Notes

Soizic Hoffelinck Comparative Economic Systems
Table des matières
CHAPTER 0 : INTRODUCTION.................................................................................................................................. 4
INTRODUCTION...........................................................................................................................................................4
CES AND APPROACHES TO IT..................................................................................................................................................4
MORE STATE OR LESS STATE?.................................................................................................................................................4
A BRIEF HISTORY OF ECONOMIC SYSTEMS.................................................................................................................................4
LOLLIPOP ACTIVITY......................................................................................................................................................4
CHAPTER 1 : HOW DO WE COMPARE ECONOMIES?................................................................................................ 5
1.1. INTRODUCTION....................................................................................................................................................5
FUKUYAMA.........................................................................................................................................................................5
EVOLVING ECONOMIC SYSTEMS IN THE 21ST CENTURY...............................................................................................................6
1.2. MIXED ECONOMY CONTINUUM (ACCORDING TO THE ECONOMIC FREEDOM INDEX)...............................................................6
1.3. HOW DO WE CLASSIFY ECONOMIES?.......................................................................................................................7
1. ALLOCATION MECHANISMS................................................................................................................................................7
2. FORMS OF OWNERSHIP.....................................................................................................................................................7
3. ROLE OF PLANNING..........................................................................................................................................................8
4. TYPES OF INCENTIVES........................................................................................................................................................8
5. INCOME REDISTRIBUTION AND SOCIAL SAFETY NETS...............................................................................................................8
6. ROLE OF POLITICS AND IDEOLOGY.......................................................................................................................................9
CRITERIA FOR EVALUATING ECONOMIES...............................................................................................................10
GENERAL CONDITION/PERFORMANCE OF VARIOUS ECONOMIES..........................................................................................11
1.4. NEW COMPARATIVE ECONOMY..............................................................................................................................13
1.4.1. "CORONA" ECONOMICS............................................................................................................................................14
1.5. SUMMARY AND CONCLUSIONS......................................................................................................................15
CHAPTER 2: THE THEORY AND PRACTICE OF MARKET CAPITALISM........................................................................16
2.0. CURRICULUM.....................................................................................................................................................16
2.1. INTRODUCTION..................................................................................................................................................16
2.1.1. MARKET CAPITALISM................................................................................................................................................16
2.1.2. THREE ECONOMIES THAT COME CLOSEST TO THE IDEAL OF PURE LAISSEZ-FAIRE MARKET CAPITALISM:.......................................16
2.2. THE THEORETICAL EFFICIENCY OF MARKET CAPITALISM.................................................................................17
2.3. LIMITS TO THE EFFICIENCY OF LAISSEZ-FAIRE MARKET CAPITALISM................................................................18
2.3.1. MONOPOLY............................................................................................................................................................18
2.3.2. EXTERNALITIES.........................................................................................................................................................18
2.3.3.COLLECTIVE CONSUMPTION GOODS.............................................................................................................................18
2.3.4. IMPERFECT INFORMATION.........................................................................................................................................19
2.4. THE ROLE OF LABOR UNIONS.........................................................................................................................19
2.5. MACROECONOMIC INSTABILITY OF MARKET CAPITALISM..............................................................................19
2.6. THE PROS AND CONS OF MARKET CAPITALISM...............................................................................................20
CHAPTER 3: THE THEORY AND HISTORY OF MARXISM & SOCIALISM..................................................................... 23
3.0. INTRODUCTION..................................................................................................................................................23
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SOVIET JOKES.................................................................................................................................................................... 23
3.1. INTRODUCTION..................................................................................................................................................23
3.2. THE DEVELOPMENT OF SOCIALIST IDEOLOGY.................................................................................................23
3.2.1. RELIGIOUS AND PHILOSOPHICAL PRECURSORS................................................................................................................23
3.2.2. UTOPIAN SOCIALISM (18TH AND 19TH CENTURY)..........................................................................................................24
UTOPIAN SOCIALISM (18TH AND 19TH CENTURY)....................................................................................................................24
3.3. MARXISM AS A QUASI-RELIGION...........................................................................................................................24
3.4. THE HEGELIAN DIALECTIC.....................................................................................................................................24
THE LABOR THEORY OF VALUE AND THE BREAKDOWN OF CAPITALISM..........................................................................................25
3.5. CONTROVERSIES IN SOCIALISM UP TO THE BOLSHEVIK REVOLUTION.............................................................26
ORTHODOXY AND REVISIONISM............................................................................................................................................26
3.5.1. THE THEORY OF IMPERIALISM.....................................................................................................................................26
3.5.2. MARXISM-LENINISM.................................................................................................................................................26
3.6. ANARCHISM AND SYNDICALISM.............................................................................................................................27
3.6.1 SOME DIVISIONS OF SOCIALISM SINCE 1917........................................................................................................27
3.7.THE THEORY OF ECONOMIC SOCIALISM..........................................................................................................28
3.7.1. THE SOCIALIST PLANNING CONTROVERSY.....................................................................................................................28
CHAPTER 4: CORE ASIAN ECONOMIC SYSTEMS......................................................................................................31
4.1. COMMUNISM....................................................................................................................................................31
4.1.1. NORTH KOREA OR DEMOCRATIC PEOPLE'S REPUBLIC OF KOREA....................................................................................31
4.1.2. MARKET COMMUNISM IN CHINA, VIETNAM, LAOS AND CAMBODIA..................................................................................34
4.2. CONFUCIANISM - TAIWAN, SINGAPORE, HONG KONG AND SOUTH KOREA....................................................36
4.2.1. TAIWAN.................................................................................................................................................................37
4.2.2. SOUTH KOREA.........................................................................................................................................................38
4.3. THERAVADA BUDDHISM - THAILAND.............................................................................................................39
4.4. COMMUNALISM – JAPAN...............................................................................................................................39
4.4.1. HISTORICAL CONTEXT...............................................................................................................................................39
4.4.2. ECONOMIC TRANSFORMATION...................................................................................................................................40
4.4.3. JAPAN KEIRETSU......................................................................................................................................................40
4.4.4. COMMUNALISM IN JAPAN.........................................................................................................................................41
– EPOCHS......................................................................................................................................................................... 42
4.4.5. CHALLENGES AND TRANSFORMATIONS.........................................................................................................................42
CHAPTER 5: ISLAMIC ECONOMICS AND THE ECONOMICS OF OTHER RELIGIONS....................................................43
5.1. WHAT IS THE TRADITIONAL ECONOMY?.........................................................................................................43

5.1.1. THE NEW TRADITIONAL ECONOMY.....................................................................................................................43
5.1.2. A TOUR OF RELIGIONS AND ECONOMICS............................................................................................................43
5.2. CONFUCIAN ECONOMICS......................................................................................................................................44
5.2.1. HINDU ECONOMICS (INDIA).......................................................................................................................................44
5.2.2. JEWISH ECONOMICS.................................................................................................................................................45
5.2.3. CHRISTIAN ECONOMICS.............................................................................................................................................45
5.3. A BRIEF HISTORY OF ISLAM............................................................................................................................46
5.3.1. SUNNI AND SHIA......................................................................................................................................................47
5.4. THE NEW TRADITIONAL ISLAMIC REVIVAL................................................................................................................48
5.4.1. WHAT LIES BEHIND THIS UPHEAVAL?...........................................................................................................................48
5.4.2. SHARIA LAW COUNTRIES...........................................................................................................................................48
5.5. THE PRINCIPLES OF ISLAMIC ECONOMICS.......................................................................................................49
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5.6. THE PRACTICE OF ISLAMIC BANKING.......................................................................................................................51

SUMMARY AND CONCLUSION.......................................................................................................................................51
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CHAPTER 0 : INTRODUCTION
Introduction
Economics: studies of how individuals and societies strive to satisfy needs and desires through incentives, choices
and distribution of scarce resources (natural, human, capital)
Economic system: set of principles by which an economy "works" and makes decisions
- about what, how and for whom to produce,
- about income distribution, about the division between the public and private sectors, and between market
mechanisms and regulation.
State’s use of economic systems: to determine how to use their limited resources efficiently.
Goal of an economic system: mainly it is to provide people with a minimum standard of living or quality of life.
CES and approaches to it

Comparative economic systems (CES): economics discipline that studies how the motivational, organizational and
institutional factors that drive supply and demand affect the productive potential and performance of different
economies
Two points of view can be studied from

chronicle of the historical systems evolution or evolution of forms of organization of
Natural selection human society; first primitive community, slavery, feudalism, absolutism, capitalism,
socialism
Pragmatism trying to find which institutions and systems work best in the modern world and why
More state or less state?

Reflection: Would you rather live in a country with high taxes and lots of government programs or a country with
low taxes and few government programs? What types of goods should the state provide to its citizens?
A brief history of economic systems

Beginning of the 20th century: capitalism was prevalent in all industrialized countries. Socialist, anarchist,
monarchist and communist countries existed but had marginal significance
In 1917: things change with Lenin and the victory of the Communist Party (CP) in Russia.
In 1925: in Italy, Mussolini establishes a fascist economic system, which extended to Germany and later to Japan.
The communist and capitalist "world" unites against fascism in WWII.
After WWII: these "worlds" grow rapidly, and the nuclear arsenal enables the coexistence of capitalism and
socialism.
The US is blocking the spread of communism by preventing the spread of Russian and Chinese influence - each of
them helping developing countries by creating their own "satellites" that support their system
In the 1970s : doubt about both systems

- Capitalism: slowdown, high inflation and unemployment
- Communism: completely fails (product shortages, low growth rates, state control, punishments for a political
dissenter, corruption ...)
In 1989: 1/3 of the world lived in communist countries!
The disintegration of communist countries was celebrated as a victory of freedom and capitalism
For some countries it was a Pyrrhic victory – many post-communist countries, now formally capitalist, still show
below-average performances.
Lollipop Activity
Activity: I will display half the amount of lollipops as are students in the class but they are for all students
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Assignment: devise your own method for distributing them (only method that is forbidden is force!). I give
ownership to you (no further directions!). Students have as much time as they need to decide on an “economic
system”. Once you have decided, lollipops are distributed according to your system
Outcome: what was the underlying philosophy of your allocation system?

- Competition?
- Equity/sharing?
- Luck/ lottery system?
- Democratic voting?
- Skill/ personal characteristics?
- Command/ Control?
CHAPTER 1 : HOW DO WE COMPARE ECONOMIES?

“As mankind approaches the end of the millennium, the twin crises of authoritarianism and socialist central planning
have left only one competitor standing in the ring as an ideology of potentially universal validity: liberal democracy,
the doctrine of individual freedom and popular sovereignty… In its economic manifestation, liberalism is the
recognition of the right of free economic activity and economic exchange based on private property and markets.”
– Francis Fukuyama, The End of History and the Last Man, 1992
1.1. Introduction
Fukuyama
Opinion: he believed that liberalism (in terms of political and economic systems) was the best choice for societies.
He thought this because of various changes happening in the world.
Reasons he based his opinion on :

- US economic boom (becoming a role model)
- The collapse of the USSR & Yugoslavia, the unification of Germany suggested that liberal democracy was
gaining ground.
- The newly created states are moving in the direction of liberal democracy
At the same time, the economy is becoming global everything becomes more interconnected
Argument: the whole world is converging to the American model. He sees that as a triumph of liberal American
capitalism.
In the early 1990s, CES was facing “extinction” as a separate economic discipline
⇒ Does this signal the end of significant competition between alternative forms of political or economic systems?
Challenges to Fukuyama’s Idea:

Not easy to adapt It is difficult for citizens to reject their traditional national institutions and systems.
The country was growing economically under a communist regime, which
China growth
contradicted the idea of the inevitable triumph of liberal capitalism.
Asian financial crises (late Those events raised doubts about the stability of liberal capitalism.
1990s) and the bursting of
the market bubble in 2000
Democratic socialism in Some European countries were turning to democratic socialism suggesting
Europe alternative models (Sweden & France revert to it in the 1990s).
Some countries following liberal economic systems experienced slower economic
Lower growth rates
growth, challenging the belief that liberalism always leads to rapid growth.
The country faced instability and economic challenges after the collapse of the
Russian uncertainty Soviet Union, raising doubts about the ease of transitioning to liberal democracy
and capitalism in all societies.
Favor of specific economic Various countries had specific economic systems that they favored (India, South
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systems Korea, Iran…).
Evolving Economic Systems in the 21st Century

In the early 2000s interest in CES was revived
In 2008 a new chapter of comparative economic systems appears

- A global crisis with origins in the US spread worldwide,
- Interventionism took center stage. Governments worldwide embraced interventionist policies in response to
the crisis, involving active government involvement in their economies. This crisis, highlighted the significance
of interventionism as a strategy to stabilize and address economic challenges.
- Consumption growth – questionable debt sustainability People started to consume more and were
borrowing money to fuel their spending. Then it raised concerns about whether they can manage and pay
back that debt in the long run.
- New players (BRIC countries) Four rapidly growing and influential countries: Brazil, Russia, India, and China.
they have become major players in the global economy due to their large populations and fast-growing
economies.
Impact of Recent Events:

- Ongoing conflicts, such as the Russia-Ukraine war and the Israel-Gaza conflict, have added complexity to the
study of comparative economic systems.
- The COVID-19 pandemic has also raised questions about how economic systems respond to unexpected
shocks.
Is there a dominant economic system that enables high growth rates in the 21st century?
Conflict Between Integration and Independence: there is an ongoing tension between two opposing processes
1. "The urge to merge": involves efforts to integrate the world economy through trade and policies. want to
create more unity and cooperation in the global economy.
2. "Drive to divide": represents movements seeking independence for smaller entities. want more control over
their own affairs and not be too connected to larger organizations or countries
Challenges in Less Developed Countries (LDCs): they are searching for suitable economic systems to drive growth,
but they face deep-rooted challenges.
To understand the transformation of economic system we need to understand the cultural and social contexts
within which these historical processes evolve
Fundamentalist Islam as a "Third Way": there is discussion about whether fundamentalist Islam could represent a
"third way" between capitalism and socialism. Is there any possibility of Islam becoming a potentially universal
ideology?
⇒The fact is there is no "pure" economic system, and each system takes on some elements of other systems.The
emergence of a new form of economic system is possible
1.2. Mixed economy continuum (according to the economic freedom index)

Analyze: as we move from left to right
- the amount of government control over business diminishes
- the level of social services diminishes (health care, child-care, social security, unemployment benefits) and
level of taxes correspondingly lower as well
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Level of social services, government control over business and taxes
1.3. How Do We Classify Economies?

