common vocabulary what is poverty? institutions of capitalism market economies capitalism and...
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COMMON VOCABULARYWHAT IS POVERTY?
INSTITUTIONS OF CAPITALISMMARKET ECONOMIES
Capitalism and Institutions
Key Vocabulary
Poverty: Living on less than $1 a day- absolute
Purchasing Power Parity- relativeU.S. official poverty line= $13 a dayIncome=how much you makeWealth=stock measure
Key Vocab Cont’
GDP- Gross Domestic Product= Dollar value of goods & services produced in country
GNI- Gross Nat’l Income= money earned by an individual on commodities bought/sold
GDP is misleading; only an average But…strong correlation to quality of life Easier to measure than quality of water or air
David Dollar, Development Research Group, World Bank. “Capitalism, Globalization and Poverty.” unpublished paper,written for The Foundation for Teaching Economics, March, 2003, p. 25.
David Dollar, Development Research Group, World Bank. “Capitalism, Globalization and Poverty.” unpublished paper, written for The Foundation for Teaching Economics, March, 2003, p. 25.
David Dollar, Development Research Group, World Bank. “Capitalism, Globalization and Poverty.” unpublished paper, written for The Foundation for Teaching Economics, March, 2003, p. 24.
Number of People Living on Less Than $1/day(millions)
1987 1990 1998
East Asia & Pacific
417.5 452.4 267.1
Sub-Saharan Africa
217.2 242.3 301.6
http://www.worldbank.org/poverty/data/trends/income.htm#table1
Top quintileof nations
Avg.GNI per capita lowest 10% share lowest 20% share
Luxembourg 53290 4.0 9.4
Norway 36690 4.1 4.1
United States 36110 1.8 5.2
Switzerland 31840 2.6 6.9
Denmark 30600 3.6 9.6
Ireland 29570 2.5 6.7
Canada 28930 2.8 7.5
Austria 28910 4.4 10.4
Netherlands 28350 2.8 7.3
Belgium 28130 3.7 9.5
Australia 27440 2.0 5.9
Japan 27380 4.8 10.6
France 27040 2.8 7.2
Germany 26980 3.3 8.2
United Kingdom 26580 2.6 6.6
Italy 26170 3.5 8.7
Finland 26160 4.2 10.0
Sweden 25820 3.7 9.6
Spain 21210 2.8 7.5
New Zealand 20550 0.3 2.7
Israel 19000 2.8 6.9
Greece 18770 3.0 7.5
Total 625520 68.1 168
Avg (total / 22) $28,433 3.1% 7.6%
Average Income Shares of the Poorest 10% of Nation’s Population Among Quintiles of World Nations Ranked by Index of Economic Freedom
Economic Growth improves the lives of the poor by making the pie bigger
Bigger "slices" mean higher standards of living
Consumer durables
Available to % of non-poor people in U.S.
population
Available to % of poor people in U.S.
population
Refrigerator 99.5 97.9
Stove 99.5 97.7
Color television 98.5 92.5
Telephone 97.2 76.7
Washing machine 92.7 71.7
Clothes dryer 87.3 50.2
Microwave 89.8 60.0
Dishwasher 58.3 19.6
Freezer 46.0 28.6
VCR 86.2 59.7
Air conditioner 71.9 49.6
Personal computer 28.3 7.4
Institutions of Capitalism
Institutions are “rules of the game”“rules of the game” are formal and informalShape incentives and outline expected,
accepted forms of behavior4 Institutions:
1. Private Property Rights 2. Markets 3. Rule of Law 4. Entrepreneurship
Private Property Rights
Definable, Enforceable & transferableRight to freely use and transfer possessionsDefending property rights critical10% of African land is definable and plottedWhat isn’t owned by people simply “Uganda”
or “Kenya”Peru villages- Hernando De Soto- economist-
someone at home 24/7Prop. Rights lead to incentives- value in
propertyProp. Rights lead to investment- allows people
to obtain debt, collateral is great benefit
Rule of Law
Rule of Force= AnarchyRule of Men= laws are enforced at goodwill
of enforcer (very few who can change laws)Rule of Law= both governed and governing
are subject to same set of lawsChange in laws impact our vision of future-
willingness to invest
Markets: Good or Evil?
