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Overview of Comparative Economics

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1 Overview of Comparative Economics
Chapter III The Theory and History of Marxism and Socialism

2 Command Socialism Form of Ownership → Most of the time the state owns the land and produced means of production (capital stock) Role of Planning → Economy is planned centrally and the planners’ preferences dominate allocative decision-making Incentive Structure → Moral Incentives-trying to motivate workers by appealing to some higher collective goal Income Redistribution → The governments control the distribution of income by setting wages and forbidding capital or land income

3 Command Socialism Role of politics and ideology → Are command socialist economies usually linked with authoritarian regimes? Authoritarian political regimes also pursue market capitalism Command socialism can also support democracy

4 Socialism An economic system characterized by state or collective ownership of the means of product, land and capital Not actually exists as a system until the early 12th century Its emergence based on criticism of feudal and capitalist systems that existed prior to its modern appearance Criticism originated from religious sources favoring egalitarian income distributions and collective sharing Became a secular theory of history and society in the writings of Karl Marx

5 Is Socialism still popular?
With the collapse of Soviet Union and end of communism, nowadays many countries that have identified themselves socialist are attempting to move toward market capitalism Why examine the socialist economic system? Many are still socialist in actual practice Frustration with efforts to move toward some form of capitalism have led to a revival of socialist ideology in some of the countries Difficulties experienced in the market capitalist world have stimulated reconsideration of limited elements of socialist model as reformist devices

6 Development of Socialist Ideology: Religious and Philosophical Precursors
It is originated in religious and philosophical criticism of inequalities in existing societies and the formulation of ideal alternatives in which collective sharing and equality reign supreme In ancient Greece → philosopher Plato described an ideal society of in his Republic Christianity provided opportunity for socialism expecting the second coming of Christ → when all would be judged and there would be heaven on earth for the saved (millennium)

7 Development of Socialist Ideology
Thomas More “Utopia” described an island where everyone shared and was equal Enlightenment of 1700 Secularized version of egalitarianism in French philosophy by Jean-Jacques Rousseau led to French Revolution in 1789 The revolution was against feudal aristocracy and inequality

8 Development of Socialist Ideology
In 1796 Francois Gracchus Babeuf is often identified as the founder of modern Communism “Conspiracy of Equals” → abolition of private property and the holding in common land Communism → local units of government in France are called communes The term socialism originated in the early 1830s with the British utopian socialist Robert Owen

9 Development of Socialist Ideology: Utopian Socialism
Utopian socialism is the first movement to label itself socialist Founders: Saint-Simon → father of command central planning Chares Fourier Robert Owen

10 Utopian Socialism: Saint Simon
The father of “fatal conceit” → constructivism The idea that a rational order of society can be planed and constructed from the top down Background in science and engineering Supported social engineering → a rational central plan ordering society for the benefit of those least well off

11 Utopian Socialism: Charles Fourier
Criticized industrialization and urbanization and called for the creation of small communities (1.600 people) in rural areas called phalansteries Everyone should share all things and would do many different kinds of work Brook farm in Massachusetts Amana Farms of Iowa

12 Utopian Socialism: Robert Owen
Coming from a working-class background Became a successful capitalist at an early age in Scotland Owned and managed a successful textile company between Introduced numerous reforms in his company Higher wages Restriction on child labor Education for the workers Attempted to start a utopian community in Indiana but failed Became the leader of the first national labor union in Britain

13 The Marxian Worldview Marxian → refers to the writings and views of Marx himself Marxist → refers to any view or idea strongly influenced by Marx

14 The Marxian Worldview Karl Marx ( ) was born in Trier in the German Rhineland Studied philosophy in Berlin Became a radical journalist Participated the uprising of Rhineland Spent most of his life in exile in London Supported financially by his collaborator, Friedrich Engels, who owned a textile mill Together Marx and Engels developed Marxian worldview in writings which influenced socialist thought

15 The Marxian Worldview Marx’s worldview constitutes a holistic system by seeking to explain virtually everything in a unified whole His holistic theory is his integration of three major strands of 19th century European thought: German political philosophy French political sociology British political economy

16 The Marxian Worldview: The Hegelian Dialectic
German Political Philosophy Hegel developed the idea of dialectic All phenomena reflect a conflict between pairs of unified opposites whose joint opposition evolves over time to critical breakpoints where reality qualitatively changes These opposites are labeled as thesis and antithesis At the critical breakpoint their opposition generates something brand new, the synthesis