An economy functions according to certain rules, customs, and laws that underpin the institutional framework
within which the people operate
It is these institutional frameworks we are most interested in comparing across different economies
Endless variety of aspects of these institutional frameworks can be considered in classifying economic systems
We shall focus upon six aspects that combine and interact with each other in different ways:
1. allocation mechanisms
2. form of ownership
3. the role of planning
4. types of incentives
5. income redistribution methods and the nature of the social security network
6. political and ideological system
1. Allocation Mechanisms
“what, how, and for whom” goods and services are produced – allocation of factors between different goods and
services & allocation of produced goods and services among people (distribution)
Three basic kinds of allocation mechanisms: traditional, market and command
- In a traditional economy allocation decisions depend on customs and traditions, usually associated with a
broader social context defined by a dominant religion (example: caste system).
- In a market economy allocation decisions are made by individuals or firms on the basis of price signals →
majority of economic decisions are made according to market forces (supply and demand) rather than
tradition or command.
- In a command economy allocations decisions are made by government authorities and are imposed by law
or by force.
Think about…
Can centrally planned economies "survive" in the long run? Ex of centrally planned eco: Russia used, Yugoslavia
(lasts 50 years) => many of them failed.
What is the reason that some leaders in command economies come to power and stay in power for a long time? It
doesn’t work because? Usually in the middle of a crisis so people hope for a better outcome, for the people le the
person in charge looks like a savor at the beginning.
2. Forms of Ownership
Karl Marx and Friedrich Engels (1848 Communist Manifesto) argue that the key to understanding an economy is to
know who owns the means of production.
The question is who owns ?
- Ownership determines the distinction between capitalism (land and produced means of production are
owned by private individuals or firms) and socialism (the state owns the land and the capital stock)
- There are a variety of intermediate forms and cases such as cooperatives or worker ownership. Ex:
Yugoslavia, workers owned farms, land where private but capital were state’s
It makes a difference under socialism if ownership is predominantly by the central government (command decision
making) or by local governments (marketbased decision making, e.g. China)
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A third possibility is ownership by organized religious groups (consistent with a traditional economy system – e.g. the
Roman Catholic Church in Middle Ages)
What is the ownership system’s relationship to allocative mechanisms?

- Capitalist economies = market-oriented economies (e.g. USA)
- Socialist economies = command-oriented economies (e.g. Soviet Union)
o Market capitalism and command socialism vs market socialism and command capitalism
- Market socialism – e.g. Yugoslavia, the state owned the capital stock (land was owned privately), but
allocative decisions were made by worker-managed firms within a market framework
- Command capitalism – e.g. Nazi Germany, market capitalist economies during the war (US), South Korea in
1970s (industries were not owned by government, but they produced in response to government orders)
3. Role of Planning
The contrast of “market versus plan” as a central defining characteristic of economic systems
In a centrally planned economy, planners’ preferences dominate allocative decision making
In a market economy consumers’ sovereignty dominates allocative decision making
Plan vs command → not the same but there is a strong correlation between allocation decisions following a
central plan and the general presence of command socialism
- this correlation misses the crucial point: planners’ preferences determine allocative decision making only
within a command framework → it is command that rules out consumers’ sovereignty
Is it possible to have command without planning?

Soviet Russia during the period of War Communism (19171921) - there was no time for planning!
Is it possible to have central planning coincide with market capitalism - the planned market economy?
known as indicative planning because it lacks the command element, e.g. France and Japan
⇒ Even in thoroughly market capitalist economies there is planning by specific government agencies
Also, most large corporations engage in long-range planning
Here, planned economy = command economy
4. Types of Incentives
What motivates people to work and produce?
Material incentives – paying people according to productivity or marginal product
- In market capitalism those are economic profit (rewards for entrepreneurship and capital investments) and
interest (for savings)
- In theory, socialism rejects receiving profits; also in theory, Islam rejects receiving interest payments
Moral incentives – trying to motivate workers by appealing to some higher collective goal
- Efforts to implement moral incentives occurred in China (serve the people) and Cuba – both were
characterized by serious economic stagnation
- USA during the WWII – production increased despite the imposition of wage and price controls (patriotic
national sacrifice)
- The new traditional economy depends partly on appealing to moral incentives (charity for the poor,
materialism distracts from spiritual matters)
5. Income Redistribution and Social Safety Nets

The extent to which and the methods by which governments intervene to redistribute income
- depends partly on starting point (e.g. how unequal income is) the Japanese government does much less
redistributing than the governments of many other capitalist countries because Japan has a more equal
distribution of wages than most other capitalist countries
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- Command socialist economies also have had less income redistribution because governments initially control
the distribution of income by setting wages and forbidding capital or land income
Equity-efficiency trade-off
Definition - greater efforts to make income more equal will result in less efficiency, meaning less rapid economic
growth started with Thatcherism in UK
- Material incentives encourage productive and entrepreneurial effort
- Redistribution of income reduces the rewards for work and entrepreneurship and thus reduces the rate of
economic growth
- Such arguments have become influential in many countries to scale back redistributive programs
- This view had its most vigorous advocates among supply-side economists associated with the “Reagan
revolution” in the United States and advising Margaret Thatcher in Great Britain.
Most countries carry out some redistribution through their tax codes and through some sort of social safety net for
certain categories of people: the aged, the unemployed, single mothers with children, the sick...
Countries that have largely market capitalist economies but have very large amounts of income redistribution
with large social safety nets are said to have social market economies
- Germany and many of the Scandinavian economies are the leading examples of this system
equity-efficiency trade-off It is valid but there are example where it can be false
Is the equity-efficiency trade-off false?

Some of the most rapidly growing economies in the world have reasonably equal distributions of income, such as the
East Asian newly industrializing countries (NICs)
Some of the countries with very unequal income distributions have had poor growth records, such as many in Latin
America
Conclusion
It is crucial that income and wealth inequalities arise from differences in productivity and entrepreneurship rather
than from corruption or inheritance (than the inequality is not perceived as unfair)
If it is from corruption or inheritance then it is negative, if not then it is fair and there is no rebellion about it
6. Role of Politics and Ideology

A central controversy – whether or not political democracy is indissolubly linked with market capitalism and
command socialism with dictatorship
Libertarian opinions (Hayek and Friedman) associate socialism with dictatorship and lack of individual freedom
(private ownership is forbidden)
Western Europe – social democratic political parties that call themselves socialist support neither extensive
nationalization of the means of production nor political dictatorship
They support income redistribution and extensive social safety nets
Sweden - almost 100 years of social democracy without political dictatorship
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Another competing ideology – New Traditionalism (especially Islamic fundamentalism)

- the focus is not on either politics or economics, but rather on religion and its rules
- the basic demand – the imposition of an Islamic law code – Shari’a
- it is not a liberal democracy because individual rights and freedoms are subordinated to a Shari’a and the
will of religious authorities
Finally: permanent command implies unambiguous loss of personal freedom, thus it is permanent command that is
incompatible with liberal democracy, not economic socialism
Socialism vs communism
Marx’s idea is elimination of state.
- The split between the two occurred after Lenin imposed a dictatorship of the proletariat
- The father of communism, Karl Marx, claimed that communism entailed the withering away of the state
(dictatorship was to be a temporary phenomenon)
- the Soviet Communists never claimed to have achieved communism, always labeling their own system
socialist rather than communist and viewing their system as in transition to communism. Communist
countries consider there self as socialist, the rest of the world gave them this attribute
CRITERIA FOR EVALUATING ECONOMIES

Useful for the final paper
Economy evaluation criteria are not always consistent (there is trade-off between them)
Frequently mentioned criteria include the following:
- Progress - income and wealth growth of a nation
- Freedom - freedom of choice; implies a democratic political system, defined rights, equality for all, tolerant
civil society
- Righteousness - an individual gets what he deserves; in the legal sense, a fair legal system is necessary; in
economic sense, opportunities, responsibilities and merits are distributed in accordance with the rights of the
individual (changing, e.g., America continues to wonder if the right to health insurance is a human right and
whether it is just)
- Stability - a stable economic system has a relatively constant growth rate, stable prices and low unemployment
- Economy evaluation criteria are not always consistent (there is trade-off between them)
- Frequently mentioned criteria include the following:
- Progress - income and wealth growth of a nation
- Freedom - freedom of choice; implies a democratic political system, defined rights, equality for all, tolerant
civil society
- Righteousness - an individual gets what he deserves; in the legal sense, a fair legal system is necessary; in
economic sense, opportunities, responsibilities and merits are distributed in accordance with the rights of the
individual (changing, e.g., America continues to wonder if the right to health insurance is a human right and
whether it is just)
- Stability - a stable economic system has a relatively constant growth rate, stable prices and low unemployment
- Peace - not only as a means of avoiding war, but to direct resources to the creation of prosperity, not to
destroy
- Sustainability - sustainable growth implies conservation of natural resources and environment protection
- Human development - the ultimate goal of the economic system is to improve the quality of life; education,
healthcare, housing, meaningful work, a fulfilling life…
- Democracy - it can take many forms, but the overriding principle is that citizens must have a decisive voice in
deciding laws and policies
Morris Bornstein presents nine criteria by which the relative performance of economic systems can be compared:
1. The level of output (corrected for population and the price level)
Despite its shortcomings, the best indicator of the material standard of living
2. The growth rate of output (corrected for population growth)
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It is easier for middle to low income countries to grow faster than the very poorest or the very richest
Malthusian low-level equilibrium traps – little investment can occur because nearly all output is absorbed by
consumption in an effort to stay alive
Solution: relative backwardness hypothesis - the middle- to lowincome countries can borrow technology
from the most advanced countries
The growth of the richest countries is limited by the general advance of technology
Command socialist economies generally have higher shares going to investment (push to growth rate) but
they have a tendency to severe stagnation in the long run
3. The composition of output

The breakdown between consumption and investment, the share of military output, and public vs private
goods
Static efficiency - implies full employment and that the set of goods produced is exactly what people want
Pareto optimality – no one in a society can be made better off without making someone else worse off
Market economies are more successful in this area although they tend to have worse unemployment than command
economies
5. Dynamic efficiency - the allocation of resources over time to maximize long-run sustainable growth
Depends on maintaining a viable environment
Macroeconomic stability and the lack of large oscillations of output, employment, or the overall price level
Economic security of the individual in terms of income, employment, and related matters such as healthcare
8. The degree of equity of the income and wealth distributions
9. The degree of freedom available to the individual in terms of work, consumption, investment, in the civil and
political realms (HDI)
General Condition/Performance of Various Economies
The last 3 groups still do not win in any category
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Role of government in various economies
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1.4. New comparative economy

