ECONOMIC SYSTEMS SCARCITY unlimited wants vs. Limited resources An organized approach to producing and distributing goods and services. Purpose is to make important decisions about the use and distribution of resources. All economic systems deal with the same problem SCARCITY unlimited wants vs. Limited resources

Economic Systems answers the problem of scarcity. Limited Resources > SCARCITY < Unlimited Wants

Scarcity forces us to make choices about… What to produce? How to produce? For whom to produce?

ECONOMIC SYSTEMS Market Economy/Private Enterprise Command Economy/Centrally Planned Economy Mixed Economy

MARKET ECONOMY (Capitalism) Pure Price System Decisions about scarcity should be made free from govt. control. Economic forces (price system/supply & demand) in the market should answer the three economic questions. In “laissez faire economics”, the government should adopt a “hands off” policy when it comes to economic decisions. Decentralized Laissez Faire Free Enterprise Free Market Private Enterprise

Market economy continued… Competition and profit motive find the most efficient and innovative methods of production. Values individualism and self-interest. Individuals can best achieve their goals if they are allowed to have private ownership. Dollar voting

Adam Smith Father of the market system. Published his ideas in his book called “The Wealth of Nations”. Believed the economy would regulate itself if left alone. (Laissez Faire) Believed those that fail to complete fail to survive. (profit motive) The “invisible hand” – the market will solve all basic economic questions. If consumers are sovereign supply and demand will dictate the natural flow of the market.

SUPPLY & DEMAND Now that you know how other merchants priced their items how will it affect your pricing of the same items? Were there some items that would be in high demand because of their low supply? How might that affect pricing?

SUPPLY & DEMAND What happens when demand exceeds supply? What happens when supply exceeds demand? How does supply and demand affect choices such as… Careers Types of cars Types of restaurants/food(I.e. Lobster) What are some recent examples of instances where demand exceeded supply? What were the results?

Advantages Disadvantages Consumers can be manipulated by advertising. Market gives producer incentive Market provides incentive to hire skilled labor Wide variety of goods and services are available. Competition encourages good quality goods. Productivity is rewarded by profits Market economy fosters self-reliance. It is possible to become rich. Consumers can be manipulated by advertising. Prices and incomes may not reflect what is best for society. Boom & bust cycle Monopolies and oligopolies can emerge Extreme income inequality can exist. Environmental problems Job security

THE ROARING TWENTIES United States was the richest country in the world.(resources & population) After the war the U.S.A. became wealthy by mass producing consumer goods like radio’s and cars. Factory workers were paid well which meant they spent money on consumer goods.

THE WALL STREET CRASH As the 20’s progressed , more and more people were buying shares of companies “on margin” and these shares rose in price. By 1929 share prices were rising but profits for companies began to decline. In October of 1929 panic selling of shares forced the value of shares to drop drastically.(crashed) The stock market crash brought an end to prosperity in the U.S.A..

Other Causes of The Great Depression Demand for goods could not keep up with supply Droughts Wages did not increase Farmers went bankrupt Banks failed Factories closed Increase in unemployment High rate of corporate fraud

THE “GREAT”DEPRESSION By 1931, unemployed people were lining up in breadlines since there was no unemployment insurance. By 1932, 12 million people were unemployed. In 1932, the American people voted for Franklin D. Roosevelt as president on a platform of government intervention to get the USA out of the Depression.

WE ARE NOW GOING TO LOOK AT THE AMERICAN MOVE TOWARD A MIXED ECONOMY Following the Great Depression, the USA was no longer a "pure" market system!

THE “NEW DEAL” Franklin D. Roosevelt’s program of government spending to help the people of the United States against the Depression. He wanted to “prime the pump”. He believed that putting money into people’s pockets was like pouring gas into an engine to get it started.

SOCIAL SECURITY Social Security Act (1935) Gave government pensions to those who could not provide for themselves. Unemployment insurance was introduced. Taxed workers to provide money for social security.

LABOUR LAWS FAIR LABOUR STANDARDS ACT (1938) Set out the maximum hours of work and minimum wage laws.

Effect of WWII Job creation for war goods (Lend Lease Act) Increase in American GNP

Demand Side Economics (Keynesian) John Maynard Keynes (Keynesian Theory) Capitalism tends to move through cycles Prosperity Recession Depression Recovery It is therefore necessary for governments to regulate the economy by spending money temporarily “priming the pump” during recession or depression.

prosperity depression Deficit financing FISCAL POLICY Increase government $ Decrease taxes MONETARY POLICY Increase $ supply Decrease interest rates FISCAL POLICY Decrease government $ Increase taxes MONETARY POLICY Decrease $ supply Increase interest rates depression Deficit financing

Supply Side Economic (Reaganomics) Supply-siders dislike government involvement in the economy and emphasize greater reliance on private enterprise.

In Times Of Recession… Reduce corporate taxes Reduce public income tax Creates more profit Acts as incentive to enter business Reduce public income tax Increases public’s incentive to work Provides more money to spend Increased production creates demand Supply-siders insist that increased demand for goods and services must come from the private sector, not from government spending.

