Unit 2: Economic Systems IES Lluís de Requesens (Molins de Rei)‏ Batxillerat Social Economics (CLIL) – Innovació en Llengües Estrangeres Jordi Franch Parella

Objectives In this unit, the students will learn the main characteristics of the three different economic systems: - Free market economy - Mixed economy - Planned economy They will also learn the key points in the thought of their intellectual “fathers”.

Adam Smith Adam Smith ( ) is considered the father of modern economic theory. He is the author of “The Wealth of Nations” (1776). He truly understood the importance of saving and established the law of supply and demand. But he was wrong with the objective theory of the labour- value, that influenced Marx. (Click here)‏

Richard Cantillon Recent research has discovered that Richard Cantillon ( ) can be considered the “father” of the free market economy with his work “Ensayo sobre la naturaleza del comercio”. He was the first to understand the effects of the increment in the quantity of money (inflation) and the process involving changes in the relative prices and distributing the income unfairly. (Click here)‏

Karl Marx Karl Marx ( ) is the author of “Das Kapital” (1867) and is the father of planned economy or communism. He claimed that the labour was the unique source of value and that capitalists took it away from workers. He was also wrong in believing that a false divide is between labour and capitalist classes. In a planned economy there is no private property and all belongs to the state, that decides for you what to study, where to work and whether you have a right to life. (Click here)‏

John Maynard Keynes Keynes ( ) was the author of the “General Theory” (1936) and the father of mixed economy. He mistrust free market for reaching full employment and supported the role of government to interfere society both fiscal and monetary. The former involves public spending, deficits and huge debts and the latter the creation of money out of thin air, to fix interest rates artificially low and the expansion of credit. (Click here)‏

Market Economies  Resources are owned and controlled by individuals  Economic decisions are made by individuals competing to earn profits  Individual freedom is considered very important  Economic decisions are made by the basic principals of supply and demand  Profit is the motive that guides firms in their attempts to serve the consumers

Market Economies  Also called capitalist economies  There are many economic freedoms  There is competition among businesses  Competition determines price which increase the quality of the product

Command Economies  The government or other central authority makes decisions and determines how resources will be used  There is no private property, nor markets, nor supply and demand, nor prices  There is little individual freedom  There is no competition  Businesses are not run to create a profit

Command Economies  Consumers have few choices in the market place  Factories are concerned with quotas  Shortages are common because of poorly run factories and farms  The government dictates the job in which you work

Command Economies  The government sets the prices of goods and services  Examples of command economies: Cuba, North Korea and the People’s Republic of China

Mixed Economies  Private property is allowed, but the government takes an active role in society  It does mean that the ratio public spending / GDP is high (40% USA, more than 40% Spain, 50% Germany, 55% France, 60% Sweden...)‏  It involves that the government commits itself to provide public education, public health, public pensions... (Welfare state)‏  In monetary terms, the Central Bank fixes interest rates, inflates monetary supply and takes control of commercial banks in orchestrating credit expansion

Three Types of Economies  Market Economies  Planned Economies  Mixed Economies Review