Economic Systems

Powerpoint produced by Rachel Farrell (PDST) & Aoife Healion (SHS, Tullamore)Sources of information: SEC Marking Schemes, newspaper articles & documentaries

LC Economics Syllabus

Economic System & Economic Thought

Brief historical outline of economic thought – Smith, Marx, Keynes etc.

Market, centrally planned and mixed economies.

Exam Questions – Ord LevelShort

2011 Q 7 Match

Long 2011 Q 7 (c)

Exam Questions – Higher Level

Short 2011 Q 2 2009 Q 3 2008 Q 5

Long 2007 Q 4

An Economic System Is the institutional means through

which natural resources are used to satisfy human wants by deciding;

1. What goods are to be produced.2. How are these to be produced.3. Who is to benefit from the production.

The three economic systems are:

Free Enterprise/Market Economy (Laissez Faire or Capitalism)

Centrally Planned/Command Economy (Communism)

Mixed Economy (Central planning & private enterprise)

Free Enterprise Economy (Definition HL 2008 SQ 5 )

Advocated by Adam Smith The market mechanism operates. The factors of production are privately

owned. There is limited government interference. Resources are allocated by a

decentralised decision making process. Citizens are motivated by self-interest.

Characteristics of a Free Enterprise Economy

(Eg. USA Capitalism )

1. Market Mechanism: Resources are allocated through the

market/price mechanism. If there is a sufficient demand for a

product/service it will be supplied. The higher the profit the more of a

good/service will be produced. Profit motive

2. Ownership of the factors of production:

Nearly all of the factors of production are privately owned.

3. Limited government interference: The government exists only to: Supply public goods eg. schools….. Provide a legal framework for citizens Prevent the creation of monopolies

Laissez Faire

4. Decentralised decision making: Decisions about: allocation of resources what to produce and who gets what are made by

individuals/entrepreneurs.

5. Motivated by self-interest: Consumers want to maximise their

utility (satisfaction). Producers want to maximise their

profits. Investors want to maximise their

return.

Article re pole

Ind August 2011

Economic advantages

1. Choice: Consumers with income have a wide

choice of goods & services.

2. Efficiency: There is an incentive to be cost

effective as those who are not will go out of business.

3. Innovation: Producers who come up with new

ideas may be rewarded by increased sales & profits.

4. Less bureaucracy: As decisions are made by individuals

there is less need for large expensive administration.

Disadvantages

1. Unequal distribution of income & wealth: Individuals who cannot supply a factor of

production have no wealth.

2. Lack of essential public services: If an activity does not make a profit then

it may not be provided. Eg. education.

3. Social costs: Lack of government regulation leads

to: Exploitation of labour Pollution Destruction of the environment

4. Vital services in private hands: It may not be desirable to have defence,

judiciary, police under private control.

5. Unemployment: Entrepreneurs try to keep costs down

and lay off workers.

“…one of the great paradoxes of modern history: that an economic system designed to offer infinite choice…has ended up homogenizing humanity”.

Nial Ferguson “Civilization: The West & the Rest”.

“Banks that think they’re casinos put us all at risk”.Independent August 2011

“Corporate crime can inflict far more damage on society than street crime”.

Anto Kerins Irish Times Magazine Jan 2011

Suggested Resources The Corporation

Moral hazardA person insulated from risk behaves differently from howthey would behave if they were Fully exposed to the risk.

For example, a person withinsurance againstcar theft may be less cautiousabout locking his or her car, because the negative consequences of vehicle theftare (partially) the responsibilityof the insurance company.

So will the possibility of debt Forgiveness make people less Inclined to make an effort to payTheir mortgage??

Independent 28/06/11

Moral Hazard?

Naomi Klein vs. Alan Greenspan on crony capitalism in the US

In the 1980’s Ronald Regan and Margaret Thatcher were big fans of Milton Freidman and close friends of General Augusto Pinochet, the Chilean dictator, who allowed Chile to be a laboratory experiment for Freidman’s free market economic policies in the 1970’s.

Suggested Resources Naomi Klein’s “The Shock Doctrine

looks at how the economic policies advocated by Milton Freidman were imposed on the people of Chile with the support of the US government.

Youtube has clips of the film and comments from Milton Freidman

The Shock Doctrine

Advisor to Nixon, Pinochet, Thatcher, Regan & GW Bush

Jnr

Are We Witnessing the Shock Doctrine in Effect?

Milton Friedman debates Naomi Klein

Centrally Planned Economy

(Communism former USSR, China)

This system was advocated by Karl Marx & later Vladimir Lenin.

They asserted that government control of all areas of economic activity is essential in order to eliminate the inequalities of capitalism.

Centrally Planned Economy

1. Planning Mechanism: Resources are allocated by the

state/government through a planning mechanism.

Planners try to predict consumers needs.

They fix the price & quantities produced.

2. Factors of Production: The factors of production are owned by

the state.

Except for labour but this is directed by the state.

3. Maximum government interference: The government exists to regulate all

economic activity.

4. Centralised decision making: All decisions are made by the

government.

5. Motivated by the common good: Consumers, workers & government

are assumed to be selfless.

They co-operate together for the common good.

Economic advantages

1. Reduced inequalities The government may place a

great emphasis on providing all citizens with a minimum standard of living.

