Capitalism

The Capitalist Economies

  

Capitalism is an economic and social system in which the nation's farms, factories, and mines are owned predominantly by private individuals, partners, and stockholders. Although social ownership may be present, and it may be substantial, it is a deviation from the rule. The market system is the basic coordinating mechanism under capitalism, but each country modifies the forces of supply and demand with its own assortment of traditional behaviors, industrial policies, social welfare programs, cultural, and other instruments of social and governmental control. Thus, there are clear distinctions among the economic systems in the United States, Germany, Japan, and the scores of other capitalist nations.

    To those of us who live in high-income capitalist countries, many of the institutions of market exchange and private property are so familiar that we have taken them for granted. We must be reminded that checking accounts, credit cards, patent rights, and markets for stocks, bonds, and real estate are relatively recent innovations in the history of civilization; indeed, they barely exist in many parts of the world today.

    Several historical preconditions had to be fulfilled before the capitalist economic system could develop. Growth of market exchange required the development of monetary institutions and a relatively safe area of travel. In the political and legal spheres, capitalism requires the development of a system of property rights and a reasonable measure of political freedom for a large segment of society. In the areas of religion and philosophy, capitalism requires the relaxation of taboos against individualism and accumulation of wealth. Finally, it requires the formation of a class of people (capitalists) who direct savings into productive investment rather than into the erection of monuments.

    The mercantilists were among the first to call for an active governmental role in the market economy, particularly in the regulation of foreign trade. Adam Smith argued that the mercantilist controls were counterproductive and he proposed a system of "natural liberty" regulated by the competitive market mechanism. Smith's followers in the classical school supported his recommendations, but they foresaw problems in the operation of capitalism. Malthus feared overproduction of goods and population crises. Ricardo predicted a trend toward a non-growth, "stationary state." Mill decried the social injustice of capitalism.

    According to Karl Marx, Capitalism is an exploitive system and its eventual replacement by socialism is an inevitable law of history. During the Great Depression, when if seemed that the Marxian prediction was becoming reality, John M. Keynes argued that the capitalist system could be saved through macroeconomic stabilization. Keynes' critics, though, claimed that his cure would be worse than the disease of unemployment. Schumpeter claimed that Keynesian policy would interfere with the progressive force of "creative destruction," and Hayek warned that governmental activism would lead us down a dangerous "road to serfdom." The popularity of Keynesian ideas peaked in the 1960's and then declined during the stagflation of the 1970's.

     At the current time, the capitalist system is interpreted in many different ways by different groups of economists. Monetarists and supply-siders draw their inspiration from Adam Smith and his classical school. They generally believe in the stability of the capitalist system and advocate a limited role for the government. New-Keynesians and Post-Keynesians question the stability, competitiveness, and equity of modern capitalism and many of them favor broad programs of macroeconomic stabilization and social reform. Radical economists expand on Marx in their analysis of domestic and international capitalist exploitation and argue that growing frictions between democracy and capitalism require the adoption of democratic socialism.

    Rapid developments in transportation and communication technologies have reduced the importance of national boundaries, encouraging the internationalization and globalization of trade, investment, production, employment, finance, and information. Mainstream economists generally support the internationalization of trade, but they have reservations concerning international investment, employment, and finance.

    The institutional framework of international capitalism took new form at the end of World War II, with the creation of such organizations as the International Monetary Fund, the World Bank, and the General  Agreement on Tariffs and Trade, and has continued to develop with the establishment of the World Trade Organization. Development of these global institutions has been accompanied by regional free-trade institutions, such as the EU, EFTA, APEC, and NAFTA. The relationship between global trade liberalization and development of regional trading blocks is a matter of continuing controversy.

    The vast changes sweeping through the world economy have focused attention upon the nature of the market capitalist economic system, the system that is the goal of many reformers in power in the former communist countries. Even many predominantly market capitalist economies are making efforts to move in the direction of a purer version of this system. Although not perfect, it seems to be the victorious universal ideology of the world.

    We have never seen a pure version of the system anywhere in history, nor are we likely to. Probably the closest to pure market capitalism ever seen were the U.S. and British economies in the middle to late 19th century. They represented the culmination of a historical line of development that, originating in the murky mists of time, formed a coherent system in the 1200's in northern Italy and Flanders with the invention of modern accounting and mass urbanization, and transformed itself into a dominating structure with the Industrial Revolution in Great Britain in the late 18th century. But even at its apogee in the 19th century, governments intervened in many ways, from trade protectionism to subsidizing. The building of transportation infrastructure to maintaining military forces. Those economies exhibited both the virtues and difficulties of unfettered market capitalism. They experienced enormous technological advances and growth as they underwent the Industrial Revolution. Even those critics of market capitalism, Karl Marx and Friedrich Engels, recognized the enormous ability of the system to "revolutionize the means of production" in ways unprecedented in world history.

