GLOBAL TRANSITION

TO CAPITALISM

C H A P T E R 2 S E C T I O N 3 N O T E S

PAT T E R S O N

PROBLEMS OF TRANSITION

• When a country becomes large and complex, a capitalist market is the best way to manage production and provide the necessary incentives.

• The transition to capitalism can be very difficult.

WHY CAPITALISM?

• Capitalism is the most powerful engine for creating wealth the world has ever seen.

• The growth of capitalism has improved the standard of living and the quality of life for millions around the globe.

• Technology has accelerated the push towards capitalism because people desire the wealth they see in others around the world.

• Perfect capitalism may not be desirable to everybody, but a mixed system that relies on capitalism is very popular.

• The transition is very difficult and some countries have failed in this transition.

PRIVATIZATION OF STATE OWNED PROPERTY• The ownership of private property is a key ingredient to capitalism.

• Privatization must occur if the transition to capitalism is to take place.

• Privatization is important because entrepreneurs want to be rewarded for taking risk and it has been shown that people take better care of their property if they own it.

• In countries like Hungary , Poland and Czech Republic vouchers were used to help individuals purchase property.

• Vouchers were either given away or sold at a very cheap price.

• Vouchers could be exchanged for certificates of ownership and state owned enterprise could be transferred to private hands.

RESPONDING TO NEW INCENTIVES• Workers were not familiar with the actions they had to take in a capitalist

system. They now had to make their own decisions, take iniative, interpret prices and fend for themselves.

• Many workers proved unable to handle this new responsibility.

• Workers were used to the same salary regardless of performance. They now had to grasp the concept that they could be fired for poor performance.

• Factory managers had to pay back loans and learn to manage their own finances.

LOSS OF POLITICAL POWER

• Under communism the Communist Party was the ruling class. With the transition to capitalism, many in the party lost political power.

• In some countries (Czechoslovakia, Poland and Hungary), the ruling class lost political power before the transition. Their voucher system worked well in allowing the people to become more powerful.

• In other countries, the ruling class bought the vouchers. Those with the old political power became the economic power brokers of the new country. Ex: Russia

• Russian communist leaders had a very difficult time in giving up power.

UNDERESTIMATING THE COSTS• Many countries that wanted to make the transition, focused on the benefits

without understanding the costs.

• The costs of capitalism include the instability, unemployment and social unrest. Until the New Deal, the United States did not have programs designed to handle these costs.

• Some economists believe that these programs have helped stabilize the economy.

• Most countries in transition do not have social welfare programs that cushion the instabilities of capitalism.

• Some countries cannot survive the unrest that initially occurs in a capitalist system.