Presentation is loading. Please wait.

Presentation is loading. Please wait.

1 Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani Week Seven Lecture Slides Source: Chapter 3 (pp 54-88) & Jackie Marietta.

Similar presentations


Presentation on theme: "1 Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani Week Seven Lecture Slides Source: Chapter 3 (pp 54-88) & Jackie Marietta."— Presentation transcript:

1 1 Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani Week Seven Lecture Slides Source: Chapter 3 (pp 54-88) & Jackie Marietta College, Spring 2011

2 What is coming up? Team 1 paper is on Japan, Sweden and France and is due on Monday, February 28 Team 1 paper is on Japan, Sweden and France and is due on Monday, February 28 –Presentation: Monday, March 14 Team 2 paper is on Germany, Russia & another country of their choice and is due on Monday, March 14 Team 2 paper is on Germany, Russia & another country of their choice and is due on Monday, March 14 –Presentation: Monday, March 21 Exam 2: Wednesday, March 16 Exam 2: Wednesday, March 16 2

3 On Monday, February 21 Expect an ICA on last Wednesday’s class material + first 15 lecture slides from this week Expect an ICA on last Wednesday’s class material + first 15 lecture slides from this week 3

4 Theoretical Foundations Saint Simon (French--1800s) Saint Simon (French--1800s) –Father of Constructivism Social engineering Social engineering –Advocate a social hierarchy in which each man shall be placed according to his capacity and rewarded according to his works. –Government has a spiritual or scientific role. 4

5 Theoretical Foundations Marx and Engels (1800s) Marx and Engels (1800s) –Criticized Utopian socialist –Called for a more scientific and fundamental change in societies 5 Marx Engels

6 Karl Marx Born in Germany Born in Germany Studies philosophy in Berlin Studies philosophy in Berlin Radical journalist Radical journalist Spent time in exile in London Spent time in exile in London Collaborated with Friedrich Engels to develop the MARXIAN WORLD VIEW Collaborated with Friedrich Engels to develop the MARXIAN WORLD VIEW 6

7 What influenced Marxian Theory? 1. German political philosophy ◦ rational is real (as opposed to real is rational)  If the reality is not rational, it should be changed. 2. French political sociology ◦ French revolution was a conflict between socioeconomic classes ◦ Conflict between bourgeoisie (capitalists) and proletariat (workers) ◦ Social classes and property ownership would disappear automatically and naturally  communism 7

8 What influenced the Marxian theory? 3. British political economy David Ricardo’s labor theory of value David Ricardo’s labor theory of value ◦ Classical economics  Value of a good = Price and it is determined by supply and demand forces ◦ Ricardo (British, )  Value of a good is determined by the amount of socially necessary labor time it takes to produce it. 8

9 Marxian Theory Land and capital are productive but do not contribute to the value of a good Land and capital are productive but do not contribute to the value of a good ◦ Return to land is zero ◦ Capital is the product of past labor W= c + v + s W= c + v + s ◦ W = value of a good ◦ c= value of fixed capital (measured by labor time to produce it) ◦ v= value of variable capital (labor) ◦ s= surplus value (created by workers but taken by capitalist (profit)  exploitation) 9

10 Marxian Theory Organic compositing of capital, q Organic compositing of capital, q –q=c/(c+v) ◦ q=dead capital/ (living + dead capital) –Firms compete to increase q (key assumption) How can q go up? How can q go up? –Invest in creating more capital, c –Hold v (value of labor) constant or decrease it Rate of exploitation, s’ Rate of exploitation, s’ –s’=s/v –How can it go up? If v is constant and s (profit) goes up, exploitation goes up If v is constant and s (profit) goes up, exploitation goes up Or, if s is constant and v goes down, exploitation goes up Or, if s is constant and v goes down, exploitation goes up 10

11 Marxian Theory Rate of profit, p’ Rate of profit, p’ ◦ p’= s/(c+v) ◦ p’=profit as a percentage of cost ◦ If c rises and s and v are constant, p’ declines ◦ Since competition among capitalist result in increased c then  Either capitalism is destroyed  Or need to drop v for p’ to stay the same or go up  Labor is worse off  class conflict rises and system collapses 11

12 But what Marx predicted did not happen in Germany Capitalism did not collapse Capitalism did not collapse Real wages were rising Real wages were rising So, Marxists came up with Revisionism So, Marxists came up with Revisionism –No drastic changes –Just gradual reform (via parliamentary democracy) to improve the welfare of workers. 12

