3 Primary Economic Systems

1. Economics 3 Primary Economic Systems Different Economic Systems Explored

2. All Economic Systems allocate resources • Market CommandTraditional Each Economic System has to answer 3 Questions: 1) What to Produce? 2) For whom to Produce? 3) How to Produce it?

3. Which Economic System? Society will choose an economic system based on goals: Economic Goals & Social Goals • Growth • Employment • Efficiency • Stability • Justice • Equality • Environment • Freedom

4. Adam Smith (1723-90) • Founder of Free Market Economics • He wrote “The Wealth of Nations” in 1776 • Argued:Free marketsbest promote the social welfare • As people follow their “self-interest” but society benefits! • Governmentshould usually not interfere in markets! • The economy is self-regulating through an invisible hand

5. "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” “We address ourselves, not to their humanity but of their advantages." Adam Smith Self-interest is our incentive to work hard

6. Reading:“Self-Regulating” Free Market Please buy my Vulture Scarce Resources

7. Self-Regulation of Market Economy • Market Economy Shortage of a Good? T-Shirts Invisible Hand

8. Adam Smith’s 2 laws of the Market • 1) Self-Interest: • People act in their own self-interest • Profits or greed motivate individuals (incentive) • 2) Competition: • Lots of producers keep business “honest” • Since business “fears” new competition, goods are produced at the lowest possible price

9. Threat of competition keeps people honest Markets naturally self-regulate Government should not Interfere! Adam Smith 2 Laws in action: People follow their own self-interest Invisible Hand = “Self Regulation”

10. Karl Marx 1848 Command Economy • Soviet Union “adopted”commandeconomic system • Called communism • Government controlled economy (centrally planned) • stressed equality & work for the common good (collective system) • Economic Incentiveto work hard? For the collective good!

11. Self-Regulation vs. Central Planning • Market Economy • Command Economy Shortage of A Good?

12. Review: • Market Economy • Command Economy Central Planer Regulates A Shortage or Surplus is common Invisible Hand Self-Regulates

13. Cuba’s Future? Gov’t Regulation of Restaurants in Cuba? https://www.youtube.com/watch?v=UmI00B2nKFs

14. Traditional Economic System • Designed to preserve culture of society • Change occurs very slowly • Gov’t uses strict laws to enforce behavior CHINA

15. Growth & Efficiency Supply & Demand Price Gov’t or Central Planner Stability Gov’tor Central Planner Need Necessity Equality Need & Tradition Production HOW WHAT FOR WHOM Economic System MARKET COMMAND TRADITIONAL GEES-Growth, Efficiency, Employment, Stability

16. Summary • Market systems stresscompetition • Work “individually” in your own “self interest” • Invisible hand regulates economy • Command systems stressequality • Work “collectively” for the common good • Government centrally plans economy • Traditional systems stresspreservation of culture • Government maintains culture of society

17. Bhutan Video: Traditional Economy Benefits Costs https://www.youtube.com/watch?v=SPujYdcWCFU 3 min https://www.youtube.com/watch?v=CXJwNSkdTH0 https://www.youtube.com/watch?v=2jf9xrnUjpI 11 min. (start 1:49 in)

18. Market Economy Benefits Costs

19. Denmark Video Why? USA Trade off Population = 5.5 million Little inequality in wealth Government provides free school Health care, retirement services

20. Bhutan June 2011 Typical Village

21. 2011 Music Video production in Bhutan No traffic lights in Bhutan