CHAPTER 18 Comparative Economic Systems. Section 1: The Spectrum of Economic Systems Main Idea: Capitalism, socialism, and communism are historically.

CHAPTER 18

Comparative Economic Systems

Section 1: The Spectrum of Economic Systems

• Main Idea: Capitalism, socialism, and communism are historically three popular economic systems.

• Objectives: • Explain the advantages and disadvantages of

capitalism.• Describe the differences among the doctrines of

socialism, capitalism, and communism.• Compare the features of communism to other types of

economic systems.

Section 1 Introduction

• Throughout most of the 1900s, the world’s developed nations fell into three categories of economic systems–communism, socialism, and capitalism.

• Communist countries were closely associated with command economies, capitalist countries were most similar to market economies, and socialist countries had a combination of both command and market economies.

• Sweden is an example of a country with a strong socialist tradition, and the high taxes that go along with it.

• The three basic types of economic systems can be illustrated in a spectrum.

• At the far right is capitalism, in which government has a limited role.

• As one moves from left to right along the spectrum, both the ownership of resources and the degree of government involvement in the operation of the economy change.

• No lines separate communism, socialism, and capitalism.

• They appear on the spectrum as having a greater or lesser degree of government involvement and private ownership of resources.

Introduction (cont.)

Figure 18.1Figure 18.1

• The means of production are privately owned.• Supply and demand determine prices.• Businesses are free to direct resources into

profitable activities.• Advantages of capitalism include efficiency,

freedom, decentralization, a smaller role for government, and a high degree of consumer satisfaction.

Capitalism

• Capitalism has some disadvantages. • It does not provide for the production of many public

goods.• produces only for those who have the resources to pay

for products and services.• is often uncertain and unstable.

Capitalism

• Government owns and runs some of the basic productive resources in order to distribute output social goals.

• Advantages of socialism include: • the distribution of benefits throughout a society and people using

their electoral power to influence economic decisions.

• Some disadvantages of socialism include:• lowered efficiency • high taxes• the government substituting its judgment for the judgment of the

market• the tendency for special interests to become entrenched

Socialism

• Theoretically, communism is a selfless society in which the needs of the individual are subservient to the needs to society.

• In reality, communism is often a rigid command-type economy in which the state owns all economic goods.

• Advantages of communism include • equality• broad range of public goods• lack of uncertainty• the ability of the economy to shift direction quickly.

Communism

• Communism has some disadvantages:• Individual freedom is lost, as is the incentive for

people to work hard• This system usually fails to meet the needs and wants

of consumers• Centralized planning is inefficient• lacks the flexibility to deal with day-to-day changes

Communism (cont.)

Section 2: The Rise and Fall Of Communism

• Main Idea: Communism is an economic system that has both centralized control of the means of production and of the political system.

• Objectives: • Explain the rise of the Soviet economy under Lenin and

Stalin.• Describe the complexities of a centrally planned

economy. • Understand the forces that brought about the collapse of communism as an

economic system.

Section 2 Introduction

• In the absence of pure communism, the former Soviet Union is the most frequently cited example of a communist economic system.

• The early Soviet economy showed the main advantage of a command system– that it could mobilize resources and change direction in a short period of time.

• The sudden disintegration of the Soviet economy in the late 1980s, however, demonstrated the essential flaws of communism.

• Lenin took large estates from the rich and gave them to the peasants, outlawed private property, and turned factories over to workers.

• Since workers did not have skills to manage factories, Lenin eventually reintroduced some capitalist methods.

• Stalin’s Five-Year Plan centralized the economy to achieve rapid industrialization.

The Economy Under Lenin and Stalin

• Stalin instituted collectivization, the forced common ownership of all enterprises.

• By the end of World War II, economic plans concentrated on defense building, space, exploration, and the production of some consumer goods.

The Economy Under Lenin and Stalin

• The real force in the Soviet Union was the Communist Party.

• Gosplan was the central planning authority, with local plant managers and workers having almost no say in how things were done.

• The agricultural sector—made up of state and collective farms—was one of the major problems for the economy.

• The government was not able to make its agriculture as efficient as agriculture in many capitalist countries.

The Soviet Economy After Stalin

• Industrialization in the Soviet Union had made considerable progress but never caught up to the United States, and it lagged much farther behind in consumer goods.

• Incentive programs, such as the use of piecework, led to the setting of unrealistic goals and poor quality work.

