ECONOMIC SYSTEMSWho or what decides what you get?

WHO GETS WHAT? HOW DO SOCIETIES DECIDE?

Because resources are scarce, society must make choices about what to have and what to give up.

WHAT GOODS AND SERVICES ARE TO BE PRODUCED?

What is most needed? Should the US conserve wildlife areas for

recreation or open them up for logging and oil exploration?

Should the US steel industry produce car parts or beams for skyscrapers?

What do consumers want more? Sneakers or diapers? Teachers or dentists?

HOW ARE GOODS AND SERVICES TO BE PRODUCED?

Wheat production How should land, labor, and capital be used to

raise this grain? Factory farms? Small farms?

Hats Handcrafted or by machine?

In the US, we have the choice to produce goods and services how we would like to because society gives us the choice. This is not the case everywhere…

FOR WHOM ARE GOODS AND SERVICES TO BE PRODUCED?

Who gets what? Brings up the question of fairness– who deserves

what? You can pay for it Equal distribution

USSR- goods were in such short supply, one had to get in line early and wait.

First come, first served USSR Goods are limited Goods like concert and theatre tickets are sold this

way Distribution according to need

Soup kitchen Special education in public schools

A SOCIETY’S ANSWERS DEPEND ON ITS ECONOMIC GOALS

Six Economic Goals: Economic freedom

The ability to make our own economic decisions without interference by the government.

Gives individuals and businesses the right to make decisions on how to use resources without government intervention.

Economic efficiency Makes the most of society’s resources Allocates resources in a way that the greatest number

of consumers get what they want with the least amount of waste.

Strives for full employment

A SOCIETY’S ANSWERS DEPEND ON ITS ECONOMIC GOALS

Six Economic Goals Economic equity

Fair and equal distribution of society’s wealth. Is it fair that corporate executives make millions while

retail workers earn minimum wage? Is it fair that women earn less than men? Difficult to achieve

Economic growth Economy grows when it produces more and better

goods and services. Improves the standard of living Key element is scientific and technological innovation.

A SOCIETY’S ANSWERS DEPEND ON ITS ECONOMIC GOALS

Six Economic Goals Economic security

Seeks to provide less fortunate members of society with the support they need in terms of food, shelter, and healthcare.

Universal healthcare? Economic stability

The goods and services we count on are there where we want them. Electricity Food and clothing in stores Jobs are there when we go to work Prices are predictable

Societies must weigh the tradeoffs and opportunity costs of pursuing any particular set of economic goals.

WHO DECIDES WHAT IN DIFFERENT ECONOMIC SYSTEMS?

Every society develops and economic system The way a society coordinates the production

and consumption of goods and services. Three basic economic systems

Traditional economies Command economies Market economies

TRADITIONAL ECONOMIES: DECISION MAKING BY CUSTOM

Custom and tradition dictate what to produce, how to produce it, and for whom

Developed by the first clans of hunter-gatherers, today survive among indigenous peoples

The highest goals of people in a traditional economy are economic stability and security. Want to follow the traditional ways of life, in

harmony with nature. Becoming increasingly difficult

TRADITIONAL ECONOMIES: THE MAASAI AND KHOI-SAN

Maasai of East Africa, who are seminomadic herding people and the Khoi-San people of the Kalahari Desert in Southern Africa What to produce?

Livestock (cattle) mainstay of economy• Diet- meat, blood, and milk from cattle

How to produce? Who does what is determined by social customs

• Maasai men build enclosures to protect cattle from lions• Boys graze the cattle• Women and girls milk the cattle• Khoi-San men hunt, women gather

For whom to produce? Social hierarchies Distribution of resources

• Khoi-San people divide up meat from hunting, with the largest share going to the hunter. The meat is then used to feed other relatives in his family so all have enough to eat.

COMMAND ECONOMIES: DECISION MAKING BY POWERFUL RULERS

The second economic system developed by humans

Decisions are made about what, how, and for whom to produce are made by a powerful ruler or other authority.

Earliest command economies originated in Mesopotamia, Egypt, China, and India 5,000 years ago. As the civilizations became more advanced,

powerful rulers imposed economic choices on society, even while more traditional style economies functioned at lower levels of society.

COMMAND ECONOMIES

Emperors, kings, and pharaohs commanded the populace to devote economic resources to building projects or military adventures. The pyramids Defensive walls Irrigation canals Temples Roads

Takes huge amounts of human labor to produce

Primary goal of these command economies was to accumulate wealth and goods for the ruling class while preserving economic security.

MARKET ECONOMIES: DECISION MAKING BY INDIVIDUALS

The newest economic system Depends on the decisions of individual

producers and consumers rather than tradition or command.

Free market economy Workings of the market are not planned or directed Economic decisions are made voluntarily by millions

of individuals guided by self interest. Highest goals or a market economy are economic

freedom and efficiency Guided by consumer spending decisions

Producers must compete for your dollars, leaving the consumer with many choices

Forces producers to use resources efficiently to keep prices down

MARKET ECONOMIES: THE FREE MARKET

In a free market, individuals are encouraged to pursue the jobs that allow them to make the most of their human capital. Start own business Find another job if not getting paid enough

Markets are highly efficient at producing a great variety of goods and services that people find attractive and at prices they are willing to pay. “The Invisible Hand”

“Every individual… neither intends to promote the public interest, nor knows how much he is promoting it… He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention… By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”– Adam Smith, The Wealth of Nations, 1776

THE FLOW OF MONEY AND GOODS IN A MARKET ECONOMY

The reason markets work so well is because one person’s output always becomes another person’s input. This flow keeps the economy running.

