ECONOMIC SYSTEMSDale R. DeBoer

University of Colorado, Colorado Springs

2014

What is an economic system?• “The system of production and consumption”

• Dictionary.com

• “The analysis of the causes and consequences of the significant institutional variety prevailing among all developed, developing, emerging, and transition economies, as well as attempts at and proposals for their reform.”• Economics Systems (journal)

The basics• Scarcity

The basics• Scarcity

• The need for allocative choices

The basics• Scarcity

• The need for allocative choices

• The organizing structure guiding those choices

Broad options• The price mechanism

Broad options• The price mechanism

• Dumb luck

Broad options• The price mechanism

• Dumb luck

• Equal distribution

Broad options• The price mechanism

• Dumb luck

• Equal distribution

• Central authority• What is the goal of the authority?

Examples• Capitalism

• Stakeholder vs. shareholder variants

Examples• Capitalism

• Centrally planned

Examples• Capitalism

• Centrally planned

• Islamic

Examples• Capitalism

• Centrally planned

• Islamic

• Market socialist

Examples• Capitalism

• Centrally planned

• Islamic

• Market socialist

• Statist

Distinguishing between systems• Level of decision making

• Centralized or decentralized

Distinguishing between systems• Level of decision making

• How is information obtained for decisions?• Plan or market

Distinguishing between systems• Level of decision making

• How is information obtained for decisions?

• What is the incentive structure?• Moral or material

Distinguishing between systems• Level of decision making

• How is information obtained for decisions?

• What is the incentive structure?

• What private property rights are allowed?• Consumption items vs. production items• Disposal, utilization, and output

Guiding rubrics

Centralized Decentralized

Level of decisions

Sou

rce

of

info

rmat

ion Pla

nM

arke

t

Centrally planned

Capitalism

IslamicMarket

socialism

?

Guiding rubrics

Moral MaterialIncentives

Sou

rce

of

info

rmat

ion Pla

nM

arke

t

Centrally planned

Capitalism

Statism

Market socialism

Islamic

Guiding rubrics

Disposal Use Output

Capitalism X X X

Islamic X X X

Centrally planned

Market socialism X X

Stylized “facts” of capitalism• Pro-growth

• Efficient

• Unstable

• Unequal final outcome

The promise of socialism• What is socialism?

• State ownership of the means of production• Is that all?

• Fabian socialism• Creeping towards state control

• Anarcho-communism• Abolition of both state and private productive property rights

The promise of socialism• What is socialism?

• A Marxian definition• Capitalism

• Exploitation of workers• Alienation of workers• Coercion of workers

The promise of socialism• What is socialism?

• A Marxian definition• Capitalism• Socialism

• The state as the new agent of exploitation• Workers remain alienated• The state as the coercive agent

The promise of socialism• What is socialism?

• A Marxian definition• Capitalism• Socialism• Communism

• The erosion of the state• The end of alienation• No coercive agent required

The promise of socialism• What is socialism?

• A Marxian definition

• What would socialism offer?• A more stable outcome• A more equal outcome

Putting socialism into practice• Two options

• No private property and a planning structure• No private property and a market

The planned version of socialism• Enrico Barone

• The possibility of mathematically solving a general equilibrium

The planned version of socialism• Enrico Barone

• Required information• Resource availability• Production functions• Demand characteristics

The planned version of socialism• Enrico Barone

• Required information

• Advantages• No market adjustment time needed• Eliminates sub-optimal market outcomes

The planned version of socialism• Enrico Barone

• Required information

• Advantages

• Core challenges• The problem of computation• Obtaining the required information• Motivating producers

Computation• Difficulty rises exponentially with size

• Non-linear functions may not have a solution

• This is a resource using process• Market is free• Outcome cannot mimic market outcome

Information and motivation• Demand characteristics

• How do markets obtain this information?• Revealed preference

Information and motivation• Demand characteristics

• Production functions• Is engineering information enough?• The role of a profit motive

Information and motivation• Demand characteristics

• Production functions

• Satisfaction behavior• Manager motivation under a plan

• Risk minimization or profit maximization

Information and motivation• Demand characteristics

• Production functions

• Satisfaction behavior• Manager motivation under a plan• The logic of stock options in a market economy

Planned socialism: the work around• Dichotomous replacement to the market

• Material balance approach• Price mechanism (and queuing) to determine final consumer sector

allocation

Planned socialism: the work around• Dichotomous replacement to the market

• Material balances example• Resources

• L = 25

• Production coefficients• aM = 0.1

• aC = 0.5

• Material balance• 0.1QM + 0.5QC = 25

Planned socialism: the work around• Dichotomous replacement to the market

• Material balances example• Resources• Production coefficients• Material balance• Targeted sector output

• Q1 = 100

• Final production solution (slack sector)• 0.1 x 100 + 0.5 x QC = 25

• QC = 2 x (25 – 10) = 30

Planned socialism: the work around• Dichotomous replacement to the market

• Material balances example• Resources• Production coefficients• Material balance• Targeted sector output• Final production solution (slack sector)• Labor allocation

• LM = 0.1 x 100 = 10

• LC = 0.5 x 30 = 15

Planned socialism: the work around• Dichotomous replacement to the market

• Material balances example

• Prices?• Targeted sector not needed• Inputs not needed

• Non-market allocation

• Residual sector?