Approach with a new perspective of institutional economics - new comparative economics
Simeon Djankov (2003) – comparative economics has seen a revival, the new focus is comparing capitalist economies
through (private and public) institutions that have a strong influence on economic development
These institutions
- operate during the election of political leaders, ensure property rights, wealth redistribution, dispute
resolution, company management, credit allocation, etc.
- differ significantly and systematically between countries, which has major consequences for their economic
results
The idea - to understand capitalist institutions, it is necessary to understand the basic compromise between the
costs of "disorder" and the costs of "dictatorship"
This logic is applied to study the structure of effective institutions
The danger of too much private sector is "disorder", while the danger of too much public sector is "dictatorship"
Disorder - crime, ethnic violence, bribery, expropriation of investors, etc.
On the other hand, a government capable of protecting property from private offenses may itself become a bully
and a thief
Djankov brings the idea of the institutional possibilities frontier (IPF)

- It retains a strong component of the old CES in that there is a focus on the roles of the private and public
sectors in the economy
- This competition is posed in terms of social losses that arise from a society either being " too private sector" or
"too public sector„ oriented either side too much is problematic
- The idea is that a given society at a given time is subject to potential "social losses" due either to a sector
engaging in predation or to rent-seeking or other corrupt activities, thereby damaging efficiency
Graph – each point on the IPF is an institution

For a particular society, there is some best balance between the two extremes (too much public or too much private
sector) that minimizes the aggregate costs of both extremes
The point of tangency of the curve of total loss minimization with IPF is an efficient institutional choice for a given
society or sector
With changes in politics, culture and economics, the position and even the shape of the curve can change
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While new comparative economists do not stress this point too much, it is clear that many other elements are
involved in where and how close the IPF will be to the origin for a given country
Much of this result may involve cultural factors as emphasized in the new traditional economy view
Frederic Pryor (2007) looks for combinations of economic and cultural factors using cluster analysis to find groups of
nations that appear to have similar combinations of cultural and economic institutions and patterns
Frederic Pryor concludes:

- OECD countries have 5 different groups determined by cultural characteristics that almost coincide with the
analysis of economic institutions
- These groups are often located next to each other, and in
- Europe there are Anglo-Saxon, Continental, Nordic and
- Southern European groups
- A comparison of the cultural characteristics of East and West Germany suggests that the economic system has
relatively little influence on the cultural systems
- Namely, in a democracy, where the economic system is not imposed by force, cultural characteristics are more
likely to determine the economic system, and not the other way around
Important: These cultural characteristics are affecting eco syst (and not the way around)
Additionally, focusing on European systems but emphasizing political rather than cultural elements, Peter Hall and
David Soskice (2001) have proposed varieties of capitalism that distinguish between liberal market systems and
coordinated systems
- Considering labor markets, they argue that liberal market systems emphasize free labor markets, while
coordinated economies emphasize the cooperation of labor unions, management, and government
- The US and Great Britain exemplify the first system, Germany is the leading model of the second, and France is
in between
- These findings are similar to Pryor's
A related view, taken by Daron Acemoglu and James Robinson (2012), considers whether an economic system has
institutions (political and economic) that encourage inclusive growth or extractive growth
- The inclusive growth is likely to outperform the extractive growth economically and socially in terms of more
growth, democracy and more equal distribution of income
- The problems posed by extractive institutions, whether private or public, are comparable to the problems of
predation by one sector or another, as conceived in the new comparative economics, although the arguments
presented are not identical
Example of extractive societies:

- Large socialist systems such as North Korea or the USSR in which the communist elites subordinated the use of
a large part of national labor and natural resources for the "higher goals"
- All regimes in which dictators grew enormously rich and citizens impoverished
In inclusive societies, broad classes through political processes monitor and control institutions, and they guarantee
law and order, property rights and encourage the development of a competitive, market economy based on
individual initiative and innovation
All approaches agree on one thing → the history is important, and it has not come to an end (as Fukuyama
announced)
Although we have examples of dramatic system changes as a result of some revolutionary aspirations, mostly the
system change is gradual and retains deep structural forces that shape the development of institutions and even
post-revolutionary patterns.
1.4.1. "Corona" economics

A "new normal"
15
Many countries were never truly "capitalist", but at least they had the facade of a free market - thanks to the
coronavirus, the facade has somewhat crumbled
"Covid capitalism" flirts with socialism - power is completely in the hands of the ruling party; the state allocates
money, determines who will work and (to some extent) what; the movement of goods and people is restricted...
Capitalism faces at least three major crises:
- A health crisis caused by a pandemic
- Economic crisis caused by health crisis
- Climate crisis happening in the background
1.5. SUMMARY AND CONCLUSIONS

Fukuyama argues that the world economy is converging on American-style market capitalism - a very complex
process in a troubled and transforming world economy
The most important aspects in comparing economic systems (the allocation system, the ownership system etc)
Criteria for evaluating economic outcomes
There are many other elements beside those listed previously that are important to the functioning of an economy
and its essential nature:
Openness to international trade and investment examples
- Industrial organization
- Policies with respect to environment
- Sectoral breakdown of industries
- Degrees of literacy and urbanization
- Population density
- Labor-management relations
- Macroeconomic policies
- Corruption levels
- The level of social capital
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CHAPTER 2: THE THEORY AND PRACTICE OF MARKET

CAPITALISM
2.0. Curriculum
DATE THEMES
8.11.2023. INTRODUCTORY LESSON
15.11.2023. CLASSIFICATION OF ECONOMIC SYSTEMS
22.11.2023. MARKET CAPITALISM + USA
29.11.2023. SOCIALISM + RUSSIA OR POLAND
ASIAN ECONOMIC SYSTEMS + CHINA 0R
6.12.2023.
S&N KOREA
13.12.2023. ISLAMIC ECONOMICS + IRAN
20.12.2023. BRAZIL / MEXICO / INDIA
10.1.2024. PRESENTATIONS
17.1.2024. PRESENTATIONS
24.1.2024. FINAL PAPER DUE
The Theory and Practice of Market Capitalism

All the bad things you hear about markets are true: unemployment, inflation, inequalities of income and wealth,
monopoly power, negative externalities, and insufficiently supplied public goods. You know, there is only one thing
that is worse than the market, and that is no market. — Csaba Csáki, speech, August 1990
2.1. Introduction
2.1.1. Market capitalism
Definition: economic system that allows private property rights and a free market with a minimal state.
Dynamic efficiency (technological dynamism): greatest appeal to countries seeking to emulate its success.
Theory vs Practice: pure version of the market capitalist system does not exist!
2.1.2. Three economies that come closest to the ideal of pure laissez-faire market capitalism:
1) Hong Kong
High growth rates with very low unemployment: dynamic and robust economic environment where businesses
thrive, and job opportunities are abundant.
Indicative planning (almost political authoritarianism): form of economic planning where the government guides the
market through non-coercive means, which is unusual in a pure laissez-faire system.
State Ownership of Land: the state owned the land and provided it for long-term rent.
It is not an independent country: a special administrative region of the People's Republic of China, but still has a
laissez-faire system characterized by very low taxes, free trade, no state-owned enterprises and little government
regulation
2) Singapore
Similar to Hong Kong: similarities likely include low taxes, free trade, and a generally pro-business environment.
More state-owned enterprises: they supply about 28% of government revenues. In a pure laissez-faire economy, the
government's role in business is minimal, and state-owned enterprises are either non-existent or very limited.
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Not a properly functioning democracy: limited political pluralism, restrictions on freedom of expression, or a less
competitive political landscape
3) New Zealand
Reformed in 1984
Major wave of tariff reductions: move towards free trade by lowering the barriers to imports.
Privatization of formerly state-owned enterprises: shifting control of these businesses from the government to the
private sector
General deregulation: reducing government rules in various sectors, fostering a more free-market environment
Reduced social safety nets: indicates a decrease in government-provided social welfare programs, aligning with
laissez-faire principles that advocate for minimal state intervention in the economy
Did not have impressive growth rates and has undone (in 1999) some of its moves toward laissez-faire capitalism by
renationalizing the accident compensation scheme, raising the top marginal income tax rate, and increasing
environmental restrictions on natural resource use
⇒Neither Hong Kong nor Singapore nor New Zealand is a pure example of a laissez-faire economy
2.2. THE THEORETICAL EFFICIENCY OF MARKET CAPITALISM

Some of the world’s highest real per capita income countries have economies that are market capitalist
It is because of the markets ability to allocate goods and resources efficiently through the supply and demand law
It is summarized in the theorem: A complete, competitive, full-information general equilibrium is efficient.
Complete - for any good or service that affects someone’s utility, there is a market
Competition - many buyers and sellers with free entry and exit, well-defined homogeneous goods and services, and
no individual supplier has any control over the price in his or her market
Full information - all agents in the economy know everything about consumer preferences, production technologies
and prices
General equilibrium - every single market is in equilibrium in the sense that the quantity supplied equals the quantity
demanded of the good or service in question
Efficiency = Pareto optimality = no one in the economy can be made better off without making someone else worse
off
If Pareto optimality holds, no more of what people want can be produced; all that
can be done is to reshuffle existing goods and services between people
If Pareto optimality holds the economy is on its production possibilities

frontier(PPF)
*Maximum quantity is produced with the given resources and technology

A -Pareto optimal at the tangency between the social indifference curve and the
PPF
B - lies at a lower level of utility on the PPF
C - represents a point of unemployed factors located inside the PPF
It idealizes reality (can be seen as good because make us want to do better or negative because we will never be able
to meet that goal)
What about equality of income distribution? Main critic, it just goes to efficiency nothing about equity
The concept of efficiency says nothing about income distribution:
- An economy could be Pareto efficient both in the case of a completely equal distribution of income and in
the case that one person has everything and everyone else are starving
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The tendency for market capitalism to have unequal distribution of wealth and income is one of the main arguments
against it
2.3. LIMITS TO THE EFFICIENCY OF LAISSEZ-FAIRE MARKET

CAPITALISM
Laissez-faire – supports market capitalism
In general, laissez-faire market capitalism will not be completely efficient; this situation is called the problem of
market failure
2.3.1. Monopoly
There is no competition
„natural” monopoly = when it is optimal to only one provider, it would cost more to
everyone
Technological dynamism it is argued that more competitive industries will be more
technologically progressive
Monopolist could have more R&D – how to motivate it? There is no competition so
they don’t have to invest more to be better, but they could.
Intermediate market forms, notably monopolistic competition, and oligopoly, lie between monopoly (one firm) and
perfect competition (many firms, none with any control over price)
An oligopoly can act as perfect cooperation (monopoly) or almost as in perfect competition
Monopolistic competition involves many firms, each having some price-setting power as a result of product
differentiation
- Some customers will remain with the firm when it raises its price because of the perceived uniqueness of its
product (e.g. restaurants)
- In the long run, such firms produce at a lower level of output than the one at which their average costs
would be minimized: the excess capacity theorem
- The USA - a more competitive and less concentrated economy than other countries
- Japan – “family companies” – keiretsu
- South Korea – chaebol grouping
Monopoly - a serious problem in the transformation of many former command socialist economies into market
capitalist economies
- Many industries in the former command socialist economies were state-owned monopolies
- Eliminating central planning and controls on prices allowed these firms to behave monopolistically; resulting
aggravation of
- inflationary tendencies, unresponsive output, and rising resentment by consumers
- On the other hand, they are ‘too big to fail’ due to social tension (unemployment problem)
2.3.2. Externalities
Another source of inefficiency in a laissez-faire equilibrium
Costs or benefits that are borne by an agent other than the agent generating them
- External costs = negative externalities
- External benefits = positive externalities
Can you recall some of the approaches to resolving the problem of externalities? Taxes, ETS (trading with emissions)
2.3.3.Collective Consumption Goods

Third source of inefficiency for laissez-faire equilibrium
19
Also known as public goods

- nonexcludability and nondepletability of consumption
o everyone consumes it simultaneously, no individual’s consumption reduces any other individual’s
consumption
- private markets fail to deliver optimal volumes - public sector ’’steps in”
- The essential problem for private market provision of true collective consumption goods is the free rider
problem
A wide spectrum of intermediate goods has both private and collective aspects (e.g. education, airports, roads,
garbage collection, libraries)
2.3.4. Imperfect Information

The assumption of perfect information is the most unrealistic
- Asymmetric information
- Principal-agent problem – can lead to moral hazard
Another perspective - the essence of markets is information transmission about relative scarcities through price
signals – central planning can never possess adequate information.
Ultimately, the problems of imperfect and asymmetric information remain unresolved for all economic systems.
2.4. THE ROLE OF LABOR UNIONS

If labor markets are perfectly competitive and no discriminatory, unions can not contribute to economic efficiency
Western European countries
- larger proportions of their labor forces as union members
- the unions are more centrally organized
- the unions are more accepted by the political establishment
- the unions are more influential in pushing for greater government intervention in their economies
- the unions are serving as the main political-economic base for Western European social democracy
The USA - unionized workers are paid more than nonunionized workers, this may contribute to the weakening of
unions (cca 20%) you need to be part of the union to benefit from the advantages they won
Sweden - if unions cooperate with management and support flexibility in labor policies, high unionization may
coexist with low unemployment
Belgium – unions insisted on restrictive laws so high unionization lead to high chronic unemployment
2.5. MACROECONOMIC INSTABILITY OF MARKET CAPITALISM

