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EconomicSystemsGuidedNotes

AnIntroduc+ontoCommand&FreeMarketEconomics

WELCOMETOJohnrovia-TheLandofSmilesand

Happiness•  Aspartofthegreatestkingdominthehistoryoftheworld,youwillhavetheopportunitytopar+cipateinthegreatestexperimentinthehistoryoftheworld.

•  Followmyrules…

System#1ProducerInstruc+ons

•  Youwill“produce”acarmodeleachround.•  Giveyourcarmodelaname.•  Youmustproduceatleastasmanycarsasthegovernmentrequires.

•  Attheendofeachround,youwillreceive$2foryourcompletedwork.

System#1GovernmentInstruc+ons

•  Youwillactasthegovernmentduringthissec+on.•  Decidewhattypeandhowmanycarsyouthinkourclassneedstofunc+on.

•  Instructeachfactoryhowmanyandwhattypesofcarstheymustcreate.

•  AVereachround,youwillawardeachproducer$2iftheycompletetheirtask.

System#2ProducerInstruc+ons

•  Youwill“produce”acarmodeleachround.•  Youmustsetapricethatyouaresellingyourcarmodelfor.

•  Giveyourcarmodelaname.•  Ifyoudonotreceiveatleast$3eachround,youwillgobankruptandnolongerbeabletoproducecars.

System#2ConsumerInstruc+ons

•  Eachroundyouwillbegiven$10tospend.•  Youwilldecidewhichcarsyouwouldliketospendyourmoneyon.Youmustbuyatleastonecareachround.

•  Youcanbuymul+plecarsifyouwish.

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Simula+onDebrief

•  Whatweretheposi+veandnega+vefeaturesofbothsystems?

•  Whichsystemdoyouthinkworkedbest?

– Forindividuals?– Forsociety?

Essen+alQues+on

•  Whatarethestrengthsandlimita+onsofcommandandfreemarketeconomies?

Economics

•  Thestudyoftheproduc+onandconsump+onofgoodsandservicesandthedistribu+onofwealthinasociety.

– Produc+on=Whatbusinessesmake.– Consump+on=Whobuyswhat.– Distribu+on=Whoisrichandwhoispoor

FreeMarket&CommandEconomies

FreeMarketEconomy•  Aneconomicsystemin

whichpricesaredeterminedbyunrestrictedcompe++onbetweenprivatelyownedbusinesses.

CommandEconomy•  Aneconomicsystemin

whichproduc+on,investment,prices,andincomesaredeterminedcentrallybyagovernment.

FreeMarketSystem:Capitalism

•  IdeasfirstproposedbyAdamSmith(1776)•  “EconomicIndividualism”

Principle1:EconomicFreedom

•  Inaworldwithlimitedresources…– Consumerscandecidewhattobuy.– Producerscandecidewhattheywanttomake.– Workerscandecidehowtheywanttowork.

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Principle2:PrivateProperty

•  Individualscanownlandandmeansofproduc+on.–  FactoryMachinery–  Land–  Labor–  Resources

•  Individualscanchoosehowtousetheirproperty.

–  LimitedGovernmentControl

Principle3:Self-InterestDrivesSociety

•  Peoplewillmakedecisionsthatbenefitthemselves…ButthatisOKAY!!!!

•  Ifpeoplemakeaproductthatpeoplewant,theywillmakemoney&peoplewillbehappy.Everyonewins!

Principle4:Compe++onisGood

•  Whenbusinessescompete,buyerswin!– LowerPrices– Inven+ve/NewIdeas-->Progress!!!

Principle5:PricesareDeterminedbytheMarket

•  Pricesofgoods&servicesaredeterminedbywhatbuyersarewillingtopayforthem.

•  “InvisibleHand,”GuidesMarket–LimitedGov.

Principle6:LimitedGovernment

•  Governmentmakeslawstoprotectindividualsandsolvedisputes.

•  Individualsmakeeconomicdecisions.•  Doesnothaveinfluenceoverthemarket.

– “LaissezFaire”:“LetthePeopledoastheyPlease”

Strengths&Limita+onsFreeMarket/Capitalism

Strengths•  Lotsofchoice–createsthings

peoplelike/wanttohave•  Lotsofincen+vetoinnovate•  Moregainforpopular

products•  Whenbrandscompete,

consumerssave•  Easilyadjusthowmuchyou

sellaproductfor•  Easyentryintothemarket

Limita:ons•  Noteveryonesucceeds–

notanequaldistribu+onofwealth

•  Poten+alproblemswithinventory–limitedinventory

•  Ifthingsgobadly,thesitua+oncangetoutofhand

•  Canbehaveasifthereareunlimitedresources

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CommandEconomy:Socialism

•  Government or public owned means of production

•  Critical of wealth in the hands of a few – Redistribution of wealth

Rise of Socialism

•  Had roots in the Industrial Revolution… Why might this have occurred?

Principle1:EconomicControl

•  Inaworldwithlimitedresources…– Thegovernmentshouldcontrolthedistribu+onofresourcestoensurethatsocietyisfairandresourcesareusedwisely.

– GenerallyfollowsaCentralPlanforthefuture.

Principle2:StateOwnedProperty

•  The government may own or influence the property and the means of production and businesses.

•  IndependentBusinessesmays+llexist,buttheyfollowtherulesofthegovernment.

Principle3:SocialNeedsDrivetheEconomy

•  Thegovernmentdetermineswhatitsci+zensneedtolivehappy&healthylivesandtellsbusinesseswhatandhowmuchtomake.

Principle4:Coopera+onisGood

•  Progress occurs when community cooperates and limits competition.

