Chapter 4 - Economic Systems Flashcards
Contrast two broad approaches that nations can adopt in their effort to produce
and distribute the things that their citizens
need and want: planned economies or market economics.
Planned Economies: Countries in which the factors of production are primarily owned, controlled or directed by the
state, through political leaders or government officials;
and
Market Economies: Countries in which the factors of production are primarily owned, controlled or directed by private
individuals, and where e
Identify four specific types of economic system
- Communism: An economic system where all of the factors of production are controlled
by the state, and where there is no private property.
Example: China and Soviet during 20th century, North Korea - Socialism: An economic system where the government owns or controls the majority of the factors of production and directs the majority of productive activity.
Example: Eastern Europe, Asia and Africa during 20th century - Mixed-market: A country where ownership and control of most of the factors of production is in the hands of private individuals, However, the
government provides a stable and conducive environment by providing public
services, enforcing laws, and providing regulation and oversight. - Pure capitalism: An economic system in which all of the factors of production are owned by private individuals. All economic activity is privately run, citizens pay no taxes, and the government Imposes no regulations on business.
Identify which economic system we have
adopted in Canada, and explain the
intended benefits from doing so,
Canada’s mixed marker economic system. Mixed Market economies are countries where control of most of the factors of production is in the
hands of private individuals. Individuals are free to buy land, employ others, borrow many and invest
in property, plant and equipment, largely as they see fit. However, in a mixed market economy, it is
also acknowledged that there is a positive role for the government. Within mixed market systems
governments collect taxes for the financing of public services like law enforcement, fire protection,
schools and hospitals. Governments also create and enforce the laws which protect the owners of private property, and governments provide regulation and oversight,
Highlight some important historical examples of governments taking control of the
factors of production, and assuming responsibility for producing goods and services.
In Britain, conscription and rationing were forced onto the country by the needs of war. In the United
States, the devastating effect of the Great Depression demanded bold and radical action by the government, In these two cases, nationalization proved successful in realizing the nation’s goals.
In 1923, the leadership of the Soviet Union
fell to Joseph Stalin. With absolute authority over the production of all goods in the Soviet
Union, including food supplies, Stalin engineered artificial famines to starve millions of people who he
imagined ta be his political enemies, in Ukraine. China’s Great Leap Forward was a catastrophe. Farmers were stripped of the ownership of their land
and forced to work in collectives.
Define the term nationalization and explain
its role in the conduct of producing goods
and services.
The process of the state assuming control and ownership of resources, businesses and industries running them with the intention of benefitting of the entire nation
Explain the intended benefits of government
ownership.
‘Only the stare, with its ability ta create and enforce the law, has the power and the authority
necessary co feed, clothe, shelter, educate and employ the nation’s entire population,
Businesses are primarily concerned with making a profit. Therefore, businesses have no concern
for those who aren’t customers, or do not have the money to buy products. Only the state has
a benevolent interest in the welfare of all members of society.
Explain some of the costs and deficiencies
of government ownership,
While state control sounds good in theory, it tends to work poorly in practice. People need an
almost infinite variety of things. The full range of people’s
needs, people of different genders, ages, tastes and personalities, is simply too vast for any one
entity - even the government - to plan, produce and distribute effectively.
Planned economic systems concentrate a great deal of power into the hands of a small number
of the political elite.
- State
run enterprises lack the motivating discipline of having ta compete for your patronage. Without
that competition, state-run enterprises can become unresponsive, wasteful and inefficient
- History and experience show that power corrupts.
Define the term privatization and explain
why governments in many countries chose
to employ this policy.
- The process of transferring ownership of a business or an industry out from government control and into the hands of private owners.
- A system of state control can’t be made good merely because it is run by “clever” people who make the arrogant assertion that they “know best” and that they
are serving the “public interest” which of course is determined by them. - State control is fundamentally bad because it denies people the power to choose and the opportunity to bear responsibility for their own actions
Through its choice of economic system, a country determines the following:
- Who owns the factors of production
- Who controls the factors of production
- Who decides what needs ta be produced
- Who decides how goods and services are distribute
The distinguishing characteristic of a socialist economy is…
the lead role played by the government, which
intervenes heavily through taxation, regulation, and through its day-to-day management of large and important industries.
- In many socialist countries the government will own, for example, the banks, and the
principle transportation companies such as railways and airlines.
- In socialist economies, the government
may take responsibility for the provision of all utilities (gas, water, electricity), the building of housing and for the distribution of food.
The philosophy that guides socialist economies is that…
only the government has the power, the resources,
and the motivation to provide nation’s citizens with the important essentials. However, this does not rule
out individual family enterprises provid
A theoretical advantage of a “market” economy is that…
individual business owners, and stare and factory
- Managers, are closer co their customers than government planners.
- These individuals will have mare current information, and better information, about what people in the streets of their towns and cities actually need and want.
