Chapter 19: Economics and Political Systems

1. Chapter 19: Economics and Political Systems

2. Economy -which can be viewed as a social institution that is organized in production, consumption and distribution of goods and services. Economic system of any society consists of norms and patterned activities regulation on production of goods and services, their distribution and consumption. (Hess and associates 1992) ECONOMICS as a Social Institution

3. Production Primarily consists of taking directly from earth and using without much processing, as in hunting, gathering, etc. Secondary Production Involves making something from raw materials, such as, pottery, bows and arrows, etc.

4. Third level of production Is characterized providing services to people. Tertiary production or Service work Involves providing assistance and information.

5. Distribution Refers to the allocation of goods and services Rule of Reciprocity The principle which means that a given good or service must be reciprocated with its corresponding value. Free Market System States that the worth of something depends on how much the consumers are willing to pay for it.

6. Consumption “to eat up” It is the usage of the produced goods. Example: Eating of bread

7. This is a tool that helps economists understand the the economic process. The demand of the product lies of the consumer's willingness to buy the product. The supply is determined by the producer's willingness to produce larger quantities. The Idea of Supply and Demand

8. The relationship between sociology and economics.(Neil J. Smelser 1991) Sociologists look for motivations other than money-this may involve companionship or a sense of belongingness. To sociologists, economic organization is a set of status and power relation. Sociology and Economics

9. Pre-industrial Societies These societies include hunting-gathering societies, pastoral societies, horticultural societies and agrarian societies. Types of Economic Systems

10. Hunting-gathering Society A society that primarily relies on food by gathering right after hunting by nomadic people. Pastoral Society A society in areas without much rainfall. Since farming is not permitted in these areas, they raise animals for food.

11. Horticultural Society A society that started to raise plant crop based on human labor. People here are less nomadic. Societies here tend to become much bigger and need to have a political system to govern them. Agrarian Society A society that is based on farming that employs plow to increase land fertility. Animals here are used for greater productivity. Money and trade in developed here.

12. Industrialization Refers to the process in which an economy based primarily on energy supplies by animals and human beings changes to energy that is provided by steam engine and electricity. Industrial Society

13. Industrial Society Where the introduction of machines usually replaces people. Automation is greatly observed in this society. This society produce high gross national product (GNP) which refers to the monetary value of goods and services produced in a given year.

14. New forms of Energy Steam powered engines Spread of Factories Machine operated factories Manufacturing and mass production Due to machines Specialization Machines specialize in a certain type of work Wage labor Men became wage laborers due to the presence of machines

15. Three types of Productive activity or sectors: Primary Sector Includes farming or agricultural, herding, fishing, forestry, and extractive activities like mining and quarrying. It is the part of the economy that draws raw materials from the environment. The division of labor here is relatively simple. Post-Industrial Societies

16. Secondary Sector This sector is concerned with producing finished goods out of raw materials. This is the part of the economy that transforms raw materials to manufactured products. Tertiary Sector This sector focuses on the provisions of services. This includes sales and advertising, law enforcement, managements, etc.

17. According to Alvin Toffler (1980) Post industrial society is the “third wave” of industrialization for: 1.decentralized of production 2. the use of renewablr ebergies 3. deurbanization 4.work in the home 5. and merging of producers and consumers.

18. He also added that the Third wave will be marked by the rapid growth of four new industries: 1. The space industry 2. Industry in the depth of the industries 3. Genetic Industry 4. Electronic Industry

19. Theories of the Economy These affects modern policy-making Economic theories also contain important assumptions which are useful in looking at how the economy of given society operates – Mc Nall and others(1992)

20. Classical Economic theory • In this theory, Adam Smith held the view that it was free trade that produced economic growth, not the accumulation of money in precious goods. • According to Adam Smith: • When specialization dominates, the people would produce goods and trade –to have benefit • Competition -lead each producer to produce the highest quality of goods at lower possible cost • Humans are rational and they seek to maximize their economic well-being

21. Milton Friedman • Devised the well-known contemporary extension of Adam Smith’s position • He believes that the legitimate functions of the government are to preserve the law, to enforce contract and to foster a competitive market • He argues that government should not undertake to support agricultural prices; fix tariffs, control output; rents or wages; provide social security benefits; deliver the mail; or provide public housing, toll roads, or national parks

22. Keynesian Economics • advocated by John Maynard Keynes • Keynes’ General Theory of Employment, Interest and Money, advocated government stimulation of the economy to avoid inflation and unemployment • According to Keynes, a government monetary policy involves increasing or decreasing the actual amount of money that is available • He made clear distinction between consumption, savings and investment, and detailed their interrelationship

23. Cautions of Keynes’ Theory • 1. Wages tend to be “sticky” , meaning they do not respond rapidly to either full employment or depression • 2. “Bottleneck” theory of inflation, which states that as society moves close to full employment, inflation becomes a serious problem because the demand for consumer goods increases, that drives up prices, and wages go up in response to shortage of workers.

