CAPITALISM AND MARKET ECONOMIES

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CAPITALISM AND MARKET ECONOMIES

• Comparative Cultural Economics
• Dr. J. F. García III

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Capitalism

• Developed by Adam Smith and the Classical
  Economists David Ricardo, John Locke.
• Economic institutions are the building blocks
  from which the economic system is construed.
• All factors of production are privately owned and
  control instead of just capital. In Canada the
  government (Queen) owns the land.
• Right of individuals to employ their talents and
  energies in the time they feel best.
• Non economic institutions and culture have
  significant bearing freedom of religion and
  speech, press, democracy, abortion, merge, etc.

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Capitalism

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

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Capitalism

• Capital is tangible things which are not directly
  use for consumption, but instead, assist in the
  production of goods.
• Distinguishing feature is the use in which it is
  put.
• capitalism is not distinguish by the mere
  physical presence of capital nor relatively
  capital intensity methods of production.
• Capitalism is not just the use of capital but
  also other FOP.

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Institutions of Capitalism

• 1. Competition.
• 2. Protestant work ethic.
• 3. Private property.
• 4. Freedom of Enterprise and choice
• 5. Competitive market.
• 6. Individualism (what about Japan
  collectivism?).
• 7. Government with regulatory measures.

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Capitalism

• Requirements
• Competition.
• Unlimited use of wants .
• non-economic institutions and culture have
  significant bearing in capitalism in its
  development.
• there should be some economic institutions in
  capitalism - private property - freedom of
  enterprise and choice - competitive markets -
  limited government - competition - individualism
  - Protestant work ethic.
• Private Property - right of individual to control
  property and the right to enjoy the economic
  rewards that result - government protects owners
  claims.

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Capitalism

• benefits are
• (1) allow prices to reflect supply and demand
  (willingness, ableness, opportunity costs, and
  utility maximization),
• (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.

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Capitalism

• 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

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Capitalism

• Economic Institutions
• private property
• Freedom of enterprise
• 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 - .
• government with regulatory matters.

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Conditions of Capitalism (perfect competition)

• Product Market.
• Factor Market.
• Distribution of Income.
• Consumers maximize total utilities or
  satisfaction instantaneously and without cost,
  firms likewise, maximize their total profits and
  factor owners maximize their income.
• Consumers, firms, and FOP can enter and exit the
  market without costs or penalties.
• There are sufficient number of firms, costumers,
  and owners of FOP in each market so everyone is
  a price taker.

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American Capitalism

• Capitalism as an existing system.
• - it has imperfections originated in the
  private sector or attributable to the
  government.
• - it is not pure capitalism.
• - Largest system of production in the
  world.
• - Endowed with variety and quantity of
  factors of production.

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American Capitalism

• There are two sources of market failure
• Private transaction costs, economies of
  scale/scope, corporate business organizations,
  and labor unions.
• Public public goods, public utilities and
  natural monopolies, indirect controls and
  subsidiaries, and regulations and regulatory
  agencies.

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American Capitalism

• Private sources of failure
• Transaction costs search, negotiation,
  litigation, advertising, distribution, and
  transaction costs.
• Economies of scale and scope decrease in per
  unit cost achieve by producing large volumes
  gives monopoly conditions to a firm.
• Corporate business organization or legal business
  organizations market prices and entrepreneurial
  planning determine all decisions for profit
  maximization. It also allows for mergers.
• Labor unions monopsony power and therefore, can
  charge higher price than otherwise.

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American Capitalism

• Public sources of cost failure (government) -
  violations of pure capitalist systems -
  government distorts prices instead of allow the
  price to be determined through equilibrium
• Provision of Public goods free rider and
  externalities.
• Public utilities and natural monopolies
  (antitrust laws) regulation of economic
  activities because monopolies create consumer
  convenience and decreases costs. .
• Indirect controls and subsidies government
  activities which depart from competition such as
  fiscal and monetary policies (Fed) and grants.
• Regulations and regulatory agencies government
  intervention through quasi organizations.

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Strengths of US Capitalism

• Flexibility.
• Raising standard of living.
• Individual opportunity.
• Technical progress.
• Economic development not just growth but also
  happiness, standard of living, health, education
  mortality rate and variety.

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Weakness of American Capitalism

• Shortcomings of institutions when promoting human
  welfare
• Pecuniary vs. human values (monetary vs.
  non-monetary values).
• Unemployed resources.
• Inequality.

