ECON 4337 Comparative Economic Systems

1
ECON 4337 Comparative Economic Systems

• Lecture 1
• January 20, 2009

2
How Do We Compare Economies?

• What is an economic system?
• The interaction of organizations of participants
  engaged, according to rules and orders, in the
  production, distribution, and use of goods and
  services
• The rules with which the community determines
  (1) what to produce, (2) how to produce, (3) how
  to distribute the benefit of the production

3
How Do We Compare Economies?

• Question Which economic systems do you know
  about?
• Question Is the world economy converging on
  American-style market capitalism after the
  collapse of FSU?
• Fukuyama (1992) The End of History and the Last
  Man predicts the eventual triumph of political
  and economic liberalism

4
How Do We Compare Economies?

• What are the criteria for classifying economies?
• 1. Resource allocation mechanisms
• What, how and for whom to produce
• Traditional allocation depends on customs or
  traditions (e.g. hunter-gatherer economies in
  South Africa, caste system in India)

5
How Do We Compare Economies?

• What are the criteria for classifying economies?
• 1. Resource allocation mechanisms
• What, how and for whom to produce
• Market economy allocation through price
  mechanism which depends on individual decision
  making by consumers and firms that together
  determine demand and supply (Adam Smith -1776
  Wealth of Nations)

6
How Do We Compare Economies?

• What are the criteria for classifying economies?
• 1. Resource allocation mechanisms
• What, how and for whom to produce
• Command economy allocation by government
  authorities, imposed by law or force (e.g. FSU)

7
How Do We Compare Economies?

• What are the criteria for classifying economies?
• 2. Forms of ownership
• Who owns the means of production (land and
  capital)
• Capitalism private ownership of all factors
• Socialism collective or state ownership of all
  factors
• (central vs. local government ownership)

8
How Do We Compare Economies?

• What are the criteria for classifying economies?
• 2. Forms of ownership
• Who owns the means of production (land and
  capital)
• Allocation mechanism ownership pairs
• Market capitalism
• Command socialism
• Market socialism (e.g. Yugoslavia, China)
• Command capitalism (e.g. Nazi Germany)

9
How Do We Compare Economies?

• What are the criteria for classifying economies?
• 3. Role of planning
• Command planning compulsive, top-down (e.g.
  FSU)
• Command without planning (e.g. war communism
  in Soviet Russia)
• Indicative planning (planned market economy)
  voluntary, guideline (e.g. France, Japan)

10
How Do We Compare Economies?

• What are the criteria for classifying economies?
• 4. Types of incentives
• Material incentives pay people according to
  their productivity reward for entrepreneurship
  as economic profits and for savings as interest
• Moral incentives motivate people by appealing
  to some higher collective goal (e.g. China under
  Mao Zedong between 1966-76, serve the people)

11
How Do We Compare Economies?

• What are the criteria for classifying economies?
• 5. Income redistribution
• John Rawls maximin criterion
• Marxs pure communism from each according to
  his ability to each according to his need
• Socialism from each according to his ability
  to each according to his work

12
How Do We Compare Economies?

• What are the criteria for classifying economies?
• 5. Income redistribution
• Social market economy market capitalism with
  broad social safety nets (e.g. Germany,
  Scandinavian economies)
• Equity-efficiency trade-off?
• Greater efforts to make income more equal will
  result in less efficiency (generally false, e.g.
  NICs)

13
How Do We Compare Economies?

• What are the criteria for classifying economies?
• 6. Role of politics and ideology
• Laissez-faire Let them do it minimal
  government intervention libertarian
• Social democracy support income redistribution
  and extensive social safety nets
• New traditionalism Sharia - imposition of the
  Islamic law code

14
How Do We Compare Economies?

• What are the criteria for evaluating economies?
• (Morris Bornsteins approach)
• 1. Level of output
• Highest levels of real income per capita exist
  in market capitalist economies

15
How Do We Compare Economies?

• What are the criteria for evaluating economies?
• (Morris Bornsteins approach)
• 2. Growth rate of output
• Middle to low income countries tend to grow
  faster than the poorest or the richest countries
• An increase in output may not be growth!

16
How Do We Compare Economies?

• What are the criteria for evaluating economies?
• (Morris Bornsteins approach)
• 3. Composition of output
• Breakdown between consumption, investment,
  public vs. private production etc.

17
How Do We Compare Economies?

• What are the criteria for evaluating economies?
• (Morris Bornsteins approach)
• 4. Static efficiency
• Pareto optimality No one can be made better
  off without making someone else worse off
• No resources are wasted being on the PPF

18
How Do We Compare Economies?

• What are the criteria for evaluating economies?
• (Morris Bornsteins approach)
• 5. Dynamic efficiency
• Resource allocation over time to maximize
  long-run sustainable growth

19
How Do We Compare Economies?

• What are the criteria for evaluating economies?
• (Morris Bornsteins approach)
• 6. Macroeconomic stability
• Stability of output, employment and price level
  over time

20
How Do We Compare Economies?

• What are the criteria for evaluating economies?
• (Morris Bornsteins approach)
• 7. Economic security
• Related to macroeconomic stability and
  extensiveness of social safety nets

21
How Do We Compare Economies?

• What are the criteria for evaluating economies?
• (Morris Bornsteins approach)
• 8. Degree of equity of income/wealth
• Socialist and social market economies tend to
  have more equal income distributions than market
  economies
• Lorenz curve and Gini coefficient

22
How Do We Compare Economies?

• What are the criteria for evaluating economies?
• (Morris Bornsteins approach)

100
Gini coefficient A / (AB)
Percent income
Total area A
Lorenz Curve
Total area B
0
100
Percent population
23
How Do We Compare Economies?

• What are the criteria for evaluating economies?
• (Morris Bornsteins approach)
• 9. Degree of economic and political freedom
• Market economies tend to provide more freedom

24
How Do We Compare Economies?

• Difficulties in evaluating systems
• Some criteria easy to define but hard to measure
  (e.g. growth, efficiency, freedom)
• Income distribution easy to measure but hard to
  assess
• Hard to assign weights to each
• Performance not necessarily related to system
  but to other factors (population, education,
  interaction with other systems, geography etc.)