24. Paul A. Samuelson’s textbook Economics(1973) reconciles with Keynes’ theories with a classical vision of how the economic system operates. • -the economic system is essentially competitive with people maximizing their self-interests and knowing just what the interest is In Keynesian theory, economic growth is claimed to continuous and that government policy makers do no need to worry about depressions because their monetary and fiscal policies can make such events extinct.

25. Marx’s Theory of Capitalism • Main criticism: it divided societies into the wealthy few who own the means of production and the many poor who do not. • Prediction; • -This system will collapse because workers would come to understand that they were being exploited and would mobilize to do something about it. -Capitalism contains-inherent flaw- each capitalist firm is caught up in a never-ending spinal where it must get bigger.

26. “falling rate of profit” • -One does this by buying up his competitors or investing in more machines, he makes more money- with the assumption that there are many customers to buy his products. • However, even though one’s total profit increases, the rate of return on his investment begins to shrink. • -As capital increases, capitalists get smaller and smaller returns on their investments • This situation causes concentration and monopolization because any given company must increase the share of total sales to keep its profit level constant. • Profit motive rather than on meeting basic human needs

27. To counteract the falling rate of profit and stagnation: • Capitalists can increase their exploitation of labor either by paying people less or getting them to work higher and longer for the same amount of money • They can move manufacturing plants to areas of the world where workers are paid less. Machines can also be made more efficient. • Production can be expanded by seeking foreign trade and new markets. Government assistance can be used in controlling the economic demands of workers.

28. 3 Major Features of Capitalism (Macionis, 2003) • Private ownership of property • - capitalist economy supports the right of individuals to own almost anything • - right to private property • Pursuit of personal profit - capitalist society encourages individuals to acquire greater amount of private property, even at the expense of others - Generally, capitalism defines a self-centered orientation as a matter of “doing business” - According to Adam Smith, it benefits everyone

29. Free competition and consumer sovereignty • - resulted form Adam Smith’s defense of profit • -Laissez-faire (“leave alone” or “let alone” policy), the economy is operated without the interference from the government • - free competitive economy regulates itself by “invisible hand” of the laws of supply and demand

30. “the greatest good for the greatest number of people”, argued by Adam Smith. • He argued that if the society is a vast complex ship, the self-interested actions of individual crew members without a captain would ensure that the remains on course. • In contrast, the government control of an economy would inevitably upset the complex market system, reducing producer motivation, diminishing the quality of goods produced, and thereby short-changing consumers.

31. In practice , CAPITALISM has been remarkably successful in unleashing productive power and raising standards of living over the long run. • However, although it generates prosperity, it is often associated with high levels of inequality.

32. To REDUCE the politically destabilizing effects of inequality, capitalist societies especially with democratic governments, have moved progressively away from a pure market system of distribution to incorporate welfare programs, health insurance, old-age pensions and others.

33. In spite, of the great success of CAPITALISM, it has some features that are likely to cause problems: • 1. The movement of the job oversees maximize immediate advantages but drastically reduces wage growth and buying power; • 2. An advanced capitalist system depends on increasing levels of demand for good and services in such a way that consumer debt rises and capital is directed toward filling the needs rather than investment in improving profit and machinery.

34. Trends toward concentration of power • Tendency for larger companies to acquire competitors in the same line of business or monopolization or exclusive control of a commodity • Merging of small companies with bigger ones • e.g: banks, book stores, book companies and publishers, food chains, movie industry

35. Free market enterprise • Distorted by the growth of conglomerates where one holding company owns controlling interests in other companies in different commercial areas • Results to INTERLOCKING CORPORATE DIRECTORSHIP, some individuals sit in the boards of a number of different companies • increase in CONCENTRATION OF POWER in hands of few • The interlocks decrease competition and increase corporate profits • FEWER and FEWER companies dominating private enterprise

36. Rise of MULTINATIONAL ECONOMIC ENTERPRISE • poses problem in loyalty and control • not supervised by any specific government which results to decision based solely on corporate goals but not on the well-being of any nation.

