Economic Theories Unit 1: Introduction to government

Journal #3  Name:  Date:  Copy question:  Where do you draw the line between what government should do for us and what we should do for ourselves?

Monty Python  What did the Romans do for us?

Economics  The study of how limited resources are used to satisfy people’s wants.  Resources: land, water, knowledge, labor  Societies must decide how resources will be used.  Political system determines how this is done.

All economic systems must answer these questions:  #1: What to produce?  #2: How to produce?  #3: Who gets what is produced?  VARIOUS ways to accomplish this

4 types of economies:  #1: Market  #2: Command  #3: Mixed  #4: Informal

Market economy: CAPITALISM  FREE ENTERPRISE: NO government intervention; private ownership  Buyers & sellers act in their individual interests (buy cheap/make profit)  Supply & demand; more demand, ie. MORE demand, MORE incentive to produce (producers must supply the goods that consumers want)  Prices determined by market; keep price down to attract consumers  Competition keeps prices stabilized

Example:  Rubber band bracelets! Start to catch on…kids want them!  Producers start making them to meet demand  Competition stabilizes cost; Equilibrium (demand matches production)  Demand decreases, producers decrease supply (the CRAZE is over!!)

Origins of capitalism  “Capital” = “money invested to make more money”  Buyers & sellers compete to make money  1200’s in Europe; Explorers & traders opening routes to Asia (spices, silk, gold)  As trade increased, more money made, more money available to invest

Origins of capitalism  1700’s Europe:  Nation-states  Wealthy middle class  Familiar with banks, markets  Value progress, invention, free market  NO LIMITS BY Government

Origins of capitalism  1776: Adam Smith, The Wealth of Nations  Provided philosophy for free trade; did not like govt. regulating trade (taxing imports)  LAISSEZ-FAIRE (“to let alone”)  Market acts as “invisible hand” (action of people determines what is bought/sold)

ADVANTAGES OF CAPITALISM?  Private ownership of industry  Private ownership of property  Possibility of large profit (if you are successful, you can be VERY successful!)  Entrepreneur ability  Consumers have a say in what is produced with their buying power

Disadvantages of capitalism?  There’s NO social “safety net”  You’re responsible for yourself  There’s a BIG GAP between the rich & the poor.  if you’re unsuccessful, you can be very unsuccessful.

True Capitalism?  Theoretical: American system is one of most capitalistic (others include Canada, United Kingdom, Australia)  Government regulates (increasing over time)  Meat Inspection (1906)  Pure Food & Drug Act (1906)  Great Depression (1930’s – WWII): Social Security Act

America: Mixed Economy  Mix of capitalism & socialism  U.S. basically identifies with capitalism  Believe that to make economic choices is part of individual freedom &  Value individual initiative

MIXED ECONOMY: MIXES CAPITALISM & SOCIALISM  Government regulates private enterprise & has social safety net (Example: regulates purity of food & drugs & Social Security)  Combines private & public enterprise: PRIVATE: individuals can own business & property Example: Walmart (Walton Family; $33 billion profit 2014, $91 million/day) PUBLIC: govt. owns & manages Examples: Corporation for Public Broadcasting & U.S. Postal Service

U.S. as mixed economy GOVERNMENT:  regulates business through licensing, banking, prevents monopolies, taxes  provides for public needs: water, sewage, rail, postal service, schools, roads, welfare systems BUSINESS:  Decide on products, costs, etc.  Lots of people start their own businesses  initiative to make profits

Command economy: Socialism a planned economy  Government:  owns basic means of production (natural resources, railways)  determines use of resources  distributes products & wages  provides social services (education, health care, welfare)  STILL SOME PRIVATE ENTERPRISE & OWNERSHIP

Origins of socialism  1800’s: Industrial Revolution brought MORE production but MORE suffering  Social reform: NO one should have to suffer with so much opportunity

 FOR: Government should control the economy: distribute goods equally; lots of public goods & services, narrows gap between the rich & poor  AGAINST: stifles individual initiative, high taxes stop growth, big government

Democratic socialism  Committed to ideals of democracy (free speech, free elections)  Want better distribution of economic goods (govt. ownership of key large industries, make economic decisions for everyone), expansive social programs  Examples: Denmark, Norway, Sweden; all prosperous economies

Communism  Karl Marx (EQUALITY)  Believed that the capitalist system would collapse  1848 The Communist Manifesto…history is the story of class struggle  Proletariat: Industrial working class  Bourgeoisie: Owners (factories, land, water rights, etc.)  Workers did not receive full value of labor; owners pay low earn big profits

Karl Marx: The Communist Manifesto  Scientific fact: struggle was inevitable  Goals:  WORKERS UNITE, overthrow bourgeoisie  Form classless society  EVERYONE owns means of production  NO NEED for government

Communism: Command economy  Government regulates ALL aspects of the economy  Decisions made at upper levels of government; decisions handed down to managers  State owns ALL means of production on BEHALF of people  Communism is an EXTREME FORM of socialism (NO private ownership)

ECONOMIC CONTINUUM _______________________________________________________________ COMMUNISM SOCIALISM CAPITALISM TOTAL GOVT REGULATION REGULATION BASIC NO REGULATION MEANS of PRODUCTION NO PRIVATE OWNERSHIPSOME PRIVATE OWNERSHIP ALL PRIVATE CITIZENS NEEDS PROVIDED EXPANSIVE WELFARE NO SOCIAL PROGRAMS PROGRAMS

Communism: Advantages?  Highly efficient (distribute resources to public)  Highly effective & stable (everyone has job, production)  Government ensures basic needs are met (house, education, welfare, job); No inequality

Communism: Disadvantages  Little freedom of choice (DO WHAT YOU ARE TOLD)  No reward for being a hard worker, no punishment if you are a slacker (NO INCENTIVE)  Has a Communist government EVER existed based on Marxist ideals? NO  Government does NOT disappear; Becomes ALL powerful (turns to coercion against people)

Communist nations  Not really true to Marx ideal…no government  China, Cuba, Laos, North Vietnam, North Korea (rejected Marxism, but still viewed by international community as communist)  People’s Republic of China (established 1949), tight state control of economy until Mao Zedong’s death in 1976 (founder of party)  Today? Mixed economy Capitalism mixed into socialist system (workers can keep some of the $ earned) Political freedoms still limited

 No pure capitalist, socialist, or communist nations  More complex and interconnected world (economics, communication, politics)  Question still debated…Where do we draw the line between what government should do for us and what we should do for ourselves?

Occupy movement “We are the 99%”  Response to financial crisis; worldwide movement  FOCUS: how large corporation & the global financial system control the world in a way that disproportionately benefits a minority, undermines democracy, and is unstable.  1 st major protest Sept (Occupy Wall Street), spread to 951 cities, 82 countries, 600 U.S. communities  Any impact?

Informal Economy  A part of almost every type of economy  Not monitored by any form or level of government (NOT taxed)  Not included in Gross National Product (GNP); measure of what citizens produced in their own country  Examples: black market, yard sales, babysitting, music teachers

CRQ