1. Chapter 2: The Economic Organization of Society
Prepared by:
Kevin Richter, Douglas College
Charlene Richter,
British Columbia Institute of Technology
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

2. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Chapter Objectives
1. Define a market economy and explain how it relies on markets to coordinate economic activities.
2. Define a command economy and explain how in practice it solves the three coordination problems.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

3. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Chapter Objectives
3. Demonstrate opportunity cost with a production possibility curve and state the principle of increasing marginal opportunity cost.
4. Relate the concept of comparative advantage to the production possibility curve.
5. Describe how economic systems have evolved from the eighth century to today.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

4. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Introduction
An economic system has to solve three coordination problems:
What, and how much, to produce.
How to produce it.
For whom to produce it.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

5. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Introduction
Every economy faces the problem of how to make individuals do what society wants them to do.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

6. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Introduction
Sometimes the goals of society and individuals conflict.
An example is the NIMBY (Not In My Back Yard) phenomenon.
NIMBY is a mindset in which individuals approve of a project so long as it is placed somewhere else.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

7. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Introduction
An economic system must provide the incentives to do those things that alleviate scarcity—produce more and consume less.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

8. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Introduction
The two main economic systems of the past 50 years, capitalism and socialism, answer these immense coordination problems differently.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

9. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Capitalism
Capitalism is an economic system based upon private property and the market in which, in principle, individuals decide how, what, and for whom to produce.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

10. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Under Capitalism:
Individuals are encouraged to follow their own self-interest, while market forces of supply and demand are relied upon to coordinate those individual pursuits.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

11. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Under Capitalism:
Distribution of goods is to each according to his or her ability, effort, or inherited property.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

12. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Under Capitalism:
Government must allocate and defend private property rights.
Private property rights – the control a private individual or firm has over an asset or a right.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

13. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Reliance on the Market
Markets work through a system of rewards and payments.
In capitalism individuals are encouraged to follow their own self-interest.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

14. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Reliance on the Market
Prices coordinate individuals' wants.
If there is not enough of something, its price goes up.
If there is too much, price goes down.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

15. What’s Good About the Market?
Most economists believe the market is a good way to coordinate individuals' needs.
The market is, however, not fair nor is it always efficient.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

16. What’s Good About the Market?
The primary debate among economists is about how markets should be structured, and whether they should be modified and adjusted by government regulation.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

17. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Socialism
Socialism is, in theory, an economic system based on individuals’ good will toward others, not on their own self-interest.
In principle, society decides what, how, and for whom to produce.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

18. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Socialism in Theory
Socialism is an economic system that tries to organize society in the same way as families are organized.
Everyone contributes what they can and get what they need, provided it is available.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

19. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Socialism in Theory
If individuals' inherent goodness will not make them consider the general good, government will force them.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

20. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Socialism in Practice
Socialism in practice is often called Soviet-style socialism.
Soviet-style socialism is an economic system that uses administrative control or central planning to solve the coordination problems what, how, and for whom.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

21. Production Possibilities Model
The production possibilities curve shows the trade-offs among choices we make.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

22. Production Possibility Table
A production possibility table lists the combinations of outputs (products) that can be obtained from a given number of inputs (resources).
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

23. Production Possibility Table
Output – an output is simply a result of an activity.
Input – an input is what you what you put into a production process to achieve an output.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

24. Production Possibility Curve
A production possibility curve shows the maximum combination of outputs that can be achieved from a given number of inputs.
It slopes downward from left to right.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

25. Production Possibility Curve
Economics grade
100 88 70 46 40 58 66 78 94 98
History grade
20 hours of
history
0 hours of
economics E D C B
20 hours of economics
0 hours of history A
Hours of study
in history
Grade in
in economics 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 96 92 90 86 84 82 80 76 74 72 68 64 62 60 43 49 52 55 61 67 73 79 85 91 97
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

26. Production Possibility Curve
The production possibility curve not only represents the opportunity cost concept, it also measures the opportunity cost.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

27. Production Possibility Curve
The production possibility curve demonstrates that:
There is a limit to what you can achieve, given the existing institutions, resources, and technology.
Every choice made has an opportunity cost—you can get more of something only by giving up something else.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