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Future of American Capitalism

• Continue preservation of rights and freedoms.
• Democratic political institutions prevail.
• Long run economic growth of real national income
  (4 or higher).
• Advance production technology and full employment
  of all productive resources.
• Application of wage labor regulation.
• Relative price stability.
• Control of inflation, unemployment, budget
  deficits.
• Can give long range goals despite not being a
  planning system.
• country has to big of a size of production to
  make predictions.
• In reality oligopolies and administrative prices
  exist.
• Fiscal and monetary policies are avenues through
  which capitalism may acquire its goals.
• Increase and constant government regulations may
  seriously impair the system in the long term.
• Difficult to preserve each private individuals
  interest rights.
• Automatic competition of large firms and large
  capital investment.

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Sweden

• Best example of capitalist welfare system with
  Social Democratic Government.
• is a market system dominated by a Social
  Democratic Party.
• socialism through gradual reform to socialism,
  rather than revolutionary change (most European
  have gone through gradual but revolutionary
  changes).
• democracy is a route to the establishment of
  socialism in Sweden - transformation from
  old-style capitalism to contemporary managed
  capitalism.
• democratic socialism meant, traditionally,
  government ownership of industries (Nazi
  Germany).

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Sweden

• Six policies used in Sweden
• monetary and fiscal policies.
• private ownership and price system.
• means associated with socialism - planning
  (rejected in 1994).
• equality - reduction in inequalities of income,
  wealth, and occupation.
• allocation of resources between private and
  public sectors.
• power and participation of private associations
  L.O. (confederation of trade unions) and S.A.F.
  (employers association).

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Sweden

• Four types of government Economic Planning
• 1. provision of government services
  education, medicine, housing, national
  defense.
• 2. macroeconomic aggregate plans.
• 3. government owned enterprises.
• 4. guidance of private sector and
  stabilization of income.

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Swedens environment Culture

• Geography has been kind to Sweden, relatively
  isolated in the Scandinavian peninsula.
• The Swedes had not participated in major war save
  for the fight against Napoleon.
• Spare the economic and human devastation of WWI
  WWII.
• Neutrality has allow them to devote only a small
  share of the national income to military and
  military related expenses (23).
• Rich in natural resources timber, wood pulp,
  iron, gold, fishery, services.

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Sweden

• Social democracy socialism through gradual
  reform of capitalism rather than violent
  revolutions.
• Unlike USA, Russia, and Germany but very similar
  to Japan.
• Population has a high degree of ethnic and
  religion homogeneity.
• 96 of population are Germanic Scandinavian of
  the Lutheran faith.
• Serf-lord never took place because servants
  maintained their freedom.
• Heavy welfare state where the income is
  redistributed from one cultural group to another
  and the haves can not be distinguish from the
  have nots.

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Sweden

• Solidarity of Swedish workers and welfare state
  policies have provided stable prices, low
  inflation, low unemployment (2) and economic
  growth.
• Like Japan, Sweden has penchant cooperation and
  consensus rather than conflict and litigation.
• Fiscal stabilization methods with tax advantages
  during economic stagnation.
• Institutional form of income policies with wage
  policies, trade unions, and association of
  employers.

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Swedens Democratic Socialism

• Democracy as a route to the establishment of a
  socialist economy and extension of democracy from
  politics into the economy, industry, and society
  at large.
• It is part of the transformation from the old
  style capitalism to contemporary managed
  capitalism.
• Traditional democratic socialism meant government
  ownership at least of strategic and basic
  industries, and government planning on means
  beyond the market to values establish as basis to
  control private, public, and economic power.

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Managed Capitalism in Sweden

• Monetary and fiscal policies.
• Private ownership and market prices.
• State polices control industry and comprehensive
  planning.
• Equality reduction of inequality of income,
  wealth, and position (occupation).
• Allocation of resources between private and
  public sectors.
• Power and participation of private organizations.

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Great Britain Declining Capitalism

• Reasons for declining capitalism
• Failure to maintain a technological lead.
• Slow in capacity to produce energy, chemicals,
  steel, and other major and integral industries.
• Government laissez faire policies in advance
  technology and production.
• Financial power was attributed to the spirit of
  middle class but the third generation declined
  symptoms (apathy).
• Government encouragement of mergers.
• Labor legislation and union growth.
• Fraud, negligence, and monopolistic banking
  practices and financial regulations.