    However, both economies experienced large macroeconomic fluctuations with serious downturns in the 1870's and 1890's and increasingly unequal distributions of income associated with increasing concentrations of industrial monopoly power. After the 1900's these problems triggered substantial movements towards greater government involvement in both economies, in the United States especially after the 1930's Great Depression.

    Today the economies that come the closest to the ideal of pure, laissez-faire, market capitalism may be Hong Kong, Macao, Singapore, and Switzerland. All have successful records in many ways. In recent decades Hong Kong has enjoyed one of the highest grow th rates in the world along with very low unemployment. Much like in Japan, Hong Kong authorities have used indicative planning, Also Hong Kong is not an independent country but in the control of the People's Republic of China. Hong Kong may become less laissez-faire. Switzerland has one of the highest real per capita incomes of any country in the world. Like Hong Kong it also has had very low unemployment rates. It clearly is a success story of market capitalism. Switzerland has an especially weak central government, although the central bank is famous for its strict monetarist policy controlling inflation. Most of the power and fiscal authority lies in the hands of the cantons, local units based on the ethnic. divisions of the country. These cantons engage in quite a bit of social welfare spending and market regulation that is similar to, though less than that practiced by the social market economies of northwestern Europe.

    The relatively harmonious relations among the Swiss cantons have made them a model for other nations with much ethnic diversity, such as Lebanon and Yugoslavia. Switzerland has had a long record of neutrality and independence from international organizations, exemplified by a recent vote to stay outside of the European Union. Macao and Singapore are also very successful city-states with government overseeing the economic and no regulations

    Some very poor less developed countries have smaller state sectors relative to GDP than Hong Kong or Switzerland, for example, some African nations. But most of these also have poorly developed markets and little modern industrial capitalism. Probably the developed economy most oriented to market capitalism after Hong Kong and Switzerland is the United States, despite its substantial increase in government intervention since the 1930s. In considering the practice of market capitalism in this chapter we shall draw heavily from the U.S. example. The dynamic efficiency or technological dynamism of market capitalism is its greatest appeal to countries seeking to emulate its successes. But this dynamism has come through the macro economically destabilizing process of creative destruction as described by Joseph Schumpeter. It is with respect the static efficiency that most economists see market capitalism as possessing significant advantages, although Adam Smith strongly argued for market capitalism's dynamic and static advantages.

                            The Theoretical Efficiency of Market Capitalism 

   Why have the countries with the highest real per capita incomes in the world also had market capitalist economies, notably Switzerland and the United States? Probably the strongest reason is the general ability of markets to efficiently allocate goods and resources through the law of supply and demand. This general ability is summarized in the following theorem: A complete, competitive, full- information general equilibrium is efficient.         To understand this theorem, its implications, and its limitations, it is necessary to know what the terms in it mean. Complete means that for any good or service that affects someone's utility, there is a market.Competitive means that there are many buyers and sellers with free entry and exit, that there are well-defined homogeneous goods and services, and that no individual supplier has any control over the price in the market. Full information means that all actors in the economy know everything about consumer preferences, production technologies, prices, or anything else they might need to know for deciding how to act. General equilibrium means that every single market is in equilibrium in the sense of the quantity supplied equaling the quantity demanded of the good or service in question. If only one market is in equilibrium this is partial equilibrium. Efficiency means Pareto Optimality, after the Italian economist Vilfredo Pareto. No one in the economy can be made better off without making someone else worse off.

     If someone can be made better off without making someone else. worse off, then the economy is not producing as much as possible. But if Pareto Optimality holds, no more can be produced; all that can be done is reshuffle existing goods and services between people.

    Thus the economy is on its production possibilities frontier (PPF), defined as the set of maximum possible output combinations the economy can produce given its resources and technology. But not all points on the PPF are efficient because they may be combinations of goods and services people do not want. The Soviet economy may have been on its PPF, but it was thought to produce too much military and not enough civilian consumer good. An efficient economy must be a fully employed economy. Otherwise it would be inside the PPF because the unemployed could presumably produce.

    In macroeconomics the Chicago School supports the classical approach Friedman in particular is the most prominent advocate of monetarism in the United States and is the father of the proposal that the money supply should grow at a constant rate per year. Beyond that, fiscal policy should involve deficits and should not be actively used for stabilization efforts.

    With respect to the distribution of income, people should be allowed to keep what they earn from the free market. Inequalities are the necessary outcome of providing sufficient incentives for production, investment, and growth. The equity-efficiency trade-off is real and efficiency should be favored. So government should not redistribute income.

