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Welcome to ECON 372:

Comparative Economic Systems

By: Dr. Jacqueline Khorassani

Week Eight Lecture SlidesSource: Chapter 3 (pp 72-91) &

Jackie

Marietta College, Spring 2011

What is coming up? Team 1 paper is on Japan, Sweden

and France and is due on Monday, February 28– Presentation: Monday, March 14

Team 2 paper is on Germany, Russia & another country of their choice and is due on Monday, March 14– Presentation: Monday, March 21

Exam 2: Wednesday, March 16

  

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Participatory or Cooperative Economy

Labor–Management Economy– A third way of doing things– Characteristics1. A board of workers hires managers2. Income sharing

Your income may not only depend on your productivity but other workers’ productivity too.

3. Capital must be rented (not owned by workers)4. Market or indicative planning (no command)

Note: indicative planning planning based on forecasts done by various agencies to minimize information asymmetry to establish various targets (output, employment,…

etc.)5. Workers choose where to work

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Participating or Cooperative Economy Advantages

1. No class struggle But…Can labor exploit management?

2. More equal distribution of income? But…Can labor exploit management?

3. Increases worker motivation and productivity

4. Worker owners will make sure that there is a hard budget constraint

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Participating or Cooperative Economy Disadvantages

1. Tendency to hire fewer labor; why? To maximize per capita income of

workers May supply less as price goes upP

Q

S

P1

P2

P3

Q1

Backward bending supply curve

Q2Q3

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Disadvantages of Participating or Cooperative Economy

Or, there may be an upward sloping supply curve that is very inelastic (quantity supplied is insensitive to changes in price)

S’P S

Q

• Which supply is less elastic?• S

• What does it mean?• Economic

Growth?P1

Q1

P2

Q’2Q2

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Disadvantages of Participating or Cooperative Economy

2. Tendencies to form monopolies To maximize labor income

3. Tendencies to disregard externalities To maximize labor income

4. Tendencies not to re-invest part of profits To maximize current labor income Result less growth

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Recall Marshall Titio (1892-1980)

– Leader of Yugoslavia Developed Worker-Management Market

Socialism How did it work?

– There were monopolies– Low labor mobility– Unemployment rose– Output fell– Hyperinflation– Income inequality rose

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But the capitalistic version of Cooperative Economy

Such as– Employee stock ownership plans– Profit sharing

Is still popular

Transition from socialism to capitalism

Began in 1989: The fall of Berlin Wall

http://www.youtube.com/watch?v=s5JdY8ENfVg&feature=PlayList&p=497C1FEC171B0B2A&playnext=1&playnext_from=PL&index=7

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Steps (not necessarily in this order!!!)

1. Privatize state-owned enterprises2. Replace command with market mechanism

Freeing prices Dangers:

1. inflation, why? Price ceiling and rationing is removed Not enough output, high demand

2. Rise in unemployment, why? Productivity matters; cost minimization matters

3. Rise in income inequality, why? Productivity matters

3. Liberalize political system11

Transition form socialism to capitalism

Difficulties Undeveloped banking system Undeveloped accounting system Undeveloped stock market No anti-trust laws monopolies No corporate laws the rules of the game are not

defined Trade rapid increase in imports due to high

domestic prices Quick change (Shock therapy) has not been very

successful corruption, stagflation, underground activities

Gradual change has been more successful 12

Who succeeded ???

Shock therapy or Gradualism

Heavy on their use of foreign aid and advisors

Economic growth per capita immediately after

Latin America

Shock therapy

Yes Close to Zero

Russia Shock therapy

Yes Negative

Africa Shock therapy

Yes Zero

China Gradualism No High positive

India Gradualism No High positive

When is the transition finished? Different opinions

1. Mostly market economy; more than one political party; mostly private ownership of resources

2. When country faces the same problems as market economies

3. When country joins EU (if European)

4. When country joins WTO (China?)14

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Traditional Economy (Chapter 4) Re-embedding religion into

economic decision-making We will go over only those

aspects of religions that have to do with economics

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As we cover characteristics of various religions, think of their economic consequences such as Income distribution Efficiency Growth Market or planned? Labor productivity Technological advancement Resource allocation Others?

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1. Buddhist Economics Influenced economic systems of

China, Japan, Sri Lanka, Burma, Thailand, Laos, Cambodia

Goals (Steph asked)1. harmony of humanity and nature

Equal distribution of income?2. de-emphasis on consumption

Wants versus needs?3. Self-sufficiency

Trade? Efficiency?

– Produce something at a higher cost that we can import it for

– Allocation of resources? Using resources to produce things we have

comparative disadvantage in

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1. Buddhist Economics4. Resources should not be wasted

Renewable/nonrenewable resources? Efficiency?

In Thailand– Evolved under powerful kings with individualist

form of religion Self interest maximization (market

economy) In Sri Lanka and Burma ( now Myanmar)

– Evolved under anti-colonialist movements– Militant form (socialist views) – Achievement of individual merit thru building

temples rather than real investment in capital – Insufficient capital investment less economic

growth

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2. Confucian Economics Not a religion (?) Influenced economic systems of

– China, Singapore, Taiwan

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2. Confucian Economics Based on five concepts

the two main ones? (Steph asked) (jen & li) are often said to constitute

the basis of Confucianism.1. Jen: human goodness; benevolence, what makes man

distinctively human; what gives human beings their humanity

2. Li: general principle of social order or the general ordering of life, propriety

father and son (loving / reverential) elder brother and younger brother (gentle /

respectful) husband and wife (good / listening) older friend and younger friend (considerate /

deferential) ruler and subject (benevolent / loyal)

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3. Hindu Economics India caste system

– Social classes There were four main castes into which

everyone was categorized. 1.At the very top were the priests, scholars, and

philosophers. 2.The second highest caste belonged to warriors,

rulers, and those concerned with the defense and administration of the village or state.

3.Third came the traders, merchants, and people involved in agricultural production.

4.The lowest caste were the laborers and servants for the other castes.

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3. Hindu Economics Basics

1. Self sufficiency Discourage over-consumption Effect on economic growth?

2. Trade within castes3. Division of labor was mostly

hereditary Efficiency?

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4. Judaic Economics Torah

– 10 commandments You shall not steal your neighbor's wife; your

neighbor's house– RESPECT PROPERTY RIGHTS (Market Economy)

Sabbath – Saturday, the seventh day of the week – The day to rest from labor work– The effect on the economy?

Higher or lower productivity?

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4. Judaic Economics Sabbatical Year (Steph asked: How does it work and how

does it affect the economy?)– The seventh year– A year during which farm-land owned by Jews has to remain

uncultivated,– When debts owed to individuals are "forgiven"

Economic consequences? – When people serving as bonded laborers were traditionally

freed Economic consequences?

Jubilee – The 50th year, i.e., the year following the last year of seven

Sabbatical cycles. – You shall return every man unto his possession (indicating

the compulsory restoration of hereditary properties) Economic consequence?

– A year of celebration and forgiveness kibbutz is pure socialist invention

Economic consequence?

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4. Judaic Economics A kibbutz

– A collective intentional community – A unique Israeli experiment– Founded in a time when independent

farming was not practical. Forced by necessity into communal life, and inspired by their own Jewish/socialist ideology

– A pure communal mode of living– The kibbutzim have given Israel a wildly

disproportionate share of its military leaders, intellectuals, and politicians.