self-sufficiency • Trade? • Efficiency? • Produce something at a higher cost that we can import it for • Allocation of resources? • Using resources to produce things we have comparative disadvantage in

18. 1. Buddhist Economics 4. Resources should not be wasted • Renewable/nonrenewable resources? • Efficiency? • In Thailand • Evolved under powerful kings with individualist form of religion • Self interest maximization (market economy) • In Sri Lanka and Burma ( now Myanmar) • Evolved under anti-colonialist movements • Militant form (socialist views) • Achievement of individual merit thru building temples rather than real investment in capital • Insufficient capital investment less economic growth

19. 2. Confucian Economics • Not a religion (?) • Influenced economic systems of • China, Singapore, Taiwan

20. 2. Confucian Economics • Based on five concepts • the two main ones? (Steph asked) • (jen &li) are often said to constitute the basis of Confucianism. • Jen: human goodness; benevolence, what makes man distinctively human; what gives human beings their humanity • Li: general principle of social order or the general ordering of life, propriety • father and son (loving / reverential) • elder brother and younger brother (gentle / respectful) • husband and wife (good / listening) • older friend and younger friend (considerate / deferential) • ruler and subject (benevolent / loyal)

21. 3. Hindu Economics • India • caste system • Social classes • There were four main castes into which everyone was categorized. • At the very top were the priests, scholars, and philosophers. • The second highest caste belonged to warriors, rulers, and those concerned with the defense and administration of the village or state. • Third came the traders, merchants, and people involved in agricultural production. • The lowest caste were the laborers and servants for the other castes.

22. 3. Hindu Economics • Basics • Self sufficiency • Discourage over-consumption • Effect on economic growth? • Trade within castes • Division of labor was mostly hereditary • Efficiency?

23. 4. Judaic Economics • Torah • 10 commandments • You shall not steal your neighbor's wife; your neighbor's house • RESPECT PROPERTY RIGHTS (Market Economy) • Sabbath • Saturday, the seventh day of the week • The day to rest from labor work • The effect on the economy? • Higher or lower productivity?

24. 4. Judaic Economics • Sabbatical Year (Steph asked: How does it work and how does it affect the economy?) • The seventh year • A year during which farm-land owned by Jews has to remain uncultivated, • When debts owed to individuals are "forgiven" • Economic consequences? • When people serving as bonded laborers were traditionally freed • Economic consequences? • Jubilee • The 50th year, i.e., the year following the last year of seven Sabbatical cycles. • You shall return every man unto his possession (indicating the compulsory restoration of hereditary properties) • Economic consequence? • A year of celebration and forgiveness kibbutz is pure socialist invention • Economic consequence?

25. 4. Judaic Economics • A kibbutz • A collective intentional community • A unique Israeli experiment • Founded in a time when independent farming was not practical. Forced by necessity into communal life, and inspired by their own Jewish/socialist ideology • A pure communal mode of living • The kibbutzim have given Israel a wildly disproportionate share of its military leaders, intellectuals, and politicians.