    A more general criticism of government intervention is made by the public choice theory, which argues that the government agencies designated to carry out the market-correcting activities are self-interested entities that become captured by special interests operating through their legislative connections. This analysis became more focused after the discovery of the concept of rent-seeking by Anne Krueger, rent defined as the return to a factor fixed in supply, such as land or a unique individual. Government agencies can through regulatory actions create artificial scarcities, such as a limited number of import licenses in a less-developed country. Doing so then artificially creates rents that can be captured by special interests or even by the bureaucrats in charge of allocating these scarce items by means of bribery. Large amounts of economic resources become devoted to the creation and capture of these rents often involving corruption.

Summary and Conclusions

    Modern market capitalism evolved out of the merchant capitalism in the late medieval period to reach its closest approach to laissez-faire in the emergence of the industrial revolution in Britain and the United States in the 19th century. These economies have seen increased government intervention in the 20th century, leaving  just few truly laissez-faire advanced economies in the world today.

    A complete, competitive, full-information general equilibrium, in which supply equals demand in all markets, is efficient in the Pareto. Thus no individual can be made better off without making some other individual worse off. This theorem does not address the question of income distribution, and critics of market capitalism emphasize its tendency to inequalities of income and wealth, which seem to be worsening over time. Supporters of market capitalism argue that such inequalities are necessary for bringing about economic growth because they provide incentives for work effort and investment.

   The efficiency theorem suggests that a minimal government, laissez-faire economy might be inefficient because of monopoly power, externalities, insufficient public goods, imperfect information, and possible macroeconomic instability. During the 20th century and beginning of the 21st. Century, the U.S. economy has developed mechanisms for dealing with these problems, many of which involve some sort of government activity or intervention although much of this has been questioned in the United States since the 1994 and 2000 elections.

   Despite this evolution, controversy and debate continue regarding the appropriate scope of government involvement in mixed market capitalist economies. Strong supporters of, laissez-faire critique proposed and actual ways in which governments seek to correct the inefficiencies of unfettered markets. This suggests that as the former socialist countries continue to move towards market capitalism, they will increasingly encounter serious questions regarding the ultimate balance between the public and private sectors within their economies.

    Although the United States is much closer to laissez-faire than most market capitalist economies, its government actively intervenes in a variety of ways to deal with the above problems. A recent trend has been towards policies that may involve establishing a market where none existed before, for example for tradable pollution permits. Compared with other market capitalist economies, the United States has a very high real income, high level of competitiveness. Greater income equality, weaker institutions such as unions, more per capita income, smaller public sector, and historically greater volume of its GDP. This shows not only dynamism but also difficulties of the Market Capitalist Economy. 

    The viability of capitalism has been demonstrated by both theory and historical experience. Capitalist theory points to its inherent tendencies toward equilibrium and historical experience shows that capitalism has survived several centuries and that there are no signs of impending collapse.

    The theory of resource allocation in the market capitalist economic system, in particular, on the way resources are allocated and the role the state should play in the allocation process. The traditional neoclassical model maintains that capitalist economies have a strong tendency toward equilibrium and that they generate and process information efficiently. Under competitive conditions, they use resources efficiently. Market capitalism promotes consumer sovereignty, which allows consumers to determine what will be produced. From a policy perspective, in the perfectly competitive market capitalist economy, government would play a very limited role, avoiding interference in the operation of business.

    Critics of this model of self-regulating market capitalism have focused on several perceived weaknesses. In his classic work dating from the late 1930's, John Maynard Keynes attempted to demonstrate that such an economy could establish a stable macroeconomic equilibrium at less than (or greater than) full employment by working with the aggregate demand, particularly through fiscal policies. Thus, given the possibility of persistent and unacceptable unemployment, Keynes argued that it is the responsibility of government through fiscal and monetary policies to bring about an appropriate (full-employment) equilibrium

    A major line of criticism focuses on the argument that in the real world, perfectly competitive markets are likely to be replaced, in part, by imperfectly competitive markets, where resources are misallocated and that regulation and taxation are required to offset potential abuses arising from monopoly power.

   The outcomes of the market economy have also been criticized from the perspective of externalities. The basic neoclassical model assumes that all costs and benefits, both private and social, can be measured and accounted for in the resource-allocation process. Economists have demonstrated that in a variety of circumstances, there are likely to be externalities that is, costs or benefits external to, and thus not accounted for by, the decision maker as resource allocation takes place. The government intervention may be necessary to achieve an optimal allocation of resources.

    The notion of self-regulating market capitalism remains controversial. For example, the monetarist view of the market economy has mounted a major counterattack against the Keynesian revolution, arguing that, on balance, government intervention in the economy is not necessarily stabilizing and thus should be minimized. Indeed, some have argued that capitalism is capable of handling problems of market imperfections and  without significant, if any, government intervention.