28. Increasing Marginal Opportunity Cost
The production possibility curve is generally bowed outward since some resources are better suited for the production of some goods.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

29. Increasing Marginal Opportunity Cost10 9 8 6 5 4 3 2 1 . 2Y 1X A X
If the slope of the production curve is -2 at A, the opportunity cost
of 1X is 2Y. 7
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

30. Increasing Marginal Opportunity Cost
Comparative advantage explains why opportunity costs increase as the consumption of a good increases.
Some resources are better suited for the production of some goods than to the production of other goods.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

31. Production Possibilities Table
% of resources
devoted to
production
of burgers
Number
of DVD’s
Numbers
Row 20 40 60 80
100 4 7 9 1 12 15 14 5 A B C D E F
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

32. Production Possibilities CurveA 15 B 14 C 12 D
DVD’s 9 E 5 F 4 7 9 11 12
Burgers
McGraw-Hill/Irwin
© 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

33. Increasing Marginal Opportunity Cost
The principle of increasing marginal opportunity cost states that opportunity costs increase the more you concentrate on an activity.
In order to get more of something, one must give up ever-increasing quantities of something else.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

34. Increasing Marginal Opportunity Cost
DVD’s
Slope is flat at A. Low opportunity cost of burgers.
Slope is steep at B. High opportunity cost of burgers.
Burgers B A
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

35. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Efficiency
In production, we’d like to have productive efficiency – achieving as much output as possible from a given amount of inputs or resources.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

36. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Efficiency
Any point within the production possibility curve represents inefficiency.
Inefficiency – getting less output from inputs which, if devoted to some other activity, would produce more output.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

37. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Efficiency
Any point outside the production possibility curve represents something unattainable, given present resources and technology.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

38. Efficiency and Inefficiency
DVDs 10 8 6 4 2
Burgers C D A B
Unattainable point,
given available technology,
resources and labour force
Efficient
points
Inefficient
point
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

39. Shifts in the Production Possibility Curve
Society can produce more output if:
Technology is improved.
More resources are discovered.
Economic institutions get better at fulfilling our wants.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

40. Shifts in the Production Possibility Curve
More output is represented by an outward shift in the production possibility curve.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

41. Shifts in the Production Possibility Curve
Neutral Technological Change
DVDs C D A B
Burgers
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

42. Shifts in the Production Possibility Curve
Biased Technological Change
DVDs C B A
Burgers
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

43. Distribution and Production Efficiency
The production possibilities curve focuses on productive efficiency and ignores distribution.
In our society, more is generally preferred to less and many policies have relatively small distributional effects.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

44. Shifts in the Production Possibility Curve
Test your understanding:
A meteor hits the world and destroys half the earth’s natural resources.
Nanotechnology is perfected that lowers the cost of manufactured goods.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

45. Shifts in the Production Possibility Curve
Test your understanding:
A new technology is discovered that doubles the speed at which all goods can be produced.
Global warming increases the cost of producing agricultural goods.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

46. Shifts in the Production Possibility Curve
(a)
(b)
(c)
(d)
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

47. Production Possibility Curve and Economic Systems
The production possibility curve presents choices in a timeless fashion but most choices are dependent on previous choices.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

48. Production Possibility Curve and Economic Systems
Sequential decisions can best be seen within a framework of a decision tree—a visual description of sequential choices.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

49. Production Possibility Curve and Economic Systems
All decisions are made in context – what makes sense in one context may not make sense in another.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

50. Production Possibility Curve and Economic Systems
Decisions are contextual.
What the production possibility curve for a particular decision looks like depends on existing institutions.
The analysis can be applied only in the institutional and historical context.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

51. Production Possibility Curve and Tough Choices
The production possibility curve represents tough choices.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

52. Production Possibility Curve and Tough Choices
Politicians make promises as though the production possibility curve did not exist or that the economy can operate outside the economy's production possibility curve.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

53. Production Possibility Curve and Tough Choices
Economists continually point out that seemingly free lunches often involve significant costs thus earning for themselves the nickname, the dismal science.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