Market: institution most associated w/ capitalism; also vilified as exploitive
Although impersonal (business is cut-throat, profit driven) not necessarily exploitive
Paul Heyne argues in his work, “Moral Criticisms of Markets” in 1995 that although Capitalism may produce have and have-nots there is not a better alternative- Excerpt below:
“There have in fact been massive experiments in this century with societies committed to the abolition of . . . production through the impersonal transactions of the market system. If history ever pronounces ‘final verdicts,’ it pronounced one in 1989 on these experiments. Market systems do not produce heaven on earth. But attempts by governments to repress market systems have produced something in the 21st century something very close to hell on earth.”
Competition
Competition: profit driven; scarcity of goods leads to interaction between buyer and seller
Adam Smith “Invisible Hand”- competition is positive for buyer and seller
Critics argue it expands the claws of rich at expense of poor
Heyne argues that competition would exist in any form of economic institution Scarcity will always exist; competition exists because of
scarcity
“Another common moral objection to market systems is the objection to competition, usually thought of by the critics as an interpersonal struggle for superiority. . . . [It is instead]. . . a process – often completely impersonal . . . – of trying to satisfy whatever criteria others are using to allocate scarce goods. Scarcity means that it is not possible for everyone to have as much as they would choose to have if they were not required to make any sacrifice to obtain it. Scarcity therefore necessitates rationing, which means allocation by some set of discriminatory criteria. It follows that competition is the unavoidable accompaniment of scarcity and will consequently be found in every human society, whatever the form of its economic organization.
The question is not whether we shall have competition, but what forms it will take (emphasis added). That will be determined by the criteria used to allocate scarce goods. . . . [The]. . . criteria in a market system are usually monetary: people compete largely by offering to pay more money for what they want to obtain and by agreeing to accept less money for what they are trying to supply.
When governments . . . set up alternative systems for allocating scarce goods, competition does not stop. It merely takes new and almost always more destructive forms. . . . Even a transformation of human nature would not eliminate competition. If everyone in the society became a saint, competition would still exist because the saints would be committed to different charitable projects, and they would consequently have to devise some (saintly) way to decide how many resources to allocate to each project. Nothing can abolish competition except the abolition of scarcity. “ (Heyne 3-5)
Voluntary Exchange
Market transactions entered freely by buyer and seller
Exchange is by choice (except in cases of fraud, deception or buyer mistake)- both parties better off
Each has given up something of lesser value (personal) to obtain something of greater value
Market Competition Variables
# of firms in the marketDegree to which different products from
different producers are regarded by consumers- good or bad
Relative ease and availability of gathering information about market
Relative ease and exit from market Grain market highly competitive- many
growers, many buyers Diamond market not highly competitive
Competitive Market Economies
Best option at reducing povertyGoods & services available at lower pricesGoods are of better quality- competition forces
improvement of productsCompetition leads to more innovation; more
innovation leads to cheaper costs (technology)Producers seek lower-cost methods of production
Goods less expensive, people/consumers work less to pay for each item
What was luxury 20 years ago- more available today; cell phone costs 2% labor time as opposed to 1984
Figure 1
Source: W. Michael Cox and Richard Alm, "Time Well Spent." 1997 Annual Report of the Federal Reserve Bankof Dallas. http://www.dallasfed.org/fed/annual/1999p/ar97.pdf (accessed October, 2003)
Production & Job Openings
Increase in production leads to more jobsMore opportunity for poor to increase incomes as
workers As economies grow, so to does labor needsLabor needs leads to higher wages (supply and
demand)- producer needs more, must pay higher wages Sharp decline of child labor as family income increases Children in developing world can go to school 1993 survey: income of poorest 10% of people in Vietnam
increased 50% Led to increase in school enrollment & decrease in child
labor