The main problem of market capitalism is not inefficiency, but rather
- Involuntary unemployment caused by macroeconomic fluctuations
- Unequal distributions of income and wealth
o Capitalism as legal cover for certain exploitative institutions
o Regardless of the initial distribution of wealth in society, interest-based financial intermediation
leads to its concentration
Interest rate problem? If you have a lot of money and it works you won’t give your money to research but rather in a
safe place. It is the problem, a lot of people having money don’t use it effectively, they just earn the interest
20
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2.6. THE PROS AND CONS OF MARKET CAPITALISM

PROS CONS
New technologies and growth (industrial revolution) Macroeconomic fluctuations (economic crises)
Efficiency - better general organization and better Monopoly and oligopoly - if governments do not
resource allocation intervene, dominant players can harm smaller players
and consumer rights, some big corp. shape political
decisions
Consumer satisfaction competition and efficiency often Lack of social services governments need to get
lead to lower prices and more products involved and ensure that public services are provided
appropriately
Freedom - some claim that democracy is possible only Greater inequalities in wealth and income - capitalist
in capitalism societies fail to create equality of outcomes and
equality of opportunity, no matter what they promote
Reducing differences between countries - free market Misuse of legal "loopholes" - profit is the ultimate goal -
and free trade should help reduce differences between cause of bad (legal or illegal) practices (exploitation)
countries as they can access goods and services from
around the world and reap their competitive advantage
22
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24
CHAPTER 3: THE THEORY AND HISTORY OF MARXISM &

SOCIALISM
3.0. Introduction
Soviet jokes
“What is the difference between capitalism and socialism? Under capitalism man exploits man, but under socialism it
is just the opposite.” —Old Soviet Joke
“What is socialism? It is the longest road from capitalism to capitalism”. —Later Soviet Joke
Conundrums of the Soviet economy:

- There was no unemployment; however, nobody worked.
- Nobody worked; however, the plan was always fulfilled.
- The plan was always fulfilled; however, there were always shortages.
- There were always shortages; however, the country was creating the land of plenty.
- The country was creating the land of plenty; however, there were always lines.
- Everybody knew how to avoid waiting in the line; however, everybody was unhappy.
- Everybody was unhappy; however, political decisions were approved of unanimously.
3.1. Introduction
Socialism: economic system characterized by state or collective ownership of the means of production, land and
capital
Goal: socialization (some form of social control) of private property, and social equality
In contrast to liberal democracy
Foundation: it emerged in the early 20th century as a critique of feudal and capitalist systems. The 2nd Industrial
Revolution brought major lifestyle changes. Workers' associations seeking labor rights appear
It originates from religious sources favoring egalitarism and evolves into secular theory in the writings of Karl Marx
In order to bring workers together in the fight against capitalism, Karl Marx and Friedrich Engels founded the First
International in
1864 in London - International Workingmen'sAssociation
1871 Workers in Paris proclaim the Paris Commune - the first proletarian state in the history of mankind (short life -
72 days)
The First International ceased to exist in 1876, and the Second
International was founded in Paris in 1889
To commemorate the bloody confrontation in 1886 between police and workers during the strike in Chicago for the
eight-hour workday,
May 1st was declared International Labor Day by the decision of the Second International
After Marx and Engels died, the Socialists of the Second International abandoned their ideas about the revolutionary
transformation of society and turned to parliamentary struggle with the help of sociodemocratic parties
3.2. THE DEVELOPMENT OF SOCIALIST IDEOLOGY

3.2.1. Religious and Philosophical Precursors
Socialist ideology originated in religious and philosophical criticism of inequalities (Old Testament; philosopher Plato
- ideal society in Republic)
In Europe, Christianity provided groundwork for socialist ideology, especially among radical Protestants (a desire to
purge society of all inequalities)
Thomas More - Utopia (1525) “an island of equality”
25
During the Enlightenment, the egalitarian impulse became secularized in France, leading to the French Revolution in
1789, but the radical egalitarian wing was suppressed
3.2.2. Utopian Socialism (18th and 19th century)

A first movement to label itself socialist  Founders:
Henry de Saint-Simon - the father of command central planning and constructivism
- advocated a new social order with a centralized structure; instead of capitalist rule, society would be
governed by scientists and the most educated members
- constructivism - the idea that a rational order of society can be planned and constructed from scratch from
the top down
Utopian Socialism (18th and 19th century)

Charles Fourier - closest to utopian socialist idea;the idea of a small community: Phalansteries or Phalanx
joint production; cca 350 families; total revenue divided by the principle 5/12 for labor, 3/12 for talent and 4/12 for
invested capital
women emancipation (first use of the term feminism in 1837) criticized the then-institute of marriage
Robert Owen
practical utopian; successful capitalist who introduced numerous reforms as a fighter against the exploitation of
workers
higher wages, restrictions on child labor, education for workers
(pioneer of investment in human capital)
leader of the first national union in the UK
made possible state intervention in regulating labor relations and enacting a series of regulations in the field of labor
la
The Marxian* Worldview

In the Communist Manifesto of 1848, Marx and Engels labeled previously stated ideas with the epithet utopian
In their opinion utopian socialists engaged in vague moralizing while failing to analyze historical dynamics
"scientifically"
Yet, they adopted some utopian ideas which therby entered modern socialism
Karl Marx and Friedrich Engels together developed the Marxian worldview that deeply influenced socialist thought
Marx's worldview constitutes a holistic system that allows him to function as a quasi-religion, with people
"converting" to it and following it with great intensity
*Marxian refers to the writings and views of Marx himself
Marxist refers to any view or idea influenced by Marx
3.3. Marxism as a Quasi-Religion

It involves an equivalence of concepts between the two systems as follows:
Yahweh (God) Dialectical Materialism
Messiah Karl Marx
The Second Coming The Revolution
The Saved The Proletariat
The Church The Communist Party
Damnation to Hell Expropriation of the Capitalists
The Millennium The Socialist Commonwealth
3.4. The Hegelian Dialectic

Georg W.F. Hegel – German philosopher; the first great intellectual influence on Marx
26
Developed the idea of the dialectic - all phenomena reflect a conflict between pairs of unified opposites whose
mutual opposition evolves over time to critical breakpoints where reality qualitatively changes
These opposites are labeled the thesis and its antithesis
At the critical breakpoint their opposition generates something brand new - the synthesis, which in turn can
generate its own antithesis
A central aspect of Hegel’s philosophy was its idealism; the ultimate reality is spiritual rather than material
Marx “materialized” Hegel’s dialectic
- using the French idea that the French Revolution was a conflict between socioeconomic classes
- emerging industrial society reflects the class conflict between the bourgeoisie (capitalists) and the
proletariat (workers)
The key to historical materialism: the idea that the driving force of history is the dialectic between conflicting
socioeconomic classes
- “The history of all hitherto existing society has been the history of class struggles.”
This struggle concerns ownership and control of the means of production: one class owns and controls the means of
production and thus exploits the other class
Class struggles determine the mode of production (a combination of society technology and class structure)
The mode of production of ancient Greece and Rome was slavery, characterized by the struggle between master and
slave ⇒the fall of the Roman Empire thus arose from this contradiction, resulting in the mode of production
transforming from slavery to feudalism ⇒driven by the struggle between lord and serf and was transformed into
capitalism with its own struggle between the capitalist, who owns the means of production, and the worker, who
does not.
The result of this struggle should be transformation into socialism

- state ownership of the means of production, direction of production by a common plan, income inequalities
and wage payments, and control by a dictatorship of the proletariat
Marx declared that eventually communism would develop, and then all classes and property ownership would
disappear and the state would wither away
Marx finds David Ricardo’s labor theory of value in London (the value of a commodity is determined by the amount
of socially necessary labor time it takes to produce it)
It contradicts neoclassical economic theory - value is codetermined by supply and demand, with capital and land
contributing to the supply side of the equation
The labor theory of value and the Breakdown of Capitalism

Marx saw land and capital as productive but not as contributing to value
- land rent was due only to differences in the productivity of different land locations, marginal land earns zero
rent; capital goods are the product of past labor, simply indirect labor
The true reality of capital is not the capital good itself but the social relation of exploitation between the capitalist
and the worker
- This assertion is the core of the Marxian doctrine
The value of a commodity (W) consists of 3 components

- c = constant capital – roughly a fixed capital stock measured by the labor time required to produce it
- v = variable capital – the value of the labor power used in production (the amount of socially necessary labor
time required to produce it, equals a subsistence wage)
- s = surplus value (Marx’s modification of the labor theory of value) – value created by the worker but taken
by the capitalist, leading to the exploitation and alienation
27
It is out of surplus value that the capitalist obtains profit

The value of a commodity W =c +v + s
c
Organic composition of capital q=
c +v
' s
The rate of exploitation s=
v
' s
The rate of profit p=
c +v
Marx argues that capitalists are driven to engage in capital investment by their competition with each other; they
raise the organic composition of capital because of competition
If c rises while s and v are constant, then the rate of profit will decline, which is the fundamental tendency of
capitalism
The capitalists destroy themselves as a group as each tries to gain a competitive edge on the other.
The dialectic leads capitalists to try to increase the rate of exploitation ( vs ) either by:
- lowering wages (immiserating the workers)
- making them (workers) work longer and harder
⇒this intensify the class struggle and increases the risk of commercial crises (now called recessions)
This leads to an increasing concentration of capital in fewer and fewer hands, while the proletariat expands and
becomes more miserable and more conscious of its condition
Eventually the contradiction becomes so intense that the system is overthrown by the revolutionary working class
3.5. CONTROVERSIES IN SOCIALISM UP TO THE BOLSHEVIK

REVOLUTION
Orthodoxy and Revisionism
A problem – capitalism has not collapsed!
The real wages were rising
- undermining the expectation of the imminent arrival of revolution
The first Marxist to point this out was Eduard Bernstein – argued that since conditions were improving, a reformist
and gradualist approach through parliamentary democracy should be used to achieve gains for the working class
This became the modern European social democracy policy.
This view was labeled revisionism.
3.5.1. The Theory of Imperialism

Another explanation for the failure of capitalism to collapse, proposed in 1902 by John Hobson.
The advanced capitalist countries reduced their internal contradictions by conquesting less developed countries
- they gain access to new markets and cheap raw materials (creating surplus value through colonization).
Vladimir Illich Ulyanov (Lenin) further developed the imperialism thesis

- He thought that revolution would come in capitalism’s “weakest link,” which he saw in Russia since it
industrialized too late to participate in the carving up of Africa
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3.5.2. Marxism-Leninism
Refocusing revolutionary expectations on less developed countries became Marxism-Leninism.
- the official Soviet doctrine after 1917, and the guiding light of Marxist revolutions in the 20th century in LDC
(China, Cuba, Vietnam)
This concept included
- the idea of the dictatorship of the proletariat
- led by a vanguard elite
- within the revolutionary party
The workers left to themselves would follow opportunistic (revisionist) paths
Lenin’s the idea of no-state implied:

- an initial smashing of former state power
- establishment of a state ruled by the vanguard of the proletariat
- vanguard elite should destroy the remains of the former ruling class
This argument was Stalin’s justification for removing political opponents and imposing a command economy
3.6. Anarchism and Syndicalism

Radical concepts arguing that state should be abolished
Anarchism - founded in 1793 by William Godwin (his wife, Mary Wollstonecraft, is the founder of feminism)
- Without government, people will peacefully organize themselves into a harmonious, non-oppressive order
- Anarchists were often violent (numerous assassinations of heads of state)
- Marx viewed this position as fuzzy-minded and unscientific
Proanarchist trade unions in 1890s argued that after the abolition of the state, society should be run by the trade
unions themselves – philosophy know as syndicalism
- In 1921 Lenin crushed a syndicalist uprising, thereby asserting the supremacy of state power in the new
regime
Although anarcho-syndicalism faded after the 1930s, it continues to influence on modern socialists through the ideas
of workers’ management and workers’ ownership
3.6.1 SOME DIVISIONS OF SOCIALISM SINCE 1917