- Compared to government officials, private entrepreneurs can respond more quickly
ta demand on the street, and therefore better satisfy people’s needs.
“market” economics are not without their problems and disadvantages.
Even
private businesses can get large, bureaucratic, and unresponsive.
What is pure capitalism and what are the arguments for it?
- Pure capitalism derives its name from the factor of production we call “capital”,that is, money
- In this kind of
economic system, only chose with money (“capitalists’’) will be able to purchase the tools and machinery
needed to create businesses. - Similarly, only those with money will be in a position to hire labor
- By controlling the factors of production, landowners, business owners, determine what gets produced, where, and to whom It gets distributed
- In a purely capitalist economy, in the absence of taxation, wealth will accumulate in the hands of
entrepreneurs, business owners, and chose who finance enterprises - Those who advocate a purely capitalist
system argue that wealth will flow to the shrewdest, smartest, hardest-working people. - Pure capitalism,
according to this argument, rewards success. - Others argue that pure capitalism encourages Social
Darwinism. Social Darwinists apply Charles Darwin’s theory of natural selection to politics and
economics. - They argue that the strong should see their wealth and power increase while the weak
should see their wealth and power decrease. - Others have used the phrase “survival of the fittest” to describe the same phenomenon.
The vast majority of countries on earth are…
- Mixed Market economies are countries where control of most of the factors of production is in the
hands of private individuals. - Individuals are free to buy land, employ others, borrow many and invest
in property, plant and equipment, largely as they see fit. - However, in a mixed market economy, it is
also acknowledged that there is a positive role for the government. - Within mixed market systems
governments collect taxes for the financing of public services like law enforcement, fire protection,
schools and hospitals. - Governments also create and enforce the laws which protect the owners of
private property, and governments provide regulation and oversight
Governments interact with businesses in three main ways:
- Governments impose and collect taxes;
- Governments pass laws which regulate the conduct of businesses; and
- Governments provide some products and services, occasionally in competition
with private enterprise.
Why are taxes collected?
- Canadians are obliged to pay taxes, - Taxes are collected by federal, provincial and
municipal governments. - The Canadian federal government collects taxes for two main purposes:
- To pay for the various services that it provides to Canadians and
- To redistribute money from those who can afford it to chose in need.
Personal Income Tax
- Canadians pay taxes based on their annual income.
- The Canadian tax system
is a “progressive” system, meaning that the more income you earn, the larger the percentage of your
income you must pay. - While most Canadians pay between 20% and 30% of their personal income as
taxes, the tax system is designed so that high income earners should pay more. - In this way, the stare is
indirectly redistributing wealth from its richer citizens to services which largely benefit those who are
less fortunate. - Personal income tax generates about one-half of all the government’s revenue.
Corporate Income Tax
- Canadian businesses also pay taxes, on their profits.
- As you can imagine,
the calculation of the tax payable by businesses of various sizes is quite complex. - In broad terms, most
Canadian business pay about 25% of their profit as tax. The revenue raised through corporate income tax
is shared between the federal and the various provincial governments.
The Canadian Human Rights Act
requires employers to ensure that all who are affected by
their organization are treated equally regardless of their race, gender, sexual orientation, or any
of the other Il grounds of discrimination. It also specifies that employers cannot discriminate
against women by paying them less than men for work of equal value.
The Canada Labor Code
- sets minimum wages, and limits the number of hours most employees
can be required to work in a day (typically, eight hours) and in a week (typically 48 hours) - The
Canadian Labor Code also dictates that employers must provide employees with a minimum of
two weeks paid vacation every 12 months.
The Employment Insurance Act
obliges employers to contribute to the Employment Insurance
(El) program.
- In addition, it obliges employers to allow workers up to 52 weeks maternity or
paternity leave.
- The El fund provides benefits to new parents taking leave.
The Competition Act
prohibits businesses from misleading advertising, or from making misleading claims.
The Consumer Packaging and Labelling Act
- requires businesses to provide specified labelling
information aimed at assisting consumers to make informed purchasing decisions.
What are crown corporations?
- The term for an enterprise owned by a government in Canada is “Crown Corporation”
- Crown Corporations can be either federal or provincial
- Federal Crown corporations are:
- Canadian Broadcasting Corporation (CBC) — Which operates a network of television
and radio stations - Canada Post — which operates the postal system
Examples of Ontario Provincial Crown Corporations are: - Liquor Control Board of Ontario (LCBO) — which operates a chain of liquor stares
- Hydro One -— which operate an electricity power utility
- OLGC — which operates a chain of casinos
- There is no precise formula for determining which products and services should be furnished by business,
and which should be supplied by the government. - To a large extent, the division comes down ta some
combination of history, politics, culture and tradition.
