ECONOMICS FOR SOUTH AFRICAN STUDENTS

CHAPTER 2:

THE ECONOMIC PROBLEM

PART 3: FOR WHOM TO PRODUCE? AND ECONOMIC SYSTEMS

ECON-1

ECONOMIC PROBLEM?

When you consider the economic problem:

•Scarcity

•Choice

•Opportunity cost

It leads to 3 important questions:

•WHAT to produce?

•HOW to produce?

•For WHOM to produce?

Economic systems determine how society will answer these questions.

FOR WHOM TO PRODUCE…Who consumes the goods and services that are produced?

Why is this an important question in SA?

Functional distribution (factor of production) vs. personal distribution (households and firms)

Occupation

Bottom 5%

R

Median

R

Top 5%

R

Manager 2,000 10,500 48,000

Professional 1,500 10,000 35,000

Technician 1,200 7,500 19,250

Clerk 1,000 4,500 15,000

Sales and services 600 2,420 12,000

Skilled agriculture 500 2,167 16,700

Craft and related trade 800 2,900 14,000

Plant and machine operator 840 2,817 9,550

Elementary 450 1,517 5,500

Domestic worker 300 1,000 2,400

Total 570 2,800 17,000

Breakdown of monthly earningsa

by occupation, 2010

1993 2000 2008

African 0.54 0.60 0.62

Coloured 0.44 0.53 0.54

Indian 0.47 0.51 0.61

White 0.43 0.62 0.56

Rural 0.58 0.62 0.56

Urban 0.61 0.64 0.67

Total 0.66 0.68 0.70

Gini co- efficienta by race and location, 1993, 2000, and 2008

FOR WHOM TO PRODUCE…Distinguish between income and wealth...

Distribution between private and public sectors...

Distribution between sectors where the production takes place:

• Primary• Secondary• Tertiary

Year

Public sector

R

Private sector

R

Differential (public sector

> private sector)

2000 3,819 3,400 12.3%

2001 4,316 3,659 17.9%

2002 4,762 4,021 18.4%

2003 4,889 3,940 24.1%

2004 5,336 4,206 26.9%

2005 5,695 4,015 41.8%

2006 5,860 4,210 39.2%

2007 6,240 4,900 27.4%

2008 6,823 5,188 31.5%

2009 7,592 5,763 31.7%

2010 8,938 6,224 43.6%

2000–10 134.10% 83.00% –

Average monthly earnings in formal non-agricultural employment in the public

and private sectors, 2000–10

ANSWERS TO THE QUESTIONS: ECONOMIC SYSTEMS

Traditional system:

• Tradition determines WHAT is produced and HOW it is produced, as well as the way it is distributed.

• Usually autarky.

• E.g. medieval Europe or the island societies of the Pacific ocean.

• Not an important system today.

ANSWERS TO THE QUESTIONS: ECONOMIC SYSTEMS

Command system:

• Central government makes 5-years plans of WHAT, HOW and FOR WHOM to produce.

• All the factors of production are owned by government.

• This is socialism and communism.

• In the 20th century this was tried in Soviet Russia, China, Poland, East Germany and North Korea.

• Today there is little left of these systems and markets are used to coordinate economic activity.

ANSWERS TO THE QUESTIONS: ECONOMIC SYSTEMS

Market system:

• What is meant by the market?

• Prices are signals / the invisible hand.

• Market capitalism:• Private ownership.• People acting in their own best interest.

• Competition is important for the system to work.

• Answers to WHAT, HOW and FOR WHOM…

ANSWERS TO THE QUESTIONS: ECONOMIC SYSTEMS

Mixed economies:

• The market + a role for government.

• Factors of production are privately owned, but government provides public goods.

• The market uses price signals, but government influences it through taxes and subsidies.

• When there is imperfect competition the government intervenes with competition policy.

• South Africa is an example of a mixed system.

FATHERS OF ECONOMICS

Adam Smith

• The wealth of nations, 1776

• Economic activity is to satisfy needs.

• Emphasises division of labour, (pin factory example), free trade, limited role for the government.

• Markets and people working in their own interest is like an invisible hand guiding the economy.

• Smith provides the roots for the classical and neo-classical schools of thought.

FATHERS OF ECONOMICS

Karl Marx

• The Communist Manifesto, 1848; Das Kapitaal, 1867.

• Sees labour as a sources of surplus value in the production process, that is more than the wages workers receive.

• Capitalists keep the surplus big, unemployment high and wages low through mechanisation.

• This will lead to social revolution and a classless system without private ownership.

• The political influence of Marx…

FATHERS OF ECONOMICS

John Maynard Keynes• Classical economists had a specific view about the economy

before the Great Depression…• But the Great Depression changed everything.• Keynes published The general theory of employment, interest

and money.• Focused on aggregate demand and the role of government

spending and tax relief to get the economy out of the depression.

WHY ARE SYSTEMS AND ECONOMIC THOUGHT STILL IMPORTANT TODAY?

There has been a world-wide crisis: “credit crunch”, “bail outs” en $1 trillion of stimulation plans.

The media wonders if capitalism has failed, “Rethinking Marx”, the developmental states and state capitalism???.

What is the road ahead? What should the role of government be in the economy?

In SA as well:

• ANC, SAKP, COSATU looks to the left about the role of government, inflation, monetary policy.

DID WE ACHIEVE THE OUTCOMES?Can you explain the question of distribution?

Can you describe and analyse each economic system?

Can you explain the origins of each system?

Can you discuss the benefits and problems of each system?

Chapter 2 in Mohr & Fourie

eFundi

Answer the Quiz questions

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