1 INTRODUCTION TO ECONOMICS Comparative Economic Systems

2 Economic System An economic system is the set of mechanisms and institutions that resolves the what, how, and for whom questions. Some standards used to distinguish among economic systems are: Who owns the resources? What decision-making process is used to allocate resources and products? What types of incentives guide economic decision makers?

K. Marx Primitive society Slavery Feudal Capitalist Socialist/Communist Criterion: ownership of the means of production and productivity 3

Walt Rostow

Walt Rostow The Stages of Economic Growth: A Non-Communist Manifesto (1960); The Economics of Take-off into Sustained Growth (edited, 1963); The World Economy: History and Prospect (1978); and Theorists of Economic Growth from David Hume to the Present (1990), with commentary drawn from Economics in the Long View: Essays in Honor of W. W. Rostow, a festschrift published in Essays on the British Economy in the Nineteenth Century (1948), which gained him recognition as an economic historian of the first rank, nor his Process of Economic Growth (1953) A Proposal: Key to an Effective Foreign Policy (With M. F. Millikan, 1957), which made his reputation in the field of foreign policy. About fifteen of his later books dealt with foreign policy.

Rostow’s Growth Theory The model argues that economic modernization occurs in five basic stages of varying length – (1) traditional society, (2) preconditions for take-off, (3) take-off, (4) drive to maturity, and (5) high mass consumption. Criterion: economic and technological level, volume and quality of the consumption

7 What are the basic types of economic systems? Traditional Command Market

8 What is a traditional economy? A system that answers the What, How, and For Whom questions the way they always have been answered

9 What is the benefit of a traditional economy? There is little friction among members because relatively little is disputed

10 What are the disadvantages of a traditional economy? Restricts individual initiative Lack of advanced goods, new technology, and growth.

11 Pure Market Economy All resources are privately owned Coordination of economic activity is based on the prices generated in free, competitive markets Any income derived from selling resources goes exclusively to each resource owner

12 Invisible Hand of Markets According to economist Adam Smith (1723–1790), market forces coordinate production as if by an “invisible hand.”

13 What is the invisible hand? A phrase, introduced by Adam Smith, that expresses the belief that the best interests of a society are served when individual consumers and producers compete to achieve their own private interests.

14 What is the advantage of a market economy? It provides a wide variety of goods and services that buyers and sellers exchange at the lowest prices.

15 Problems with Pure Market Economies Difficulty enforcing property rights Some people have few resources to sell Some firms try to monopolize markets No public goods Externalities

16 Pure Centrally Planned Economy All resources government-owned Production coordinated by the central plans of government Sometimes called communism Use visible central planners

17 Problems with Centrally Planned Economies Consumers get low priority Little freedom of choice Central planning can be inefficient Resources owned by the state are sometimes wasted Environmental damage

18 Consuming units Producing units Supreme planning agency Specialized planning agencies The Command Economy Pyramid

19 What are the strengths of a command economy? Economic change can occur very quickly. Social welfare can be enhanced.

20 What are the weaknesses of a command economy? Decision makers have the power to be absolutely wrong. Quality and variety of goods suffer.

21 Mixed Economy United States is a mixed economy Also considered a market economy Government regulates the private sector in a variety of ways. USA vs. Japan or Sweden ?

22 Transitional Economy A transitional economy is in the process of shifting orientation from central planning to competitive markets. It involves converting state-owned enterprises into private enterprises— privatization. The transition now under way will shape economies for decades to come.

23 GDP per capita in 2009 (USD, PPP) Belarus 10,600 Germany 34,800 Cuba 9,500 Holland 40,300 China 6,000 Brazil 9,500 Bulgaria 12,900 Japan 34,200 USA 47,000 Sweden 38,500 Denmark 37,400 Liechtenstein 118,000 EU 33,400 World 10,400 Zimbabwe 200 Congo 300 Burundi 400