54. Comparative Advantage, Specialization, and Trade
The production possibility curve is bowed because individuals specialize in the production of goods for which they have a comparative advantage and trade with others.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

55. Comparative Advantage, Specialization, and Trade
The comparative advantage argument used to explain the bowed-out shape of the production possibilities curve can be used to show how trade makes society better off.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

56. Comparative Advantage, Specialization, and Trade
Collaboration and specialization can make society better off.
Total production can rise.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

57. Comparative Advantage, Specialization, and Trade
The outward bow graphically represents the potential gains from trade.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

58. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Gains From Trade
Sunder can either write one economics paper or four creative writing papers in a day.
Ti can either write one creative writing paper or four economics papers in a day.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

59. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Gains From Trade
Sunder has a comparative advantage in creating writing and Ti has a comparative advantage in economics.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

60. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Gains From Trade
The following table and production possibility curves demonstrate how output increases when two individuals collaborate and specialize in the activity for which each has a comparative advantage.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

61. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Gains From Trade
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

62. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Gains From Trade
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

63. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Gains From Trade
Each individual's PPC is drawn by connecting the number of papers each can write in a day on a graph.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

64. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Gains From Trade 5 4
Economics 3 2
(a) Ti 1
(b) Sunder
Creative writing
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

65. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Gains From Trade
The combined PPC curve is drawn by finding three points and connecting them.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

66. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Gains From Trade A
(c) Combined with trade 5 B 4
Economics 3 2
(a) Ti 1
(b) Sunder C
Creative writing
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

67. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Gains From Trade
Point A: This is the combined number of economics papers they both can write in a day.
If economics papers are on the Y axis, it is point 0,5.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

68. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Gains From Trade
Point B: This is the combined number of creative papers they both can write in a day.
If economics papers are on the Y axis, it is point 5,0.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

69. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Gains From Trade
Point C: This is where each is focusing on that activity for which he or she has a comparative advantage.
Sunder writes four creative papers and Ti writes four economics papers.
This is the coordinate 4,4.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

70. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Gains From Trade
The combined PPC is bowed out because of comparative advantage and specialization.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

71. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Division of Labour
Markets allow specialization and the division of labour.
They allow individuals to develop their comparative advantages, thereby increasing the production possibilities of society.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

72. Markets, Specialization, and Growth
Markets and specialization have led to growth.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

73. Markets, Specialization, and Growth
The growth in per capita income (constant 1990 dollars) in the past 2 millennia has been astonishing.
This owes largely to the introduction of markets and democracy.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

74. Markets, Specialization, and Growth
As people are allowed to compete and specialize, they get better at what they do, develop new technologies and the market grows ever larger.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

75. Growth in the Past Two Millennia
col17930_0207.eps
Growth in the Past Two Millennia
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
2000
1500
1000
500
(in 1990 international dollars)
Per capita income
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

76. The Economic Organization Of Society
End of Chapter 2
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

77. The History of Economic Systems
Chapter 2 Appendix
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

78. Evolving Economic Systems
Capitalism and socialism have not existed forever.
Capitalism came into widespread existence in the mid-1700s; socialism came into existence in the early 1900s.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

79. Evolving Economic Systems
Before capitalism and socialism other forms of economic systems existed:
Feudalism dominated the Western world from about the 8th to the 15th century.
This owes largely to the introduction of markets and democracy.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

80. Evolving Economic Systems
Feudalism gave way to mercantilism.
Mercantilism is an economic system in which government determines the what, how, and for whom decisions by doling out the rights to undertake certain economic activities.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

81. Evolving Economic Systems
Mercantilism remained the dominant economic system until the Industrial Revolution.
Industrial revolution – a time when technology and machines rapidly modernized industrial production and mass produced goods replaced handmade goods.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

82. Evolving Economic Systems
Capitalism evolved from the Industrial Revolution in 1700s.
Industrial revolution led to a decrease in power of small producers and increase in power of capitalists.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

83. The Need for Coordination in an Economic System
Every economic system needs coordination.
In his 1776 classic, Wealth of Nations, Adam Smith argued that markets could coordinate the economy without the active involvement of government.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