13 Another reason why capitalism did not collapse? Imperialism View Imperialism View –Advanced capitalist countries avoided class conflict by engaging in conquest of less developed nations (especially African nations) engaging in conquest of less developed nations (especially African nations) –Got inexpensive raw material 13 Lenin

14 Deficiencies in Marxian analysis (Can you thing of more?) 1. Applied mostly to the manufacturing rather than the service industry ◦ Service industry is more labor intensive than manufacturing industry 2. Value of a good was determined based on supply side (cost) factors only. 3. Because profits depend on productivity of labor and productivity of labor depends on how happy he/she is, firms (owners of capital) would not have an incentive to maximize the exploitation of labor. 14

15 Marxism-Leninsim ( ) Doctrine The idea is that The idea is that –workers in developed nations with colonies will not be exploited (due to ability of firms to make high profits because of their access to low cost of raw material in colonies) –But workers in less developed nations (China, Cuba..) with no colonies will be exploited by capital owners (firms). Need dictatorship in those nations Need dictatorship in those nations 15

16 More radical views Anarchism & Syndicalism Anarchism & Syndicalism ◦ State should be abolished (Anarchism = more violent ideas) ◦ No government  Consistent with Utopian socialism and modern libertarianism ◦ Any connections to communism?  Proudhon (French , the first individual to call himself an "anarchist“)  Says yes to this question 16

17 Any connections between Anarchism and Marxism? Marx says no. Marx says no. 17

18 More on Syndicalism Trade unions (workers) should run the society Trade unions (workers) should run the society Influenced Russian Bolshevik (Meaning "majority" in Russian) Party in Russia in 1917(revolution)) Influenced Russian Bolshevik (Meaning "majority" in Russian) Party in Russia in 1917(revolution)) ◦ Lenin (the main leader of the party)  Crushed the syndicalist uprising  In favor of state power 18

19 Other Views Trotskyism Trotskyism –Leon Trotsky (Russian, ) A member of the Mensheviks Party (minority party split from the Bolsheviks in 1903). A member of the Mensheviks Party (minority party split from the Bolsheviks in 1903). True socialism must be achieved internationally (Can’t do it in isolation) True socialism must be achieved internationally (Can’t do it in isolation) 19

20 Other Views Titoism Titoism –Marshall Titio ( ) Leader of Yugoslavia Leader of Yugoslavia Developed Worker-Management Market Socialism Developed Worker-Management Market Socialism –Quasi – Syndicalist –One party –Little central planning –Market forces –Management appointed by workers 20

21 Other Views Maoism Maoism –Mao ( ) Chinese Marxist military and political leader, who led the Chinese Communist Party Chinese Marxist military and political leader, who led the Chinese Communist Party Emphasis on rural agricultural development Emphasis on rural agricultural development Moral incentives Moral incentives But to succeed we need to destroy first But to succeed we need to destroy first –Cultural Revolution we have to destroy an old system of production, an old ideology and old customs first. we have to destroy an old system of production, an old ideology and old customs first. 21

22 22 The Theory of Economic Socialism (Page 66)  1908  Enrico Barone ( Italian Economist) ▪ Proposed a no -money (barter) economy ▪ In which the state determines exchange rate (this for that) ▪ Price = cost  No profit ▪ Assumes that the cost of production, demand functions, capital stock are known by state  and state sets the price to force firms to minimize cost  and achieve competitive equilibrium result in all markets

23 23 The Theory of Economic Socialism –Ludwig von Mises ( , Austrian ) Barone’s plan is not practical Barone’s plan is not practical –Need money –Insufficient incentives Need profit Need profit a major influence on the modern libertarian movement a major influence on the modern libertarian movement

24 24 The Theory of Economic Socialism –Oskar Lange (Polish, ). Need a Central Planning Board (CPB) Need a Central Planning Board (CPB) –Sets raw material, capital, and intermediate good prices (finds the efficient price by trial and error) –Sets the level of investment Distributes social dividends (yield on capital and natural resources) Distributes social dividends (yield on capital and natural resources) Consumer goods Consumer goods –Produced by state firms but sold in a free market P = MC (efficient) P = MC (efficient)