In Times of Inflation… The unrestricted market will eventually bring inflation under control

Reaganomics in Action Reaganomics Following 1981 the Reagan administration put in action the following policies… Tax cuts primarily for corporations and the wealthy Cut income tax 25% Government spending cuts in social services Welfare subsidies, Medicaid, food stamps A stable money supply Deregulation of the economy Reduced environmental, health, & safety regulations An aim to balance the budget.

Thatcherism in Action Thatcherism Following 1979 the Thatcher government in Britain put in action the following policies… Wide scale privatization Emphasis on individual initiative Reduced the power of labor unions Reduced income and corporate taxes

Reaganomics: A Balance Sheet Arguments in Favor A reduction in unemployment A reduction in inflation An increase in production A world wide move towards private enterprise Arguments Against Growing national debt Growing inequalities in income levels A boom and bust cycle The decline of the middle class.

ESSENTAILS OF A MIXED ECONOMY

Capitalism (Laissez Faire) Laissez faire (Adam Smith) was used to describe the belief that the government should keep their hands off the economy. Supported by liberals who believed “there were bound to be poor people in society”. Typical laissez faire factory… Means of production owned by capitalists Owners want to maximize production Low wages Expensive product If there is an excess of labor people are fired Workers are seen as a piece of machinery

Ideas to Battle the Evils of the Industrial Revolution Democratic Socialism Turned against Laissez Faire policies and urged government reform to help the long suffering workers. Typical factory run by the beliefs of a democratic socialist… Means of production still owned by capitalists Minimum wage laws would be passed to create higher wages Reduction in working hours Safety conditions in factories Labor unions allowed to operate in the interest of the workers, etc. They believe that while everyone may not be born with equal abilities, all are equal as human beings and should therefore be guaranteed the basic necessities of life.

Ideas to Battle the Evils of the Industrial Revolution Communism Communists believe that the inequality capitalism should be overthrown by workers (proletariat) in a violent revolution. Ultimately capitalists are out to exploit the “proletariat” to make a profit. Factory run by the beliefs of a Communist… Workers would overthrow the bourgeoisie (owner) Temporary dictatorship is set up to create stability Once the stability exists the government “withers away” and society becomes a workers paradise. State owns the factory No profits simply make what you need Workers are all paid equally. (From each according to their ability, to each according to their need – Karl Marx) Karl Marx : The Communist Manifesto

SWEDEN Both private & public enterprise Wealth to be distributed evenly Goal is that every person has a high standard of living

PRIVATE OWNERSHIP Almost 100% of agriculture Private enterprise employs 90% of all industrial workers Produce 95% of manufactured goods Many multinationals (IKEA, Saab, Electrolux, Volvo) Exporter of technology

GOVERNMENT CONTROLS Controls some essential services Natural resources, transportation, energy, railway, water, power, etc.) Atomic energy state monopoly Some control because of social policy to prevent company bankruptcies and to maintain high employment. Use fiscal and monetary policies (loans, interest rates, subsidies, taxes.)

GOVERNMENT PLANNING Purpose of regulations is the desire for the free enterprise to run smoothly Use five year plans (not official govt. policy) Forecast and project for economic growth Communicate to private firms guidance Methods of indirect planning (Indicative Planning) The use of government targets to coordinate private and public economic decision making. Methods of direct planning Full employment/freedom from poverty Social welfare programs

THE ROLE OF UNIONS IN THE SWEDISH ECONOMY Cooperation of Swedish leaders in business, labour and government. 80% of workforce is unionized Role of unions is to abolish the negativity of capitalism. Co-determination Act of 1977 Gave unions a role in industrial decision making. (i.e. wage earner funds) All decisions are negotiated

THE CRADLE TO GRAVE WELFARE STATE (Womb to Tomb) Jobs, housing, adequate income, medical care Free pre-natal care, family allowance, maternity/paternity allowance Free nursery, low cost daycare, funded higher education 5 week vacations, old age pensions Goal is that every person has a high standard of living

Economic Equality in Sweden Health: 90% if workers are sick Free health care Dental care free for under 19 (40% over 19) Travel to and from doctor covered Patients pay only 4% of all medical fees.

Education: Free to secondary (lunches included) Grants & loans to post secondary Pensions: Receive pension 65+ (65% of highest income years.) Housing: Housing subsidies for families with children. Construction regulated by government to ensure safety.