The 1917 Bolshevik Revolution in Russia transformed Marxist and socialist ideology.
Henceforth all socialist movements had to define themselves in relation to the Marxist-Leninist movement.
Each of these movements sought to distinguish itself from Soviet orthodoxy, with three main varieties
- Trotskyism
- Titoism
- Maoism
Trotskyism
Leon Trotsky, a former Menshevik and founder of the Red Army in USSR, was Joseph Stalin’s chief rival for power
after Lenin’s death.
Trotsky and Stalin agreed about the need for rapid industrialization in the Soviet Union - they disagreed about
whether this should be done in isolation (Stalin) or in an international context (Trotsky).
Trotsky supported the idea of an international permanent revolution, believing that true socialism could not be
achieved in the Soviet Union without an international revolution
Trotskyism has never achieved power anywhere.
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Titoism
Developed as a practice before it became an ideology
Initially a strong Stalinist, Josip Broz, known as Marshall Tito, broke with Stalin in 1948 and declared the political
independence of Yugoslavia from Soviet influence
The main goal was to develop a distinctive economic system for Yugoslavia that Tito would choose (cult of
personality Tito's Yugoslavia)
The system adopted was worker-managed market socialism described by some as quasi-syndicalist
- state-owned enterprises in a one-party state operating with little central planning according to market forces
and with managements appointed by worker selected boards
After Tito’s death in 1981, the economic system deteriorated, later culminating in the complete disintegration of the
country
Maoism
Communist revolution in 1949 led by Mao Zedong relied on a rural guerrilla movement that encouraged egalitarian
economic development
China imitated centrally planned command industrialization model of Stalin’s Soviet union – only more emphasis
upon rural agricultural development, egalitarianism and moral incentives
Great Leap Forward and the Great Proletarian Cultural Revolution emphasized
- industrial decentralization throughout the country
- complete communalization of agriculture
- total egalitarianism and moral incentives
- complete obliteration of all remains of previous culture
https://www.youtube.com/watch?v=xWRhPf9Qzmw
After Mao’s death 1976, his philosophy was rejected in China
3.7.THE THEORY OF ECONOMIC SOCIALISM

3.7.1. The Socialist Planning Controversy
It began in 1908 with Enrico Barone
Applied Pareto’s efficiency analysis of the Walrasian general equilibrium model – he set a system with no money and
the state determining equivalences (relative prices) between goods and distributing them through state stores in
exchange for goods
The Ministry of Production
- would have to know all costs of production, all demand functions, and all capital stocks
- general equilibrium could be solved for a collective maximum
- the cost of production would be minimized and the price would equal the cost of production
Barone foresaw most of the later controversies - actual solving for the planning equilibrium would be very difficult
(especially a priori).
Proposed that the economic determination of the technical coefficients [prices] can be carried out “in an
experimental way,” – by varying prices and seeing what happens in the markets
Ludwig von Mises critique: Money is necessary to calculate prices
The artificial market of the experimenting socialist central planner can never generate rational prices because of
insufficient incentives
In 1936 Oskar Lange defended market socialism

Answers the problem of economic calculation by arguing that managers in a centrally planned economy would be
able to monitor supply and demand through increases and decreases in inventories of goods, and advocated the
nationalization of major industries
30
He proposed a Central Planning Board (CPB) that sets producer goods prices and the level of overall investment and
distributes the social dividend
Consumer goods prices are set by free-market forces, with supply coming from state-owned firms that set the price
equal to the marginal cost, as in perfectly competitive markets
- Setting producer goods prices in this plan proceeds along the trialand-error lines proposed by Barone
Such a system would solve the problem of market failures (monopolies, externalities, etc.) and lead to an efficient
outcome that is fair and macroeconomically stable
Monopolists are eliminated, so competitive prices are set
Planners account for externalities
Public goods are adequately supplied
Central control of investment eliminates macroeconomic fluctuations
Friedrich Hayek argued:
Without private ownership and the profit motive, firm managers will lack the incentive to minimize costs or fulfill
consumer demand
The problem of gathering information to carry out the necessary calculations
There will be no entrepreneurs in such a system and thus technological stagnation
More recent argument for command central planning is that the plans must arise within democratic political
frameworks
One approach suggests that modern computers can be linked together to overcome the Hayekian information
problems and achieve rapid feedback that will maintain balances and lead to efficient planning, but with goods
distributed in markets
Central planning first appeared in USSR in1920

Indicative planning was instituted for several heavy industrial sectors under state ownership such as electricity,
steel, and cement
This was carried out using the material balance method, which became the main planning method
Long-term planning was on a five-year time horizon
Five-year plans were broken down into one-year plans from which monthly quotas for individual firms were derived
Each firm had a techpromfinplan, or technical-production-financial plan which specified output quantities and prices;
input quantities and prices, including wages and the levels and kinds of capital investment for the firm
Material balance implied that supply equals demand in all sectors
- based on desired production, the quantities of inputs required were estimated
- in theory, it results in a general equilibrium!
In practice, one year’s plan involved minor modifications of the previous year’s plan based on the outcome of that
plan
- this led to the ratchet effect (firms avoided producing beyond the quota for fear of facing higher future
quotas)
In the 1930s mathematical approaches to implementing planning were found - the first was input-output analysis
(Wassily Leontief)
It is a precise analogue of the material balance method
- it depicts the production structure of an economy using a rectangular input-output matrix
- its rows represent inputs and columns represent outputs
Soviet economists estimated I-O matrices, but they never succeeded in estimating one at a level of detail that
matched the level of detail at which planning was actually carried out (the seriousness of Hayekian information
problems)
Optimization can be achieved by using a generalized version of I-O analysis – linear programming
31
assuming that the planner can establish some kind of value weighting of the final desired goods so that they can be
added up in a planner’s objective function
Also known as the labor-managed economy

Market socialist system in which the state owns the means of production
The fundamental argument in favor of this organizational form is that it may eliminate worker alienation and the
struggle between labor and management, thereby increasing worker motivation and productivity along with fairer
distribution of income
When Tito first introduced this system into Yugoslavia, it was argued that it represented the true culmination of
Marx’s historical dialectic
Jaroslav Vanek proposed five characteristics distinguishing the participatory economy
Workers manage the firms – professional managers hired by worker-controlled boards
Income sharing – a “democratic” determination of wage levels for specific types of jobs (firms generally exhibit
internal variations in wages)
Productive resources are not owned by the workers and therefore must be paid for by rentals, although workers
enjoy usufruct rights to the fruits of the operation
It is a market economy – central planning is indicative not commanded
Workers can freely choose where to work
Criticism of this vision:
Cooperatively managed firms show tendency to employ less labor as workers strive to maximize net income per
head of existing workers
(backward-bending supply curve)
Worker-managed firms may tend toward monopolization and may disregard externalities such as pollution
Underinvestment in capital in the long run because workers drain firms of extra income in the short run, especially in
the socialist version, where workers’ lack of property rights in firm assets reduces their incentive to support long-
time investment  Vanek responded to this argument:
Entry by new firms would solve the monopol problem
Workers would not want to pollute their own work or living places
Workers would recognize that their own jobs ultimately depended on the firm making timely and productive
investments
Most of the nations that adopted some form of Marxistinspired socialism since 1989 are moving towards some form
of capitalism
The transition process has been a source of much study and debate that continues with no definite resolution
In adopting markets rather than command, freeing prices from central control was usually the easiest thing to do
More difficult to achieve was macroeconomic stabilization, as the sudden freeing of prices often led to inflationary
outbursts
In most countries, total output declined sharply and unemployment increased
The biggest problem – the establishment of an institutional framework that allows stable functioning of markets
such as developing financial systems, laws of corporate governance etc.
The process of privatization has proven difficult countries that privatized quickly run into serious problems compared
with some that have privatized more gradually and carefully (restructuring more important than privatization per
se?)
As many countries fell into deep recessions with high inflation, and experienced political and institutional instability,
social problems emerged
In countries that have failed to establish a well-functioning new set of institutional arrangements, much economic
activity has gone underground and problems of corruption and crime have become severe – related to the quality of
government and the level of democracy.
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CHAPTER 4: CORE ASIAN ECONOMIC SYSTEMS

Asia has four mayor economic systems
- Communism
o Market communism (China, Vietnam, Laos and Cambodia)
o Planned (command) communism (North Korea)
- Confucianism (Taiwan, Singapore, Hong Kong, South Korea)
- Teravada Buddhism (Thailand and Sri Lanka)
- Communalism (Japan)
Some nations are excluded from the analysis (e.g. Philippines) as they fall somewhere between or are predominantly
Muslim (Malaysia) or Hindu (India)
Main difference is in the mode of governance that is, the primary source of demand that drives national supply and
distribution
Similarity – limiting the maximization of an individual’s utility through rituals, guilt, shame, and fear.
4.1. Communism
Communal state of equality, sharing and mutual support where every individual enables everyone else to reach their
full potential
There is no private property, market or state governance → there is no mechanism to ensure this therefore, in
practice, communism is what political authorities say it is
In China, Vietnam, Laos and Cambodia, communism = achieving a harmonious, prosperous, egalitarian, and socially
just society through the wise administration of the Communist Party, which coordinates markets and plans.
Communism in these countries is unproductive and unjust
4.1.1. NORTH KOREA or Democratic People's Republic of Korea
The Korean peninsula was annexed by Japan in 1910

Japan introduced his style of business and industrial organization
After WWII, the then Japanese colony was occupied by the victorious military forces, the United States (US) and the
Soviet Union (SU), with the occupation zone boundary at the 38th parallel
The SU and the US failed to agree on a way to unify the country, and in 1948 they established two separate
governments – the Soviet-aligned Democratic People's Republic of Korea and the Western-aligned Republic of Korea
– each claiming to be the legitimate government of all of Korea
South Korea declared itself a state in May 1948 → North Korea responds with its own proclamation, with Kim Il-
sung as prime minister
Soviet Union is the first to recognize Kim Il-Sung as the only legitimate representative of the Korean people
In 1950 North Korea invades the South (Korean war involving US, SU and China)
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North Korea initially was successful and occupied almost all of South Korea - afterwards the US became more
involved in the war, expelled North Korean forces from almost the entire peninsula and invaded the Chinese border
– later China became involved in the war and conquered territories in the north
In 1953, a ceasefire was established establishing two Korean states with the border at the 38th parallel (Korean
Demilitarized Zone)
Tension between the two sides continued
Kim Il-sung led North Korea until his death in 1994
He introduces communist dictatorship with a pervasive personality cult with one party, Communist Party
He also steered the country on an independent course in accordance with the principle of Juche (self-reliance)
His son successor, Kim Jong-il, due to severe economic crisis caused by natural disasters and the collapse of the
Soviet Bloc in 1991, moved closer to an economically more prosperous South Korea
Despite the fact that the two countries signed the Reconciliation, Non-Attacking and Cooperation Agreement in
1991, relations between them are tense today - the main reason is the North Korean’s military nuclear program
After Kim Jong-il's death in 2011, his younger son, Kim Jong-un, took over the presidential post
At first, the situation in the Korean Peninsula worsened
They openly threatened the US
They withdraw from the truce signed in 1953 and cut off all communications with South Korea
In 2013, Korean authorities said the missiles were ready to fire targets in America, and that the start of the war
would be decided by days
In 2018, Kim Jong-un made a sudden peace overture towards South Korea and the United States
About North Korea

