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1、1,Overview of Comparative Economics,Chapter I How do we compare economies?,2,Criteria for Classifying Economies,How do we classify economies?,3,Institutional Mechanisms,Allocation MechanismsForms of OwnershipRole of PlanningTypes of IncentivesThe method of Income Redistribution and Social Safety Net
2、sRole of Politics and Ideology,4,I.Allocation Mechanisms,What good and services are produced?How goods and services are produced?For whom goods and services are produced?Production allocating factor inputsDistribution allocating produced goods and serviceThree basic kinds of allocation mechanisms:1.
3、Traditional Economy2.Market Economy3.Command Economy,5,II.Forms of Ownership,Who owns the means of production?In capitalist economies,land and produced means of production(capital stock)are owned by private individuals or private firms(Market Capitalism)In socialist economies the state owns the land
4、 and the capital stock(Command Socialism),6,II.Other Forms of Ownership,Intermediate forms of ownership(like cooperatives or worker ownership)Under socialism:central government vs local government ownershipReligious groups ownership,7,II.Forms of Ownership,Market Capitalism vs Command SocialismUnite
5、d States vs Soviet UnionALSOMarket Socialism vs Command CapitalismYugoslavia and China vs Nazi Germany,8,III.Role of Planning,Centrally planned economy planners preferences dominate allocative decision-makingMarket economy consumers sovereignty dominates allocative decision-making,9,III.Role of Plan
6、ning,Centrally planned economy is usually correlated with command socialism(Soviet Union,there are exceptions command without planning Soviet Russia during 1910s and 1920s)Market economy is usually correlated with market capitalism(there are exceptionsindicative planning France and Japan),10,IV.Type
7、s of Incentives,Material Incentives paying people according to their productivity(their marginal product that maximizes profits for competitive firms hiring labor in such a system)Under capitalism takes the form of rewards for entrepreneurship and capital investment as economic profitsMoral Incentiv
8、es trying to motivate workers by appealing to some higher collective goal,11,V.Income Redistribution and Social Safety Nets,Social Market Economies(or some advanced capitalist countries)do their income redistribution through social safety netsCommand Socialist Economies did not have to redistribute
9、income their governments controlled the distribution of income by setting wages and forbidding capital or land income,12,VI.Role of Politics and Ideology,Central controversyIs democracy linked with market capitalism?Is authoritarian regime linked with command economy?,13,VI.Role of Politics and Ideo
10、logy,Friedman“libertarian”laissez-faire lack of individual freedomIn democracies,social democrat parties exist(like Sweden)They support income redistribution and extensive social safety netsThey support nationalization and central planningThey do not support dictatorship,14,VI.Role of Politics and I
11、deology,Authoritarian political regimes pursued market capitalism(East Asia and Latin America)Market capitalism is not a guarantee of political democracyIslamic FundamentalismImposition of an Islamic code-ShariaIt is not a liberal democracy individual rights and freedoms are subordinated to a Sharia
12、 and the religious authoritiesEconomically it does not follow neither capitalism nor socialism,15,Overview of Comparative Economics,Chapter II Market Capitalism,16,Market Capitalism,Form of Ownership Most of the time land and produced means of production(capital stock)are owned by private individual
13、s or private firms Role of Planning Market capitalism is usually planned by the market(with demand and supply)Material Incentives In market capitalism material incentives exist in forms of rewards for entrepreneurship and capital investment as economic profits,17,Market Capitalism,Income Redistribut
14、ion is usually done through social safety nets in market capitalismRole of politics and ideology Are market capitalist countries mostly democratic?Social democrat parties exist in market capitalist countries supporting income redistribution,extensive social safety nets,nationalization and central pl
15、anning,18,Why market capitalism popular?,End of communism most former communist countries are concentrating on market capitalist economic systemsPredominantly market capitalist economies are making efforts to move toward a purer version of this system,19,Advantages and Disadvantages of Market Capita
16、list Economies,Experienced enormous technological advances and growth as they underwent the Industrial Revolution in the late 18th century“ability to revolutionize the means of production”Experienced large macroeconomic fluctuations with serious downturns in the 19th century(unequal distribution of
17、income and increasing concentrations of industrial monopoly power),20,Pure version of market capitalist system,Pure version of market capitalist system does not existClosest to the ideal of pure laissez-faire market capitalism are:Hong KongSingaporeNew Zealand,21,Efficiency,Static efficiency no one