•  This helps ensure a fair and equal society.

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Principle5:GovernmentSetsPrices

•  TheGovernmentdeterminesthevalueandworthofproducts.

Principle6:LargeGovernment

•  Thegovernmentmakeslawstohelpcarryoutthecentralplanandtosupporttheneedsofci+zens.

Strengths&Limita+onsCommandEconomy/Socialism

Strengths•  Interes+ng/wonky

manufacturing•  Everybodymakesmoney•  Fullemployment–

everyoneshouldhaveajob•  Couldbeefficient•  Setpricesforessen+al

services-medicine

Limita:ons•  Interes+ngmanufacturing

quirks•  Liqleincen+vetostretch/

striveforgains•  Lossinquality•  Peoplehavelessofavoice/

lessinfluenceontheeconomy

WhatHappenedinChinaNa:onalists-GMD/KMTTheGuomindang(GMD),theNa+onalistpartywasformedin1913andinfluencedheavilybytheprincipalsofSunYat-sen.

TheGMDruledChinafromabaseinNanjingfrom1927-1937.

ChiangKaiShek(JiangJieshi)wastheheadoftheGMDfrom1928un+lhisdeathin1975

Communists-CCPTheChineseCommunistPartywasfoundedin1921inShanghai.

BasedintheideasofMarxandheavilyinfluencedbyagentsoftheSovietUnion.

TheCCPwasleadbyMaoZedong,ZhouEnlaiandChenDuxiu

TheNa+onalistsIdeologyTheNa+onalists(GMD)partywasdrivenbythe3People’sPrinciplesofSunYatsen:

Na+onalism-Createana+onaliden+tyDemocracy-Chinashouldbeademocra+crepublic

People’sLivelihood-Economicopportunityforthepeople

SYSnbelievedthatthesewouldbeachievedinthreestages:

1.  Militaryopera+onstodefeatwarlords

2.  Poli+calTutelagetofosterdemocracyamongstthepeople

3.  Democracy

SupportBaseinChinaTheNa+onalistweresupportedintheurbancentersofChina(Guangzhou,Shanghai,Nanjing,Etc…)

Theirsupporterswereeducated,pro-westernandcapitalist

Modernizingthemilitarywasatoppriorityforachievingthefirststageandthereforethena+onalistsputalotoffocusongainingforeignrecogni+onandsupport.

TheCommunistsIdeology

BasedintheideasofKarlMarx,theChineseCommunistPartywasheavilyinfluencedanddirectedbyagentsoftheSovietComintern,whosejobitwastospreadcommunismaroundtheworld.

TheysoughttoorganizetheworkersofChineseci+es(theproletariat)totakecontrolofthefactorsofproduc+onandthefarmworkerstoredistributethelandownershiptomakeitmoreequal.

SupportinChina

TheCCPhadveryliqleini+alsupportinChineseci+esbuttheirmessagecaughtonamongstintellectuals.

Later(underMaoZedong)theyadaptedtheideasofMarxtoappealtoChinesepeasantsandtheirmessageoflandreformbecameverypopular.

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RiseofNa+onalists

AVerthecollapseoftheQingdynastyin1911,itwasreplacedbyamilitarydictatorYuanShihkai.Whilehepretendedtosupportanewrepublic,hebetrayedtherepublicandestablishedamilitarydictatorship.Whenhedied1916,Chinafellintochaos,knownastheWarlordEra(1916-1928)wherenoonecentralpowerhadcontrol.

TheNorthernExpedi+onandtheEstablishmentoftheNanjing

GovernmentDuringtheWarlordEratheGMD’spowergrewinsouthernChina.In1922itjoinedwiththeCCPtogainresourcestobuildanarmyfromtheSovietUnion.In1925,SYSdiesandisreplacedbyChiangKaishek.CKSleadacombinedarmyofGMDandCCPmembersonaNorthernExpedi+on(1927)againstthewarlordsandestablishedanewgovernmentinNanjingfrom1928-1937.

TheWhiteTerrorandJiangxiSoviet

AVersuccessfullyuni+ngChinaunderGMDcontrol,ChiangturnedontheCommunistandpurgedthemfromtheNa+onalistparty.ManywerekilledandimprisonedbutthosethatsurvivedmadeittoasmallruraloutpostinJiangxi(southeastChina)thatwasrunby(atthispointminorcommunist)MaoZedong.UndertheleadershipofMaoandZhuDe(militarycommander)theCCPfoughtaguerrillawaragainsttheforcesoftheGMD.

LongMarchandJapaneseInvasionofWWII

InOctober1934,theCommunistswereforcedtofleeJiangxiandbeganayearlongretreatthatcovered9500kilometersandreducedtheCCPfrom100,000tojustover5,000members.

WhentheJapaneseinvadedinChinain1937,theCCPandtheGMDwereforcedtopausefigh+ngeachothertofightthecommonenemy.Whenthewarendedin1945,theChineseCivilWarbeganagain.

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ChineseCivilWarPart21946-1949OnceJapanhadwithdrawnfromChina,theGMDaqackedtheCCP.Theyhadsuperiortraining,equipmentandnumbers.

TheCommunistssurvivedusingguerillatac+csandprolongingtheconflictaslongaspossible.

In1947theGMDarmybegantoweakenandthe+debegantoturnagainsttheNa+onalists.

In1948,LinBiaoledtheCCParmyanarmytotakeManchuriaandintheBaqleofHuaihai,destroyedtheGMDarmyofcentralChina.

Throughout1949,theGMDforcesretreatedsouthun+lfinallyevacua+ngtoTaiwanandonOctober1,1949,thePeople'sRepublicofChinawasfounded.