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Great Britain

• Not a socialistic state but a mixed capitalism
  with failures such a social reforms and
  nationalization.
• Government discretionary policies have allowed
  socially owned industries.
• Social security system, unemployment
  compensation, welfare and retirement programs are
  less comprehensive than other developed countries
  such as Japan, Germany, and Scandinavia.

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Great Britain

• Power resides in different degrees with the
  consumer, the firm or some social collective
  (local, regional or national) government.
• Private firms are free to determine their output
  and input mixed in pursuit of profit
  maximization.
• Individuals have the right to freely choose
  employment and what he/she wishes to consume.
• Firms are small in most industries.
• Nationalized industries are market oriented.
• Government intervenes in the economy but it is
  limited to changing the environment of doing
  business and induced people to do things rather
  than forcing them.

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Great Britain

• Capitalist economy with a strategic sector of
  socially owned industries.
• The locus of decision making is principally
  private and decentralized with a number of social
  programs running directly by a subsidized levels
  of the government.
• The market signals and directs the activities of
  most economic actors with even the socially owned
  industries responding to the market forces and
  dealing thorough markets with the private sector.

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France

• Great exporter of ideas through the physiocrats,
  natural economic order, policy of laissez-faire,
  circular flow model, national economic planning,
  and indicative planning.
• Indicative planning was established after WWII to
  improve the operations of the market mechanism
  through cooperation and exchange of information
  among all sectors of the circular flow.

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France Indicative Planning

• Compliance with plan is voluntary but it is
  encourage by government financial and regulatory
  actions and by relatively new system of plan
  contracts.
• Modern mixed economy with a unique blend of
  economic institutions.

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Frances criteria of Mixed Economy

• Private vs. Public sectors
• Private ownership is predominant but the public
  sector by US standards is quite large, the state
  owned public utilities, energy industry,
  airlines, railroads, control interest on
  petroleum, autos, aircrafts, banks, large sector
  of insurance industry, and other major
  industries.
• Approximately 40 of GDP flows through the
  central government including goods and services
  and transfer payments.

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Frances criteria of Mixed Economy

• Power
• Economic power (market and circular flow) in
  France resides both in the individual consumer
  and private firms as well as the state.
• The private decision maker is free to choose
  his/her employment and consumption patterns.
• The private firm is free to determine its output
  and input mixed.
• Collective decision making has a powerful
  influence in the nature of private decisions.

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Frances criteria of Mixed Economy

• The state is able to modify many parameters
  entering into the private decision making and
  thus able to modify the decisions themselves by
  using the following techniques
• Indicative planning.
• Planning organizations.
• Planning cycles.
• Monetary and credit controls.
• Taxes and tax policies.
• Wage controls.
• Development of income policies.
• Social welfare.
• Regional planning.

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Frances criteria of Mixed Economy

• Resource allocation among competing uses
• signals of resource allocation is done by the
  market.
• despite extensive government influence in the
  economy and national plans, few economic actions
  are the result of the direct order of the
  government.
• government intervene in the market by altering
  the demand and supply conditions but this
  intervention is reflected in the changing costs
  of doing business and influence the profitability
  of the private sector.

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Germany

• Mixed capitalism characterize by social market
  economy, neoliberalism, and codetermination.
• Private property predominates but the government
  owns and runs wide variety of enterprises.
• Although the great majority of economic decisions
  are made by individual consumers and firms,
  collective decision making has a significant
  impact on the structure and direction of the
  economy.
• Government influences the economy through the
  operation of a large budget.

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Germany

• The market carriers the economic decisions,
  public as well as private.
• Although the state sector is large, most state
  owned enterprises act independently and are
  concerned with their profitability.

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Germans Neoliberalism

• Luidwig Erhart and Walter Ericken.
• Alternative philosophy to laissez faire, total
  planning of China, or partial planning of France
  and Sweden.
• The efficiency of the price system combined with
  competition and monetary stability and the need
  of the government interference.
• The government primary responsibility is to
  promote competition by removing trade and market
  barriers, state controls, and by dissolving
  economic groups.
• Price stability is ensure only by the government
  responsibilities to conduct monetary policies.

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Germans Neoliberalism

• Neoliberalism is compatible with government
  redistribution of income, social welfare programs
  and measures, and environmental control.
• Market equilibrium may be government manipulated
  including changing in technology and demand
  conditions, and countercyclical policies.