84. The Need for Coordination in an Economic System
Markets coordinate economic activity by using the price mechanism to direct individuals' self-interest into society's interest.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

85. The Need for Coordination in an Economic System
Markets coordinate economic activity by using the price mechanism to direct individuals' self-interest into society's interest.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

86. Evolutionary Changes Within Systems
Both capitalism and socialism are constantly evolving with changes in social customs, political forces, and the strength of markets.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

87. Evolutionary Changes Within Systems
Capitalism evolved into welfare capitalism—an economic system in which the market operates but government regulates markets significantly.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

88. Evolutionary Changes Within Systems
The opposite took place in some socialist nations in the 1980s—socialism integrated capitalist institutions into its existing institutions.
In the 1990s, most of the former socialist countries have undergone transition to market oriented economies based on private property.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

89. Blurring of the Distinction Between Capitalism and Socialism
Recent events point to a blending of economic systems.
If this trend continues, the 21st century will see the emergence of a single general type of economic structure; it will be a mix of socialist and capitalist institutions.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

90. Feudal Society: Rule of Tradition
Feudalism developed in the 8th and 9th century.
The Lord of the manor was the protector; serfs were working the land.
Feudalism was a tradition based society.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

91. From Feudalism to Mercantilism
Mercantilism emerged with the development of trade and markets in the 15th century.
The power of the society shifted from manors to towns.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

92. From Feudalism to Mercantilism
In mercantilism, traders supported the king, who in turn protected their interests.
The role of government increased during this period.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

93. From Mercantilism to Capitalism
Industrialists or capitalists were the business people who acquired large amounts of money and used it to invest in business.
Craft guild members were artists in their own crafts.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

94. From Mercantilism to Capitalism
The economic power base shifted from the guilds to industrialists.
Coordination of the economy by government was deemed necessary by the craftsmen.
Industrialists considered the market capable of coordination on its own – no government was needed.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

95. From Mercantilism to Capitalism
Laissez-faire policy is an economic policy of leaving coordination of individuals’ wants to be controlled by the market.
Adam Smith’s invisible hand supported the industrialists’ view.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

96. Industrial Revolution
The invisible hand worked; capitalism thrived.
Machine production began to increase enormously in the late 18th century, almost totally replacing hand production.
This phenomenon has been termed the Industrial Revolution.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

97. Industrial Revolution
Eventually, modern economic institutions replaced guilds.
Modern capitalism evolved by the 19th century.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

98. From Capitalism to Socialism
Capitalism was marked by significant economic growth but also by human abuses of the working class who were producing for the elite few.
This led to criticism of the capitalist market economic system.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

99. From Capitalism to Socialism
The best known critic of capitalism was Karl Marx, a German philosopher, economist and sociologist.
Marx developed an analysis of the dynamics of change in economic systems, in the 19th century.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

100. From Capitalism to Socialism
Marx saw an economy marked by tensions between economic classes
The proletariat class – the working class and
The capitalist class (businessmen)
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

101. From Capitalism to Socialism
The capitalist class made profits by exploiting the working class.
Marx believed that this exploitation would lead to revolt by the proletariat who would overthrow the capitalists.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

102. From Feudalism to Socialism
Contrary to Marx’ predictions, capitalism did not evolve into socialism.
Marx’ socialist ideas took root in feudalist Russia instead.
State socialism was created – a system based on central planning and command.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

103. From Capitalism to Welfare Capitalism?
However, evolutionary changes brought about regulation to protect the working class.
Economic safety net was developed in capitalist economies. Examples are
Public welfare
Unemployment insurance
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

104. From Feudalism to Socialism
Contrary to Marx’ predictions, capitalism did not evolve into socialism.
Marx’ socialist ideas took root in feudalist Russia instead.
State socialism was created – a system based on central planning and command.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

105. © 2006 McGraw-Hill Ryerson Limited. All rights reserved.
Economic Transition
In the 1990s most Eastern European socialist economies started a path of transition to a market-based economic system.
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.

106. The History of Economic Systems
End of Chapter 2 Appendix
© 2006 McGraw-Hill Ryerson Limited. All rights reserved.