One of the most ethnically homogeneous countries in the world
Given Korea's secrecy and often dubious official reports, demographic (as well as economic) data are largely the
result of estimates
Although religious freedoms are guaranteed by the constitution, the government in reality discourages them
- About 2/3 of the population declares themselves non-religious
- According to official data, illiteracy is only 1%
Today, North Korea faces the problem of illegal expatriates  Since its inception in 1947, North Korea has been
dominated by Stalin's concept of communism
Criminalization of private property, private business and entrepreneurship
The control follows the top-down principle
- The Communist Party is on the top
- The means of production are nationalized
- Management is planned and centralized
Cult of Personality - Kim Il Sungism (Great Leader) and his descendants Kim Jong-il (Dear Leader) and Kim Jongun
(Great Heir, Great Friend, Young General)
Graet leader Kim Il-sung and his successors Kim Jong-il and Kim Jong-un argue that the planned optimal choice takes
place at two levels of hierarchical control:
- Central planners collect data and determine production levels
- Enterprise managers (often called ”red directors”) prepare operating microplans
Microplans are done on the basis of past levels of production and the policy guidelines of ministerial supervisors who
are ultimately responsible for the match between microplans and centrally planned figures
Red directors are responsible to fullfil the outlined plans under the penalty of law
If production is higher than planned, they are awarded managerial bonuses (higher production = higher bonuses)
- The positive effects are greater managerial effort, but also employee discipline
- Negative consequences - companies that depend on other inputs often fail to meet their plans because they
do not receive inputs on time
Kim Jong-un relies on state laboratories, design offices (bureaus) and new state enterprises - the goal is to develop
science & technology and new goods
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Established enterprises are managed by ministers and design offices, while the wishes of red directors or end
consumers are not taken under consideration
These institutions are paid in accordance with the quantity of new products and inventions, not their effectiveness
questionable economic results
- Red directors as entrepreneurs is better solution → but it is considered heresy
The state is committed to buy everything that is produced
It is a country with everlasting excess demand - it does not produce what consumers want
North Korea is a state that is always in imbalance whereby microeconomic inefficiencies are partially offset by
overwork
Hyper-production bonuses create a group of people who aim to blind rulers and enrich as much as possible - these
rent-seeking networks is family circle
These are managers, red directors and high-level friends with the aim of diverting state assets, resources and
products to private use
They conceal their tracks with
a) elaborated accounting scams,and often increase of the results
- Managers receive unearned bonuses
- Red directors receive undeserved promotion
On paper, plans are fulfilled and overfulfilled, but not in reality → it is possible because there is no transparency
b) Red directors often collude with managers and pricesetters to falsely claim that goods have been improved –
spurious innovation
- What is the difference between three and four star cognac?
- The number of stars on the label. (Old joke)
Frauds like this are hardly damaging
- Rising prices that (do) not reflect higher quality – hidden inflation
- Earning undeserved bonuses
- The illusion of material progress (data are not realistic)
The leaders of N. Korea secretly forgive this enrichment (to prevent a coup d'état)
The North Korean system works thanks to strict disciplinary methods and lethal forced labor
Kim Jong-Un understands that the North Korean command system is inefficient, subject to moral hazard, entropy,
political intrigue and that the premise stated at the beginning cannot be fulfilled!
Kim Jong-il knew the same thing and tried to reform the basic system
A reform in North Korea?
The collapse of the USSR, North Korea's main economic partner, was a major impetus for reform
Kim Jong-il made improvements in the production of agricultural and consumer goods in the 1990s
He gave the red directors more discretionary power:
They were permitted to buy and sell investment goods at market prices and engage in foreign trade (enterprise
liberalization)
The cross from pure command to a mixed command-market regime
However, these and other measures such as the introduction of farmers’ market (but without land ownership) had
no visible positive effects
Conclusion – North Korea
North Korea is a society where many personal freedoms are prohibited or restricted, including the right to housing,
access to education, choice of work, travel, right to property, business, entrepreneurship, personal views, religion,
political opposition ...
The North Koreans are being oppressed by the authorities, including being dragoned into forced labor
As long as North Korean leaders believe the command economy is best for them, they will continue ruling with an
iron fist
A 2014 UN inquiry into human rights in North Korea concluded that "The gravity, scale and nature of these
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violations reveal a state that does not have any parallel in the contemporary world"
Throughout 2017, following Donald Trump's assumption of the US presidency, tensions between the US and North
Korea increased, and there was heightened rhetoric between the two, with Trump threatening "fire and fury" and
North Korea threatening to test missiles
In 2018, an easing of hostility and strained relations developed - a series of summits took place between Kim
Jong-un of North Korea, President Moon Jae-in of South
Korea, and President Trump of USA
4.1.2. Market Communism in China, Vietnam, Laos and Cambodia

An ideologically sovereign system in which communist ideology and culture determine
supply and demand more than the autonomous preferences of the individual
The system is non-competitive and repressive and individuals cannot maximize their
utility in it
Proponents of this system emphasize that there is no need for free ownership and
democratic protections because the Communist Party ensures that the system works and
that everyone gets what they need
Despite high growth, China and Vietnam are extremely unequal and inconsistent
Laos and Cambodia, on the other hand, are one of the poorest countries
The Evolution of Chinese Command Communism to Market (1950 – 1978)

In 1940s, Mao Tsetung (China), Kim Il-sung (North Korea) and Ho Chi Minh (Vietnam) adopted Stalin's coercive
command communist model
Mao Tsetung - a cruel ruler whose reforms brought China to the brink of existence
- More than 40 million people died during the Chinese Great Leap Forward (1956-1961) - economic and social
reform project aimed at industrialization - the Chinese Cultural Revolution (1969-1973) and Cambodia’s
dystopic killing fields (1975-1979)
- A period marked by persecutions and executions of dissenters, taking control of universities, destroying
cultural monuments, confiscating property, relocating young people to the countryside ...
This led to technocratic and administrative reforms in their systems from 1975-1980
First Phase (1978-1989)

Deng Xiaoping (Hsiao Ping) succeeded Mao Tsetung
1978 - beginning of economic liberalization - „socialism with Chinese characteristics" or dual system
- granting citizens the right to rent property from the state for a fixed time (leasing, not private ownership)
- the right to participate in the business for profit
- right to start a business (managers in state-owned enterprises)
This required the approval of the right to determine wages and prices - abolition of the state determination
Communist Party is still the master puppeteer whose strategy was to harness peoples’ productive energies including
foreign investors - the concept of power still remained top-down
The transition in China has happened more than it was planned
Transition starts from the countryside (80% of the population was rural)
Deng Xiaoping implements a program of "four modernizations"

- agriculture, industry, science and technology,and the military
By then, agriculture was organized in COLLECTIVES
- The peasants did not own the land
- Everything they produced belonged to the state
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At the end of 1978, the agricultural collective secretly divided the land into households that had to meet the
production quota and could keep the surplus
- Efficiency increased as well as the surplus of agricultural products
- A market is developing in which price is determined by supply and demand
Authorities subsequently approved this mode of production
Also, the transfer of ownership rights to local administrative units starts -TVE (town and village enterprises)
TVE member households did not own land and capital forever, but had informal right to operate assets and sell
produce for a long enough period to have an incentive to work for profit
TVEs were flexible and discrete on their own activities thus operating de facto as private companies - so-called dual
track system in which plan and market exist simultaneously
Over 700 million Chinese farmers are considered semiindependent (working on state-owned land and selling to
state-owned enterprises but enjoying significant operational freedom)
Deng’s modernization is not limited to domestic production Special Economic Zones (SEZs) were established in the
1980s with the aim of strengthening foreign trade
- They attract large amounts of foreign capital (cheap LF)
Deng strengthens domestic large industries at the same time enterprise reform has not started spontaneously, but
has been initiated!
- State-owned enterprises are allowed to sell surplus production (above the plan) at market prices
By 1989, nearly 22,000 joint ventures were launched in SEZs
Progress was slow at first, but it was spectacular in the 1990s
The reform of the enterprises took place in 4 phases:

1. In 1979 companies were enabled to retain some of their profits
2. 1984 brought formalization of financial liabilities to the state
o income tax introduced
3. In 1987 the system of responsibilities and obligations of managers formalized
4. In 1993 a modern corporate system was introduced
China still holds a large portion of its companies stateowned

This Chinese evolution of economic reform is often referred to as Gaige Kaifeng, that is, reform and openness
But the Chinese system is still a communist commandplanned economy
The goal was not to become a market economy but to get people to produce more and more efficiently - the result is
an economy in the form of Swiss cheese - a regulated economy with many deregulated “holes” in which the private
sector developed
The regime is still authoritarian and involves forced criminal work, a huge military and a ban on civil society
Market Communism: Second Phase (1992-present)
In 1992, Deng continued its economic liberalization and economic opening and he labeled China as “socialist market
economy”
In 1994, the dual economy was abolished and uniform rules were introduced for all sectors of the economy
Red directors become managers of market competitive state owned enterprises (SOEs) and then ulitimately into
menagers of private companies regulated by special law which mimicked the rights of western companies
However, the enterprises were still state-owned and the emergence of moral hazard still exists - managers rely on
government subsidies and privatize usufruct and assets to themselves
Deng's successors, Zhu Rongji, Jiang Zemin, Hu Jintao, solved the problem of moral hazard by allowing managers to
- Lease state assets
- Close unsuccessful state enterprises
- Merger and acquire leased companies
- Enter into foreign joint ventures at home and abroad
- And in general to become billionaires while adhering to the
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- Marxist communist principle of criminalizing freehold property
Chinese companies are classified into two broad categories:

- private firms - leased from the state but with majority private proprietorship (there is no complete freehold
property right, there is no freehold capitalism in China)
- SOEs - majority state-owned and the state has a decisive influence even though it leases them to profit-
making managers
The Party holds the discretion of hiring and firing managers
- SOEs are most commonly assigned to Party members, family, or friends
- SOEs are thus a way of enriching the privileged members of the Communist Party
- SOEs control over 40% of non-agricultural economic activities; they are profitable and grow thanks to
subsidies, but they are inefficient because they are committed to meeting government policy goals
Sources of Chinese success

The performance of China’s market communist system during the second phase was excellent in terms of
modernization, growth and development
Chinese statistics significally exaggerate accomplishments, yet all other evidence confirms that China has become a
"workshop of the world"
How could this be accomplished in an privilege granting system in anti-competitive environment?
Deng's reforms have improved supply response to demand
Turning to the market was the basis of economic convergence
The most important aspect of China's economic growth was attracting more than a trillion dollars of FDI
- Foreign investors were attracted by cheap resources and a disciplined workforce
- Benefits multiplied rapidly as the Chinese quickly copied foreign technology which further accelerated
growth
The benefits of lagging are exhausting and China is on the verge of technological advancement
In order to keep rates high, China will have to implement additional reforms
4.2. CONFUCIANISM - TAIWAN, SINGAPORE, HONG KONG AND

SOUTH KOREA
Utopian prescription for constructing ideal imperial
states with harmonious societies, founded on
virtuous patriarchal households (hierarchy)
The goal is to eradicate individualistic discords, foster
harmony and promote prosperity
Every individual’s moral obligation is familial
wellbeing (not God, country, law or sth else)
Confucian societies are based on pillars of instilled
senses of guilt for wrongdoing, and shame for
disgraceful behavior
In Taiwan, Singapore, Hong Kong, and South Korea,
family rigidities have weakened significantly over the
last two decades
The economies of these countries (Asian tigers or 4 little dragons) are influenced by classical Confucianism
Confucianism cannot explain every aspect of these countries’ governance systems but its impacts on individual
psychology, values, communal norms, hierarchy, politics etc are profound
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- Culture is what determines supply and demand for the most part, not individual preferences
They have traditionally favored the authoritarian state forms
The individual is limited in maximizing utility, investment, job selection, production and consumption, while the state
is limited in providing social programs (which are offset by family safety and mutual assistance systems - selfishness
is amoral)
Over time, family restrictions weaken and personal freedom increases, which increases productivity
This adaptation has pulled women from households into the job market, which strengthens their role in the family
- In parallel, the size of the family is being reduced and the status of women and men is being equalized
All this reinforced attitudes towards free enterprise and profit making
4.2.1. Taiwan
The Republic of China (ROC) or Taiwan is a partially recognized country (considered part of the People's Republic of
China)
Turbulent history; in brief:
First Chinese settlements were recorded in the 7th century
- In 1624The Dutch occupy the island
- In the 2nd half of the 17th century China conquered it
- From 1895 to 1945 it was a Japanese colony
- From 1945 to 1952 it belongs to China
- The Chinese Civil War begins, the communist forces of Mao Zedong take power in China, and the nationalist
forces of Chiang Kai-shek (leader of the Kuomintang Party) flee to Taiwan and establish a dictatorship,1949-
1975.
Chang's main goal was rapid modernization and secession
To achieve this, he used family aspirations for wellbeing
- He encourages private jobs while diverting them into desirable state projects
Taiwan has been able to profit thanks to cheap resources, easy access to the US and Japanese markets, and
technology transfer
In addition, traditional Confucianism's pursuit of education became an engine for skill growth
It records a high drop in inequality unlike China; a democratic order is established, social protection grows
After the escape of Chiang Kai-shek, both governments considered themselves the real government of China (ROC vs
PRC)
Thanks to the fight against communism, the ROC receives international recognition (and represents the PRC in the
UN)
In the 1970s, the UN adopted a resolution confirming that the representatives of the PRC are the only legal
representatives of China in the UN - the ROC was thus expelled and has the same status to this day
- China considers Taiwan to be part of it even though it is self-governing
- USA - "strategic independence" - recognizes that Taiwan is part of China, but wants China to leave Taiwan
alone (under military threat)
- Taiwan does not accept the idea that it is part of China, they consider themselves independent, and on the
other hand, they do not insist on recognizing independence (status quo)
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Changes come with Trump getting closer to Taiwan (Biden continues) and the change in the political climate in 2016
- President Tsai Ing-wen took over from a pro-Beijing president
- China's handling of the protests in Hong Kong in 2019 was push factor
Military equipment of China and Taiwan, and US troops in
Taiwan (potential for war)
- Taiwan - important location (especially for Japan)
- Microchip (semiconductor) industry - 90% of the smallest and most advanced microchips are produced in
Taiwan (about 63% of the world total) - essential for the production of high-tech products such as phones,
airplanes, solar panels...
GDP growth rates, Taiwan, 2010.-2023.
4.2.2. South Korea

