Comparative Economic Systems Chapter 18

Types of Systems Three types of economic systems: Capitalism/market Communism/command Socialism/command and market Communism Socialism Capitalism

Communism Political an economic system where: all property is collectively owned Labor is organized Everyone consumes according to their needs No “pure” communism today Cuba, North Korea and the Soviet Union have been the closest

Characteristics: 1) It has a central planning authority Does not follow supply and demand Gov’t sets prices 2) Movement of resources and labor is strictly controlled You can’t choose your own career 3) all decisions made by gov’t Gov’t owns most industries The only private property you would have would be small tools for you job

4) individual risk taking is forbidden You can’t start up your own company or be an entrepreneur 5) gov’t officials decide what to produce, how to produce, and for whom to produce

Disadvantages: 1) individual freedom is lost 2) no incentives to make the people work hard Most get the same pay no matter how hard they work 3) fails to meet the needs and wants of consumers Most communist gov’t produce more military products Neglect consumer goods like TV, microwaves, etc.

4) inefficiency of centralized planning Resources needed and obstacles are too much 5) lack the flexibility to deal with changes from day-to-day

Socialism Economic system where the gov’t owns and runs SOME of the basic productive resources Purpose is to distribute goods and services in ways that are good for the people MOST socialist economies have democratic governments

Advantages: 1) Those who are not able to be productive still get a share of the benefits 2)People can elect representatives who determine what is produces, how, and for whom

Disadvantages: 1) less efficient than capitalism 2) more workers are hired than necessary which drives up the cost of production 3) taxes are higher because gov’t has to provide health care, education and welfare

Capitalism The means of production are owned by private citizens Supply and demand control pricing Businesses are free to engage in activities that provide the greatest profits

Advantages: 1) it is efficient 2) freedom if there are lots of buyers and sellers And resources are mobile And if buyers and sellers are well informed Then it will be profitable and efficient 2) freedom Consumers can buy what they want Producers can make whatever consumers desire

3) capitalism is highly decentralized Consumers and producers determine what, how, and for whom to produce Not the government 4) the role of government in the economy is much smaller 5) high degree of consumer satisfaction

6) flexibility to accommodate change When consumer demands change, products can change 7) capitalist nations have a vast amount of wealth The countries that have the highest standard of living are capitalist countries

Disadvantages: 1) capitalism doesn’t always satisfy everyone’s needs Markets are geared towards private consumer goods instead of public goods like roads and education 2) capitalism produces only for those who have demand and the ability to pay Pure capitalist societies would ignore the poor, unemployed and elderly.

The Rise and Fall of Communism 1917 – Russia’s government was overthrown Vladimir Lenin set up a communist gov’t All private property was outlawed Factories were turned over to the workers They didn’t have the skills to manage the factories Production declined and the economy began to fail

In steps Joseph Stalin Introduced his Five-Year Plan Began policy of collectivization All agricultural and industrial enterprises were collectively owned Many people revolted against this Stalin had millions killed or imprisoned Millions starved when he seized grain harvests Standard of living dropped dramatically

However, the gov’t kept on with other plans The Five Year Plan was a failure However, the gov’t kept on with other plans Concentrated heavily on defense industries, heavy manufacturing and some consumer goods By the time Stalin died, the Soviet Union was a major industrial power

The Gosplan was the central planning authority that devised the plans Very complex process Had to decide: How much would be produced, styles, colors, sizes, etc. What would go into each product What the quota would be for individual factories They detailed EVERYTHING that would be needed

Problems with agriculture: State farms – owned by government Workers paid for number of items produced Prices fixed by government Collective farms – private farms collectively operated Land, tools, livestock, machines owned by gov’t Had to produce a certain amount per acre Not very efficient

The Soviet Economy Collapses Made progress but never caught up with the US Morale low in factories Began incentive programs Piecework – workers paid for each piece they produced rather than hours they worked Quotas were set too high This led to storming – workers rushing to finish at the end of the month Quality of products not as good Medals, vacations, free housing

Quotas: Quotas failed because, for example: If shoe factories were given a quota of 1 million shoes per year Then they would make small shoes because they could do it faster So there were more small shoes than consumers needed, and not enough large shoes

Inadequate supply of consumer goods: After WWII, parents were asked to make sacrifices so their kids could have a better life Most did so But when those kids grew up and were adults, they were not so willing to do the same thing They were aware of the high standards of living in many other countries They were impatient for more and better consumer goods

Perestroika: Mikhail Gorbachev came to power in 1985 Economy the worst it had been in 80 years The Gosplan wasn’t working Quotas weren’t working People were demanding changes Gorbachev introduced perestroika – restructuring of the economy and government Wanted to introduce a little capitalism