   What hypotheses can be put forward concerning the economic performance of the market capitalist economy? The traditional view holds that the markets tend to result in an efficient allocation of resources but that economic activity remains unstable or cyclical with the business cycles, inflation, and unemployment in the short term fluctuations and, economic fluctuations and unstable growth in the long term. Perhaps the distribution of income will be less even than in those systems where greater degrees of social ownership or government redistributive effort are present; however, the matter of an appropriate distribution of income is controversial on both equity and efficiency grounds. No firm hypotheses are suggested regarding economic growth in the market capitalist economy. 

 

Capitalism

a) a system of economic organization in which individual persons, singly or in groups, privately own the factors of production and possesses the right to use and dispose those economic resources generally in whatever matter they choose

b) economic activities will be conducted by managers of firms instead of entrepreneurs (Joseph Schumpeter) - freedom of enterprise

c) Requirements

i) Competition - all factors of production be privately owned and controlled instead of just capital - Canada, where the government owns the land, is not capitalist - self reliant individuals must compete for economic rewards - benefits are (1) allow prices to reflect supply and demand, (2) will show prices and costs to be efficient, (3) encourages innovation, invention, flexibility, and decrease in the long run cost, (4) encourages equitable distribution of income, (5) provides a variety of goods and services

ii) Unlimited use of Wants - right of individuals to employ his or her talents and energies in the matter he deems best to promote personal interest - slavery is not capitalistic - Calvin and Luther: accumulation of capital is not evil - rewards are for those who are economically competent and punishes for incompetence

iii) non-economic institutions have significant bearing in capitalism in its development

iv) there should be some economic institutions in capitalism - private property - freedom of enterprise and choice - competitive markets - limited government - competition - individualism - Protestant work ethic

v) Private Property - right of individual to control property and the right to enjoy the economic rewards that result - government protects owners claims - functions: (1) does not refer to only tangible things (intellectual rights), (2) encourage accumulation of private property - encourages the private savings of private and corporate income (3) inheritance - generational transfer of wealth - separate from but attached to private property - not based on merit

d) Economic Institutions

i) private property

ii) Freedom of enterprise - gives individual owners the right to select economic activity in which your economic resources will be employed - in Capitalism, it is entrepreneurship, owning capital, and generally, exercising self interest (maximization of self-interest and satisfaction - producing where MR=MC)

iii) competitive markets - circular flow (factor market (supply) and product market(demand)) - owners of FOP and demanders of FOP and how they interact - to be competitive, nobody is coerced - free interaction -

a) price serves two functions - plus a less important third

(1) rationing - allocate goods and services to those willing to pay prevailing price - willingness depends of purchasing power - rationing also among producers who are able to make more efficient use of resources

(2) motivating - both in factor and product market, price increases are created by increase in Demand and price decreases are created by decrease in Demand - these shifts in supply and demand result in equilibrium

(3) price may affect consumer choices - price will tell us way in which resources will be employed - (non-price determinants of demand)

iv) government with regulatory matters

a) should have checks and balances - liberal?

b) must preserve social values and use regulatory measures

c) government must exist to stop existing institutions from destroying themselves

d) Milton Friedman - wrote Capitalism and Freedom - government exists to preserve law and order - government exists to promote competition - he was a monetarist - government should intervene in all monetary policies - government should never be neutral - for instance, government should guarantee property rights - when government intervenes, negative externalities are created

e) Conditions of Capitalism (perfect competition)

i) Product Market

a) self-interest allows consumers to determine which products they want - Supply and Demand and all that affects price mechanism

b) Consumers maximization of utility - must be without cost

c) sufficient number of firms in each market - many buyers and sellers

d) individuals are price takers - one person cannot affect market

e) consumers experience decreasing marginal utility - as consumers consume more, smaller satisfaction is received for each additional item consumed

ii) Factor Market

a) response of the prices to demand and supply conditions

b) firms maximization of profit

c) resource (factor) owners maximization income

d) firms can enter or exit without cost or penalty

e) no barriers to impede operation of perfectly competitive market

f) political power parallels concentration of economic power

g) competitive system achieves equilibrium prices and quantities in every market by Pareto?

iii) Distribution of Income

a) the more you own, the more income you have 

 

f) American Capitalism

i) Capitalism as an existing system - it has imperfections - it

is not pure capitalism - it originates in the private sector - government has created failures in the economic system

ii) There are two sources of market failure:

a) Private sources of market failure

(1) Transaction Costs

(a) theoretical capitalism assumes that market transaction occurs instantaneously without cost to buyer or seller

(b) in existing capitalism there exists:

(i) search costs because producers and consumers must find each other and find

the lower prices and costs

(ii) negotiation costs

(iii) litigation costs

(iv) distribution costs

(v) subjective costs

(vi) advertising costs

(vii) transaction costs

(viii) Insurance cost and risk aversion

(c) resources used for these costs could be used to produce more 

 

(2) Economies of Scale and Scope - gives monopoly conditions to develop into a monopoly - in reality with capitalism, corporations can work in economies of scale and scope - monopolies can develop --- long run, short run - In short run, all FOP's except

technology - usually either labor or capital - in short run, called law of diminishing returns - in long run, all FOP's change including technology - arises from technological conditions, lack of pure competition (absence of perfect information) or information flaws, research and development, and managerial expertise

(a) Scale - change all inputs to produce no changes in outputs?

