Economics – Chapter 2 Economic system: the method used by a society to produce and distribute goods and services. Factor payments: The income people receive for supplying something needed for production (land, labor or capital) Patriotism: Duh! (love of country)

Goals of an Economy Efficiency: making the most of resources Freedom: Freedom from government intervention Economic security: Assurance against shortages, creation of safety net Equity: Fair distribution of resources Growth: Innovation though efficiency (the book has a long-winded definition) Environmental protection Health and safety etc.

Economic Systems Market-based economy: Laissez-faire, the basic U.S. model before 1935 Command economy: Government planned, centrally planned economy, such as socialism, fascism, etc. Mixed economy: Combination of market and command. Most nations fall into this category.

Command Economy Communism Fascism/Nazism Democratic Socialism State ownership of capital Collectives: Solkholz Authoritarian Shortages Black market Small businesses allowed during NEP Fascism/Nazism State control of capital through regulation, taxes Private “ownership” of capital, but nominal ownership Slightly more efficient than socialism (Why?) Democratic Socialism Not authoritarian Some state ownership of capital Some state control of capital through regulation, taxes Some black market Some private enterprise allowed

Free Market Usually exists before command market, because command market cannot innovate or create wealth. Allows specialization, “creative destruction” of inefficient producers. Supported strongly by Austrian School, mostly by Monetarists Market: An arrangement that allows buyers and sellers to exchange goods and/or services (Free market: when government doesn't interfere with voluntary, private exchanges except to stop fraud or theft.

Adam Smith The Wealth of Nations (1776), said government intervention was generally a bad idea Described specialization of industrial revolution by the 20 tasks performed in a pin factory Industrial revolution in Britain, 1770s Industrial revolution in U.S.: 1820s in New England, 1870s in rest of U.S. Urbanization of U.S., change in economy from agriculture (latter less than 2% of households) Firm: business, company or organization that pools resources for a commercial gain

Command Economies Socialism: Government ownership of the means of production Communism: same as socialism, but under the Communist Party, and with political tyranny Fascism: No (or little) government ownership of the means of production, but heavy government control of the same through regulations Nazism: Adolf Hitler's variant of “National Socialism” that mixed some socialism with fascism (plus tyranny).

Socialism/Communism Karl Marx: The Communist Manifesto (1848) Revolutionary: Various failed revolutions V.I. Lenin 1917 Failure of Soviet Union 1989 Russia descends to corruption, gangsterism as the top communists become top capitalists using tax incentives and exclusive state contracts (and bribes to avoid regulation)

Democratic Socialism: Sweden Some government ownership of industry Heavy “safety net” for disadvantaged Half of all monies taken in taxes, used for safety net. Government-subsidized health care Cutting edge medical treatments slow to be compensated, compared with private systems Lower cost than U.S. health care system Does socialism stifle innovation?

Mixed Economies United States: has much free enterprise, but: Government's Federal Reserve Bank manipulates market interest rates Government manipulates mortgage market with loan guarantees and bailouts Government owns some auto industries (2008-09) Government has heavy regulation and tax incentives on a variety of issues, such as environment, “affordable” housing, agricultural prices, international trade, etc.

Free Enterprise Business cycle: The boom/bust of an economy GDP: Gross Domestic Product; the measure of the value of all goods and services produced in an economy Microeconomics: Study of a particular market or unit of an economy Macroeconomics: Study of an entire economy

Elements of Free Enterprise Legal equality Free contact Voluntary exchange Competition Private property rights Ten Commandments English common law Defended by Catholic Church Public disclosure laws: requirements for information that prevent theft and fraud Public interest regulations: requirements for standardization of some industries

Common Exceptions to Free Enterprise Copyright and Patent, legal monopolies for inventions and artistic creations Infrastructure: Roads and rails Welfare: Cash transfers from taxpayers to the impoverished. Safety net:

Measurements of an economy GDP Unemployment/Employment Poverty level Inflation