1. Comparative Economic Systems
Chapter 18

2. Types of Systems Three types of economic systems:
Capitalism/market
Communism/command
Socialism/command and market
Communism Socialism Capitalism

3. Communism Political an economic system where:
all property is collectively owned
Labor is organized
Everyone consumes according to their needs
No “pure” communism today
Cuba, North Korea and the Soviet Union have been the closest

4. Characteristics: 1) It has a central planning authority
Does not follow supply and demand
Gov’t sets prices
2) Movement of resources and labor is strictly controlled
You can’t choose your own career
3) all decisions made by gov’t
Gov’t owns most industries
The only private property you would have would be small tools for you job

5. 4) individual risk taking is forbidden
You can’t start up your own company or be an entrepreneur
5) gov’t officials decide what to produce, how to produce, and for whom to produce

6. Disadvantages: 1) individual freedom is lost
2) no incentives to make the people work hard
Most get the same pay no matter how hard they work
3) fails to meet the needs and wants of consumers
Most communist gov’t produce more military products
Neglect consumer goods like TV, microwaves, etc.

7. 4) inefficiency of centralized planning
Resources needed and obstacles are too much
5) lack the flexibility to deal with changes from day-to-day

8. Socialism
Economic system where the gov’t owns and runs SOME of the basic productive resources
Purpose is to distribute goods and services in ways that are good for the people
MOST socialist economies have democratic governments

9. Advantages:
1) Those who are not able to be productive still get a share of the benefits
2)People can elect representatives who determine what is produces, how, and for whom

10. Disadvantages: 1) less efficient than capitalism
2) more workers are hired than necessary which drives up the cost of production
3) taxes are higher because gov’t has to provide health care, education and welfare

11. Capitalism The means of production are owned by private citizens
Supply and demand control pricing
Businesses are free to engage in activities that provide the greatest profits

12. Advantages: 1) it is efficient 2) freedom
if there are lots of buyers and sellers
And resources are mobile
And if buyers and sellers are well informed
Then it will be profitable and efficient
2) freedom
Consumers can buy what they want
Producers can make whatever consumers desire

13. 3) capitalism is highly decentralized
Consumers and producers determine what, how, and for whom to produce
Not the government
4) the role of government in the economy is much smaller
5) high degree of consumer satisfaction

14. 6) flexibility to accommodate change
When consumer demands change, products can change
7) capitalist nations have a vast amount of wealth
The countries that have the highest standard of living are capitalist countries

15. Disadvantages: 1) capitalism doesn’t always satisfy everyone’s needs
Markets are geared towards private consumer goods instead of public goods like roads and education
2) capitalism produces only for those who have demand and the ability to pay
Pure capitalist societies would ignore the poor, unemployed and elderly.

16. The Rise and Fall of Communism
1917 – Russia’s government was overthrown
Vladimir Lenin set up a communist gov’t
All private property was outlawed
Factories were turned over to the workers
They didn’t have the skills to manage the factories
Production declined and the economy began to fail

17. In steps Joseph Stalin Introduced his Five-Year Plan
Began policy of collectivization
All agricultural and industrial enterprises were collectively owned
Many people revolted against this
Stalin had millions killed or imprisoned
Millions starved when he seized grain harvests
Standard of living dropped dramatically

18. However, the gov’t kept on with other plans
The Five Year Plan was a failure
However, the gov’t kept on with other plans
Concentrated heavily on defense industries, heavy manufacturing and some consumer goods
By the time Stalin died, the Soviet Union was a major industrial power

19. The Gosplan was the central planning authority that devised the plans
Very complex process
Had to decide:
How much would be produced, styles, colors, sizes, etc.
What would go into each product
What the quota would be for individual factories
They detailed EVERYTHING that would be needed

20. Problems with agriculture:
State farms – owned by government
Workers paid for number of items produced
Prices fixed by government
Collective farms – private farms collectively operated
Land, tools, livestock, machines owned by gov’t
Had to produce a certain amount per acre
Not very efficient

21. The Soviet Economy Collapses
Made progress but never caught up with the US
Morale low in factories
Began incentive programs
Piecework – workers paid for each piece they produced rather than hours they worked
Quotas were set too high
This led to storming – workers rushing to finish at the end of the month
Quality of products not as good
Medals, vacations, free housing

22. Quotas: Quotas failed because, for example:
If shoe factories were given a quota of 1 million shoes per year
Then they would make small shoes because they could do it faster
So there were more small shoes than consumers needed, and not enough large shoes

23. Inadequate supply of consumer goods:
After WWII, parents were asked to make sacrifices so their kids could have a better life
Most did so
But when those kids grew up and were adults, they were not so willing to do the same thing
They were aware of the high standards of living in many other countries
They were impatient for more and better consumer goods

24. Perestroika: Mikhail Gorbachev came to power in 1985
Economy the worst it had been in 80 years
The Gosplan wasn’t working
Quotas weren’t working
People were demanding changes
Gorbachev introduced perestroika – restructuring of the economy and government
Wanted to introduce a little capitalism