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German codetermination

• Workers are given a voice in the management of
  their companies.
• Employees are able to participate in management
  through work councils and through representation
  on corporate supervising boards.
• Work councils are in charge of job evaluations,
  overtime, breaks, holiday schedules, recruitment
  selection, dismissal, training, and safety of
  workers.

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Germany social market economy

• Social Market Economy (SME) created after WWII
  with one of the most extensive welfare systems in
  the world which combines market system efficiency
  with the decency of the welfare state.
• SME is based on a rejection to central planning
  and an affirmation of the market system with an
  active effort to abolish cartels and establish
  competition, a supply side fiscal policies, a
  monetary policy dedicated to price stability, and
  extensive social welfare system.

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Japan

• Modern economic growth was launched in 1868, when
  the Meiji restoration abolished feudal controls
  and opened the nation to foreign trade and
  technology.
• Market economy based on the feudal Samurai
  system.
• After the devastation of World War II, rapid
  economic growth resumed in the 1950's and 1960's,
  caused first by the growth of the capital stock
  and then by the contributions of knowledge and
  technology, the growth of the size and quality of
  the labor force, economies of scale, and the
  shift of laborers from primary production to
  industry.
• The Japanese economy was shaken by the oil shocks
  of the 1970's, the bubble economy of the late
  1980's, and the collapse of the bubble during the
  early 1990's. Now it is passing through a
  difficult process of administrative reform and
  deregulation.

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Japan

• The business community is organized in a dual
  market structure very large businesses and very
  small businesses with few in the middle.
• Many of the big companies are members of zaibatsu
  and keiretsu conglomerates, which provide
  protected markets and financing for their members
  and exert considerable influence over
  governmental policies.
• The small companies are centered in distribution
  and subcontracting they serve to reduce labor
  and inventory costs and to absorb the effects of
  business cycles for the larger firms.

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Japan

• The labor market, which is credited with much of
  Japan's success, is organized around a relatively
  docile network of company unions that participate
  in a semi-decentralized system of collective
  bargaining known as the Spring Labor Offensive.
• The lifetime employment system, which applies to
  more than one-quarter of the work force,
  strengthens the family spirit of enterprises and
  may encourage technological innovation, but it
  reduces labor mobility and may impose a burden on
  employees who are not covered by the system.
• Support for lifetime employment seems to be
  waning among both employers and employees.
• Pay is strongly influenced by seniority and a
  relatively large proportion is paid in bonuses.
  The latter may help to explain the high savings
  rate and the low unemployment rate in Japan.

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Japan

• Led by the Ministry of International Trade and
  Technology (MITT) and centered on the large city
  banks, the Japanese financial system played a
  pivotal role in the growth miracle and in the
  rise and fall of the bubble economy.
• Individual families were encouraged to save by
  the convenience and tax advantages of the postal
  savings system.
• Today, Japan is passing through a "Big Bang"
  program of financial reforms, designed to
  strengthen the efficiency and competitiveness of
  the system.
• The government plays a limited role in the
  economy in direct taxation, expenditure, and
  nationalization. It plays an important role,
  however, in regulation lending, and the
  formulation of indicative plans and industrial
  policies.

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Japan

• The Japanese culture is influence by three values
  of Confucianism ethics which are of particular
  interest loyalty, reciprocal obligations, and
  honesty in dealing with others. This creates
  ethics of hard work and cooperation between
  management and labor for the good of the company.
  
• Reciprocal obligations and honesty fosters trust
  between companies and sellers in Japan, and
  therefore, long-term relationships which help
  with inventory reductions, quality control and
  joint designs to improve organizational
  competitiveness.
• Individual entrepreneurial lacks because it is a
  product of individual mind-set and not groups. On
  the other hand, the United States values
  individualism and innovation, e.g., biotechnology
  and computers.

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Japans indicative planning

• Uses the market to coordinate short run decisions
  in combination with plan to coordinate long run
  decisions.
• Includes broad goals for the entire industries
  over a long time horizon.
• Private companies are not legally required to
  comply with plan targets, but the government may
  use fiscal and monetary policy instruments to
  encourage voluntary compliance.
• The government plays a limited role in direct
  taxation, expenditure, and nationalization.
• It plays an important role, however, in
  regulation, lending, and formulation of
  indicative plans and industrial policies.
• Japan uses quality control circles.

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economics 331 comparative CUltural Economics
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