1. The Spectrum of Economic Systems

2. Capitalism The means of production are privately owned Supply and demand determine prices Business are free to direct resources into profitable activities

3. Capitalism Advantages –Efficiency –Freedom –Decentralization –A smaller role for government –High degree of consumer satisfaction Disadvantages –Does not provide for the production of many public goods –Produces only for those who have the resources to pay for products and services –Often uncertain and unstable

4. Socialism Government owns and runs the basic productive resources in order to distribute output to meet social goals

5. Socialism Advantages: –Distribution of benefits throughout a society –People using their electoral power to influence economic decisions Disadvantages: –Lower efficiency –High taxes –Government substituting its judgment for the judgment of the market –Tendency for special interest to become entrenched

6. Communism Theoretically: communism is a selfless society in which the needs of the individual are subservient to the needs of society (for the greater good) Reality: rigid command-type economy in which the state owns all economic goods State officials answer: WHAT, HOW, and FOR WHOM?

7. Communism Disadvantages: –Individual freedom is lost –Incentive for people to work hard –Fails to meet the needs and wants of consumers –Centralized planning = inefficient –Lacks the flexibility to deal with day to day changes

8. Rise and Fall of Communism

9. The Economy Under Lenin and Stalin Lenin –Took large estates from the rich and gave them to the poor –Outlawed private property –Turned factories over to workers No skills to manage reintroduced some capitalist methods Stalin –Five-Year Plan Centralized economy to achieve rapid industrialization –Collectivization: forces common ownership of all enterprises

10. After WWII Economic Plans concentrated on: –Defense Building RED SQUARE REVIEW –Space Exploration –Production of some consumer goods

11. Soviet Economy After Stalin Real Force was the Communist Party Gosplan: central planning authority –Local plant managers and workers had no say in how things were done Agricultural: –Made up of collective state farms –Major problem –Government had problems with efficiency

12. Soviet Economy Collapses Industrialization: –made progress but never caught up with US –Lagged behind in consumer goods Incentive Programs –Unrealistic goals –Poor quality of work Quotas –Failed –Worsened the economy’s reputation for producing poor goods

13. 1970’s-1980’s –People inpatient for more consumer goods and unwilling to accept sacrifices Gorbachev: –Introduced Perestroika: restructuring of economy and government –Did not see his plans realized –The economy collapsed Soviet Economy Collapses

14. Transitions to Capitalism

15. Problems of Transitions Privatization –Conversion of state-owned factories and property to private ownership –Accomplished using vouchers –Communist Party lost power (other countries retained power) –Have not developed automatic stabilizers and social welfare nets that cushion the instabilities of capitalism –Learn to live with new incentives

16. Countries and Regions in Transition Russia: well underway Poland, Hungary, the Czech Republic, Baltic States moving toward capitalism Mexico: rapidly moving toward capitalism and open markets China –Great Leap Forward: disastrous –Gov’t introduced privatization of industries and market reforms

17. The Various Faces of Capitalism

18. Japan Gov’t very involved in the day to day activities of the private sector Economic crisis has tested the close employee-employer relationship Success = ability and willingness to develop new technology Government: –Limited foreign competition in the domestic market –Economy partially closed to products of foreign produces –Need to institute reforms and redefine role of the gov’t in the economy

19. The Asian Tigers Hong Kong: developed efficient manufacturing based economy using technology other countries developed Singapore: Generous tax breaks; government subsidies, government-sponsored training employees to develop technology Taiwan: development based on gov’t intervention in various markets in order to direct the flow of resources South Korea: New economic growth depends on the private economy’s adapting to competition and reducing the support from the political sector

20. Sweden Not model of PURE socialism –has considerable amount of private enterprise Government owned some basic industries and used steep taxes to pay for welfare state benefits Heavy tax burden has cut into their growth Free-market gov’t elected in 1991 has reduced the role of the public sector