Bolshevik Revolution - Russia
- a violent revolution overthrew Tsar Nicholas Il, The Tsarist regime had been
weak and corrupt. - Almost all of the land and all of the capital was concentrated in the hands of a privileged few.
- Many millions of others lived in dire poverty.
- The Bolsheviks under Lenin abolished private ownership and natural resources as well as land became part of the state
- A year later, they owned banks and in extension the supply and distribution of capital.
- Then they took over distribution of shipping companies and also took control of the production and distribution of all food.
- Once all the levers of productive activity were concentrated in the hands of the government, the Soviet
government created a series of 5-year plans setting targets for the production of, for example, food,
housing and electricity. - The process of the state assuming control and ownership of resources, businesses and industries is called
nationalization. - The motivation behind nationalization is the belief that only the state has the motivation
to run the economy for the benefit of the entire nation.
Franklin Roosevelt and the New Deal - USA
- USA’s economy suffered terribly as a result of the Great Depression, which began in 1929.
- Roosevelt came to office promising to end the depression and cut unemployment by offering “a new deal for the American people”
- Roosevelt’s promise gave rise co a series of laws and executive orders chat became known as the “New
Deal” - The New Deal involved government-managed and government-funded programs to provide employment, housing, electricity, Improved education and opportunity for the unemployed and the poor.
- Roosevelt administration created a number of government agencies, and gave
them responsibility of creating jobs, and producing products - The Works Progress Administration (WPA) employed millions of people to construct various buildings, roads etc. while The Agricultural Adjustment Administration (AAA) sec targets, and limits, on the production of various crops
- The result was a lower unemployment rate and farm prices increasing meaning more income for farmers
Mobilization for war - Europe
- European governments were mobilizing people and resources for another reason: war, - A key
element of most countries’ war efforts was conscription, - Conscription means compulsory enlistment into state service, typically into the armed forces. In this
way, various - European governments took control of one of the factors of production: labour.
- By compelling their citizens to perform military service, the nations of Europe were directly engaged in
deciding where people should work, and what they should do. - Another element of these European countries’ war effort was rationing.
- Rationing means limiting the
quantity of a good or commodity that each person |s allowed - The government oversaw the production, distribution and apportioning of food.
- By imposing conscription and rationing on its people, the UK government wanted to have the resources,
both labor and natural resources, to successfully win a war - Nationalization proved successful in realizing the nation’s goals.
Mao’s communists win civil war - China
- In China, when the Communists under Mac Zedong came to power in 1949, the country’s economy
had been devastated by more than three decades of military insurrection, warlordism, civil war and foreign invasion. - Mines and factories had been damaged. - China’s transportation, communication, and
power systems had been destroyed - The chief goal of the Mao’s government was to restore the economy to normal working order.
- It moved quickly to make all mines, factories, transportation companies.
and banks into state-owned enterprises. - No privately owned firms remained.
- In 1958 Mao introduced The Great Leap Forward. - Private ownership of land was entirely abolished
and households all over China were forced into state-operated communes. - The communes were ordered to meet centrally dictated production targets. - Mao insisted that the communes increase grain production so as to meet the needs of the cities
- In addition, the central plan called for rapid industrialization, through the production of iron and steel.
- The government’s central plan called for wildly optimistic production targets, and many farmers spend
their nights producing steel in backyard furnaces. - China’s Great Leap Forward was a catastrophe.
- Farmers were stripped of the ownership of their land and forced to work in collectives.
- Thus, they were stripped of much of their motivation and all of their
incentive. - Mao’s obsession with steel production meant that many millions of farmers were taken off the
land to work in steel mills, and the over-optimistic targets set by the central plan meant that households
melted down pots and pans and agricultural tools, in order ta meet
their quota. - In the end, as a result of The Great Leap Forward, tens of millions died from starvation.
Perestroika
- Mikhail Gorbachev admitted that, under its existing, state-dominated economic
system the Soviet Union’s people were suffering from inadequate living standards. - Example: The Soviet Union, the world’s biggest producer of steel. raw materials, fuel and energy has shortfalls in them due to wasteful or inefficient use.
- Gorbachev and his advisors then introduced a series of reforms, which became known as
perestraika (in Russian, literally “restructuring ). - The 1987 Law on State Enterprise allowed state
enterprises to determine production levels based on customer demand. - Enterprises now had to
cover all of their expenses through revenues and had to generate a profit - A year later the Law on Cooperatives permitted private ownership of businesses in services, manufacturing, and foreign-trade
- The nationalization of the economy,
begun by Lenin 70 years before, had been reversed
Privatisation
- Privatization is the opposite of nationalization.
- It is the process of transferring ownership of a business or an industry out from government control
and into the hands of private owners. - All too often the state is tempted into activities to which le is either (ill-suited or
which are beyond its capabilities. - privatization shrinks the power of the state and free enterprise enlarges
the pawer of the people.’