South Korea had, like Taiwan, a turbulent past
In 1945,under US influence , Syngman Rhee launched a democratic government run in an authoritarian manner in
the South Korean Peninsula
Despite constitutional formalities, electoral democracy established in 1988
Confucian symbiotic relationship between politicians, ministers and technocrats on one hand and chaebols on the
other began in 1961 when General Park Chung Hee came to power
Chaebols are familial business conglomerates
General Park Chung Hee's mission was to industrialize the country
The center piece of planning regime was the Economic Planning
- Board (EPB) and the Ministry of Economy, Trade and Industry (METI)
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The EPB collects data, evaluates production functions and delivers programs in accordance with Park's wishes
Park favors "friendly" companies with government contracts and helps them become mega-conglomerates
Chaebols are evolving into global giants (Samsung, Hyundai Motor, LG, SK, Hanhwa, KumhoAsiana) capable of
competing for state aid and subsidies, and in turn providing political support
Over time, the Chaebols developed sufficient power to impose their will on the government
Judging from South Korea's rapid economic development, it can be inferred that neither the military dictator-
chaebol alliance nor its fractiuos democratic successor were destructive enough to offset the gains from
occupational mobility, urbanization, education, capital widening, foreign outsourcing, US aid and technology transfer
But the 1997 financial crisis proved clan governance, massive corruption and wasteful subsidization
- Variuos reforms occured; professionals hired instead of family managers
According to Confucian principles, the state and society are inseparable, so there is no pressure to claim rights from
the state (in particular, women’s roles are tightly constrained)
4.3. THERAVADA BUDDHISM - THAILAND

Religious culture (not doctrine) that views earthly desire as the cause of human
suffering
The cure is a meditative quest for enlightenment (Nirvana)
It rejects neoclassical utility maximization as a delusion
- It encourages a harmonious, spontaneous interaction
with nature and community (including enlightenment
seeking) as a superior mode of existence
The Thai economic system is heavily influenced by the
Theravada Buddhism
4.4. COMMUNALISM – JAPAN

4.4.1. Historical Context
Isolationism in the 17th Century
Tokugawa Shogunate's policies: in the 17th century, isolationism (the Tokugawa shogunate) began- closing of Japan
to all foreign cultural influences
Consequences of isolationism on foreign relations and internal governance: foreigners were not allowed to enter,
and if Japanese left the country and returned, they were often killed.
Despite its isolation, Japan was a pro-capitalist society

Transition to Openness (First event)
The Forced Opening of Japan in 1854 (Matthew C. Perry) : the opening came as a shock because they believed in
their cultural superiority over everything else
Cultural and economic impacts of this opening:
- for Japanese, the forced opening was a humiliation from which they learned that they had to modernize in
order to protect themselves from foreign enemies
- Japan sends young people to the west for education
Meiji Restoration 1868-1945 (Second event)
Overview of political and economic reforms: the feudal system was abolished
42
- Territorial division of the country is over

- In order to create a strong centralized government, they buy up land and introduce a land tax that serves as
the main source of revenue
- Administrative reorganization and modernization of the army was carried out
- Deprived of land, Samurai became government officials or entrepreneurs
- A change from a military regime to a new system of government with officials focused on modernization
- Japan's rapid economic development began
Abolishment of the feudal system and impacts on social structure
4.4.2. Economic Transformation

Land Redistribution and Economic Implications
Creation of a new class of landowners and their contribution to the economy
- An important political move was the redistribution of land that few owned and given to farmers (who never
owned their own land).
- Created the first class of people who had excess income to buy goods."
Emergence of surplus production and export capacity.

- They had an incentive to produce efficiently, which enabled Japan to have surpluses for export - especially
important for maintaining technology imports
- Many created companies started to develop products for farmers, such as agricultural machinery - some of
the biggest car companies started with the production of agricultural machinery
Rise of Zaibatsu and Industrialization

Evolution of Zaibatsu
- Much of the economic and industrial power was held by a few large companies, known as zaibatsu
- In the center are the family owners and the family bank (as with chaebols)
Shift from Traditional to Modern Industrial Enterprises

There were four main zaibatsu, namely Sumitomo, Mitsui, Mitsubishi and Yasuda
Sumitomo: the oldest, initially focused on copper mining and silk imports; controlled about a quarter of the nation's
copper mining licenses, and branched out into coal mining, machinery, forestry, warehousing and banking (the
engineering part of the concern is now known as Mazda)
Mitsui started out as a soybean seller and pawnbroker; parts of the group are egToshiba, Yamaha, Toyota and Sony
Mitsubishi started out as a ship insurance company - with money from the insurance business, the company bought
a coal mine (needed to power their steam ships); in addition to mining, Mitsubishi entered the production of steel,
glass, paper, shipbuilding and banking and branched out into optics and heavy industry - parts of the group include,
for example, Mitsubishi motors and Nikon.
Yasuda started as a money changer - focused on banking, finance, warehousing and food processing and branched
out into optics and heavy industry (Hitachi, Canon and Nissan)
These four zaibatsu formed cartels and managed to isolate their business empires through various legal mechanisms,
and the trading system further protected their interests at home
4.4.3. Japan Keiretsu

Post-WWII Economic Structure
Transition from Zaibatsu to Keiretsu
- After WWII Zaibatsu reformed into keiretsu (large, modern industrial enterprises)
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- Zaibatsu were initially subsidized and protected by the state, and the factories were financed by the central
bank
Industrial and Economic Power

Role of Family Banks and Conglomerates
- the central role of family banks in the formation and operation of keiretsu
Analysis of Keiretsu’s Influence

There were four main zaibatsu, namely Sumitomo, Mitsui, Mitsubishi, and Yasuda, which formed cartels and
managed to isolate their business empires through various legal mechanisms, and the trading system further
protected their interests at home.
4.4.4. Communalism in Japan

Concept and Implementation
Definition and Characteristics of Communalism in Japan
- A collective form of governance where group welfare supersedes individual self-seeking
- The community (commune - communalism). It can take many institutional forms, but always entails placing
duty before self-interest, substituting group for individual preferences
- The obligation to accommodate others leads to no maximization of self-satisfaction
- Communalism and neoclassical optimizing behavior are mutually exclusive approaches to creating ideal
societies
Cultural and Social Impact

Role of Communalism in Work Ethics and Corporate Culture
- The private sector places more emphasis on community harmony than kinship (blood relations)
- Japan’s economy is strongly influenced by its 2,500 year old communalist tradition
- The state is authoritarian, though authoritarianism is mitigated by communalist consensus
- Japanese depend more on each other than on the state, substituting direct community assistance for
government transfers
- It may be assumed that the communal system is unproductive, but this paradigm requires Japanese to work
immaculately for the community
Japanese are conditioned to place group obligations above their own interest
Thus, individuals either adopt the group's preferences as their own or subordinate their preferences to the wishes of
the community
- Doing what the community expects is ahead of efficiency and wealth accumulation`
Conflict-Averse Nature
- The Japanese paradigm is conflict averse within families and across society
- Companies and communities strive to avert discord by retaining workers whose marginal value added is less
than their wage, rewarding them equally, providing special assistance if needed, building consensus on
issues of mutual concern etc.
It is shameful to be selfish,and virtuous to be communally altruistic
These cultural mechanisms are not always effective although they have a relatively uniform distribution of income
and social satisfaction,real growth is stagnant
Shame and Guilt Mechanisms

Influence on Communal Behavior
- Shame regime makes Japanese more communally attentive and self-disciplined
- The correct behavior is determined by the group attitudes, approval and fear of communal reproach, which
is often contextual
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- This implicit moral code is extremely complex and demanding

- If the team considers overwork appropriate, shame will force other members to obey it
Japanese intellectuals appreciate the power of shame-based situational ethics and consider the mechanism superior
to inflexible Confucian and western morality and guilt-based discipline → it is tailored better to life complexities
Consensus-Building
Japanese society is a consensus building,where group wellfare supersedes individual utility-seeking
Shame-based norms of right and wrong are not dictated
by authorities, but the opinion of high-ranking individuals carries great weight (hierarchy matters)
E.g. in Japan, an assembly that engages in exhausting political debates ends only when everyone agrees that a
solutions are best
- some individuals may still harbor reservations, but they embrace and support the group consensus with
greater commitment than under the principle of majority rule where losers are often disgruntled
Japanese shame-based communalism is intrinsically anticompetitive
Communalist profit seeking is satisficing, not maximizing this is why Japanese workers enjoy jobs for life, causing
sustained overfull employment
In addition, people overwork, factors are misallocated, goods are not produced with optimizing characteristics
(e.g.cars) and are over-exported, wrong prices are set…
- Japanese work twice as many hours a year from Germans to earn the same per capita income
The Japanese overwork for free!

- Both employees and employers feel communally obligated to work overtime without direct material
compensation
- Supervisors stay on jobs to show their dedication, and loyalty compels employees to stay on the job until the
day’s tasks are done
This means that everyone works more hours than they would in the individualistic competitive model, although that
does not affect their income
Japanese firms will only operate in at the competitive equilibrium accidently, and normally will be in a state of acute
disequilibrium
Communalist labor practices are an obstacle to the invisible hand
The willingness of Japanese to work overtime for free disables the Walrasian wage adjustment mechanism, and
disorients the Marshallian quantity adjustment (profit maximizing) mechanism
Japanese workers could enjoy more leisure without reducing their total utility, and Japanese shareholders could
enhance their wellbeing if Japanese firms maximized profits
– epochs
The Japanese communalist model (miraculous) proved to be a formidable engine of economic modernization and
development until the great bubble of 1989
4.4.5. Challenges and Transformations

Causes of stagnation: aging population, "zombie banks"
- has an economic net worth less than zero but continues to operate because its
- ability to repay its debts is shored up by implicit or explicit government credit support), deflation, growing
Asian competition, the disorienting effects of liberalization, and more recently the 2008 financial crisis, yen
appreciation, 2011 tsunami…
Also, Western leisure ethics started appearing making the compensating factor that once masked the shortcomings
of communalism to exaggerate them.
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CHAPTER 5: ISLAMIC ECONOMICS AND THE ECONOMICS OF

OTHER RELIGIONS
5.1. WHAT IS THE TRADITIONAL ECONOMY?
Traditional economies are embedded within larger social and cultural frameworks
In traditional economies people decide according to past practices that have coevolved slowly with the religious and
family structures of their societies
Often characterized by familistic groupism that extends beyond family groups (the original economic system in
human history)
OldTraditional Economy took various forms:

Household economy – focus on family groups and sharing
Reciprocal economy – exchange relations between groups take a ritualistic form of gift giving that is reciprocated
Redistributive economy – Big Man or another central authority redistributes goods – the model for the despotic
ancient empires
In all of the Old Traditional economies the traditional religion dominates the society
In the NewTraditional Economy there is an effort to built economic decision making within such a religiously derived
sociocultural matrix
5.1.1. THE NEW TRADITIONAL ECONOMY

… is the trueThird Way between capitalism and socialism
The proponents of the New Traditional Economy seek to function in the modern world with modern technology and
to use it to further spread their religion
Movements reflecting such ideas show among most major religions of the world
The one most clearly projecting a well-defined view of economics is Islam
5.1.2. A TOUR OF RELIGIONS AND ECONOMICS

A brief review of major world religions in terms of their ideas about economic conduct:
- Buddhism, Confucianism, Hinduism, Judaism, and Christianity
Islam will be considered in more detail, as this is the most prominent and most fully developed form of the new
traditional economic system in the contemporary world
The goal of humanity should be spiritual liberation and Buddhist economics offers a means to this end  The pros
of budism (E. F. Schumacher, 1973):
- a balanced attitude toward work
- directed at achieving a level of consumption that is satisfying but not saturating
- the harmony of humanity and nature
- nonrenewable resources should not be wasted
- local production should be favored over long-distance trade (reduction of wasteful transportation activities)
- encouragement of self-sufficiency
Is there such a thing as Buddhist economics, and does it correspond with this idealized image?
The answer is not simple!
In much of the Buddhist world,especially China and Japan, the religion has played a relatively passive role (they are
more deeply based on Confucianism)
As a dominant ideology, Buddhism has been confined mostly to South and SoutheastAsian countries
Sri Lanka, Myanmar (Burma), Thailand, Laos, Cambodia are representative countries
- In Laos and Cambodia no such Buddhist movement exists openly because the official ideology is orthodox
Marxism-Leninism, now gradually undergoing a transformation
46
Buddhism in Thailand evolved during the 19th century under powerful kings who emphasized a rationalistic and
individualistic form of the religion, with each individual responsible for his or her own enlightenment (coincides well
with market capitalism)
In Sri Lanka and Burma, Buddhism became identified with nationalist and anticolonialist movements
In Burma - a militant form associated with socialist views of economics developed, labeled Buddhist socialism
(military dictatorship proclaims itself Buddhist, but among its most serious opponents are monks)
5.2. Confucian Economics