18、in society can be made better off without making someone else worse offresources are being utilized to their best potential given the existing technologyDynamic efficiency allocation of resources over time to maximize long-run sustainable growthtechnological dynamismdestabilizing process of“creative
19、 destruction”,22,Theoretical Efficiency of Market Capitalism,Efficiency TheoremThe general ability of markets to allocate goods and resources efficiently through the law of supply and demandA complete competitivefull-information general equilibrium is efficient,23,Theoretical Efficiency of Market Ca
20、pitalism,CompleteFor any good or service that affects someones utility,there is a marketCompetitionThere are many buyers and sellers with free entry and exitThere are well-defined homogenous goods and servicesNo individual supplier has any control over the price in his or her market,24,Theoretical E
21、fficiency of Market Capitalism,Full information All agents in the economy know everything about consumer preferences,production technologies,and pricesGeneral equilibrium Every single market is in equilibrium in the sense that the quantity supplied equals the quantity demanded of the good or service
22、If that does not happen:Surplus ShortagePartial equilibrium with a few markets being in equilibrium,25,Theoretical Efficiency of Market Capitalism,EfficiencyPareto optimality no one in the economy can be made better off without making someone else worse offIf someone can be made better off without m
23、aking someone else worse off,then the economy is not producing as much as possible of what people want,26,Why is a complete,competitive,full-information,general equilibrium efficient?,Adam Smiths invocation of invisible hand of the market working across all sectors to allocate goods in a way that ma
24、ximizes the“wealth of the nations”He founded classic laissez faire economicsHe argued that the government should get out of the economy(minimal government intervention)It is at the equilibrium price that the maximum amount will be both produced and sold and thus actually consumed by public,27,Invisi
25、ble Hand,In the free marketplace an“invisible hand”regulates and self-corrects the economyThe market itself will regulate the economyEfficient producers will prosper and the inefficient producers will loseThe public will get the best product for the lowest priceSupply and demand will determine price
26、s better than any government official can,28,Limits to the Efficiency of Laissez-Faire Market Capitalism,Monopoly PowerExternalitiesCollective Consumption GoodsImperfect Information,29,Source of Inefficiency:Monopoly Power,Monopoly power prohibits competition Monopolist will maximize profits by sett
27、ing marginal cost equal to marginal revenueExceptions:Natural monopoly Characterizing an industry with economies of scale(declining LRAC)even at level of output equal to total market demandTechnological dynamismMore competitive industries will be more technologically progressive,30,Source of Ineffic
28、iency:Monopoly Power,Intermediate market formsMonopolistic competitionMany firms,each having some price setting power as a result of product differentiationExcess capacity theoremOligopolySmall number of firms in industry with reaction to any action taken by othersPerfect collusionJoint-maximizing c
29、artel(OPEC in oil crisis)Longest surviving cartel?,31,Source of Inefficiency:Externalities,These are either costs or benefits that are born by or accrue to an agent other than the agent generating themExternal costs negative externalitiesExternal benefits positive externalities,32,Source of Ineffici
30、ency:Externalities,External costs are negative externalities,such as environmental pollution If the firm that generates pollution damages another industry but does not reduce that damage the private marginal cost to the firm does not equal the social marginal cost and too much pollution is produced,
31、resulting in inefficiency,33,Source of Inefficiency:Externalities,External benefits are positive externalities,such as technological invention without patent protection for inventorsIf an inventor has no patent protection,then other firms can steal her invention and she may make no money even if her
32、 invention generates great social benefitsPrivate marginal benefit to the inventor does not equal marginal social benefit of the invention and too little inventing will occur,resulting in inefficiency,34,Source of Inefficiency:Collective Consumption Goods,Consumption goods=public goods such as natio
33、nal defenseBecause of the nature of such goods,it is difficult for private markets to organize themselves to provide these goods in optimal quantitiesThe characteristics of pure public good:Nonexcludability of consumption:It is not possible to exclude this kind of consumption Nondepletability of con