(b) Scope - change all input to produce on output

(3) Corporate business organization or legal business organizations

(a) market prices alone determine decisions for firms - but entrepreneurial planning decrease transaction costs and helps firms take advantage of economies of scale and scope - utilize rationalized production in which General Motors, e.g., can produce all parts in different factories - or e.g. Sprint with North Supply and LTD's - large scale ventures are allowed in the US - theoretical capitalism does not support corporate business organizations

(b) US capitalism also supports mergers

(c) economic power in US is concentrated in corporations instead or individuals - theoretical capitalism believes that the only organization is the individual, not a corporation

(d) capitalism allows firms to have political power to influence other institutions - some believe that the US has power that was taken from the pure capitalist system

(4) Labor unions

(a) mergers of individual workers joined together to gain a better bargaining position - American capitalism allows owners the right to form monopolies (sellers) - unions are monopsonies (buyers) as monopolies - US unions are exempted from

prosecution - do unions today protect against monopolies?

b) Public sources of market failure (government) - violations of pure capitalist systems - government distorts prices instead of allow the price to be determined through equilibrium

(1) Provision of Public goods - goods provided by society as a whole - use benefit/cost

analysis - examples are defense and aid programs - government uses legal coercion to supply public goods (e.g., taxes) - problems:

(a) free riders

(2) Public utilities and natural monopolies (antitrust laws) -

(a) inefficiency - some monopolies are allowed to exist (e.g., gas, communications) - Inter State Commerce Commission and FCC regulate public utilities - it is inefficient for a market to exist - so utilities are regulated because they are

monopolies - they could produce less at lower quality and higher price - government allows regulation to work in direct violation to pure capitalism

(3) Indirect controls and subsidies

(a) Indirect Controls Macroeconomic Economic Stability policies are the greatest violation of pure capitalism (unemployment and stabilizing national economy) - Government manipulates these through monetary and fiscal policies - place major roles on what happens in economy - this distorts pure capitalism - Federal Reserve regulates interest rates and exchange rates and imposes price controls

(i) price ceilings

(ii) price floors 

 

(b) Subsidies - government aiding private sector through grants, unemployment

compensation, social security payments, welfare payments - government imposes

transaction costs greater than what they would be if pure capitalism existed with licensing and others

(c) Tariffs and non tariffs (barriers of trade)

iii) Strengths of US Capitalism

a) Flexibility

(1) allows capitalism to conform to environmental changes in technology and changes in preferences - the only way to deal with government role in economy is flexibility - one form of flexibility is our ability to form organizations

b) Raising Standard of living

(1) US capitalism is operating at a high level of efficiency - there are few economic systems

that have come close to the US standard of

living - economic betterment is a factor in

human happiness

c) Individual opportunity

d) Technical progress

e) Economic development - not just growth but also happiness and better utilization though technology and better innovation

iv) Weaknesses

a) Pecuniary vs. human values (monetary vs. non-monetary values)

b) Unemployed resources (less than 100% utilization of FOP)

c) Inequality

v) Future of American Capitalism 

 

24. Sweden

a) best example of capitalist welfare system

b) Social Democratic Government

i) It is a market system dominated by a Social Democratic Party

a) socialism through gradual reform to socialism, rather than revolutionary change (most European have gone through gradual but revolutionary changes)

b) democracy is a route to the establishment of socialism in Sweden - transformation from old-style capitalism to contemporary managed capitalism

c) democratic socialism meant, traditionally, government ownership

of industries (Nazi Germany)

d) Six policies used in Sweden

(1) monetary and fiscal policies

(2) private ownership and price system

(3) means associated with socialism - planning (rejected in 1994)

(4) equality - reduction in inequalities of income, wealth, and occupation

(5) allocation of resources between private and public sectors

(6) power and participation of private associations

(a) L.O. and S.A.F.

e) Four types of government Economic Planning

(1) Provision of government services

(a) education

(b) medicine

(c) housing

(d) national defense

(2) Macroeconomic aggregate plans

(a) attain goals more effectively - government oversees and regulates - it is not managed capitalism - promotes Macroeconomic policies for expansion and growth

(b) similar to US

(3) government owned enterprises

(4) guidance of private sector and stabilization of income

ii) allows firms to set aside 40% of profits in tax-free investments

iii) institutional forms of income policies:

a) heavily unionized labor force

b) lowest level of labor/management conflict

c) Swedish Conference of Trade Unions (L.O.)