25. Faced some stiff opposition from diehard communists
As did his successor, Boris Yeltsin
It was ultimately the collapse of the economy, collapse of leadership and ethnic unrest that led to the fall and breakup of the Soviet Union in 1991
All of the former republics of the Soviet Union, including Russia, are some degree of capitalist

26. Transition to Capitalism
Problems with transition:
Hard to go from communist/command to capitalism
Key feature of capitalism is private property
Communist countries had to privatize gov’t run factories
Factories where people are allowed to make a profit work better
More incentive to produce

27. Poland, Hungary, and Czech gov’t gave people vouchers
These vouchers could be turned in at auctions for shares in a company
Companies then went from being owned by gov’t to privately owned (by people)
Some gov’ts just sold the companies to foreign corporation

28. The move to capitalism stripped the Communist party of its power
Power transferred to new class of entrepreneurs and capitalists
In Russia, many former Communist leaders bought up the vouchers
So the old group of leaders ended up being the new group of leaders

29. Transition to capitalism is hard and slow
In many nations, the transition results in high unemployment, inflation and lost production
This will eventually turn around if they can wait it out
The people had to learn how to make their own decisions about what to produce, how, and for whom
Jobs were no longer guaranteed
Prices were no longer kept low
Transition to capitalism is hard and slow

30. Countries & Regions in Transition
Russia:
Russia sold vouchers which were turned in for stocks
Most factories are privately owned
Most restaurants and shops are in private hands
Russia has a stock market now

31. Eastern Europe: Newest countries to become capitalist Poland:
Started with labor union called Solidarity
They gained a lot of freedoms for the people
Communist party lost power
Move to capitalism was slow

32. Hungary: Czech Republic:
Had been the most “western” of the communist countries
Also had a large “black market” of consumer goods
Transition to capitalism was easier
Czech Republic:
Czechoslovakia separated into Czech Republic and Slovakia
Partly because Slovakia was not crazy about capitalism
In Czech, 80% of businesses are now privately owned

33. Latin America:
Many countries had combined socialism and isolationism (to give their infant industries a chance to be successful)
Mexico:
By 1989, most businesses were privately owned
Joined the US and Canada in a free trade agreement (NAFTA)

34. Chile:
Has sold gov’t controlled airlines, telephone companies and utility companies
Gov’t loaned billions to new entrepreneurs
Has many exports
Including popsicle sticks to US and chopsticks to Japan
Argentina:
Has sold many gov’t industries to private investors
Has become very capitalistic quickly

35. China:
1949 – Mao Zedong and the Communist turned China into a command economy
Much like that of the Soviet Union
1958 – Great Leap Forward began
Move towards pure communism
High industrialization
More collectivization – farmers forced off their land to work on state owned farms
Plan was a huge failure – millions starved

36. Started to realize it wasn’t working in the 1970’s
By early 1980’s, the success of Taiwan, South Korea, Hong Kong, etc. was too much to ignore
Some Chinese provinces were allowed to experiment with capitalism
A lot of capitalism has been introduced, but still has gov’t planning.

37. The Faces of Capitalism
Japan:
Very capitalistic economy
However, the gov’t is very involved in the day-to-day- activities of businesses
It is the 3rd largest economy in the world
Reasons for success:
1) employees are very loyal to their companies
Many are hired for life
Many companies supply private schools and vacation resorts
Take great pride in their work

38. A Closed Economy: High Cost of Living:
2) ability and willingness of Japanese to develop new technology
Robotics, computer tech, cars, etc.
A Closed Economy:
They export to many countries
They try not to import much to protect their industries
As a result, prices are high on many goods
High Cost of Living:
Fruit cost 3-4 times more than in US
Clothing 2 times as much
Japanese citizens can go to Hawaii and buy a camera made in Japan cheaper than they can in Japan

39. Recession: Reform: In a recession for most of the 1990’s
A banking crisis
Banks stopped lending
People stopped paying
Value of land dropped
Unemployment rose
Reform:
Japan must buy from other countries because they can produce cheaper
They need to allow for more competition between businesses

40. The Asian Tigers: Singapore, Hong Kong, Taiwan & South Korea
Huge economic progress in the last 50 years
All are capitalist
Hong Kong:
As a colony of Great Britain, it was the most free market economy in the world
It was given back to China in 1997
China began to put some gov’t interference in Hong Kong businesses

41. Singapore: Taiwan: Island nation only 3.5 times larger than DC
Has a GNP about 80% of what the US has
1,000 multinational firms work there
Gov’t has spend millions on technology, investments, research and scientists
Taiwan:
Island about the size of West Virginia
GNP almost ½ of what the US has
China vows they will be reunited

42. South Korea: Smallest GNP of the Tigers Technocrats govern SK
Small number of powerful families control many of the businesses
Very close business relationship with the US

43. Sweden: Regarded as a “socialist state that works”
Has more welfare programs for its citizens than any other free world country
Basic industries are nationalized (gov’t control)
But there are many private businesses
They had very high taxes to pay for the welfare

44. Many people returned to bartering to avoid paying the taxes
This began to cut into their economic growth
Socialist party was defeated
Capitalist gov’t was elected
Taxes were lowered
Still much higher than US