• Quotas also failed and worsened the economy’s reputation for producing poor goods.

The Soviet Economy Collapses

• In the 1970s and 1980s the Soviet people were impatient for more consumer goods and unwilling to accept sacrifices.

• Gorbachev hoped to introduce the policy of perestroika, the fundamental restructuring of the economy and government.

• Gorbachev did not remain in power long enough to see his plans realized, and the Soviet Union collapsed.

The Soviet Economy Collapses (cont.)

Section 3: The Transition to Capitalism

• Main Idea: Reforms in the former Soviet Union, China, and many Latin American and eastern European nations have moved these economies toward more capitalistic, market-oriented systems.

• Objectives:• List four problems encountered when an economy

makes the transition to capitalism.• Recognize the major countries and regions that are

making the transition to capitalism.

Section 3 Introduction

• Andrei Mladentsev, a Russian entrepreneur, now runs one of the largest and most modern pharmaceutical companies in Russia.

• At age 26 he used the funds he accumulated trading stocks to engineer a takeover of the 75-year-old pharmaceutical factory in Nizhny Novgorod.

• He is, however, the exception rather than the norm–as the problems of transition are truly daunting.

• Privatization in some transitional states has been accomplished using vouchers, and by selling state-owned companies to foreign corporations.

• Loss of Political Power Where vouchers worked, the communist Party leaders lost power; in other nations, the old ruling group retained their power.

• The discipline of capitalism Nations in transition have yet to develop the automatic stabilizers and social welfare nets that cushion the instabilities of capitalism.

• Responding to new incentives Transitional countries will have to learn to live with a whole new set of incentives.

Problems of Transition

• Privatization in Russia is well underway.• Poland, Hungary, the Czech Republic, and the

Baltic states are moving toward capitalism.• Mexico is rapidly moving towards capitalism

and open markets.• In China, after such disastrous plans as the

Great Leap Forward, the government has introduced privatization of industries and market reforms.

Countries and Regions in Transition

Countries and Regions in Transition (cont.)

Figure 18.2

Section 4: The Various Faces of Capitalism

• Main Idea: Many countries have moved toward capitalism, although its exact form varies from country to country.

• Objectives:• Explain the factors that encouraged economic growth

in Japan.• Rank the “Asian Tigers” according to per capita GNP.• Describe Sweden’s retreat from socialism.

Section 4 Introduction

• Capitalism is a force sweeping the world, a force that has many different faces.

• The common element of capitalism is that the factors of production are privately owned and controlled; there are, however, many variations on this theme.

• The sharp financial crisis that swept Asia in the fall of 1997 also demonstrates another feature of capitalism–that the welfare of most capitalist economies is increasingly entwined.

• The interdependence we often see at the local and national levels is beginning to become a feature of the global economy.

• These are some of the forces that are causing capitalism in Japan to continue to evolve and expand.

Introduction (cont.)

• The government is very involved in the day-to-day activities of the private sector.

• Japan’s recent economic crisis has severely tested the historically close employee-employer relationship, which was one of the reasons for Japan’s early success.

• Another reason for Japan’s success was its ability and willingness to develop new technology.

Japan

• Government has worked closely with businesses to limit foreign competition in the domestic market.

• Japan’s economy is partially closed to the products of foreign producers.

• Protectionism in Japan does not help consumers, who pay high costs for many products.

Japan (cont.)

• The Ministry of International Trade and Industry identifies promising exports markets and then subsidizes industries so that they can be competitive in this area.

• In the 1990s a banking crisis resulting from bad loans was part of the reason for Japan’s poor economic performance.

• Japan needs to institute reforms that redefine government’s role in the economy and to restructure how firms produce and compete with each other.

Japan (cont.)

• Entrepreneurs in Hong Kong developed an efficient manufacturing-based economy that used technology other countries had developed.

• Singapore uses generous tax breaks, government subsidies, and government-sponsored training of employees to develop its own technology.

• Taiwan’s economic development was based on government intervention in various markets in order to direct the flow of resources.

The Asian Tigers

• In South Korea new economic growth depends on the private economy’s adapting to competition and reducing the support from the political sector.

The Asian Tigers (cont.)

• The country is not a model of pure socialism because it has had a considerable amount of private enterprise.

• Government owned some basic industries and used steep taxes to pay for welfare state benefits.

• The heavy tax burden has cut into Sweden’s economic growth.

• A free-market government elected in 1991 had reduced the role of the public sector.

Sweden