d) Swedish Employers Association (S.A.F.)

e) Swedish wage policy - central wage bargaining without government intervention is between trade unions and Swedish Employers Association - all organization sign agreements and

government approves - results in high employment

iv) taxation - about 60% of national income (highest in US is 32%)

a) health care

b) subsidized housing - (US - 1/4 to 1/3)

c) education

v) per capita income is second only to the United States

c) Military

i) not participated in a war since 1913 - not a part of W.W.I and W.W.II - they spend 33% of national income on military

ii) no foreign nation except Denmark has invaded

d) Environment

i) smaller than US

ii) diverse in wood, iron ore, and second to Germany in gold

e) Population

i) highly homogeneous population - they all look alike - this helps the economic systems

ii) about 8.2 million (US has 282 million)

iii) solidarity of workers

a) 1993 - unemployment was greatest problem according to 18% of people - it was 2%

f) Comparison of US to Sweden

i) both do aggregate demand management (not aggregate supply)

ii) planning is essential to both

iii) expansion of provisioning of government services

iv) both desire to redistribute income

v) improvements through monetary and fiscal policies

vi) in Sweden, industry concentration is allowed

vii) in Sweden, actively fight unemployment

viii) stabilization of investment - government uses instruments to smooth out flow of government investment

a) 10% of reserve of capital expenditure

b) regulation of investment by labor market boards and the ministry of finance

ix) government has direct control of private housing 

 

25. Great Britain

a) General Comments:

i) British economy is a declining capitalist economy

ii) formed in 1707 formed by 3 countries - in 1901 a union of England and Britain made Great Britain - power of 18th Century was the result of their economic power - in 1870 they had 2 percent of population and 30% of production - they were first industrialized countries - three former colonies

(Canada, Australia, and US) have the greater share each of the world's economy now

iii) high inflation and unemployment

iv) why British Empire declined

a) failure to maintain technological advances after industrialization - industrial revolution in England started in England by the middle class (House of Commons) - the following generations did not keep up with advances of the first generation of industrialization

b) slow in capacity to produce electricity and automobiles

c) British financial power was attributed to the lower middle class - third and fourth generations became apathetic

d) government encouragement of mergers of small enterprises into larger ones

e) laissez-faire

f) union growth

g) banking and financial regulations - they were allowed to police themselves through their own trade groups

v) Britain paid more attention to colonies than to homeland

vi) Great Britain is not socialist (misconception) - it is a mixed capitalist system like US, France, or Germany

vii) misconception has to do with wave of social reforms and nationalizations that took place in UK after W.W.II. Certainly UK's public sector is greater than the US. It's more the structure of this public sector that makes the UK differ from the US, Germany, Japan, and Scandinavian countries.

viii) Like France, UK has a large nationalized sector and socialized its medical service

ix) The overall % of GDP that passes through the government is actually very similar to the other Western Economies. However, in Britain the nationalized industries show up in the government's accounts.

x) The socially owned industries both sell to and purchase form the private sector; they are large employers and undertake substantial fraction of total international investment.

xi) Britain's social security system, unemployment compensation, welfare and retirement programs are much less comprehensive than those of many other develop nations including Germany, Japan, and the Scandinavian countries.

xii) The overall size of the public sector is then an imperfect measure of the extent and nature of the governments role and of its ability to influence or guide the economy

b) Balance of public and private sector of the factors of production

i) Britain nationalized the Bank of England after W.W.II - just like the US

Federal Reserve (publicly owned and operated for international income) further nationalization did not take place, leaving private sector alone

ii) BBC - state owned communications monopoly (1927) but private radio and TV broadcasting enjoys economical success

iii) in civil aviation several public corporations dominate - airport authorities control ground facilities

iv) the Transport Act of 1947 placed many passenger and freight haulage facilities under a single public body, the British Transport Commission

v) long distance road haulage has been partially nationalized but remains partially in private hands

vi) The fuel and power industry (coal mining, electrical generation, and

distribution facilities) and the total steel industries are either completely or predominately socialized

vii) Public authorities principally local building societies subsidized by the central government have built more than half the housing units constructed since 1945

viii) The great predominance of industries and firms that do not have to contend with direct state intervention may be viewed alternatively by planners as the anarchic element which has made their plans unworkable or by anti-planners as the last healthy elements of mismanagement over their managed economy.