Unions: Operates U.I. Government paid scholarships Training Relocation (travel expenses) Unemployment Rates Sweden (2004) 3-4 % Canada (2004) 7.5 %

BUT…. Canada 5% GST Sweden 25% VAT Sweden’s tax rate is considerably higher than any other country in the world. Canada 5% GST Sweden 25% VAT

THE ECONOMIC CRISIS IN SWEDEN 1970 deficit was increasing, high inflation, high unemployment 1982 the Social Democratic Party is elected Depression Persuaded Swedes to save Produced more goods, decreased consumption of consumer goods. Invest surplus money in countries economy. Reduce govt. $, lower interest rates Used capitalist policies to maximize production and socialist policies to redistribute wealth. RESULT= economic growth

Probably the closest Canada has come to a pure market system was during the 1920s. During that decade governments followed Adam Smith's advice, and left the privately owned economy alone. Because government did little, taxes were low. Then came the "crash of '29" followed by the Great Depression. Most Canadians experienced major economic hardships throughout the 1930s.

Business owners and workers began to feel that the government should do something to prevent such a national collapse again and to provide help to helpless individuals. Since then, the Canadian government's role in the economy has grown steadily so that in the 1990s, Canada has become very much a mixed economy.

MIXED ECONOMIES (CANADA)

Look at some of the programs run by governments in Canada today: • stabilization of the economy to prevent booms and busts (Monetary Policy) control of bank interest rates Control $ supply (Fiscal Policy) increase or decrease taxes increase or decrease government spending BANK OF CANADA

Government Laws & Regulations Agriculture Govt. marketing boards Influence prices Crop controls Quotas to limit production Food inspection Negotiate sales of wheat to foreign nations Regulation of the market quality controls some price controls • prevention of monopolies to preserve competition Deregulation A reduction of govt. restrictions on business enterprises. (neo-conservatives)

Provision of public services (universality) Redistribution of wealth to provide security old age pension unemployment insurance child tax credit welfare Provision of financial support to businesses subsidies to failing businesses Provision of public services (universality) schools Police fire control Hospitals parks Transfer Programs Progressive tax systems

Government Owned Business Crown Corporations (nationalized industry) CBC Radio and TV Royal Canadian Mint Canada Post Corporation Reasons… Control an area of the economy which is vital to general welfare of nation. To provide goods/services private entrepreneurs are unable to provide. Earn income for the government. To rescue companies from bankruptcy. Help stabilize economy.

Privatization Keynesian Methods (deficit financing) created a $580 billion dollar deficit by 1996. Canadian govt. began cutting social programs. Selling of state owned companies to private industry. (Thatcherism/Reaganomics) Create more efficiency in govt. Cut bureaucracy in govt. Mulroney 1984-1992 Privatized 39 crown corps. Prov. Govt. Alberta Liquor Licensing Telephone

Direct Taxes: those paid by citizens. (GST/Income tax) Indirect Taxes: hidden in the price of goods. (excise tax)

There are many direct and indirect controls over our economic system. The good news is that these many government programs and regulations have provided us with increased stability, security, and equality. The bad news is that we have lost some individual freedoms and that the cost to taxpayers is high.

Canada's debt is the sum our federal government owes in total Canada's debt is the sum our federal government owes in total. As you can see from the graph below, Canada has continued to have annual deficits that add to our accumulated national debt every year.

What role(s) should the government play in the Canadian economy?

Planned Economy (Command Economy) Economy directed by the government All means of production (land, labor, capital) are state owned and controlled. The government makes all economic choices of what to produce, how to produce, how to distribute.

Rise of the Planned Economy People believed that other economic systems were exploiting the working class. Came as a response to the industrial revolution. Some people believed that if the government controlled the economy and chose what should be produced, how and for whom; there would be greater economic equality.

Problems Created by the Industrial Revolution Low wages Long hours Urbanization Crime Poverty Disease Pollution Unfair labor practices Unsafe working conditions

Elements of a Planned Economy Cooperation Public ownership Equality as incentive Central planning A group of economic experts carry out the goals of the government. See “Corkscrews vs Bottle Openers” page 325 Ideologies

Advantages of the Planned Economy Income & wealth more evenly distributed Little unemployment Experiences fewer booms and busts in economy Profits used to expand production Production of goods and services is planned to meet society’s needs Consumers receive basic necessities.

Disadvantages of the Planned Economy Lack of incentive Lack of technological progress Bureaucracies (planning creates inflexibility) Black markets Loss of individuality Inefficient and widespread waste of resources.

Father of Communism Karl Marx was the most well known advocate of the planned economy. Wrote the Communist Manifesto & Das Kapital (with Engels) Moved by the problems of the industrial revolution. Did not believe in gradual change rather REVOLUTION. Believed workers (proletariat) must replace the ruling class(bourgeoisie) through revolution.

Marx’s Beliefs The bourgeoisie exploited the workers by forcing them to create goods and services with a greater value than the wages received. Capitalism would bring itself to ruin Economic depression Imperialism Wars Revolution by the proletariat. After a series of revolutions capitalism would be eliminated and people would live in a cooperative and voluntary society. Production would be distributed by the motto… “from each according to his abilities, to each according to his needs.”

The Ideal Marxist Society Individual differences would still exist but no one could amass enormous wealth while others lived in poverty. Equal opportunity (classless society) Abolish private property and profit motive (public ownership) With the existence of surplus goods crime and greed would not exist. Common Good