ECONOMIC SYSTEMS Chapter 2 TRADITIONAL COMMAND MARKET

TRADITIONAL Allocation of scarce resources by ritual, custom, or habit, e.g. hunter-gatherer societies An economy in which the basic economic questions are answered by custom & tradition Individuals not free to make decisions based on what they want Roles defined by customs of ancestors Economic decisions are based on how they were made in the past Economy is self-sufficient and mostly make things necessary to survival

TRADITIONAL No specialization or division of labor Producers are their own consumers Bartering, instead of money No real changes in technology Examples: the Amish, Indian cultures in Central & S America

TRADITIONAL Strengths: Everyone has defined role Little uncertainty over how, what, for whom Weaknesses: Discourages innovation Discourages satisfaction of personal wants; tends to have lower standard of living

COMMAND Economy controlled by the government Government owns all factors of production (resources, factories, railroads, etc.) Economic decisions are made by the central government – at the top & people expected to follow State can shift resources at will to focus on new priorities a/k/a CENTRAL PLANNING; characteristic of communist countries Interdependent: much specialization and division of labor

COMMAND Examples: former Soviet Union, Cuba, Iraq, early People’s Republic of China Strengths: Can change direction very quickly Planning agencies can shift resources quickly on a massive scale Labor shortages solved by forcing redirection of workers

COMMAND Weaknesses: Does not meet needs and wants of individuals Few consumer goods and very long waits Little incentive to work – low pay (“We pretend to work & they pretend to pay us)” People keep jobs for life – no incentive to work hard Large decision-making bureaucracy – out of touch and slow Does not move quickly to solve day to day problems Discourages innovation

MARKET ECONOMY Privately-owned capital goods are used to produce all goods and services without significant government intervention People and companies act in own self interest to answer “What, How, For Whom” Economics decisions are based on supply & demand Markets allow buyers & sellers to come together Entrepreneurs Interdependent: much specialization and division of labor Highest standard of living a/k/a Capitalism & Free Enterprise

MARKET Highest production and sale of consumer goods Examples: U.S., Canada, Japan, Great Britain… Strengths: Can adjust to change over time – gradual Change not prohibited or discouraged Decision making decentralized- resources directed to where consumers want them Huge variety of goods and services Freedom for everyone involved - people decide their own “What, How, For Whom” with relatively little government interference

MARKET Weaknesses: People may be caught without work as the “For Whom” question is not always clear. Young and sick may not get support as they are unproductive Markets don’t always function optimally – need competition, resources free to move around, need good market information Public goods not naturally provided

U.S. ECONOMY Mixed A Modified Private Enterprise Economy Capitalism modified by government intervention and regulation So… market mixed with command. What is the current mix? What is the role of the consumer in the U.S. economy? Consumer Sovereignty – consumers rule! What is the role of government? Protector, provider & consumer, regulator, promotes national goals Protector – can’t discriminate, misleading ads, safe food, etc. National goals – social security, child labor, minimum wage, etc.

5 CHARACTERISTICS: Economic Freedom Voluntary exchange Choices for consumers & businesses Voluntary exchange Buyers & sellers freely exchange in market transactions Private property rights Profit motive Entrepreneurs Competition Only because private individuals own the factors of production – better goods, lower price

U.S. Economic & Social Goals Used to Evaluate Economic Performance Economic Freedom – to make your own decisions Economic Efficiency – get the most out of the scarce resources there are—no waste Economic Equity – fairness! Equal pay for equal work, no false advertising, etc. Economic Security – disability, retirement, social security Full Employment – unemployment equals poor economy Price Stability – NO inflation….particularly harsh for those on “fixed incomes” Economic growth – to achieve the “American dream”

Conflicts in Goals Society evaluates costs and benefits of each to promote one over the other What goals would be in conflict with a minimum wage increase? How do you resolve the conflict? Cost v. benefit analysis Elect the person to office who agrees with you Equitable thing to do BUT could do more harm than good – cost producers more – and restricts choice of employers to pay what they think is a fair wage