Economics, Chapter 2, Section 3: Centrally Planned Economies
Standard: PA 6.1.12.A PA 6.1.12.C PA6.2.12.A
o Explain why markets exist.
o Analyze a circular flow model of a free market economy.
o Understand the self regulating nature of the marketplace.
o Identify the advantage of a free market economy.
Objectives:
q Describe how a centrally planned economy is organized.
q Analyze the centrally planned economy of the former Soviet Union.
q Identify the problems of a centrally planned economy.
Remember, in a free market, individuals & businesses make voluntary transactions, but in centrally planned the gov’t controls everything
In centrally planned economies, the central government answers the three key economic questions (not the producers or consumers)
This central bureaucracy determines what items get produced, how they are produce, and also who gets them once they are produced.
Government owns both land and capital, and tells people where they work and what wages they will be paid
Socialism:
Political philosophy based on the belief that democratic means should be used to evenly distribute wealth throughout a society.
Communism:
A political system characterized by a centrally planned economy with all economic and political power resting in the hands of the central government.
Socialist:
· argue that real equality can only exist when political equality is coupled with economic equality, which is only possible if the public controls the centers of economic power
· socialist nations may be democratic, but the government still exercises enormous control
Communist:
Believe that a socialist society can only occur after a violent revolution
· Authoritarian– requiring strict obedience to an authority (ex: dictator)
· Do not allow freedom of judgment or action.
· Socialist government can still be democratic; communist cannot
· in the old Soviet Union, the gov’t controlled everything & owned everything while deciding how much each individual would receive (nothing voluntary—everything decided by the gov’t)
Collectives– large farm leased from the state to groups of peasant farmers
Heavy Industry– industry that requires a large capital investment and that produces items used in other industries (ex: chemicals, steel, and heavy machinery manufacturing)
· Soviet Union’s biggest problem was that they focused too heavily on heavy industry; wanted to make a lot of missiles, send someone to space, & make large equipment but stopped growing their own food
· This focus made it difficult for the people to get their basic needs provided for (~10 million starved to death on 2 different occasions during the 20th century)
· Went from being one of the world’s top exporters of grains to one of the world’s leading importers
Centrally Planned Economies Lack:
§ The concept of consumer sovereignty
§ Market forces of Self Interest (motivating force) and Competition (regulating force)
Problems with Centrally Planned Economies:
q Poor quality, shortages of non-priority goods and services and diminishing production.
q no incentive to work hard, since you won’t benefit anyhow
q discourage any change, including innovation
q large expensive bureaucracy lacks flexibility to adjust to consumer demands
q sacrifice individual freedoms to pursue societal goals because of this they cannot meet consumers demand
q Performance almost always falls short of the ideas of which the system is built.
Chapter 2, Section 4: Modern Economies
Objectives:
q Explain the rise of mixed economic systems
q Interpret a circular flow diagram of a mixed economy.
q Compare the mixed economies of various nations along a continuum between centrally planned and free market system.
q Understand the role of free enterprise in the economy of the United States.
All modern economies are mixed; some lean toward market and some lean towards centrally planned.
Adam Smith and other early free market philosophers believed that the market economy would provide the greatest benefit for consumers and raise the standard of living for everyone.
Laissez Faire– the doctrine that states that government generally should not intervene in the marketplace
Some needs and wants of modern society are difficult to answer in the market place.
· Even Smith agreed that there was a need for a certain limited degree of government intervention otherwise we wouldn’t have roads, schools, hospitals, etc.
· As time goes on however, the government’s role continues to increase because some needs and wants of modern society are difficult to answer.
· Markets could not operate without some government intervention, usually through laws that protect people’s rights.
In mixed economies the Government interacts in all spheres of the economic system (see Circular Flow) p.42
· No system has solved the problem of answering the 3 questions perfectly & many vary in their degree of gov’t control.
Free enterprise– an economic system characterized by private or corporate ownership of capital goods; investments that are determined by private decision rather than by state control; and determined in a free market
· Although all are mixed, nations still vary greatly in whether they are controlled more by consumers or the gov’t
Continuum– a range with no clear divisions (pg. 43)
· mixed economies vary in the amount of government intervention in the economy
· at the centrally planned end of the continuum, government dominates almost all aspects of the economy, but there is still some degree of private production
· for example, China currently experiencing transition to become more of a market economy
Transition– period of change in which an economy moves away from a centrally planned economy toward a market-based system
Privatize– to sell state-run firms to individuals
· On the free market end, private sector controls most everything, but the government still sets some laws (like wage and price controls on rent & public services)
· US government has free enterprise economy; gov’t provides vital services, but doesn’t play a big role in the economy