34、sumption:Everyone consumes it simultaneously,and no individuals consumption reduces any other individuals consumptionFree-rider problem,35,Source of Inefficiency:Imperfect Information,Unrealistic to have perfect informationWhen one party in a transaction knows more than another,special problems aris
35、e causing asymmetric informationAkerlof“The market for Lemons”Principal agent problemSub-optimizing behavior,36,Macroeconomic Instability of Market Capitalism,The General pictureThe major market capitalist economies have been less than perfectly stable over timeThere was a general increase in unempl
36、oyment rates after the early1970s in many countries,associated with a general stagnation of economic growth,that appears to have been reduced recentlyThe considerable variation in capital investment can be explained by factorsExogenous fluctuations in new technologies that can serve as the basis for
37、 the investmentFluctuations in government monetary policies affecting interest ratesPsychological fluctuations due to the“animal spirits”of those making investments,37,Macroeconomic Instability of Market Capitalism,QUESTIONWhy do these variables lead to fluctuations in the unemployment rate,since in
38、 a perfectly labor market,wage rates should fall when the demand for labor falls,thereby preventing the emergence of any involuntary unemployment?TWO DIFFERENT ANSWERSKeynesian SchoolClassical School,38,Macroeconomic Instability of Market Capitalism,Keynesian SchoolRigidities of various sorts exist
39、in labor markets and that capital investment can collapse and stay down for extended periods of time,as in the Great DepressionThe implication is that government intervention through fiscal or monetary policies is advisable to stimulate the economy and to stabilize and smooth out business cycles,39,
40、Macroeconomic Instability of Market Capitalism,The Classical SchoolDeriving from 19th century classical political economists such as David RicardoMarket capitalist economies are powerfully self-stabilizingConscious government intervention merely generates inflation and intensifies fluctuationsTo min
41、imize unemployment,unions should be broken up and a stable fiscal and monetary environment should be maintained within a laissez-faire environment,40,Laissez-faire Economic Policies,Shift toward supporting more laissez-faire economic policiesThere is a tension between asserting the efficiency of com
42、petitive equilibria and recognizing the limits of the applicability of that theoremChicago Schools(Milton Friedman)argument draws directly from the efficiency theorem and follows by asserting the irrelevance or unimportance of the various exceptions and limits,41,Chicago School,Markets are almost al
43、ways efficient,so government should keep its hands off The most externalities will be resolved by private markets if property rights are properly defined and enforced“free market”Many of the goods provided by the public sector are not really collective consumption goods and could be more efficiently
44、 provided privatelyInformation costs are inevitable and cannot be avoidedThe Chicago School supports the Classical School approach in macroeconomicsFriedman is the most prominent advocate of monetarism in the US With respect to distribution of income,people should be allowed to keep what they earn f
45、rom the free marketInequalities are the necessary outcome of providing sufficient incentives for production,investment and growth,42,Austrian School,They reject equilibrium analysis and emphasize dynamic market processesEntrepreneurs are the most important agents in the economyThey must be allowed t
46、o function freely,without government restriction,so that they can lead the market to evolve in conjunction with the evolution of consumer preferences through process of innovationStatic efficiency is relatively unimportantIt is the dynamic success of market capitalism that is its most important econ
47、omic feature,43,Overview of Comparative Economics,Chapter III The Theory and History of Marxism and Socialism,44,Command Socialism,Form of Ownership Most of the time the state owns the land and produced means of production(capital stock)Role of Planning Economy is planned centrally and the planners
48、preferences dominate allocative decision-makingIncentive Structure Moral Incentives-trying to motivate workers by appealing to some higher collective goalIncome Redistribution The governments control the distribution of income by setting wages and forbidding capital or land income,45,Command Sociali
49、sm,Role of politics and ideology Are command socialist economies usually linked with authoritarian regimes?Authoritarian political regimes also pursue market capitalismCommand socialism can also support democracy,46,Socialism,An economic system characterized by state or collective ownership of the m
50、eans of product,land and capitalNot actually exists as a system until the early 12th centuryIts emergence based on criticism of feudal and capitalist systems that existed prior to its modern appearance Criticism originated from religious sources favoring egalitarian income distributions and collecti
