1 OUR ECONOMIC SYSTEM. 2 Pure Capitalism Type of economic system generally characterized by: u...

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OUR ECONOMIC SYSTEM

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Pure Capitalism

Type of economic system generally characterized by:

Limited involvement of the government in the economy.

Individual ownership of the factors of production.

Individuals pursue their own self interest with few constraints.

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What is an economic system ?

All of the institutional means through which the FOP are used to satisfy wants.

A representative democracy facilitates the institution of a capitalistic economy.

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By institution we mean principally the laws of the nation and cultural practices which control the way in which individuals act.

A law is something that serves to instruct.

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There are six basic criteria associated with a pure capitalistic system:

The institution of private property Free enterprise and free choice Self interest Competition and unrestricted markets The market system The limited role of government

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The Institution of Private Property

Ownership of most property is held by individuals or groups of individuals (corporations, partnerships, etc.).

The state is not the owner of productive resources that are important forms of property.

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Private property is controlled and enforced through the legal framework of laws, police, and courts.

Therefore one function of government is the protection of private property rights.

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Individuals are usually free to use their private property as they choose, so long as they do not infringe on the legal property rights of others.

Individuals are usually allowed to enter into private contractual agreements that are mutually satisfying.


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Free Enterprise and Free Choice (An Extension of Property Rights)

Exists when private individuals are allowed to obtain resources, to organize those resources, and to sell the resulting product in any way the individual chooses.

As long as their actions do not infringe on the property rights of others

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– Assumes there are no artificial restrictions that a government or other producer can put up to block a business's choice in the matter of purchasing its inputs and selling its outputs.

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– Assumes there are no artificial restrictions that a government or other producer can put up to block a business's choice in the matter of purchasing its inputs and selling its outputs.

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Workers are free to enter any line of work for which they are qualified, and consumers can buy the desired basket of goods and services that they feel is best for them.

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The ultimate voter is the consumer, he/she votes with dollars, and decides which product will survive– This reasoning is known as consumer

sovereignty, where the ultimate purchaser of goods and services determines what is produced.

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The ultimate voter is the consumer, he/she votes with dollars, and decides which product will survive– This reasoning is known as consumer

sovereignty, where the ultimate purchaser of goods and services determines what is produced.

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Self Interest

Normally implies the maximization of profits or the minimization of losses.

Consumers: strive to maximize the amount of satisfaction possible from spending a given amount of money income. (as little as possible!)

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Self Interest

Producers : strive to maximize the amount of net income possible from selling commodities at the highest possible price (get as much as possible!)

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Self Interest

Consumers: strive to maximize the amount of satisfaction possible from spending a given amount of money income. (as little as possible!)

Producers : strive to maximize the amount of net income possible from selling commodities at the highest possible price (get as much as possible!)

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Self Interest

Employees (Workers): strive to obtain the highest level of income possible for least amount of work.

Employers :strive to obtain the most amount of work from employees for the least cost.

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Self Interest

Owners of resources: strive to obtain the highest possible price when that resource is sold or leased.

Users of resources: strive to obtain the lowest possible price for a resource so that THEY can make the most profit.

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Competition and Unrestricted Markets

Competition is Rivalry among sellers who wish to attract customers and rivalry among buyers to obtain desired goods and services.

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Competition requires a minimum of two conditions:– A relatively large number of independently

acting sellers and buyers.

– Freedom of sellers and buyers to enter or exit a particular industry without restrictions (unrestricted markets).

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Economic competition imposes limits on the self interest of buyers and sellers. Competition is a regulating force in capitalist systems.

– i.e. Raise prices Consumers go to another one of many sellers.

– Economic profit earned New firms will enter the industry.

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Unrestricted Markets

– Economic profit earned New firms will enter the industry.

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The Market System

An institution that develops from the– Private Property Rights– Free Choice and Free Enterprise– Self-Interest– Competition and Unrestricted Markets

Also referred to as the “Price System”

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The Market System

Capitalism is a market economy. That is, buyers and sellers relate their opinions by expressing how much they are willing to pay for, or how much they demand of goods and services.

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The Market System

Prices are used to signal the value of individual resources and commodities. Therefore, prices provide valuableinformation to consumers and producers.

Prices are the "guiding light" to which resource owners, businesses, and consumers follow when economic choices must be made.

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The Market System

Therefore, we can say that the market system (price system) IS the organizing force in capitalist systems.