17 The Marxian Worldview: The Hegelian Dialectic
The ultimate Hegelian thesis is the Universal Idea → God The antithesis is the individual person The synthesis is the state The idea of emergent powerful and nationalist German state These ideas influenced the movement for German unification that accelerated toward its culmination under Bismarck in 1871 and influenced the ultranationalist Nazi movement in the 20th century

18 The Marxian Worldview: Historical Materialism
Marx “materialized” Hegel’s dialectic by using the idea of French Revolution The key to historical materialism → the idea that the driving force of history is the dialectic between conflicting socioeconomic classes The class conflict of the emerging industrial society between the bourgeoisie (capitalists) and the proletariat (worker) The Communist Manifesto starts as “The history of all existing societies has been the history of class struggles”

19 The Marxian Worldview: Historical Materialism
The struggle concerns ownership controls of means of production One class owns and controls the means of production and exploits the other class, which does not own and control the means of production The technology of society → forces of production Combines with the structure of classes → relations of production To determine the mode of production → the substructure or base of the society that determines everything else, the superstructure, that is religion, politics, culture and so forth

20 The Marxian Worldview: Historical Materialism
The mode of production of ancient Greece and Rome was slavery, characterized by the struggle between master and slave The fall of the Roman Empire was a result of this contradiction → resulting in the mode production transforming from slavery to feudalism In turn, feudalism was driven by the struggle between lord and serf and was transformed into capitalism In capitalism, the struggle is between the capitalist who owns the means of production and the workers who does not

21 The Marxian Worldview: Historical Materialism
As this struggle reaches its peak in the most advanced capitalist countries such as England and Germany, there would be a revolutionary transformation into socialism with state ownership of the means of production direction of a production by a common plan, income inequalities and wage payments control by a dictatorship of the proletariat

22 The Marxian Worldview: Historical Materialism
Marx claims Once socialism is accomplished, communism would eventually develop All classes and property ownership would disappear The state would wither away

23 Ricardo’s labor theory of value
The Marxian Worldview: The Labor Theory of Value and the Breakdown of Capitalism Ricardo’s labor theory of value The value of a commodity is determined by the amount of socially necessary labor time it takes to produce it Contradicts the neoclassical economic theory that value is determined by supply and demand, with capital contributing to the supply side

24 Core of Marxian doctrine
The Marxian Worldview: The Labor Theory of Value and the Breakdown of Capitalism Land and capital as productive but not as contributing to value Capital goods as being the product of past labor, indirect labor Core of Marxian doctrine The true reality of capital was not the capital good itself but the social relation of exploitation between the capitalist and the worker

25 The value of commodity (W) = c+v+s
The Marxian Worldview: The Labor Theory of Value and the Breakdown of Capitalism The value of commodity (W) = c+v+s Constant capital (c) fixed capital stock as measured in the labor time required to produce it Variable capital (v) the value of labor power used in production that is the amount of socially necessary labor time it takes to reproduce labor, equal to subsistence wage Surplus value (s) value created by the worker but taken by the capitalist, leading to exploitation “Marx’s modification of the labor theory” Marx concentrated on the “surplus value”- profit

26 The Marxian Worldview: The Labor Theory of Value and the Breakdown of Capitalism
Capitalist → capital investment → raising the organic composition of capital c rises while s and v are constant → the rate of profit declines The fundamental tendency of capitalism Increase the rate of exploitation → by lowering wages or by working longer The class struggle and the commercial crisis Concentration of capital in fewer hands and proletariat becomes more miserable Eventually the contradiction between the forces of production and the relations of production becomes so intense that the system is overthrown by the revolutionary working class

27 Controversies in Socialism: Revisionism
Difficulties arose for the Marxists of the German Socialist Democratic Party in 1895 Capitalism did not collapse Real wages rose The expectation of arrival of revolution undermined Eduard Bernstein first pointed this out

28 Controversies in Socialism: Revisionism- Modern European Social Democracy
Eduard Bernstein argued that since the conditions were improving, a reformist and gradualist approach through parliamentary democracy should be used to achieve gains for the working class This eventually became the policy of the German Social Democratic Party, which still exists

29 Controversies in Socialism: Theory of Imperialism
Capitalism had succeeded in transforming itself into imperialism, expanding overseas into colonies to exploit their raw materials, cheap labor and new markets The domestic market could not absorb what the capitalists produced, so they found overseas markets With the enormous profits capitalist made from their colonies, they started paying off their working class → this changed this class into reformists rather than revolutionaries