25 25 The Socialist Planning Controversy –Friedrich Hayek ( , Austria) the most influential members of the Austrian School of Economics the most influential members of the Austrian School of Economics Influenced by Mises Influenced by Mises Lange did not address Mises’s criticism regarding motivation in Barone’s model Lange did not address Mises’s criticism regarding motivation in Barone’s model 1.Cost minimization does not happen if there is no private ownership and profit motive 2.The state can not gather all information required for efficiency 3.In the system purposed by Barone technology will not advance

26 26 The Socialist Planning Controversy János Kornai, (1928- Hungary) also criticized the Central Planning System János Kornai, (1928- Hungary) also criticized the Central Planning System –State owned firms may be Subject to hard budget constraint in principle, and Subject to hard budget constraint in principle, and Subject to soft budget constraint in practice Subject to soft budget constraint in practice 1.Can continue operating at loss 2.Can be inefficient 3.No incentive to minimize cost

27 27 The Socialist Planning Controversy Proponents of central planning system respond to Kornai’s criticism Proponents of central planning system respond to Kornai’s criticism 1. Pragmatic market socialism  Market economy +  Bureau of Public Ownership To enforce hard budget constraint To enforce hard budget constraint To distribute profits to workers as a percentage of their wages To distribute profits to workers as a percentage of their wages

28 28 The Socialist Planning Controversy 2. Copy Japanese keiretsu system ▪ Group of tightly linked corporations + bank ▪ Bank will impose hard budget constraint ▪ Bank is state owned ▪ Social dividends are distributed by a democratic political process 3. Copy socialist market economy of China ▪ Town and village enterprises ▪ Owned by local governments ▪ Operate in free market ▪ Have hard budget constraints

29 29 The Socialist Planning Controversy Maurice Dobb ( ) Maurice Dobb ( ) –Foremost Marxian economist of his generation in Britain. –Criticizes Lange’s CPB Investment should not be set Investment should not be set –It should be maximized To increase economic growth To increase economic growth Economic growth is more important than efficiency Economic growth is more important than efficiency This policy was adopted by Stalin in 1928 This policy was adopted by Stalin in 1928

30 30 The Socialist Planning Controversy Recent thoughts on command economy Recent thoughts on command economy A democratic political system should plan the economy A democratic political system should plan the economy 1.Use modern information technology to maximize information and feedback to help plan better 2.Mixed economy (but closer to command). Planning is done by councils of consumers and worker

31 31 Central Planning in Soviet in 1920s Five year plan broken into 5 one year plans Five year plan broken into 5 one year plans –One year plan Monthly production quotas for firms Monthly production quotas for firms By products of this system By products of this system 1.Ratchet Effect If a firm exceeded its quota, future quota will be higher If a firm exceeded its quota, future quota will be higher Had adverse effect on productivity Had adverse effect on productivity 2.Illegal Activity If near end of the month a firm is not meeting its quota, it will buy more inputs from illegal markets to increase production. If near end of the month a firm is not meeting its quota, it will buy more inputs from illegal markets to increase production.

32 32 Input-Output Analysis (Page 70) Developed by Leontief ( ) Developed by Leontief ( ) To plan production To plan production To mathematically solve a general equilibrium model To mathematically solve a general equilibrium model –Links the quantities of inputs to quantities of outputs –output of one firm is input of other firm

33 33 Hypothetical Input Output Table Transactions in a Three Sector Economy Inputs to Agriculture Inputs to Manufacturing Inputs to Transport Final DemandTotal Output Agriculture5 (example: cattle feed) 15 (example: cotton) 2 (example: sugar cane for ethanol fuel) 68 (coffee)90 Manufacturing10 (example: farm machines) 20 (example: tools) 10 (example: trucks) 40 (example: cars) 80 Transportation Labor

34 34 Shortcomings of input-output model 1. Assumes constant return to scale  Always need 20 hours of labor to produce one chair What if What if  technology improves and  labor productivity goes up? 2. Two inputs are not substitutable  20 hours of labor + 2 screw drivers  1 chair  25 hours of labor + 1 screw driver  0 chair

35 35 Participatory or Cooperative Economy Labor–Management Economy Labor–Management Economy –A third way of doing things –Characteristics 1.A board of workers hires managers 2.Income sharing Your income may not only depend on your productivity but other workers’ productivity too. Your income may not only depend on your productivity but other workers’ productivity too. 3.Capital must be rented (not owned by workers) 4.Market or indicative planning (no command) Note: indicative planning Note: indicative planning planning based on forecasts done by various agencies planning based on forecasts done by various agencies to minimize information asymmetry to minimize information asymmetry to establish various targets (output, employment,…etc.) to establish various targets (output, employment,…etc.) 5.Workers choose where to work