Eg. subsidising essential food.

2. Provision of essential services The state provides vital services. Eg. healthcare, education.

3. Economies of scale The government may be more

efficient in the production of goods & services that need large amounts of capital.

Large scale production leads to lower costs per unit.

Eg. energy generation

4. Full employment* Historically centrally planned

economies were able to achieve full employment while some “free enterprise economies” suffered from unemployment.

*All those who are willing to work at existing wage levels are employed.

Economic disadvantages

1. Shortages of goods & services The state may limit prices causing

excess demand. Shortages develop. Goods allocated by a queuing

system.

2. Restricted choice and freedom

Consumers have little say in what is produced.

What is available might be restricted.

Eg. Denim jeans banned as they were a symbol of Western capitalism

3. Inefficiency No profit motive. Therefore no incentive for

enterprise and innovation. Therefore individuals and firms are

not encouraged to take risks, work hard or innovate.

4. Low economic growth As individuals are not motivated by

self-interest this may result in reduced economic activity and poor economic growth.

Excesses of the Industrial Revolution. Led to inequality and poverty. No social welfare. Capitalism condemned by Marx. It contained the seeds of it’s own destruction. Communism would replace capitalism,

leading to a socialist state where all means of production would be publicly owned.

The rise & fall of Communism

In the early 20th century under the control of the Bolshevik Party, a communist government seized power during the Russian revolution, leading to the creation of the Soviet Union, the world’s first Marxist state.

During ensuing decades, communist governments took power in many parts of the world through conquest, including most of eastern Europe, eastern Asia and parts of Africa.

During the late 1980s and early 1990s most of these communist regimes collapsed and adopted capitalistic economic policies.

Today, communist governments control China, Cuba, Laos, Vietnam, and North Korea.

Animated map of Communism (1910- 2000)

3rd secret of Fatima; Consecration of Russia

The cartoon version of George Orwell’s “Animal Farm”

Mixed Economy

An economy that has a mix of both central planning & private enterprise in its economic system.

Eg. Ireland.

Examples of Mixed Economy Economic

Activity

1. Existence of Social Partnership Negotiation between the government

and other social partners to set and achieve targets over a specified time.

Eg. “Towards 2016”. The government meets with IBEC, ICTU, IFA … to set targets for taxation and job creation.

2. Existence of semi-state bodies and private enterprise

There are both government and privately owned businesses providing goods and service.

Eg. RTE – government own TV station TV3 – privately owned TV station

3. Government departments

Regulate economic activity through their actions.

Eg. The financial services regulator ensures that banks work within the law.

4. Legislation The government introduces laws

which affect economic activity. Eg. Minimum Wage Act 2000 Companies Act 1990 Planning Laws

5. Use of taxation & gov spending

The use of fiscal policy* by the government affects economic activity and can alter market outcomes.

Eg. Increasing PRSI will make it more expensive to hire workers and may cause unemployment.

* (any action taken by the government which alters current revenue & expenditure) .

Economic advantages

1. Benefits from efficiency encouraged by free enterprise with regulation form central government.

2. Enterprise is encouraged.3. Ensures a fair distribution of wealth

(tax). 4. Provision of essential services (health).

Economic disadvantages

1. Gov may have to support unsuccessful enterprise (eg banks).

2. State intervention may result in higher taxes.

3. A large public & private sector may be divisive (private sector workers critical of the job security of public sector workers).

John Maynard Keynes (1883-1946)

Keynes lived during an era of great economic change and upheaval – the post-war changes in the 1920’s and the depression of the 1930’s, when there was a loss of faith in classical economic doctrine.

A new approach was sought by many governments and economists.

Keynes provided this alternative which has resulted in the modern mixed economy such as exists in Ireland and the UK today.

Signs that Ireland is moving towards a

Free Enterprise Economy

Deregulation of marketsAllowing competition into powergeneration industry.Eg.

Encouraging enterpriseBy;Gov agencies such asCounty Enterprise Boards &Low CPT & lower PRSI,

Privatisation of SSBEg. Eircom & Aer Lingus

Public/private partnershipTo build schools & hospitals

Signs that Ireland is moving towards a

Centrally Planned Economy

Nationalisation of BanksEg. Anglo Irish Bank

Establishing tribunalsTribunals of enquiry to examine the abuses of the free market system

Increased legislationEg.Introduction of minimum wage

“Nanny State”Some say the government is interfering too much?Eg. smoking laws

Suggested Resources Print out this pp and cut into 6 pieces

to use for “My Little Book” methodology.

Cloze tests Crosswords Matching exercises Wordwall games (Powerpoint) Exam question templates

6 “killer aps”

1. Competition

5. Consumption

4. Medicine

3. Property

2. Science6. Work (ethic)

Suggested Resources

Niall Ferguson’s 6 part documentary explores the rise of Western civilization due to 6 “killier aps” and asks

“Is the West history?”.

Suggested Resources Capitalism a Love Story Michael Moore’s documentary

explores the down side of capitalism and the alternatives.

Clips available on Youtube

Suggested Resources The Corporation

Suggested Resources The cartoon version of George Orwell’s “Animal Farm”

The Shock Doctrine

Advisor to Nixon, Pinochet, Thatcher, Regan & GW Bush

Jnr