30 Controversies in Socialism: Marxism-Leninism
Vladimir Illich Ulyanov known as Lenin developed the Imperialism thesis Lenin noted that imperialism was expanding unevenly The revolution would come in capitalism’s weakest link, Russia Industrialized too late to participate in the conquest of Africa Dominated by foreign investment from the leading capitalist powers like Great Britain, France and Germany

31 Controversies in Socialism: Marxism-Leninism
Refocusing revolutionary expectations on less developed countries became Marxism-Leninism, the official Soviet doctrine after 1917 It also became the guiding light of Marxist revolution in the 20th century in less developed countries from China to Cuba and to Vietnam

32 Controversies in Socialism: Anarchism and Syndicalism
They both support the abolishment of the state Anarchism Founded by British William Godwin in 1793 Without government people will peacefully organize themselves into harmonious and non-oppressive order

33 Controversies in Socialism: Anarchism and Syndicalism
French Pierre - Joseph Proudhon in 1840 linked anarchism with communism and the revolutionary working class movement Syndicalism In 1890s, proanarchist trade unions in Spain, Italy, Switzerland and France After the abolition of the state, society should be run by the trade unions themselves Production being directly controlled by the workers at the production site

34 Some Divisions of Socialism since 1917
Trotskyism Titoism Maoism

35 Some Divisions of Socialism since 1917: Trotskyism
Leon Trotsky, founder of the Red Army in the Soviet Union, was Stalin’s chief rival for power after Lenin’s death in 1924 He was exiled in 1927 and founded the Fourth International, which fragmented into factions after his assassination in Mexico in 1940

36 Some Divisions of Socialism since 1917: Trotskyism
Trotsky and Stalin agreed about the need for rapid industrialization, but they disagreed whether this should be done in isolation or in an international context Trotsky supported the idea of an international permanent revolution, believing that true socialism could not be achieved in the Soviet Union without an international revolution

37 Some Divisions of Socialism since 1917: Titoism
Marshall Tito led Communist partisans in throwing the Nazis out of Yugoslavia during the Second World War, with little assistance from Soviet Red Army A strong Stalinist Tito broke with Stalin in 1948 and declared political independence of Yugoslavia from Soviet influence

38 Some Divisions of Socialism since 1917: Titoism
Tito developed a distinctive economic system for Yugoslavia → worker-managed market socialism State-owned enterprises in a one-party state operating with little central planning and with managements appointed by worker selected boards After Tito’s death in 1981, the economic system in Yugoslavia deteriorated and eventually collapsed

39 Some Divisions of Socialism since 1917: Maoism
In 1949 a Communist insurgency led by Mao Zedong took power in mainland China Rural guerilla movement that encouraged egalitarian economic development in zones of revolutionary control Imitated the centrally planned command industrialization model of Stalin More emphasis upon rural agricultural development, egalitarianism, the use of moral incentives

40 Some Divisions of Socialism since 1917: Maoism
In the Great Proletarian Cultural Revolution ( ), Mao emphasized industrial decentralization complete communalization of agriculture total egalitarianism moral incentives After Mao’s death in 1976, a decline of support in his ideas

41 The Theory of Economic Socialism
The Socialist Planning Controversy The Theory of Command Socialist Central Planning The Participatory or Cooperative Alternative

42 Theory of Economic Socialism: Socialist Planning Controversy
1908 Enrico Barone’s system with no money Pareto’s efficiency analysis and the Walrasian general equilibrium model The state determining equivalences (relative prices) between goods and distributing them through stores in exchange for goods brought by people An efficient competitive equilibrium in that the cost of production would be minimized and the price would equal to the cost of production

43 Theory of Economic Socialism: Socialist Planning Controversy
1920 Ludwig von Mises’ proposal Money is necessary to calculate prices The artificial market of socialist central planner can not generate rational prices because of insufficient incentives Fundamental driving force in Austrian School → the profit motive based on the private ownership of capital

44 Theory of Economic Socialism: Socialist Planning Controversy
In 1936 Oskar Lange defended market socialism Central planning board that sets producer good prices and the level of overall investment and distributes the social dividend Consumer good prices are set by free-market forces, with supply coming from state-owned firms that set the price equal to marginal cost (as in perfectly competitive markets) Market failures (due to monopoly power, externalities, income inequality and macroeconomic fluctuations) resolved leading to equitable and macro-economically stable outcome

