Economic Systems

1. Economic Systems

2. The 3 Major Production Questions • What to produce? • How to produce? • For whom to produce? We will classify economic systems into categories, based on how each of them attempts to answer these three questions.

3. Traditional Economy • The answers to the three major production questions are dictated by ritual, habit, or custom.

4. INUIT

7. Examples of Traditional Economies • Inuit tribe • Some parts of South America • Some parts of Africa • Aboriginal tribes of Australia • Some island societies

8. Traditional Economies Disadvantages? Advantages?

9. Command Economy • The answers to the three major production questions are given by some strong central authority (i.e. the government) • Public ownership of resources • Communism – an economic system in which all factors of production are the property of the state.

10. Examples of Command Economies • Cuba

11. Examples of Command Economies • North Korea

12. Command Economies Weaknesses Strengths

13. Market Economy • Businesses and individuals act in their own best interest to answer the three major production questions. • Private ownership of resources • Capitalism – an economic system in which individuals and businesses compete, with a minimum of government interference • “Laissez-Faire”

14. Market Economies Weaknesses Strengths

15. Mixed Economies • Mixed-Market • Socialism • Economies in Transition

16. Total Economic Freedom Little Economic Freedom Capitalism Communism Socialism Mixed-Market Total Government Control No Government Control

17. 2009 Index of Economic Freedom: The Top 10 http://www.heritage.org/Index/

18. 2014 Index of Economic Freedom:

19. Bottom 7

20. Role Players in the Mixed-Market Economy • Consumers • Producers • Government • Consumer • Producer • Protector • Regulator • Provider

21. 7 Economic & Social Goals of Capitalism • Economic Freedom • Economic Equality • Economic Security • Economic Growth • Economic Efficiency • Price Stability • Full Employment

22. Capitalism Communism vs.

23. Capitalism Communism vs.

24. Economic Freedom Economic Equality Cooperation / Collectivization Competition Supply & Demand Government Planning Public Property Private Property Patriotism: The Good of Community Profit Motive

25. “From each according to his ability, to each according to his needs!” • Karl Marx • Critique of the Gotha Programme, 1875

26. Communism Communism: How/Why does it rise? How/Why does it fall?

27. Why Doesn’t It Work? • Incentive Problem • Average Test Scores Example • Coordination Problem • In one word, why doesn’t it work? GREED

28. “As for me, I am not a Marxist.” Karl Marx

29. When CAN It Work?

30. Characteristics of Free Enterprise Capitalism • Economic Freedom • Voluntary Exchange • Consumer Sovereignty: The consumer drives the market – DOLLAR VOTES • “The customer is always right!” • Private Property Rights • The Tragedy of the Commons • Profit Motive/Self-interest • Competition • Markets and Prices • Specialization/Division of Labor

31. Market System Questions • What will be produced? • consumer sovereignty • dollar votes • How will goods be produced? • technology • resource cost 2-31

32. Market System Questions • Who gets the output? • willingness to pay • How is change accommodated? • self-interest • How is progress promoted? • technological advance • capital accumulation 2-32

33. The Invisible Hand • 1776 Wealth of Nations byAdam Smith • Unity of private and social interest • Virtues of the market system • Efficiency • Incentives • Freedom 2-33