Economics Different Economic Models

Market Economy  A market economy is an economy in which decisions regarding investment, production and distribution are based on supply and demand  Prices or goods and services are determined in a free price system:  Someone will pay you whatever they think it is worth

Characteristics  The major defining characteristic of a market economy is that decisions on investment and the allocation of producer goods are mainly made through markets  This is contrasted with a planned economy, where investment and production decisions are embodied in a plan of production.

Levels of Planning  Market economies can range from hypothetical laissez- faire and free market variants to regulated markets and meddling variants  In reality market economies do not exist in pure form, since societies and governments regulate them to varying degrees  Most existing market economies include a degree of economic planning or state-directed activity, and are thus classified as mixed economies  The term free-market economy is sometimes used synonymously with market economy, but it may also refer to laissez-faire or Free-market anarchism

Market Models  Market economies do not logically assume the existence of private property in the means of production  There are many different models of a market economy:  Various types of cooperatives  Collectives  Autonomous state agencies  Others models that involve public ownership of the means of production (the factories) where capital goods are allocated through markets

Mixed Economy  The term market economy used by itself can be somewhat misleading  For example, the United States constitutes a mixed economy  substantial market regulation  agricultural subsidies  extensive government-funded R & D  Medicare/Medicaid  Different perspectives exist as to how strong a role the government should have in both guiding the market economy and addressing the inequalities the market produces

Capitalism  Capitalism generally refers to economic system where the means of production are largely or entirely privately owned and operated for a profit  The markets determine: ◦Investments ◦Distribution ◦Income ◦prices

Capitalism Variants  There are different variations of capitalism with different relationships to markets  In Laissez-faire and free market variations of capitalism:  Markets are utilized most extensively with minimal or no state intervention  No regulation over prices and the supply of goods and services  In Economies that are interventionist, welfare capitalism and mixed economies  Markets continue to play a dominant role but are regulated to some extent by government in order to correct market failures or to promote social welfare  In state capitalist systems, markets are relied upon the least, with the state relying heavily on either indirect economic planning and/or state-owned enterprises to accumulate capital

Does True Capitalism Exist?  Capitalism has been dominant in the Western world since the end of feudalism  True Capitalism does not really exist anywhere in the world  The term "mixed economies" probably more precisely describes most western economies today  Most western economies contain a mix of both private-owned and state-owned enterprises

Supply and Demand  In capitalism, prices determine the demand-supply scale  Higher demand for certain goods and services lead to higher prices and lower demand for certain goods lead to lower prices  Oil prices

Laissez-faire  Why don’t true free market capitalist economies exist?  Laissez-faire is was the role of the government in strict capitalist free market economies during industrial  For an idealized free market economy to exist there must be:  The complete absence of government regulation  Subsidies  Artificial price pressures  Government-granted monopolies  No taxes or tariff other than what is necessary for the government to provide:  Protection from coercion and theft  maintaining peace and property rights  providing for basic public goods

Free-Market Economy  Free-market economy refers to a capitalist economic system where prices for goods and services are set freely by the forces of supply and demand without intervention by government policy  It typically entails support for highly competitive markets, private ownership of productive enterprises  Laissez-faire is a more extensive form of free- market economy where the role of the state is limited to protecting property rights.

Social Market Economy  This model was implemented after World War II in West Germany  The social market economic model is based upon the idea of realizing the benefits of a free market economy:  Economic performance  High supply of goods  It hopes to avoid the disadvantages such as:  market failure  destructive competition  concentration of economic power  anti-social effects of market processes

Social Market Economy  The aim of the social market economy is to realize greatest prosperity combined with best possible social security  One difference from the free market economy is that the state is not passive, but takes active regulatory measures  The social policy objectives include:  Employment  Housing  Education policies

Market Socialism  Market socialism refers to various types of economic systems where the means of production and the dominant economic institutions are either publicly owned or cooperatively owned but operated according to the rules of supply and demand  The distinguishing feature between non-market socialism and market socialism is the existence of a market for factors of production and the criteria of profitability for enterprises  Profits derived from publicly owned enterprises can variously be used to:  Reinvest in further production  To directly finance government and social services  distributed to the public at large through a social dividend or basic income system

Socialist Market Economy  Following the 1978 reforms, the People's Republic of China instituted what it calls a "socialist market economy“  Most of the economy is under state ownership, but the state enterprises are reorganized into joint-stock companies where various government agencies own controlling shares through a shareholder system  Prices are set by a largely free-price system and the state- owned enterprises are not subjected to micromanagement by a government planning agency  A similar system called "socialist-oriented market economy" has been implemented in Vietnam following reforms in 1986.