A national economy and its government: an overall picture 1The policy menu: from national planning to a complete laissez-faire 2The anatomy of an economy 3Individual behaviors and economic processes 4Problem with policy objectives 5The types of policy instruments 6The logic of policy analysis 7Imperfections of markets vs. imperfections of governments

1 The policy menu: from national planning to a complete laissez-faire a) National planning: of production, of investment, imperative, indicative, centralized, decentralized b) Government ownership of firms, or only banks, government enforced cooperative ownership c) Selective industrial policies: differential taxes and subsidies to specific firms and/or industries d) Macroeconomic policies: fiscal, monetary, Keynesian fine tuning, Friedmanian low inflation e) Public goods, externalities, paternalism f) None of this: only voluntary contracts on markets

2 The anatomy of an economy Economic agents: individuals and organizations of individuals (households, firms, government) Interconnections: markets and/or hierarchies Government: complex organization established and run by a political process, democratic or not Institutional rules (better term than “institutions”): - formal (laws) & informal (socio-cultural norms) - levels: the economy vs. its organizations - types: mixes of capitalism, welfarism, socialism Government branches: legislative vs. executive

government as legislator as resource- allocator (“manager”) socio-cultural norms informal IRs formal IRs network of producers and investors final consumers

3a Individual behaviors Whatever an economy does, there must be some individual or individuals who do it What an individual does depends on his/her - resource constraints (assets) - incentives: evaluation of expected payoffs (gains or losses) according to own preferences - information: about environments and about own means; can be received, or must be sought by trial-and error - rationality (competence, intelligence): ways of perceiving and using available information

3b Economic processes Resource-allocating in a given network of agents (markets and/or organizations), under given institutional rules (IRs): production, exchanges, consumption, savings, investment Development = changing the network (markets or organizations), by entry, M&As and growth; or decline and exit - under given IRs Evolution = changing IRs: - of formal IRs (laws) by known legislators - of informal IRs (socio-cultural norms), by widely imitated anonymous innovators

4 Problems with policy objectives Objectives: preference rankings (objective functions) over outcomes and/or rules Objectives as directions of behaviors: declared, really desired, actual (observable, imputed) Can a society have own objectives? “teleonomy” Policy objectives: - states to attain (Pareto efficiency, efficiency- equity …) - much disagreement possible - states to avoid (unemployment, crises) - agreement more likely! Short term vs. long term (“bitter pills” vs. “sweet poisons”)

5 Types of policy instruments General institutional rules: legislation of laws (incl. tax laws, antitrust …) Specific controls: interventions into resource- allocation (quantities, prices, money supply …) NB: confusion around the term “regulations” distinguish specific controls from institutional rules distinguish regulations of inter-agent transacting from regulations of intra-agent organizing and/or management (e.g. corporate governance)

6 The logic of policy analysis Seeking the “best” vs. avoiding the “worst” Search for causes: who does what and why: incentives? information? rationality? Design of policies: specific controls of resource- allocation or of development? or general rules? (cf. medicine: drugs, transplantations, genes …) Analysis of consequences: intended primary vs. unintended secondary (side-effects) Disagreements: on policy objectives and/or on means; how can analysis help?

7a Imperfections of markets Demand for public goods (distinguish from their supply!) – including security, infrastructure, and basic research, coping with free-riders External effects: positive and negative (relate to property rights!) Information asymmetries: less informed buyers may be victims of better informed sellers Increasing returns: inefficient prices, big firms diminish the competiveness and contestability of markets (competitive markets self-destruct) Wealth and income inequalities: economically inefficient and politically inacceptable; but NB: wealth for production vs. wealth for consumption

7b Imperfections of governments Distorted incentives: rent-seeking, favors for interest groups, more or less far from “social good”, nepotism cf. theories of Public Choice, of Agency – also in large firms, but there little more under control Bounded rationality: in average, if all goes well, only little better than average - far from the best entrepreneurs and investors - but still better than many consumers (possible justification of “liberal” paternalism)

Questions for debate Since 1990, the popularity of capitalism in the Czech Republic has dropped alarmingly deep (cf. much stronger KSCM than ODS). Why? -Mistaken privatization? -The wrong regulations of financial markets? -Corruption? But of whom by whom? -- of capitalists -- of government and/or other politicians? -Can capitalism be politically rehabilitated? How?