Lecture 2

The tipology of the social / political / economic systems

 capitalism (and the market economy)

 socialism (and the planned economy)
 some attempted hybrids: market socialism (or state capitalism) and economic
fascism (corporatism)
 interventionism

The core difference between human societies and national economies in the international
arena = the attitude of the governments towards individuals and mainly their private property
rights (= the property regime) → such an institutional framework is the core determinant of
how individuals act and interact.

Private property versus Common property (state property)

 is natural → derives from the scarcity of goods that are its object
 allows capitalization = the value of future cash flows can be taken into account in
order to assess the present capital value = a market value for the capital goods (see the
stock exchange)
 align the „control” incentive with „saving” incentive = the owner is the only one who
can maximize the present and future cash flows in order to preserve the capital value
of his/her good;
 private property is void unless there is also free trade in it and in its services
 Capitalism

= the political and economic system where the proprerty rights are private and there is
also the freedom to exchange
 a capitalist system = is naturally competitive, generate competition (= the market
economy) → the economics goods are usually held by those who value them most
(and have the ability to pay their price)
 production is oriented towards the satisfaction of the consumer preferences of the
population → it is „anarchic” = each entrepreneur will assume an economic risk for
his investment
 entrepreneurial decision = taken under uncertainty = imply discoveries = there is
always a process of „creative destruction” = business failures are natural

International Property Rights Index – 2018 (Property Rights Alliance)

- the protection of private property rights in the world

1. Finland 52. China

2. New Zeeland 53. Panama

3. Switzerland 53. Romania

4. Norway 121.Pakistan

5. Singapore 122. Bangladesh

6. Sweden 123. Venezuela

7. Australia 124. Yemen

8. Netherlands 125. Haiti

125. Haiti

Fragile States Index: 2018

178. Finland 138. Croatia

177. Norway 137. Romania
176. Switzerland 136. Panama
175. Denmark
3. Yemen
2. Somalia
1. South Sudan
 The market economy

 scarcity – implies the need of choice among competing uses

 the market = the allocation of economics goods is made through the mechanism of
free supply and demand (free prices)
 an economic good is employed in the most profitable use identified by market
participants (everyone attempts to maximize his profit)
 from a aggregate perspective, economic goods are allocated towards the most
profitable uses = determines the maximization of the use of economics goods =
maximization of the welfare of the society

Collective property

 either natural (and compatible with capitalism) or imposed (by the state = state
property = socialism)
 collective ownership = generate „the tragedy of the commons” = each one attempts to
maximize his own gain so they consume the capital value of the commonly held goods

State ownership

 state ownership implies the centralization of the allocation of resources → economic

planning = prices are fixed by a central planner + the quantities to be produced are
established through „plans”
 the state allocate the resources (including credit, labor or currency) following political
criteria, ignoring profit and loss = economic planning
 the satisfaction of political criteria will lead to a loss in social welfare
 Self declared socialist states

 People Republic of China

 Republic of Cuba
 Laos People Democratic Republic
 Socialist Republic of Vietnam

Impossibility of Economic Calculation in socialism

= as long as prices are politically fixed in order to reach political objectives → at some point
they will ignore the real scarcity of resources as well as consumer preferences

Prices versus costs: does the price is a sum of costs and a profit?

A socialist economy, from a producer perspective

 the concepts of profit / loss are arbitrary / void;

 however, real scarcity remain (government decrees cannot eliminate scarcity) = the
criterion for the allocation of resources is however „political” and not „economic”
 no differences in motivation and rewards (= same wages for the education / training) =
no incentive to excel, to be more professional than the others
 state companies have usually the objectives to avoid firings, promote hirings, political
objectives and so on.

As a general rule, socialist economies have rejected private property and especially foreign
ownership → however, these economies were involved in trade and investments with other
companies sometimes, significant opportunities for profit.
 The impossibility of market socialism (MS)

= can we have a „market economy” without „capitalism”?

MS = defined as a system where ownership belongs to the state but prices are free = state
enterprises had the liberty to negotiate prices (ex. former Yugoslavia, up to a point)
 the failure of planning cannot be ignored = without a free capital goods market (e.g.
stock exchange) and the liberty to fail (bankruptcy) / start a new business
 no correct incentives = moral hazard = I follow my personal profits while the costs are
paid by the public

Economic fascism

= a particular form of „planning” and, fundamentally, socialism = while property rights are
formally private, their exercise is somehow socialized – the state plans production and fixes
prices and the companies are obliged to honor these (especially as the major client / supplier
is the state)
 private business decisions are denied
 the only real „liberty” for private entrepreneurs = the liberty to fail
 all private producers are members of state imposed cartels (same prices, production
quotas) = they are “told” what and how much to produce

Dilemma: is the economic success of contemporary China a counter

example of the impossibility of economic calculation in socialism?

 Paradoxically, no. It seems to be even an argument.

 the economic performance of China in the last 35 years is due to the emergence of
private property and freedom of exchange and the engine of growth have been the
foreign direct investments (FDI).
 1978: „special economic zones” + „open cities”
- allowed FDI (initially, through joint ventures);
- some national legislation didn’t apply (more business friendly);
- fiscal facilities;
 China

 „a country, two systems”: while Hong Kong is among the freest market economies in
the world, mainland China still experiences state ownership and planning
 onshore jurisdictions = an area inside the borders of a country where there is a
special legislation with different objectives (like free ports, free trade zones, London
City and so on) than in the rest of the country
 offshore jurisdictions = an autonomous or independent jurisdiction, usually in
tropical islands, where there are manifestly different legislations (commercial, fiscal,
so on): Isle of Man, Cayman Islands, so on