– Organization is the coordination of individuals in the furtherance of a common goal.

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The Market System

Resources tend to flow where they yield the highest rate of return or highest profit.

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The Market System

Prices generate the signals for resource movements, provide information cheaply and quickly, and affect incentives.

– i.e. The current movement of resources out of the farming sector and into the ornamentals, landscape and turf sectors.

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Real Net Farm Income, N.C.(Millions $)

0

500

1000

1500

2000

2500

3000

Year

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Ag. Institute Fall Enrollment

050

100150200250300350400450500

32

0

500

1000

1500

2000

2500

3000

050

100150200250300350400450500

33

Percentage of Students Enrolled In Livestock Mgmt. & Tech

0

5

10

15

20

25

30

35

34

Percentage of Students Enrolled In Field Crops Technology

0

5

10

15

20

25

35

Percent of Students Enrolled in General Agricutlture

0

2

4

6

8

10

12

14

16

18

20

36

Percentage of Students Enrolled in Ornamentals & Landscape

0

5

10

15

20

25

30

37

Percentage of Students Enrolled in Turfgrass Management

0

5

10

15

20

25

30

35

40

38

Percentage of Students Enrolled in Traditional Agriculture Curr.

0

10

20

30

40

50

60

70

39

Percentage of Students Enrolled in Orn. & Land., and Turf

0

10

20

30

40

50

60

70

40

0

10

20

30

40

50

60

70

0

10

20

30

40

50

60

70

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Average Starting Salaries, May 1992 and 1995 Graduates

$0 $10,000 $20,000 $30,000 $40,000 $50,000

Ph.D

MS

BS

AA

1995

1992

$20,400$21,000

$22,183$22,000

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Average Starting Salaries of Ag. Inst. Graduates, 1993, 1994, 1995

$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000

All Majors

Ag. Bus.

Ag. Pest

Field Crops

Livstk. Mgmt.

Orn. & Land.

Turfgrass

Gen. Ag.

199519941993

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Average Starting Salaries of Ag. Inst. Graduates, 1996, 1997, 1999

0 5000 10000 15000 20000 25000 30000 35000

All Majors

Ag. Bus.

Ag. Pest

Field Crops

Livstk. Mgmt.

Orn. & Land.

Turfgrass

Gen. Ag.

199919971996

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The Limited Role of Government

Someone or some entity has to define and enforce private property rights.

– The government protects the rights of individuals and business persons to keep private property private, and keep the control of that property vested with the owners.

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Reconcile Negative Externalities through Legislative Action or Civil Process to Settle Disputes Judicially

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Eliminate monopolies that would restrain trade,

Issue money, Prescribe a standard of weights

measures,

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Raise funds through taxation and other means (BORROW) for public goods such as national defense.

Therefore, government is essential to the existence of a pure capitalist economic system.

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Public Goods

COLLECTIVE CONSUMPTION: Many people can consume the same

units of a good or service simultaneously.

consumption of the good by one person does not diminish the amount available for anyone else.

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Public Goods

NON-EXCLUSION PRINCIPLE: There is no technology available to

prevent people who do not pay for the good or service from consuming it,

ORthe costs of exclusion are prohibitively high

relative to the commodity's benefit.

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Public Goods

NON-EXCLUSION PRINCIPLE: There is no technology available to

prevent people who do not pay for the good or service from consuming it,

ORthe costs of exclusion are prohibitively high

relative to the commodity's benefit.

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Quasi-Public Goods

These are goods and services provided by government that could be exclusive.

In other words, these goods and services could be provided by the private sector rather than government

Examples: Education, fire and police protection, highways, etc.

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Public Production vs. Public Provision

Public Production: – government actually produces public goods

using government employees and other government owned resources

– For example: DOT production of streets, roads, highways, and associated services

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Public Production vs. Public Provision

Public Provision:– Government uses subsidies, contracts with

private firms, and administrative regulations and codes to enhance production of public and quasi-public goods and services to a point deemed optimum.

– For Example: the government does not produce aircraft carriers or submarines, the government contracts with private firms to produce these.

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Privatization

Privatization: the shifting of actual government production of quasi-public goods to the private sector.– Volunteer fire departments in North Carolina

often negotiate contracts with municipalities to provide fire protection.

– Garbage collection has been contracted out– Prison management has been contracted

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THE MIXED ECONOMIC SYSTEM

Pure Capitalism is only one extreme type of social organization for the production and distribution of commodities.– The other extreme is a political system

whereby the government, or a central decision making body, controls all productive resources.