Planned socialism: the work around• Advantages

• Reduced information set required• Easier linear system of equations to solve

Planned socialism: the work around• Advantages

• Remaining concerns• How are production coefficients determined?

• Is engineering data sufficient?

Planned socialism: the work around• Advantages

• Remaining concerns• How are production coefficients determined?• How do ensure compliance with production coefficients?

Incentives and planning• Are moral incentives enough?

• Is this socialism or communism?

Incentives and planning• Are moral incentives enough?

• Implementing material incentives• Judgment criteria

• Quantity goals• Quality goals

Incentives and planning• Are moral incentives enough?

• Implementing material incentives• Judgment criteria• Monitoring bureaucracy • Reward structure

• Monetary rewards and the problem of inflation• Will this work?

Incentives and planning• Are moral incentives enough?

• Implementing material incentives• Judgment criteria• Monitoring bureaucracy • Reward structure

• Monetary rewards and the problem of inflation• Non-monetary rewards and shortages

A missing signal and planning• János Kornai

• Capitalism• The cost minimization/profit maximization dual• Impact of a declining resource on production decisions?

A missing signal and planning• János Kornai

• Capitalism• Planning mechanism

• Input mix• Historical accident• Difficulty of altering the input coefficient

A missing signal and planning• János Kornai

• Capitalism• Planning mechanism

• Input mix• No input price signal• Production rigidity and “inevitable” shortages

Assessing socialism• Data limits

• The environmental problem• Time period: 1965-1988

• Countries for comparison• Capitalist

• US• W. Germany• Japan• UK• Canada

Assessing socialism• Data limits

• The environmental problem• Time period: 1965-1988

• Countries for comparison• Capitalist• Socialist

• USSR• Hungary• Bulgaria• Romania

Assessing socialism: growth

1965-1980 1980-1988

-1%

0%

1%

2%

3%

4%

5%

6%

Capitalist

Planned

Assessing socialism: stability

1965 to 1980 1980 to 19880.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Capitalist

Planned

Assessing socialism: inequality

19900.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

Capitalist

Planned

Assessing socialism: other measures

Literacy

Life expectancy

Greenhouse

Workweek

Maternal m

ortality

0

10

20

30

40

50

60

70

80

90

100

CapitalistPlanned

The market version of socialism• Ward-Vanek version

• Worker self management

The market version of socialism• Ward-Vanek version

• A change to property rights• Each employee has equal ownership share• No right of disposal

The market version of socialism• Ward-Vanek version

• A change to property rights

• Stylized characteristics• Worker management board replaces board of directors• Prices/wages set by market

• Inequality remains (but mitigated)

• Firms maximize and keep profits• Each worker earns equal profit share

• No employment coercion• No stock market

The market version of socialism• Ward-Vanek version

• A change to property rights

• Stylized characteristics

• Does it work?• Employment-equality trade-off• Will it spur greater worker effort?

• Logic of stock options

Islamic economics• System focus

• Capitalism• Profits (?)

• Socialism• Equality (?)

• Islamic

Islamic economics• System focus

• Role of the Quran

Islamic economics• System focus

• Role of the Quran

• Systemic differences• Property rights

• Moral precept to protect natural world• Leads to prohibitions rather than market based solutions

Islamic economics• System focus

• Role of the Quran

• Systemic differences• Property rights• Incentives

• Hadiths require “reasonable wages” and “fair prices”

Islamic economics• System focus

• Role of the Quran

• Systemic differences• Property rights• Incentives• Prohibition of “riba”

• Murabaha• Ownership and resale

Islamic economics• System focus

• Role of the Quran

• Systemic differences• Property rights• Incentives• Prohibition of “riba”

• Murabaha• Mudaraba

• Partial ownership

Islamic economics• System focus

• Role of the Quran

• Systemic differences

• Source of conflict?

Capitalist variants

Source: http://www.economist.com/node/15954434

Capitalist variants• Shareholder capitalism

• US/UK variant• Emphasis on shareholder return• Bias towards limited government interference with business

activities

Capitalist variants• Shareholder capitalism

• Stakeholder capitalism• Emphasis on stakeholders

• Business• Consumer• Community• Labor

Capitalist variants• Shareholder capitalism

• Stakeholder capitalism• Emphasis on stakeholders• Questions

• What is maximized?• Whose interests take precedence?

Capitalist variants• Shareholder capitalism

• Stakeholder capitalism• Emphasis on stakeholders• Questions• Example

• Mitbestimmungsgesetz (Codetermination Act)• 2000+ employees• ½ of supervisory board of directors worker representatives

Capitalist variants• Is the difference real?

• Growth and Stability Pact (1997)• National Debt < 60%• Budget Deficit < 3%• Inflation < 3.2%

Capitalist variants• Is the difference real?

Source: Google Public Data/World Bank

Capitalist variants• Is the difference real?

Source: Google Public Data/World Bank

What distinguishes systems today?• Government role in correcting market failures

• Response to imperfect competition• Response to asymmetric information problems• Response to externalities

What distinguishes systems today?• Government role in correcting market failures

• Government role in macroeconomic stabilization

What distinguishes systems today?• Government role in correcting market failures

• Government role in macroeconomic stabilization

• Government role in social welfare protections