CIRCULAR FLOW MODEL Household

A person or a group of people living together.

Owns the factors of production Firm

Uses the factors of production to make and sell goods or services.

Product Market Where goods and services are sold by

firms and purchased by households. Malls and supermarkets

Factor Market Where households sell their land, labor,

and capital to firms. Household may rent to a firm, loan

money, or buy a firm’s stock.

Factor Payments The funds paid to households (rent,

wages, interest, or dividends) “It is not from the benevolence of the

butcher, the brewer, or the baker that we expect our dinner, but from regard to their own interest.” –Adam Smith

CAPITALISM GIVES RISE TO SOCIALISM AND COMMUNISM Beginning in the 1700s and continuing into the 19th

century, market economies across Europe began to grow rapidly due to the Industrial Revolution. New inventions and manufacturing processes spurred

the growth of industry. Capitalists

Grew wealthy accumulating capital (machinery, factories, railroads, etc.) Andrew Carnegie, JP Morgan, etc.

Capitalism The free market system Improved the standard of living for some as more and better

goods became widely available. But, workers worked in poor conditions, had low wages, and

critics of capitalism blamed the capitalists for exploiting the workers and keeping them in poverty.

MARX AND ENGELS- THE COMMUNIST MANIFESTO In 1848, Karl Marx and philosopher

Friedrich Engels published The Communist Manifesto, in which they advocated the overthrow of capitalism.

Marx and Engels alternative to capitalism was called socialism. A political and economic

philosophy that calls for property to be owned by society as a whole, rather than by individuals, for the equal benefit of all.

To bring about their vision, Marx and Engels called on workers everywhere to revolt against their governments. Once the workers gained power,

private property and the free market would be replaced with national ownership of industry and more equal distribution of income.

THE FINAL PHASE OF SOCIALISM: COMMUNISM

Communism A political and economic system in which all

property and wealth are owned by all members of society.

Class differences are to disappear, and once this happens, the government is no longer needed to keep order.

Rather than self-interest, people are guided by Marx’s famous slogan: “From each according to his ability, to each according to his needs.”

MODERN COMMAND ECONOMIES: DECISION MAKING BY THE STATE The ideas of Marx and

Engels spurred several political movements aimed at creating a workers’ paradise. The first successful

communist revolution took place in Russia in 1917. Rather than creating a

utopian society, an authoritarian government was formed, pursuing its goals with brutal force.

The USSR was the first modern command economy.

MODERN COMMAND ECONOMY: USSR

USSR Private ownership of property was forbidden. The state owned the factors of production Economic planners

Government committees of economists, production experts, and political officials.

Attempted to perform the functions of a market Decided what goods and services to produce Decided what farms and factories should get which

resources to produce what was planned. Committees controlled prices and wages and decided

how goods and services should be distributed. Meant to ensure economic equity and security, but the

planning committees could not keep track of the millions of prices and products in the Soviet system.

MODERN COMMAND ECONOMY: USSR Shortages were common in this planned economy.

Waited in line for products, but once a consumer finally got to the head of the line, choice was limited or nonexistent.

Planners ignored the “incentives-matter” principle Wages were determined by the government, not by a

worker’s output or ability. A poor worker could not be fired for slacking, or a good worker

would not be rewarded for working hard, giving workers little to no incentive to produce high quality goods or innovate to increase productivity.

Production was slow and products were shoddy.

The USSR did succeed in creating more economic equity and security, but people couldn’t buy anything with what they earned.

The economy eventually collapsed because of the inefficiency and wastefulness of the central planning system.

HOW DO MIXED ECONOMIES DIVIDE DECISION MAKING?

Traditional, Market, and Command economies are extremes.

Mixed economy Both governments and individuals play important

roles in regard to production and consumption. Role of the government

Establish institutions that enable markets to operate. Legal system, stable currency system

Step in when the market operates in a way society finds unacceptable, which varies by country. Child labor, FDA

Public works Government financed projects- dams, highways, sewers

THE FLOW OF GOODS AND MONEY IN A MIXED ECONOMY Three participants:

households, firms, and the government

Government Purchases land, labor and

capital from households in the factor market.

Employees people Purchases goods and

services from firms Federal government is the

nation’s largest employer and consumer.

Collects taxes from both households and firms

Transfer payments Social security, welfare,

unemployment

WHAT ARE THE KEY CHARACTERISTICS OF THE US ECONOMIC SYSTEM?

Free enterprise system Individuals own the factors of production and

make decisions about how to use those factors within the framework of the law.

Seven key characteristics: Economic freedom- ability for individuals to act in their

own best interests in the free market. Laissez-faire- a market economy free from

government intervention Competition- the hallmark of the free enterprise

system. Creates incentives for businesses to create new and

better products and ways of serving customers, while also encouraging producers to use resources efficiently.

Equal opportunity (not always)

KEY CHARACTERISTICS OF THE US ECONOMIC SYSTEM

7 Characteristics (continued) Binding contracts- agreements between buyers and

sellers that are upheld by the legal system. Property rights- the right to own property

Intellectual property Patents Copyright

Profit motive- the desire to make a profit Limited Government

Protects property rights and contracts Promotes the general welfare Preserves competition Protects consumers, workers and the environment Stabilizes the economy