Lecture 3. Economic systems and models Social Economics Yevgeniy M. Orel, C.Sc.(Econ.), Docent, Faculty of Economic Science, NaUKMA

Thursday, July 23, Outline of the presentation (Topic 3 Economic systems and models) Economic systems Division of economic system Values Mainstay of free market Social market economy Index of Economic Freedom

Thursday, July 23, Economic system, definition Economic system is a mechanism dealing with the production, distribution, exchange, and consumption of goods and services in a particular society

Thursday, July 23, Economic system, component parts People; Institutions Relationships.

Thursday, July 23, Division of economic systems Market economy Mixed economy Planned economy Traditional economy Participatory economy

Thursday, July 23, Free market Free markets are advocated by proponents of economic liberalism; In the United States, support for free market economic structures is a key tenet of U.S. conservatism and libertarianism.

Thursday, July 23, Evils (?) of the market economy: Insider trading Price fixing Price gouging Adverse selection Moral hazard Principal-agent problem

Thursday, July 23, Mixed economy A mixed economy is an economy that combines capitalism and socialism". Some sources prefer the use of command economy" over "socialism" in defining a mixed economy (see external links below). Relevant aspects include a degree of private economic freedom (including privately owned industry) intermingled with centralized economic planning (which may include state ownership of some of the means of production).

Thursday, July 23, Participatory economics, or parecon Participatory economic system proposed as an alternative to contemporary capitalism and also an alternative to centrally planned socialism or coordinatorism

Thursday, July 23, Systems of values result from theories in ethics: Utilitarianism Liberalism Communitarianism

Thursday, July 23, Perspectives: Utilitarianism – outcomes Liberalism – starting points Communitarianism – character

Thursday, July 23, Utilitarianism ( John Bentham ) the greatest good of the greatest number : Subjective: Individuals decide on their own well-being; Objective: experts create and apply an index of well-being.

Thursday, July 23, Utilitarianism – cont.: problems Utility may not even exist as a measurable thing; (utilometer has never been invented) There is no 100%-correct way to measure utility; Is it fair to sacrifice some for others?

Thursday, July 23, Liberalism: people have the right to choose their own life plan Libertarianism ( libertarian liberalism ): Negative rights, i.e. the rights to be left alone ( laissez-faire? ); Egalitarianism ( egalitarian liberalism ): Positive rights as a prerequisite for effective choice ( universal public health and public education; abortions, euthanasia, etc. ).

Thursday, July 23, Liberalism – cont. : problems Difficult to know who is entitled to what rights; Uncertain extent of possible redistribution; If the rights conflict, what do we do?

Thursday, July 23, Communitarianism: Good character of individuals to result in good society Relativism ( relativist communitarianism ): Each society to define good character for itself; Universalism ( universal communitarianism ): One and the only true good character exists. (Does it?)

Thursday, July 23, Communitarianism – cont.: problems Boundaries of the community are hardly (if at all) definable; Communities suppress dissent? How far do they go towards it? Conflicting visions of different universalists: How to handle those conflicts?

Thursday, July 23, Economists: what are they? Economists tend to be subjective utilitarians, whether they know it or not. Marc J. Roberts Professor Harvard School of Public Health

Thursday, July 23, Market economy, key points Private ownership Entrepreneurship Invisible hand Market failures Underground economy

Thursday, July 23, Ideological mainstay of the free market Minarchism Libertarianism Liberalism Neo-liberalism.

Thursday, July 23, Minarchism Minarchism, sometimes called minimal statism, is the view that the size, role and influence of government in a free society should be minimal - only large enough to protect the liberty of each and every individual, without violating the liberty of any individuals itself.government

Thursday, July 23, Opposite to market: Socialism Communism Gift econmy Traditional economy

Thursday, July 23, Social market economy the state intervenes where the market does not fulfill the needs of the market participants John Rawls

Thursday, July 23, Index of Economic Freedom Trade policy, Fiscal burden of government, Government intervention in the economy, Monetary policy, Capital flows and foreign investment, Banking and finance, Wages and prices, Property rights, Regulation, and Informal market activity.

Thursday, July 23, Economic Freedom of the World, Annual Report 2005 Average EF up from 5.17 (out of 10) in 1985 to 6.4 in the recent year data available; Of 109 nations (1985), 96 recorded improvement in EF; The most substantial gains: Bolivia, Brazil, Ghana, Iceland, Poland, Uganda, etc. Hong Kong with the highest IEF: 8.7(!)

Thursday, July 23, Economic Freedom of the World, Annual Report 2005 (cont.) Most of the lowest rating countries are: –African –Latin American –Former communist states; Top quintile, average GDP $25,062; Bottom quintile, average GDP $2,409; Top quintile, per capita econ.growth rate 2.5%; Bottom quintile, per capita econ.growth rate 0.6%.

Thursday, July 23, Economic Freedom of the World, Annual Report 2005 (cont.-2) Top quintile, unemployment 5.2%; Bottom quintile, unemployment 13%; Top quintile, life expectancy 77.7 y.; Bottom quintile, life expectancy 52.5 y.; Top quintile, life expectancy 77.7 y.; Bottom quintile, life expectancy 52.5 y.;

Thursday, July 23, Economic Freedom of the World, Annual Report 2005 (cont.-3) Top quintile, children in labor force 0.1%; Bottom quintile, children in labor force 22.6%; Top quintile, political rights 1.7 (1-7); Bottom quintile, political rights 5 (1-7); Top quintile, 10% poorest aver.inc. $6,451; Bottom quintile, 10% poorest aver.inc. $1,185.

Thursday, July 23, Economic freedom versus democracy Economic freedom is ca. 50 times more effective than democracy in diminishing violent conflict; Nations with a low score for economic freedom (below 2 out of 10) are 14 times more prone to conflict than states with a high score (over 8); The impact of economic freedom is highly significant on whether states fight or have a military dispute; democracy is not.

Thursday, July 23, Дякую за увагу! Thank you for attention!