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Economic Theories Unit 1: Introduction to government

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Journal #3 Name: Date: Copy question: Where do you draw the line between what government should do for us and what we should do for ourselves?

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Monty Python What did the Romans do for us?

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Economics The study of how limited resources are used to satisfy peoples wants. Resources: land, water, knowledge, labor Societies must decide how resources will be used. Political system determines how this is done.

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All economic systems must answer these questions: #1: What to produce? #2: How to produce? #3: Who gets what is produced? VARIOUS ways to accomplish this

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4 types of economies: #1: Market #2: Command #3: Mixed #4: Informal

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Market economy: CAPITALISM FREE ENTERPRISE: NO government intervention; private ownership Buyers & sellers act in their individual interests (buy cheap/make profit) Supply & demand; more demand, ie. MORE demand, MORE incentive to produce (producers must supply the goods that consumers want) Prices determined by market; keep price down to attract consumers Competition keeps prices stabilized

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Example: Rubber band bracelets! Start to catch onkids want them! Producers start making them to meet demand Competition stabilizes cost; Equilibrium (demand matches production) Demand decreases, producers decrease supply (the CRAZE is over!!)

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Origins of capitalism Capital = money invested to make more money Buyers & sellers compete to make money 1200s in Europe; Explorers & traders opening routes to Asia (spices, silk, gold) As trade increased, more money made, more money available to invest

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Origins of capitalism 1700s Europe: Nation-states Wealthy middle class Familiar with banks, markets Value progress, invention, free market NO LIMITS BY Government

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Origins of capitalism 1776: Adam Smith, The Wealth of Nations Provided philosophy for free trade; did not like govt. regulating trade (taxing imports) LAISSEZ-FAIRE (to let alone) Market acts as invisible hand (action of people determines what is bought/sold)

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ADVANTAGES OF CAPITALISM? Private ownership of industry Private ownership of property Possibility of large profit (if you are successful, you can be VERY successful!) Entrepreneur ability Consumers have a say in what is produced with their buying power

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Disadvantages of capitalism? Theres NO social safety net Youre responsible for yourself Theres a BIG GAP between the rich & the poor. if youre unsuccessful, you can be very unsuccessful.

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True Capitalism? Theoretical: American system is one of most capitalistic (others include Canada, United Kingdom, Australia) Government regulates (increasing over time) Meat Inspection (1906) Pure Food & Drug Act (1906) Great Depression (1930s WWII): Social Security Act

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America: Mixed Economy Mix of capitalism & socialism U.S. basically identifies with capitalism Believe that to make economic choices is part of individual freedom & Value individual initiative

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MIXED ECONOMY: MIXES CAPITALISM & SOCIALISM Government regulates private enterprise & has social safety net (Example: regulates purity of food & drugs & Social Security) Combines private & public enterprise: PRIVATE: individuals can own business & property Example: Walmart (Walton Family; $33 billion profit 2014, $91 million/day) PUBLIC: govt. owns & manages Examples: Corporation for Public Broadcasting & U.S. Postal Service

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U.S. as mixed economy GOVERNMENT: regulates business through licensing, banking, prevents monopolies, taxes provides for public needs: water, sewage, rail, postal service, schools, roads, welfare systems BUSINESS: Decide on products, costs, etc. Lots of people start their own businesses initiative to make profits

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Command economy: Socialism a planned economy Government: owns basic means of production (natural resources, railways) determines use of resources distributes products & wages provides social services (education, health care, welfare) STILL SOME PRIVATE ENTERPRISE & OWNERSHIP

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Origins of socialism 1800s: Industrial Revolution brought MORE production but MORE suffering Social reform: NO one should have to suffer with so much opportunity

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FOR: Government should control the economy: distribute goods equally; lots of public goods & services, narrows gap between the rich & poor AGAINST: stifles individual initiative, high taxes stop growth, big government

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Democratic socialism Committed to ideals of democracy (free speech, free elections) Want better distribution of economic goods (govt. ownership of key large industries, make economic decisions for everyone), expansive social programs Examples: Denmark, Norway, Sweden; all prosperous economies

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Communism Karl Marx (EQUALITY) Believed that the capitalist system would collapse 1848 The Communist Manifestohistory is the story of class struggle Proletariat: Industrial working class Bourgeoisie: Owners (factories, land, water rights, etc.) Workers did not receive full value of labor; owners pay low earn big profits

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Karl Marx: The Communist Manifesto Scientific fact: struggle was inevitable Goals: WORKERS UNITE, overthrow bourgeoisie Form classless society EVERYONE owns means of production NO NEED for government

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Communism: Command economy Government regulates ALL aspects of the economy Decisions made at upper levels of government; decisions handed down to managers State owns ALL means of production on BEHALF of people Communism is an EXTREME FORM of socialism (NO private ownership)

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ECONOMIC CONTINUUM _______________________________________________________________ COMMUNISM SOCIALISM CAPITALISM TOTAL GOVT REGULATION REGULATION BASIC NO REGULATION MEANS of PRODUCTION NO PRIVATE OWNERSHIPSOME PRIVATE OWNERSHIP ALL PRIVATE CITIZENS NEEDS PROVIDED EXPANSIVE WELFARE NO SOCIAL PROGRAMS PROGRAMS

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Communism: Advantages? Highly efficient (distribute resources to public) Highly effective & stable (everyone has job, production) Government ensures basic needs are met (house, education, welfare, job); No inequality

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Communism: Disadvantages Little freedom of choice (DO WHAT YOU ARE TOLD) No reward for being a hard worker, no punishment if you are a slacker (NO INCENTIVE) Has a Communist government EVER existed based on Marxist ideals? NO Government does NOT disappear; Becomes ALL powerful (turns to coercion against people)

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Communist nations Not really true to Marx idealno government China, Cuba, Laos, North Vietnam, North Korea (rejected Marxism, but still viewed by international community as communist) Peoples Republic of China (established 1949), tight state control of economy until Mao Zedongs death in 1976 (founder of party) Today? Mixed economy Capitalism mixed into socialist system (workers can keep some of the $ earned) Political freedoms still limited

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No pure capitalist, socialist, or communist nations More complex and interconnected world (economics, communication, politics) Question still debatedWhere do we draw the line between what government should do for us and what we should do for ourselves?

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Occupy movement We are the 99% Response to financial crisis; worldwide movement FOCUS: how large corporation & the global financial system control the world in a way that disproportionately benefits a minority, undermines democracy, and is unstable. 1 st major protest Sept. 2011 (Occupy Wall Street), spread to 951 cities, 82 countries, 600 U.S. communities Any impact?

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Informal Economy A part of almost every type of economy Not monitored by any form or level of government (NOT taxed) Not included in Gross National Product (GNP); measure of what citizens produced in their own country Examples: black market, yard sales, babysitting, music teachers

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CRQ