Lecture 2 - Economic Systems (1m)

economic system

how production and distribution of goods and sevrices is organized in an economy

institutions

laws and social customs that determine how g+s are produced and distributed

examples of economic systems

feudalism, subsistence economies, central economic planning, capitalism

capitalism

economic and political system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state

main institutions = private property, markets, firms

in most capitalist economies…

most means of production are privately owned and production is guided and income distributed largely through the operation of markets

does capitalism refer to a specific economic system?

no - it refers to a class of systems sharing the 3 institutions and characteristics

how institutions of capitalism interact with each other and different government systems varies greatly across countries

flaws of capitalism

• tendency toward increasing inequality

• boom and bust economic cycles

• damage to the environment

• market failures

• short-termism and excess materialism

central planning

gov controls production, decides how goods should be distributed and who gets them i.e. soviet union, east germany

in ussr, agency repsonsible for econ planning = gosplan

challenges of central planning

(1) computation - very difficult to calculate all of the commodities and they were normally based on bad data

(2) information - if there’s no market, there’s no supply and demand aka prices don’t send messages - without these messages, planners lose valuable feedback that prices provide about what people want, making it hard to make efficient decisions —> often surpluses and shortages of goods

(3) incentives - ppl lack incentives for hard work, high quality products, and innovation

USSR economy

• during greta depression, the economy grew, unlike the rest of the world but during the soviet famine millions of ppl died

• 1980s - large scale systemic inefficiences and unbalanced outputs - some goods always in shortage and some always in surplus

• falsification of statistics in order to satisfy central plans

• plan failures were blamed on sabotage - civil unrest

current communist countries - central planning or market ecnoomies?

• cuba and North korea = central planning

• china, vietnam, laos = market economies w/ lots of gov involvement

socialism

• strong protections for worker organizing

• improved schools and child nutrition

• beginning of a national health service

• dramatic increase in social housing construction

• policy to never use force against public demonstrations

• nationalization of basic industry

US vs. Scandinavia

both: means of production owned privately and government regulates the economy

differences: how strong is safety net, universalism

industrial revolution

new tech emerged —> period of cumulative innovation

the emergence of capitalism brought about two major changes

(1) technology - firms competing w/ each other had strong incentives to adopt and develop new and more productive technologies

(2) specialization - increased output w/ same # of employees

natural experiment

use an external event i.e. change in institutions or natural disaster to compare outcomes for eocnomic actors who were and weren’t affected by the event

counterfactual

what would have happened if there had been no change

in india colonization reduced living standards because:

(1) used railways for military use

(2) tax collecting institutions were bad, made local elites focus on collecting taxes instead of improving the economy

were the colonies and slavery involved or necessary to britain’s industrial revolution?

if they hadn’t been available, the IR likely wouldn’t have occurred when and where it did

the colonies and enslaved labor provided both the markets and the materials for expansion of output for the industrial revolution