36 36 Participating or Cooperative Economy Advantages Advantages 1.No class struggle But…Can labor exploit management? But…Can labor exploit management? 2.More equal distribution of income? But…Can labor exploit management? But…Can labor exploit management? 3.Increases worker motivation and productivity 4.Worker owners will make sure that there is a hard budget constraint

37 37 Participating or Cooperative Economy Disadvantages Disadvantages 1.Tendency to hire fewer labor; why? To maximize per capita income of workers To maximize per capita income of workers May supply less as price goes up May supply less as price goes up P Q S P1 P2 P3 Q1 Backward bending supply curve Q2 Q3

38 38 Disadvantages of Participating or Cooperative Economy Or, there may be an upward sloping supply curve that is very inelastic (quantity supplied is insensitive to changes in price) Or, there may be an upward sloping supply curve that is very inelastic (quantity supplied is insensitive to changes in price) S’ P S Q Which supply is less elastic? S What does it mean? Economic Growth? P1 Q1 P2 Q’2 Q2

39 39 Disadvantages of Participating or Cooperative Economy 2. Tendencies to form monopolies  To maximize labor income 3. Tendencies to disregard externalities  To maximize labor income 4. Tendencies not to re-invest part of profits  To maximize current labor income  Result  less growth

40 40 Recall Marshall Titio ( ) Marshall Titio ( ) –Leader of Yugoslavia Developed Worker-Management Market Socialism Developed Worker-Management Market Socialism How did it work? How did it work? –There were monopolies –Low labor mobility –Unemployment rose –Output fell –Hyperinflation –Income inequality rose

41 41 But the capitalistic version of Cooperative Economy Such as Such as –Employee stock ownership plans –Profit sharing Is still popular Is still popular

42 Transition from socialism to capitalism Began in 1989: The fall of Berlin Wall Began in 1989: The fall of Berlin Wall om/watch?v=s5JdY8E NfVg&feature=PlayList &p=497C1FEC171B0B 2A&playnext=1&playn ext_from=PL&index=7 om/watch?v=s5JdY8E NfVg&feature=PlayList &p=497C1FEC171B0B 2A&playnext=1&playn ext_from=PL&index=7 om/watch?v=s5JdY8E NfVg&feature=PlayList &p=497C1FEC171B0B 2A&playnext=1&playn ext_from=PL&index=7 om/watch?v=s5JdY8E NfVg&feature=PlayList &p=497C1FEC171B0B 2A&playnext=1&playn ext_from=PL&index=7 42

43 Steps (not necessarily in this order!!!) 1. Privatize state-owned enterprises 2. Replace command with market mechanism  Freeing prices  Dangers: 1.inflation, why?  Price ceiling and rationing is removed  Not enough output, high demand 2.Rise in unemployment, why?  Productivity matters; cost minimization matters 3.Rise in income inequality, why?  Productivity matters 3. Liberalize political system 43

44 Transition form socialism to capitalism  Difficulties  Undeveloped banking system  Undeveloped accounting system  Undeveloped stock market  No anti-trust laws  monopolies  No corporate laws  the rules of the game are not defined  Trade  rapid increase in imports due to high domestic prices  Quick change (Shock therapy) has not been very successful  corruption, stagflation, underground activities  Gradual change has been more successful 44

45 Who succeeded ??? Shock therapy or Gradualism Heavy on their use of foreign aid and advisors Economic growth per capita immediately after Latin AmericaShock therapy YesClose to Zero RussiaShock therapy YesNegative AfricaShock therapy YesZero ChinaGradualismNoHigh positive IndiaGradualismNoHigh positive

46 When is the transition finished? Different opinions Different opinions 1.Mostly market economy; more than one political party; mostly private ownership of resources 2.When country faces the same problems as market economies 3.When country joins EU (if European) 4.When country joins WTO (China?) 46


Download ppt "1 Welcome to ECON 372: Comparative Economic Systems By: Dr. Jacqueline Khorassani Week Seven Lecture Slides Source: Chapter 3 (pp 54-88) & Jackie Marietta."

Similar presentations


Ads by Google