ix) Margaret Thacher's privatization in the 1990's -- domino effect in europe and the rest of the world

c) The location of the decision making in the economy

i) As in most democratic nations, the economic implications of the British democracy are the rights of an individual to freely choose his employment and what he wishes to consume

ii) Private firms are free to determine their output and input mix in pursuit of maximum profit

iii) Government at all levels, however, have a variety of levers which can alter the environment in which private decision makers operate

iv) By manipulating tax levels and structures, subsidies, and tariffs, the government can influence what remains nevertheless a private decision by a worker -- consumer or firm

v) practical and legal limitations on the power of the government to alter these decisions do exist - certain policies can push just to far and then diminishing returns appear

vi) government runs industries unprofitable in an accounting sense - Average Total Cost => loss making industry

vii) the government may also impose social welfare programs in areas that could theoretically be left to private decision making - these areas are the personal every day risks, wherein the individual could easily protect himself in situations such as illness, unemployment, or retirement

viii) Rational - social and public programs implicitly represent a social judgment that universal minimum coverage is socially desirable or individuals are not good judges of social risks

d) Criterion of classification

i) The mechanism for allotting resources

ii) Britain is a capitalist nation, the representative firms are small in most industries

iii) buying/selling is free and competitive

iv) substantial amount of firms are large and developed to establish international portion in the world market

v) the socialized industry sector could be a qualification that UK is a socialist economy -- even the nationalized industries are market oriented

vi) government intervenes in the economy but its limited to changing the environment of doing business and inducing people to do things rather than forcing them to

e) Summary:

i) Britain has a capitalist economy with a strategic sector of socially owned industries

ii) The locus of decision making is principally private and decentralized with a number of social programs run directly by or subsidized by several levels of government 

 

26. France

a) General Comments:

i) France has always been a great exporter of ideas

ii) The French contribution to economic theory and policy has been equally important in the 18th century - Adam Smith with their believe in natural economic order with their conception of a circular flow of international income, with their believe in laissez - faire policy and was influence by

the French

iii) In the 19th century, Jean Baptiste Say laid the groundwork for classical Macroeconomic theory ( Supply side Economics)

iv) In the 20th century, after W.W.II, the French established unique system of indicative planning, although it bore the resemblance to the scheme suggested by Saint Simon

v) Subsequently, the French record of Economic growth was transformed from one of the worst in the industrialized world to one of the best

vi) Correctly or not, many observers attributed that achievement to the system of indicative planning and several other countries engaged in establishing their own planning systems (i.e., Great Britain)

vii) France has a tradition of social discord, which encouraged the development of strong government institutions under Colbert, Napoleon, and DeGaulle to maintain order

viii) This has led to a tradition of government intervention in the economy

b) Indicative planning

i) On important form of that intervention has been the system of indicative planning, established after W.W.II

ii) Indicative Planning is meant to improve the operations of the market mechanisms through cooperation and exchange of information

iii) Compliance with the plan is voluntary but its encouraged by government financial and regulatory actions and by the relatively new system of plan contracts. The record of plan fulfillment is recent years has not been good

iv) France also has long experience with nationalized industries, a wide range of operation were nationalized by Mitterand in 1982 - The Chirac government, however, initiated a privatization program in 1986 - French industry is concentrated, but firm sizes are relatively small

v) mergers are encouraged

vi) The labor union movement is relatively weak

vii) The financial system also has a tradition of governmental participation in ownership and regulation - a program of financial deregulation was initiated in 1985

viii) During the post war years, the general stance of fiscal and monetary policy has been pro-growth with occasional austerity programs to handle balance of payment problems

ix) The Mitterand government was forced to adopt an austerity program in 1982-1983 followed by a series of tax and spending cuts and a broad based program to alleviate unemployment

c) France is a modern mixed economy with a unique blend of economic institutions.

i) private vs. public

a) In France private ownership is predominant. The great majority of firms operating in the areas of agriculture, industry, and services are privately owned

b) The Public sector, by US standards, is quite large. Public utilities (gas and electricity) are publicly owned (RR and airlines too). The state owns coal mines and has the major interest in the petroleum industry. The government also produces cars and aircraft. The Bank of France and the four major deposit backs and the large segment of the insurance industry is also nationalized.

c) Approximately 20% of the GDP flows through the budget of the central government including social security and transfer payments

ii) locus of decision making power

a) Economic power in France resides both in the individual and private firms as well as the state. The private decision maker is free to choose his employment and his consumption patterns. The

private firm is free to determine its output and input mix.

b) Collective decision making has a powerful influenced on the nature of the private decisions. The state, through a variety of techniques:

(1) Indicative planning

(2) planning organizations planning cycles

(3) monetary and credit controls

(4) tax policies

(5) wage controls

(6) development of income policy

(7) social welfare

(8) regional planning

c) is able to modify many of the parameters entering into the private decision making and thus is able to modify the decision themselves

d) Collective decision making in the operation of the nationalized sector also has an important influence on the direction of the entire economy.