45 Theory of Economic Socialism: Socialist Planning Controversy
Friedrich Hayek, von Misses’s follower, counterattacked in 1940 Lange failed to answer von Mises’s argument regarding motivation Without private ownership and the profit motive, firm managers will lack the incentive to search out minimum cost or fulfill consumer demand Also difficulty in gathering information to carry out calculations The decentralized capitalist market is the best information transmission system

46 Theory of Economic Socialism: Socialist Planning Controversy
Socialist Market Economy of China Rapidly expanding town and village enterprises Operate in free markets with hard budget constraints but are owned by local units of government

47 Theory of Economic Socialism: Theory of Command Socialist Central Planning
Central planning first appeared in Soviet Russia with the 1920 electrification plan Indicative planning instituted for heavy industrial sectors under state ownership such as electricity, steel and cement Long-term planning was on a five-year time horizon

48 Theory of Economic Socialism: Theory of Command Socialist Central Planning
Five year plans were broken down into one-year plans from which monthly quotas for individual firms were derived Each firm had a technical-production-financial plan that specified output quantities and prices input quantities and prices including wages levels and kinds of capital investment One year’s overall general plan generally involved minor modifications of the previous year’s plan based in the outcome of that plan

49 Theory of Economic Socialism: Theory of Command Socialist Central Planning
For the first five-year plan, the material balances were based on the inherited structure of production Figure out how much of which final goods were to be produced the amounts of all the inputs required to produce those outputs the inputs to produce those inputs If a commodity was in “deficit” then either one of the three previous mechanisms would be drawn on or greater efficiency in its production would be induced or demand for it had been cut back

50 Theory of Economic Socialism: Theory of Command Socialist Central Planning
In the 1930s mathematical approaches to implementing planning began Input-output analysis Designed by Leontief Depicts the production structure of an economy using a rectangular input-output matrix, whose rows represents inputs and whose columns represent outputs

51 Theory of Economic Socialism: Participatory or Cooperative Alternative
Also known as the labor-managed economy-Yugoslavia is the example Market Socialist System → state owns the means of production Characterized by workers’ ownership or workers’ management Combination of capitalism and socialism, constituting a Third Way

52 Theory of Economic Socialism: Participatory or Cooperative Alternative
Workers will manage the firms There will be income sharing Productive resources are not owned by the workers → workers enjoy usufruct rights to the fruits of the operation Market economy → Any kind of planning is indicative planning rather than of the command sort Workers can freely choose where to work

53 Theory of Economic Socialism: Participatory or Cooperative Alternative
Advantages While market efficiency exist, it eliminates class struggle and worker alienation It may eliminate struggle between labor and management It increases workers’ motivation and productivity It increases fair distribution of income

54 Theory of Economic Socialism: Participatory or Cooperative Alternative
Criticisms Tendency for less labor to be hired in order to maximize net income Worker-managed firms may tend toward monopolization → may disregard externalities such as pollution May underinvest in capital in the long run since workers will drain firms of extra income in the short run

55 Transition from Socialism to Capitalism
Most Marxist-inspired socialist states have moved away from it since 1989 toward some form of capitalism Some of them slowed down Some of them such as Uzbekistan reversed

56 Transition from Socialism to Capitalism
In 1989 when the Berlin Wall fell, many Eastern and Central European countries that pursued command socialist economies (with some market socialism) achieved political independence from Soviet Union Transition from one-party systems to multi-party systems took place

57 Transition from Socialism to Capitalism
Transition from command socialism to market capitalism requires replacement of command economy with market mechanisms in decision-making privatization of state-owned enterprises to move from socialism to capitalism liberalization of the political system

58 Transition from Socialism to Capitalism
In adopting markets rather than command Freeing prices from central control was the easiest thing Macroeconomic stabilization was more difficult to achieve as sudden freeing of prices led to inflationary outburst Total output declined sharply with unemployment rising Establishment of the institutional framework that allows for the open and stable functioning of markets is difficult Developing banking, financial and accounting systems A proper competition policy Laws of corporate governance and bankruptcy Opening to trade and investment Foreign currency convertibility

59 Transition from Socialism to Capitalism
Problems of privatization Restructuring of enterprise management is more important than privatization Countries that privatized quickly ran into serious problems (Russia and Czech Republic) compared to those that privatized more gradually (Poland and Slovenia) Privatized firms in transition countries exhibit greater productivity that state-owned ones The emergence of social problems as countries fell into deep recessions with high inflation and institutional instability


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