Comparative Economic Systems

Comparative Economic Systems Chapter 18

Types of Systems • Three types of economic systems: • Capitalism/market • Communism/command • Socialism/command and market Communism Socialism Capitalism

Communism • Political an economic system where: • all property is collectively owned • Labor is organized • Everyone consumes according to their needs • No “pure” communism today • Cuba, North Korea and the Soviet Union have been the closest

Characteristics: • 1) It has a central planning authority • Does not follow supply and demand • Gov’t sets prices • 2) Movement of resources and labor is strictly controlled • You can’t choose your own career • 3) all decisions made by gov’t • Gov’t owns most industries • The only private property you would have would be small tools for you job

4) individual risk taking is forbidden • You can’t start up your own company or be an entrepreneur • 5) gov’t officials decide what to produce, how to produce, and for whom to produce

Disadvantages: • 1) individual freedom is lost • 2) no incentives to make the people work hard • Most get the same pay no matter how hard they work • 3) fails to meet the needs and wants of consumers • Most communist gov’t produce more military products • Neglect consumer goods like TV, microwaves, etc.

4) inefficiency of centralized planning • Resources needed and obstacles are too much • 5) lack the flexibility to deal with changes from day-to-day

Socialism • Economic system where the gov’t owns and runs SOME of the basic productive resources • Purpose is to distribute goods and services in ways that are good for the people • MOST socialist economies have democratic governments

Advantages: • 1) Those who are not able to be productive still get a share of the benefits • 2)People can elect representatives who determine what is produces, how, and for whom

Disadvantages: • 1) less efficient than capitalism • 2) more workers are hired than necessary which drives up the cost of production • 3) taxes are higher because gov’t has to provide health care, education and welfare

Capitalism • The means of production are owned by private citizens • Supply and demand control pricing • Businesses are free to engage in activities that provide the greatest profits

Advantages: • 1) it is efficient • if there are lots of buyers and sellers • And resources are mobile • And if buyers and sellers are well informed • Then it will be profitable and efficient • 2) freedom • Consumers can buy what they want • Producers can make whatever consumers desire

3) capitalism is highly decentralized • Consumers and producers determine what, how, and for whom to produce • Not the government • 4) the role of government in the economy is much smaller • 5) high degree of consumer satisfaction

6) flexibility to accommodate change • When consumer demands change, products can change • 7) capitalist nations have a vast amount of wealth • The countries that have the highest standard of living are capitalist countries

Disadvantages: • 1) capitalism doesn’t always satisfy everyone’s needs • Markets are geared towards private consumer goods instead of public goods like roads and education • 2) capitalism produces only for those who have demand and the ability to pay • Pure capitalist societies would ignore the poor, unemployed and elderly.

The Rise and Fall of Communism • 1917 – Russia’s government was overthrown • Vladimir Lenin set up a communist gov’t • All private property was outlawed • Factories were turned over to the workers • They didn’t have the skills to manage the factories • Production declined and the economy began to fail

In steps Joseph Stalin • Introduced his Five-Year Plan • Began policy of collectivization • All agricultural and industrial enterprises were collectively owned • Many people revolted against this • Stalin had millions killed or imprisoned • Millions starved when he seized grain harvests • Standard of living dropped dramatically

The Five Year Plan was a failure • However, the gov’t kept on with other plans • Concentrated heavily on defense industries, heavy manufacturing and some consumer goods • By the time Stalin died, the Soviet Union was a major industrial power

The Gosplan was the central planning authority that devised the plans • Very complex process • Had to decide: • How much would be produced, styles, colors, sizes, etc. • What would go into each product • What the quota would be for individual factories • They detailed EVERYTHING that would be needed

Problems with agriculture: • State farms – owned by government • Workers paid for number of items produced • Prices fixed by government • Collective farms – private farms collectively operated • Land, tools, livestock, machines owned by gov’t • Had to produce a certain amount per acre • Not very efficient

The Soviet Economy Collapses • Made progress but never caught up with the US • Morale low in factories • Began incentive programs • Piecework – workers paid for each piece they produced rather than hours they worked • Quotas were set too high • This led to storming – workers rushing to finish at the end of the month • Quality of products not as good • Medals, vacations, free housing

Quotas: • Quotas failed because, for example: • If shoe factories were given a quota of 1 million shoes per year • Then they would make small shoes because they could do it faster • So there were more small shoes than consumers needed, and not enough large shoes

Inadequate supply of consumer goods: • After WWII, parents were asked to make sacrifices so their kids could have a better life • Most did so • But when those kids grew up and were adults, they were not so willing to do the same thing • They were aware of the high standards of living in many other countries • They were impatient for more and better consumer goods

Perestroika: • Mikhail Gorbachev came to power in 1985 • Economy the worst it had been in 80 years • The Gosplan wasn’t working • Quotas weren’t working • People were demanding changes • Gorbachev introduced perestroika – restructuring of the economy and government • Wanted to introduce a little capitalism