Alias: COMMUNISM

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MIXED ECONOMIC SYSTEM

In reality, most economic systems are a combination of market and political systems.

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In the US, we have a hybrid economic system.– Some decisions are made by the government

directly.» Movement of resources has been strongly

influenced by government through our tax system

– Most decisions, however, are made in the market by businesses (producers) and consumers.

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Economic Systems

Market Economies Mixed Economies Command Economies

Pure Capitalism Socialism Pure Marxist

Communism

Hong Kong

Singapore

United States

Canada

Japan

W. Germany

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Economic Systems

Market Economies Mixed Economies Command Economies

Pure Capitalism Socialism Pure Marxist

Communism

Great Britain Cuba

France North Korea

Sweden

China

Former USSR

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Therefore, our system is a mixed economic system that leans heavily towards pure capitalism.

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After World War II, the role of the US government in our economic system expanded.

– Government stepped in to help out (subsidize) certain industries and individuals.

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loan guarantees to Lockheed and Chrysler,

protective tariffs on textiles, automobiles, beef, and peanut imports,

price support programs for many agricultural commodities,

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expanded social welfare programs. Tax dollars are redistributed to those whom the government deems to be needy,

Social Security and Medicare Programs Medicaid Program

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and tax other industries and individuals.– windfall profit tax on the oil companies,

(Carter Administration 1976-1980)– luxury taxes on expensive boats and

automobiles, (10% tax under Bush Administration, Democratic Congress)

– repeal of capital gains exclusion in the tax code (Reagan Administration, Democratic Congress.).

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Restrictions on the agricultural sector by means of quotas or allotments.

– e.g. peanuts, tobacco, milk, and certain fruits

Restrictions on production and procurement of resources due to environmental concerns.

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Government Intervention

Whether this government intervention is good or bad is a decision you must make.

Once you decide, you must voice your opinion at the voting booth.

To make objective decisions, you must have information.

This course is designed to provide information for the decision making you will have to undertake in the course of your career.

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CONCLUSIONS

CAPITALISM:

An economic system in which individuals privately own productive resources and possess the right to use these resources in what ever manner they choose subject to certain (minimal) legal restrictions.

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CONCLUSIONS

A pure capitalist system works within the institution of private property that is controlled and enforced through the legal framework of laws, courts, and police.

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CONCLUSIONS

It is a system of free enterprise, where producers freely choose the resources they use in the production process.

Consumers have freedom of choice also, as do workers and owners of resources in general.

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CONCLUSIONS

Individuals and producers express their desires through the market system where

prices are signals about the relative scarcities of different goods, services, and resources.

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CONCLUSIONS

The role of government is limited to the – protection of private property rights,

– provide an environment favorable to competition, and

– provide public goods.

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CONCLUSIONS Reconcile Negative Externalities through

Legislative Action or Civil Process Provide for national defense, eliminate monopolies that would restrain trade, issue money, prescribe standards of weights measures, raise funds by taxation and other means

(BORROW) for public goods, and settling disputes judicially

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Circular Flow ModelCircular Flow Model

BUSINESSESBUSINESSES HOUSEHOLDSHOUSEHOLDS

RESOURCERESOURCEMARKETMARKET

RESOURCESRESOURCES INPUTSINPUTS

$ COSTS$ COSTS $ INCOMES$ INCOMES

PRODUCTPRODUCTMARKETMARKET

GOODS &GOODS &SERVICESSERVICES


$ CONSUMPTION$ CONSUMPTION$ REVENUE$ REVENUE

Copyright McGraw-Hill, Inc. 1999

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THE CIRCULAR FLOW REVISITEDTHE CIRCULAR FLOW REVISITED









GOVERNMENTGOVERNMENT


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NET TAXES FLOWTO GOVERNMENTFROM BUSINESSES



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GOVERNMENTGOODS & SERVICES

FLOW TO BUSINESSES



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NET TAXES FLOWTO GOVERNMENT

FROM HOUSEHOLDS



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GOODS & SERVICESFLOW TO HOUSEHOLDS

FROM GOVERNMENT



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EXPENDITURESFLOW TO

ACQUIRE RESOURCES



80











RESOURCESFLOW TO

GOVERNMENT


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GOVERNMENTEXPENDITURES

FLOW TOPRODUCT MARKET


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GOODS & SERVICESFLOW TO

GOVERNMENT


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