e) The state further influences the allocation of resources through its extensive redistribution measures: social security is 13% of the GDP; family allowance scheme; comprehensive sickness insurance, maternity, and pension benefits and unemployment compensation allocation of economic resources

iii) mechanisms used to allocate resources among competing users

a) France has a market and the signals of allocation of resources is done by the market

b) Despite extensive government influence in the economy and international plans, few economic actions are the result of direct order from the government. The government may intervene in

the economy, altering Supply and Demand conditions but this intervention will be reflected in the cost of doing business and will influence the profits of the private sector.

c) Post W.W.II economic has become a blend of institutions that have caused high rates of growth

d) High full employment and high stable growth rates but had not permanently been able to control inflation which has been a persistent problem often threatening to block expansion programs

e) France has been less successful in the diversion of output among economic elements

f) Social tensions have developed and occasionally erupted into violence despite the strong performance of economic aggregates. 

 

27. Germany

a) mixed capitalist

i) Social Market Economy (SME)

ii) strong welfare state - it works well for the Germans

iii) expressly rejected planning

iv) Three policies to promote competition

a) anti-monopoly

b) small and medium corporations (training, R&D)

c) spread wealth and ownership of capitalism - nationalism

v) Ludwig Erhard

a) created the social market economy

b) rejected social planning

c) wanted to avoid cartels (oligopoly) - must have control of a product in the market

d) established a system of compensation

e) supply side economics (traditionally through laissez-faire)

f) extensive social welfare system

b) neoliberalism philosophy and policies

i) alternative to laissez-faire

ii) no central planning

iii) efficiency of the price system should be combined with competition and monetary stability

iv) government has a role, but not to plan

v) they believe that the market has to be perfect

vi) need for government to interfere in market, but not through planning

vii) governments promotes competitive forces

viii) removal of trade barriers

ix) remove state controls

x) dissolving of economic power groups (trade associations)

xi) price stability is insured only by the government's responsibility to conduct monetary policies

xii) compatible with government redistribution of income

xiii) social welfare measures and control of environment

xiv) market equilibrium may be government regulated (government shifts demand curve)

xv) private property predominates but government owns railroads, telephone, and other corporations - 90% electricity - 70% aluminum - 70% of Volkswagen - largest interest in banking system

xvi) government influences allocation of resources - agriculture, housing, and regional development

c) monetary and credit policies

i) strong central bank - for price stability - limited stock market

ii) Central Bank:

a) power to regulate money supply

b) promote high levels of investment

c) government influences through credit policies

d) owns 25% of 138 companies

e) owns 425 joint stock companies

d) tax and investment incentives

i) 1993 - 36% GDP was collected in taxes

ii) Savings Premium Act allows small companies to be owned

by individuals

iii) saving deposits can be deducted from taxable income

iv) top tax bracket is 53%

e) stabilization policies

i) government influences the economy through changing interest rates

ii) because of previous experiences with high inflation, reluctant to use Keynesian policies

iii) Constitution requires a balanced budget

iv) they try to stabilize income

f) labor and development of income policies

i) co-determination

a) workers given a voice in the management of the company - work consuls

b) handled through workers consuls and corporate supervisory boards

c) migrant workers (Gastarbaiter)

d) system has led to labor peace, price stability, and low unemployment

e) unification has caused unemployment, higher taxes, retraining and debt

ii) average wage earnings have been high

iii) 1/3 of corporate boards have labor representation

g) budgetary planning

i) more than 30% GDP in tax

ii) committee to study trends but not to make recommendations 

 

28. Japan

a) miracle or myth

i) during war

a) lost 1/4 of national wealth

b) 1/4 housing destroyed

c) 1/3 infrastructure

ii) from 1950 to 1985

a) national income increased by ten times

b) individual income increased by seven times

b) the environment

i) homogeneous population

ii) planned market economy

iii) cultural and social relationship in society (amae and wa) - stabilized relationships that allow for mild changes and cultural harmony - Japanese will work for maximization of profit in the long run (planning is done for 200 years), while planning is done in the short run in the United States -

iv) interlocking network of families in corporations

v) few resources except the labor source

vi) they are a protectionist economy - they consider Japan as a whole above all else

vii) little mobility

c) industrial organization

i) big business and small business that work for the big businesses

ii) small companies are created, but are bought out when they become successful

d) labor market and labor relations

i) collective bargaining

ii) lifetime employment - not the same job, but with the same company (salaries can be lowered)

iii) seniority pays and bonus - profit sharing and stock options

e) share economy

f) the government

i) economic planning

a) indicative planning

(1) government makes economy harder through pre-planning rather than using the free market for planning

b) strong welfare state

ii) industrial policy

a) planning mostly takes place on corporate level but also for market -- corporate takes plan to unions (federated by industry) and union takes to planning board

iii) fiscal, monetary, and trade policies

g) nemawashi - decisions to decide; ringi - decision making group in corporation

Dr. J. F. García III 
Comparative Economic System 331