Faced some stiff opposition from diehard communists As did his successor, Boris Yeltsin It was ultimately the collapse of the economy, collapse of leadership and ethnic unrest that led to the fall and breakup of the Soviet Union in 1991 All of the former republics of the Soviet Union, including Russia, are some degree of capitalist

Transition to Capitalism Problems with transition: Hard to go from communist/command to capitalism Key feature of capitalism is private property Communist countries had to privatize gov’t run factories Factories where people are allowed to make a profit work better More incentive to produce

Poland, Hungary, and Czech gov’t gave people vouchers These vouchers could be turned in at auctions for shares in a company Companies then went from being owned by gov’t to privately owned (by people) Some gov’ts just sold the companies to foreign corporation

The move to capitalism stripped the Communist party of its power Power transferred to new class of entrepreneurs and capitalists In Russia, many former Communist leaders bought up the vouchers So the old group of leaders ended up being the new group of leaders

Transition to capitalism is hard and slow In many nations, the transition results in high unemployment, inflation and lost production This will eventually turn around if they can wait it out The people had to learn how to make their own decisions about what to produce, how, and for whom Jobs were no longer guaranteed Prices were no longer kept low Transition to capitalism is hard and slow

Countries & Regions in Transition Russia: Russia sold vouchers which were turned in for stocks Most factories are privately owned Most restaurants and shops are in private hands Russia has a stock market now

Eastern Europe: Newest countries to become capitalist Poland: Started with labor union called Solidarity They gained a lot of freedoms for the people Communist party lost power Move to capitalism was slow

Hungary: Czech Republic: Had been the most “western” of the communist countries Also had a large “black market” of consumer goods Transition to capitalism was easier Czech Republic: Czechoslovakia separated into Czech Republic and Slovakia Partly because Slovakia was not crazy about capitalism In Czech, 80% of businesses are now privately owned

Latin America: Many countries had combined socialism and isolationism (to give their infant industries a chance to be successful) Mexico: By 1989, most businesses were privately owned Joined the US and Canada in a free trade agreement (NAFTA)

Chile: Has sold gov’t controlled airlines, telephone companies and utility companies Gov’t loaned billions to new entrepreneurs Has many exports Including popsicle sticks to US and chopsticks to Japan Argentina: Has sold many gov’t industries to private investors Has become very capitalistic quickly

China: 1949 – Mao Zedong and the Communist turned China into a command economy Much like that of the Soviet Union 1958 – Great Leap Forward began Move towards pure communism High industrialization More collectivization – farmers forced off their land to work on state owned farms Plan was a huge failure – millions starved

Started to realize it wasn’t working in the 1970’s By early 1980’s, the success of Taiwan, South Korea, Hong Kong, etc. was too much to ignore Some Chinese provinces were allowed to experiment with capitalism A lot of capitalism has been introduced, but still has gov’t planning.

The Faces of Capitalism Japan: Very capitalistic economy However, the gov’t is very involved in the day-to-day- activities of businesses It is the 3rd largest economy in the world Reasons for success: 1) employees are very loyal to their companies Many are hired for life Many companies supply private schools and vacation resorts Take great pride in their work

A Closed Economy: High Cost of Living: 2) ability and willingness of Japanese to develop new technology Robotics, computer tech, cars, etc. A Closed Economy: They export to many countries They try not to import much to protect their industries As a result, prices are high on many goods High Cost of Living: Fruit cost 3-4 times more than in US Clothing 2 times as much Japanese citizens can go to Hawaii and buy a camera made in Japan cheaper than they can in Japan

Recession: Reform: In a recession for most of the 1990’s A banking crisis Banks stopped lending People stopped paying Value of land dropped Unemployment rose Reform: Japan must buy from other countries because they can produce cheaper They need to allow for more competition between businesses

The Asian Tigers: Singapore, Hong Kong, Taiwan & South Korea Huge economic progress in the last 50 years All are capitalist Hong Kong: As a colony of Great Britain, it was the most free market economy in the world It was given back to China in 1997 China began to put some gov’t interference in Hong Kong businesses

Singapore: Taiwan: Island nation only 3.5 times larger than DC Has a GNP about 80% of what the US has 1,000 multinational firms work there Gov’t has spend millions on technology, investments, research and scientists Taiwan: Island about the size of West Virginia GNP almost ½ of what the US has China vows they will be reunited

South Korea: Smallest GNP of the Tigers Technocrats govern SK Small number of powerful families control many of the businesses Very close business relationship with the US

Sweden: Regarded as a “socialist state that works” Has more welfare programs for its citizens than any other free world country Basic industries are nationalized (gov’t control) But there are many private businesses They had very high taxes to pay for the welfare

Many people returned to bartering to avoid paying the taxes This began to cut into their economic growth Socialist party was defeated Capitalist gov’t was elected Taxes were lowered Still much higher than US