Faced some stiff opposition from diehard communists • As did his successor, Boris Yeltsin • It was ultimately the collapse of the economy, collapse of leadership and ethnic unrest that led to the fall and breakup of the Soviet Union in 1991 • All of the former republics of the Soviet Union, including Russia, are some degree of capitalist

Transition to Capitalism • Problems with transition: • Hard to go from communist/command to capitalism • Key feature of capitalism is private property • Communist countries had to privatize gov’t run factories • Factories where people are allowed to make a profit work better • More incentive to produce

Poland, Hungary, and Czech gov’t gave people vouchers • These vouchers could be turned in at auctions for shares in a company • Companies then went from being owned by gov’t to privately owned (by people) • Some gov’ts just sold the companies to foreign corporation

The move to capitalism stripped the Communist party of its power • Power transferred to new class of entrepreneurs and capitalists • In Russia, many former Communist leaders bought up the vouchers • So the old group of leaders ended up being the new group of leaders

In many nations, the transition results in high unemployment, inflation and lost production • This will eventually turn around if they can wait it out • The people had to learn how to make their own decisions about what to produce, how, and for whom • Jobs were no longer guaranteed • Prices were no longer kept low • Transition to capitalism is hard and slow

Countries & Regions in Transition • Russia: • Russia sold vouchers which were turned in for stocks • Most factories are privately owned • Most restaurants and shops are in private hands • Russia has a stock market now

Eastern Europe: • Newest countries to become capitalist • Poland: • Started with labor union called Solidarity • They gained a lot of freedoms for the people • Communist party lost power • Move to capitalism was slow

Hungary: • Had been the most “western” of the communist countries • Also had a large “black market” of consumer goods • Transition to capitalism was easier • Czech Republic: • Czechoslovakia separated into Czech Republic and Slovakia • Partly because Slovakia was not crazy about capitalism • In Czech, 80% of businesses are now privately owned

Latin America: • Many countries had combined socialism and isolationism (to give their infant industries a chance to be successful) • Mexico: • By 1989, most businesses were privately owned • Joined the US and Canada in a free trade agreement (NAFTA)

Chile: • Has sold gov’t controlled airlines, telephone companies and utility companies • Gov’t loaned billions to new entrepreneurs • Has many exports • Including popsicle sticks to US and chopsticks to Japan • Argentina: • Has sold many gov’t industries to private investors • Has become very capitalistic quickly

China: • 1949 – Mao Zedong and the Communist turned China into a command economy • Much like that of the Soviet Union • 1958 – Great Leap Forward began • Move towards pure communism • High industrialization • More collectivization – farmers forced off their land to work on state owned farms • Plan was a huge failure – millions starved

Started to realize it wasn’t working in the 1970’s • By early 1980’s, the success of Taiwan, South Korea, Hong Kong, etc. was too much to ignore • Some Chinese provinces were allowed to experiment with capitalism • A lot of capitalism has been introduced, but still has gov’t planning.

The Faces of Capitalism • Japan: • Very capitalistic economy • However, the gov’t is very involved in the day-to-day- activities of businesses • It is the 3rd largest economy in the world • Reasons for success: • 1) employees are very loyal to their companies • Many are hired for life • Many companies supply private schools and vacation resorts • Take great pride in their work

2) ability and willingness of Japanese to develop new technology • Robotics, computer tech, cars, etc. • A Closed Economy: • They export to many countries • They try not to import much to protect their industries • As a result, prices are high on many goods • High Cost of Living: • Fruit cost 3-4 times more than in US • Clothing 2 times as much • Japanese citizens can go to Hawaii and buy a camera made in Japan cheaper than they can in Japan

Recession: • In a recession for most of the 1990’s • A banking crisis • Banks stopped lending • People stopped paying • Value of land dropped • Unemployment rose • Reform: • Japan must buy from other countries because they can produce cheaper • They need to allow for more competition between businesses

The Asian Tigers: • Singapore, Hong Kong, Taiwan & South Korea • Huge economic progress in the last 50 years • All are capitalist • Hong Kong: • As a colony of Great Britain, it was the most free market economy in the world • It was given back to China in 1997 • China began to put some gov’t interference in Hong Kong businesses

Singapore: • Island nation only 3.5 times larger than DC • Has a GNP about 80% of what the US has • 1,000 multinational firms work there • Gov’t has spend millions on technology, investments, research and scientists • Taiwan: • Island about the size of West Virginia • GNP almost ½ of what the US has • China vows they will be reunited

South Korea: • Smallest GNP of the Tigers • Technocrats govern SK • Small number of powerful families control many of the businesses • Very close business relationship with the US

Sweden: • Regarded as a “socialist state that works” • Has more welfare programs for its citizens than any other free world country • Basic industries are nationalized (gov’t control) • But there are many private businesses • They had very high taxes to pay for the welfare

Many people returned to bartering to avoid paying the taxes • This began to cut into their economic growth • Socialist party was defeated • Capitalist gov’t was elected • Taxes were lowered • Still much higher than US

Comparative Economic Systems