Chapter 2Economic Systems

Sections 1 & 2

KEY CONCEPT• An economic system is the way in which a society uses its resources to satisfy its people’s unlimited wants.

WHY THE CONCEPT MATTERS

• An economic system determines what to produce, how to produce, and for whom to produce. Countries have mixed systems, but some systems give more economic and political freedom and create more wealth than others.

Economic Systems

KEY CONCEPTS• Economic system — desires that can be met by consuming products• Three basic systems: traditional, command, and market economies•Mixed economies have features of more than one type of system

Types of Economic Systems

Introduction to Economic Systems

TYPE 1: Traditional Economy• Traditional economy centers on families, clans, or tribes — decisions are based on customs and beliefs• Everyone has a set role; no chance of deviating from pattern• Good of the group always comes before individual desires

TYPE 2: Command Economy• Command economy—government makes economic decisions — determines what to produce; how to produce; who gets products• Wants of individual consumers rarely considered• Government owns means of production: resources and factories

TYPE 3: Market Economy• Market economy -driven by choices of consumers and producers

— consumers spend money, go into business, sell their labor as they wish

— producers decide how to use their resources to make the most money• Consumers, producers benefit each other when they act in self-interest

Types of Economic Systems

KEY CONCEPTS• Early societies all had traditional economies• Traditional systems help societies survive• Tend to be inefficient; do not adapt to change

Characteristics of Traditional Economies

TRAIT 1: Advantages and Disadvantages• Advantages: little disagreement over goals, roles — methods of production, distribution determined by custom• Disadvantages: as result of resistance to change, less productive — do not use new methods; people not in jobs they are best suited for — low productivity results in low standard of living

TRAIT 2: Under Pressure to Change• Many traditional economies under pressure to change• Kavango people of Namibia lived as subsistence farmers for centuries• Modern telecommunications brought Kavango images of outside world — thousands have moved to cities — a few have turned to commercial farming

Characteristics of Traditional Economies

Government Controls

KEY CONCEPTS

• Centrally planned economy—central government makes all decisions• Decides for whom to produce in part by setting wages — only some people have money to buy available products

Command Economies

EXAMPLE: Government Planning• In all societies, government exerts some control over people’s lives• In centrally planned economy, government exerts great control — determines businesses to operate, amount produced each month — determines who is employed, work hours, pay scales

EXAMPLE: Socialism and Communism• Karl Marx influenced some societies to adopt command economies — socialism—government owns some of the factors of production — communism—no private property; little political freedom• Authoritarian system requires total obedience to government — communism is authoritarian socialism• Democratic socialism established under democratic political process — government owns basic industries — other industries private — central planners make decisions for government-owned industries — central planners might control other sectors, such as health care

Government Controls

A New View of Economics• Marx lived during Industrial Revolution• Argued factory owners used workers as resource — exploited workers by keeping wages low to

increase profits — workers would rebel, establish classless society• Wrote The Communist Manifesto (with Friedrich Engels),

Das Kapital

Karl Marx: Economic Revolutionary

KEY CONCEPTS• No pure command economies today

— modern telecommunications bringing

about change• Some economies still have mostly command elements

Command Economies Today

North Korea• Communist North Korea used resources for military, not necessities• Built large army; nuclear weapons program• In 1990s and early 2000s, millions died of hunger, malnutrition• In 1990s, production decreased and economy shrank• Since 2003, some market activity allowed

Command Economies Today

Impact of Command Economies• In theory, command systems fair to everyone; In practice, many disadvantage • Central planners do not understand local conditions

• Workers have little motivation to be productive or conserve resources • Artificially low prices lead to shortages• People sacrificed to carry out centrally planned policies

Command Economies Today