Economic Systems
The 3 Major Production Questions What to produce? How to produce? For whom to produce? We will classify economic systems into categories, based on how each of them attempts to answer these three questions.
Traditional Economy The answers to the three major production questions are dictated by ritual, habit, or custom.
Examples of Traditional Economies Inuit tribe Some parts of South America Some parts of Africa Aboriginal tribes of Australia Some island societies
Traditional Economies Advantages?Disadvantages?
Command Economy The answers to the three major production questions are given by some strong central authority (i.e. the government) Communism – an economic system in which all factors of production are the property of the state.
Examples of Command Economies Cuba
Examples of Command Economies North Korea
Command Economies StrengthsWeaknesses
Market Economy Businesses and individuals act in their own best interest to answer the three major production questions. Capitalism – an economic system in which individuals and businesses compete, with a minimum of government interference “Laissez-Faire”
Market Economies StrengthsWeaknesses
Mixed Economies Mixed-Market Socialism Economies in Transition
Total Government Control No Government Control CommunismSocialismMixed-Market Capitalism Little Economic Freedom Total Economic Freedom
RankCountryOverallChange 1Hong Kong Singapore Australia Ireland New Zealand United States Canada Denmark Switzerland United Kingdom Index of Economic Freedom: The Top 10
2011 Index of Economic Freedom:
Bottom 5
Role Players in the Mixed-Market Economy Consumers Producers Government Consumer Producer Protector Regulator Provider
7 Economic & Social Goals of Capitalism 1.Economic Freedom 2.Economic Equality 3.Economic Security 4.Economic Growth 5.Economic Efficiency 6.Price Stability 7.Full Employment
Communism Communism: How/Why does it rise? How/Why does it fall?
Capitalism Communism
Capitalism Communism
“From each according to his ability, to each according to his needs!” –Karl Marx »Critique of the Gotha Programme, 1875
“As for me, I am not a Marxist.” Karl Marx
Why Doesn’t It Work? Incentive Problem –Average Test Scores Example Coordination Problem In one word, why doesn’t it work? GREED
When CAN It Work?
CharacteristicCapitalismCommunism Primary Economic Goal Basis of Economy Resource Allocation Government Planning Ownership of F.O.P. Motivation Economic Freedom Economic Equality Competition Cooperation / Collectivization Supply & Demand Government Planning Private Property Public Property Profit Motive Patriotism: The Good of Community
Characteristics of Free Enterprise Capitalism Economic Freedom Voluntary Exchange –Consumer Sovereignty: The consumer drives the market –“The customer is always right!” Private Property Rights –The Tragedy of the Commons Profit Motive