37. THEORY OF IMPERIALISM • Based on an analysis of capitalist mutinational corporations • It argues that when competitive capitalism gives way to monopoly and oligopoly , then large capitalist corporations expand beyond the borders of the society looking for highly profitable economic opportunities. • Third World countries, most profitable economic opportunities due to the reason that these countries contain valuable raw materials due to large number of poor people who can be employed at very low wages. A form of colonization , according to social scientists.

38. COMMUNISM • A social, political and economic system in which all property is publicly owned. • A system of political and economic organization in which property is owned by the community and all citizens share in the enjoyment of the common wealth, more or less according to their needs. • owes much to the writings of Karl Marx • Its goal is the creation of classless society, one which will be free from exploitation, affluent and peopled by workers who make no distinction between mental and manual labor.

39. As practiced, communist economy involved monolithic political control by one party and depend on close supervision and detailed long-range plans rather than on free-market forces. • Laws of supply and demand have little bearing on the economy • Follows the rise of power of the Marxist-inspired Bolsheviks in Russia in 1917 and the consolidation of their power under Vladimir Lenin and Joseph Stalin, communism came to denote a totalitarian system in which a single political party controls the government which , in turn, owns the means of production and distributes wealth with the professed aim of establishing a classless society.

40. The idea of classless society where all the means of production and distributions are owned by the community as a whole • The origin of the idea of communism lies in Western thought • Common ownership of property , described in Thomas Moore’s Utopia

41. Late 20th century , communism entered a period of crisis • By the 1980s , it had become clear that state-owned systems of economic production were unable to provide the same standards of living obtained in many countries with free market economies . • The communist government of China abandoned the economics of Maoism in the 1970s and 1980s and began allowing limited private ownership and the use of market incentives in its economy

42. In the Soviet Union, Mikhail Gorbachev set in motion an even more far-reaching reassessment of the efficacy of communist ideals and practices in that nation. In his attempt to liberalize the Soviet politico-economic system provoked that system ‘s collapse altogether in 1991

43. Socialism • Socialist economic system maybe considered as the polar opposite of the capitalist system • Pure socialist economies, all productive property resources are owned by the population at large, not by private enterprises, and are used for public, not private interests. • Profits or other benefits derived from the property go to collectivity, not individual. • The government plans and regulates the operation of the economic market system in order to ensure that the public or societal good is maximized .

44. At present, some countries adopting socialist economic system find it difficult to maintain the practice. • In result, they have tampered socialist principles with some capitalist elements, DEMOCRATIC SOCIALISM • The private ownership of productive property is largely regulated by the government direction of markets in the interest of collective or public good. • TAXATION is imposed by the government

45. In SOCIALIST ECONOMIC SYSTEM, the means of production are collectively owned and distribution of goods and services is guided by public needs. • GOALS: • Reduction of inequality based on inherited wealth or status • Distribution of basic resources as food, education, health, housing, and other basic services.

46. The contemporary socialist economic theory owes much to Karl Marx’s critique of capitalism, “forces of production”. • The REPLACEMENT of capitalism by socialism will happen when the workers themselves own or at least control the means of production thereby eliminating the basic sources of social conflict. • The socialist utopia remains unrealized, like all other visions of perfect order.

47. Some Trends In The International Market • Global Economy is comprised of a handful of rich countries and over a hundred developing nations. • Poorer countries are struggling to increase their position and earning power in the international marketplace. • A big gap can be seen betweetn the “haves” and the “have nots” among these nations.

48. Economic alliance are formed for survival of nations. Some countries formed trading blocks, expand existing alliance, and revive old ones. These blocks are in the following forms: • There is uninhibited free trade among member nations, there is uniform trade and tariff (example: European Community)

49. Other nations participate in “free trade” which permits each country to determine its own trade rules and agreement with non-member countries • Cooperation among members on issues relating to modernization (common environmental problems and information links) These lack a cohesive structure and have some trade barriers among nations.

50. The World Trade Organization is an example of these agreements for trade relations strengthening.