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Comparative Models of the Market Economy

This text discusses three models of the market economy: the Guided Market Economy, the Modified Market Economy, and the Social Market Economy. It explores their characteristics, business systems, capital markets, and welfare goals.

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Comparative Models of the Market Economy

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  1. Comparative Models of the Market Economy Frederick University 2009

  2. Economic problems

  3. Models of the Market Economy • Market failure and social welfare function • Different priorities in the social welfare function • Three models: • The Guided Market Economy (Japan, Korea, France, Italy, Greece, Spain, Portugal, etc.) • The Modified Market Economy (the U.S., the U.K., Ireland, New Zealand) • The Social Market Economy (Germany, Denmark, Sweden, Norway, Finland, Estonia)

  4. The Guided Market Economy

  5. The Guided Market Economy • Priority on resource allocation • Direct government participation in resource allocation and industrial restructuring • Long-term focus

  6. The Guided Market Economy Industrial Policy • a set of instruments and techniques designed to promote economic growth on the basis of direct government participation in resource allocation and industrial restructuring • identification of key industries and promotion of their better access to resources and faster growth

  7. Business systems • distinctive configurations of firms and markets, which have been established, in a particular environment as the dominant ways of structuring economic activities. • Characteristics of the business system The nature of economic agents Work co-ordination and control Market organization

  8. The Guided Market Economy The Business System • A dual business structure • Domination of big businesses • Strong vertical and horizontal integration • Low rate of change of activities • Widespread subcontracting • Small share of the medium-size firms

  9. High social tension and low labor and capital mobility STUDENTS DEMONSTRATE AGAINST LABOR LAW – French students protest during a rally in Marseille, France, April 11 against a measure which would have allowed employers to fire young people under the age of 26 without giving a reason. The proposal was dropped by the government April 10 after large-scale protests in the country

  10. The Guided Market Economy The Keiretsu system – business groups of firms in all industries, linked through: • Interlocking directorates • Stock cross ownership • Financial support (provision of loans at favorable rates) • A built-in stable market for each other’s products • Transfer of labor force • Cooperation in the international expansion

  11. The keiretsu system firm “А” firm “B” Firm “C” Firm “D” Firm “E” Main bank

  12. The Guided Market Economy Capital markets • The banking system serves as a major institution of capital allocation • The “main bank”: • Provides debt financing • Raises capital for the industrial firms • Monitors • Guarantees firms’ debt • Participates in executives turnover and shifts in corporate strategy

  13. The Modified Market Economy

  14. The Modified Market Economy • Motivation for efficiency • Main goals: • to motivate private decision makers for efficient use of resources • to trigger higher living standards • to moderate inequality • to contribute to social integration • to guarantee efficient administration

  15. The Modified Market Economy • Core institution – capital markets • The stock exchange: • High capital mobility • High liquidity of funds • A wide set of financial institutions

  16. The Modified Market Economy The Business System • Short – term focus • Mobile labor • Easy hiring and firing • High specialization of tasks, roles and skills • High market contestability • Strong antitrust attitude

  17. The Modified Market Economy • Welfare goals: • Free choice in consumption • Free choice in occupation and education • Greater purchasing power • Widespread system of consumer credit • Social support for the poor • Equal opportunities to everyone • High capital diffusion

  18. The Social Market Economy

  19. The Social Market Economy • Priority on equity, social equality and full employment • Major features: • Strong support of workable competition • Promotion of asset formation among lower income groups • Direct transfer payments • Codetermination and regulation of the labor market • Strong role of associations • Extensive role played by local governments • Social and welfare programs for everyone • Faster increase in salaries than in profits • Restrictive monetary policies

  20. The Social Market Economy The Business System • Prevailing medium-size firms • Strong competition • High owner involvement in control • Codetermination in the big firms • Strong associations • Powerful cooperatives • Dependence on the financial decisions made by the banking sector

  21. The Social Market Economy Capital markets • The banking system serves as a major institution of capital allocation • Excessive integration of the banking institutions with the industrial enterprises in: • Ownership • Decision-making

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