Confucianism is more a philosophy and a cultural influence than a religion
Elements of Confucianism are seen to have an impact on the nature of the economic systems in Singapore, Taiwan
and PR China
Confucius was a scholar/adviser to political leaders with five central concepts:
1. Benevolence (jen)
2. Righteousness (i)
3. Propriety (li)
4. Wisdom (zhi)
5. Faithfulness (xin)
Benevolence implies a hierarchy in which benevolent elites rule those who are loyally obedient to those elites as
long as they truly practice benevolence
This idea extends to the family, where the son obeys the father and the wife obeys the husband
Strong emphasis upon order, hierarchy,education, and benevolence
- Generally the current Confucian revival in East Asia tends to support reliance on market forces, although
with authoritarian state structures and elements of state planning and control
5.2.1. Hindu Economics (India)

Central to the Hindu socioeconomic worldview is the caste system, the archetype of an old traditional economic
system
The caste system, justified by the karmic doctrine of reincarnation,persists in the jajmani system of fairly
selfsufficient groups of local villages trading with each other through the well-defined division of labor provided by
the inheritable caste system
Despite centuries of foreign rule, the caste system survived
The foundation of Hindu economics was laid by
Mohandas (Mahatma) Gandhi
- Highlights selfrule and self-sufficiency, both at the national village level
47
Emphasized the need to revitalize caste system and purge it of evil elements such as suppression of the
Untouchables, the lowest caste
The emphasis on economic nationalism
Despite his desire to reform the Hindu caste system, Gandhi was essentially an OldTraditionalist in his economic
views, strongly opposing modern industrialization, railroads and urbanization
5.2.2. Jewish Economics

The Torah contains a long list of specific rules and prohibitions regarding economic behavior
Many are consistent with markets and private property (ethical rules for trade), and many are irrelevant in the
modern world (rules about the selling or treatment of slaves)
Some orthodox Jews consider some laws as appropriate for Israeli society
- E.g. the use of tithes for redistributing income and the prohibition of charging interest among Jews
An example of a religious idea influencing current economic behavior is the prohibition against working on the
Sabbath
- This rule has generated the most heated specific demands by fundamentalist groups in Israel, such as
forbidding flights on the Sabbath by the national airline, El Al
Modern Israel emphasizes building a functioning economy within a hostile environment

The Zionist movement or Zionism - a national movement of Jews for the establishment of a Jewish state on the
territory of the Land of Israel (today's Israel, the West Bank and the Gaza Strip, and parts of Jordan, southwestern
Syria and southern Lebanon)
Today it is a political movement that seeks to return the Jews to the Land of Israel
5.2.3. Christian Economics

Christianity contains 3 broad branches
1. Orthodoxy
2. Roman Catholicism
3. Protestantism
Orthodoxy is the oldest; widespread in Eastern Europe and parts of Western Asia
- It does not have a well-defined view of the economy and is associated with the old traditional economy
(especially during the time of the Russian tsars)
- Since the fall of communism in Russia, Orthodoxy has experienced a revival and developed close connections
with the country's leaders, but without interfering in economic issues or problems
Roman Catholicism is the largest branch (over a billion adherents worldwide)

In the Roman Catholic Church an important figure in developing economic doctrines was St. Thomas Aquinas
- In the 13th century he reconciled Aristotelian philosophy with Christian theology
- Among Aristotle’s ideas that he imported into Catholicism was the idea of the just price and an abhorrence
of charging interest
Aquinas can be considered an ideoloque of the old traditional economy in its feudal European form → this linkage
between feudalism and Roman Catholicism led to a lack of enthusiasam for modern capitalism
However, the church has generally been antisocialist, especially under Pope John Paul II of Poland and Benedict XVI
Pope John Paul II of Poland supported market capitalist economics more than any previous pope while remaining
critical of its excessive materialism and lack of compassion for the poor
Pope Francis (Latin American) is reputed to have more sympathy with the liberation theology movement (centred in
Latin America, it sought to aid the poor and oppressed through involvement in political and civic affairs)
48
Pope Francis also placed greater emphasis on criticizing aspects of capitalism as "a new tyranny" subject to "the
idolatry of money" and questioning "the trickle-down economics"
In 2015 Pope Francis released “Laudato Si,” his encyclical urging “care for our common home” – he encouraged
solidarity with the poor and criticize “blind confidence” in technology, but also included climate change as one part
of the his message
In 2023, Francis released an addendum to “Laudato Si,” addressed to “all people of good will on the climate crisis”
The Christian Democrats in Europe support fairly extensive social welfare programs and considerable state economic
intervention (consistent with the ideology of social market economy).
Christian Protestantism is more closely linked to market capitalism both socially and ideologically.
Max Weber argued that “the Protestant ethic is the spirit of capitalism”
- Protestantism emphasizes the value of work as a way of making the most of, and therefore glorifying, God's
creation
- Professional success was seen as a sign of divine election
- As Puritanism also recommends a frugal lifestyle and the rejection of luxury, this work ethic was seen as the
ideal foundation for the development of means of production and economic growth.
The Protestant Reformation occurred in countries and at times that modern market capitalism was rapidly
developing, with the most supportive attitude coming from Calvinist churches in Northern Europe, but the
foundations were certainly laid much earlier in Catholic areas of medieval Europe.
Nevertheless, among the most radical of the Anabaptists, communal attitudes and approaches emerged
Given the differing views among both fundamentalist and mainstream Protestants as well as Roman Catholics, the
true nature of Christian economics remains unclear
5.3. A BRIEF HISTORY OF ISLAM

Origin: Islam was founded by the Prophet Muhammed (570-632), a successful merchant in the Arabian city of
Mecca.
Mecca lay at the intersection of major trade routes and contained a shrine (destination of the annual pilgrimage).
The Prophet Muhammed belonged to the Hashemite clan; but Mecca was dominated by the Quraysh clan (which
controlled the earnings obtained from the pilgrims).
Around 610 the Prophet Muhammed began to receive revelations from Allah which constitute the body of the
Qur’an, codified into suras (chapters) after his death.
He also made many pronouncements separate from the Qur’an that are collectively known as the Hadith.
These two sources are the foundation of the Islamic law code, the Shari’a.
Many early revelations deal with predictions of a Day of Judgment and the End of the World.
- These suras reflect anger against the arrogant attitudes of the wealthy Quraysh and their lack of charity
toward the poor
- A fundamental point is an absolute monotheism
- There is no god but Allah, who is all powerful and utterly transcendent
The central concept of Islam is submission to the will of Allah; the word Islam means exactly that
This assertion of monotheism threatened the livelihood of the Quraysh, who profited from the pilgrims worshipping
the gods, but Muhammed attracted many followers, especially among the poor and dispossessed
In 622 the Hijra occurred – the migration of the Prophet Muhammed and his followers to Medina – he became a
political leader as well as a religious prophet.
This was year 1 of the Islamic calendar and is viewed as the beginning of the world Islamic community, the umma (a
religious/political/economic entity in which unity, or tawhid, is paramount).
The Qur’anic suras of this time establish rules for marriage, inheritance, and many other issues.
49
During next ten years, the Prophet Muhammed succeeded in converting most of the tribes of the Arabian peninsula
into the umma, including the Quraysh in Mecca.
After the Prophet Muhammed’s death in 632, the inner circle of his companions selected a successor to him known
as a caliph, who would lead the umma but would not be a prophet.
By 644 the caliphs engage in war and conquer parts of Asia and later North Africa and Spain (Arab conquests).
They imposed benevolent rule, leaving intact local political and social structures;
- believers in monotheism were allowed to practice their religion as long as they paid a special tax
5.3.1. Sunni and Shia

The fight over the caliphate divided Islam.
The 4th caliph was the Prophet Muhammed’s son-in-law, Ali, whose caliphate was contested by Mu’awiya of the
Quraysh clan (Ali killed Mu’awiya)
- Ali’s supporters came to be known as Shia, while Mu’awiya’s supporters came to be known as Sunnis
In 680 Mu’awiya’s son, Yazid I, defeated and killed Ali’s son, Husayn at the battle of Karbala in Iraq
- This formed the main split within Islam
Yazid’s victory signalled the general dominance of Sunnis, who constitute about 85% of the world’s Muslims
The Shias are dominant in Iran, and form the majority in Iraq and Lebanon, but the Sunnis dominated in these 2
countries politically, socially, and economically
Sunnis are the majority in Yemen and Syria, but Shiites have political power
Islamic civilization peak came after 750

Muslim scholars studied the ancient Greek philosophers and expanded upon their knowledge with such intellectual
achievements as the development of algebra and Arabic numerals
Islam became a truly multinational religion and as a consequence, the Sunni Shari’a underwent considerable
development
- It broke into (4) competing versions under the pressure of absorbing peoples with different cultures and
traditions
The foundation of the Shari’a was the Qur’an and the Hadith
But these works were not definitive because much of the Qur’an is written in a highly poetic language subject to
many possible interpretations
Debate arose regarding the validity of certain Hadith: were they actually said by the Prophet Muhammed or were
they made up by someone later to justify a non-Islamic practice?
50
The period 900–1700 saw the greatest expansion of Islam in terms of converts
After 1700 the global expansion of Islam slowed due to the expanding power of industrializing Christian Europe
The early 20th century brought a low point for Islam as most Muslim states became colonies of Christian European
powers; only Turkey, Saudi Arabia, Iran, and
Afghanistan maintained formal independence
The modern revival of Islam arose in the context of nationalist and anticolonialist struggles against this domination
during the second half of the 20th century
5.4. The New Traditional Islamic Revival

At the start of the twenty-first century Islam is surging as a movement
- Aided by high birth rates and emigration
In core zone countries, either a self-styled Islamic fundamentalist government is in power or a significant opposition
movement is Islamic fundamentalist
A universal demand of these movements is for imposing and enforcing a Shari’a law code
- There are several different Shari’as, disputes arise once it is implemented
- In many countries one Shari’a is clearly preferred
- This demand has extended to countries with significant non-Muslim populations (e.g. Nigeria and Sudan),
resulting in war
5.4.1. What lies behind this upheaval?

Colonial domination by European powers led to Islam being identified with national identity in anticolonialist
struggles
In most countries, independence raised national identity issues because their borders were drawn by the colonial
powers with little regard for cultural or ethnic considerations. The lack of solid national identity has led to the search
for something else to unite them, and Islam has emerged as that something else!
Raising oil prices and the enormous wealth this generated
Finally, there is nostalgic appeal of Islam’s glorious past which offers a historical and cultural identity that has an
international character → according to them, Islamic countries are modern, rich and powerful, and spiritually
superior to rich non-Muslim countries.
The appeal of fundamentalist Islam is ultimately the appeal of the New Traditionalism
5.4.2. Sharia Law Countries

There are a number of countries that fully or partially use Sharia law
According to the type of sharia, they are:
- Classic: Afghanistan, Brunei, Egypt, Indonesia, Iran, Iraq, Malaysia, Maldives, Mauritania, Morocco, Nigeria,
Pakistan, Qatar, Saudi Arabia, Somalia, Sudan, United Arab Emirates, Yemen
- Mixed: Algeria, Bahrain, Bangladesh, Comoros, Djibouti, Gambia, Jordan, Kuwait, Lebanon, Libya, Mali,
Oman, Palestine, Syria
- For Muslims only: Eritrea, Ethiopia, Ghana, India, Israel, Kenya, Myanmar, Philippines, Singapore, Sri Lanka,
Tanzania, Thailand, Uganda, UK
51
5.5. THE PRINCIPLES OF ISLAMIC ECONOMICS

The principles of Islamic economics are derived from the Shari’as.
Even within the accepted foundation of the Qur’an and Hadith there are different interpretations of key passages
regarding economic matters, even within particular Shari’a schools – the reason for debate over what constitutes the
Islamic economy.
Three ideas underpin the Islamic economic system as a whole:

1. Tawhid – divine unity, the idea that all economic activity must be in accord with divine commands
2. Khilafah – viceregency, the idea that humans are the partners of Allah in managing the world and its
resources
3. Adalah – justice,implies concern for the welfare of others and cooperation as the basic principle of economic
organization
1. Zakat, or Almsgiving
In theory almsgiving is supposed to be a voluntary activity
- In practice it became a religious tax used for income redistribution purposes by Islamic governments
- In its original formulation it is a 2.5% tax on most forms of wealth above a minimum necessity level, while
higher rates (the tithe) are due for agricultural produce (income tax)
Debates about whether or not higher rates can be charged for newer forms of wealth not specifically mentioned in
the Qur’an or Hadith.
Countries that have introduced state collection of Zakat are Pakistan, Saudi Arabia, Malaysia and Sudan.
Also, the Shari’a codes allow for taxing non-Muslims at higher rates.
2. Hard Work and Fair Dealing

Islamic economic command that involves working hard and dealing fairly with others.
- Sellers should use fair weights and measures
- One should work hard at one’s chosen profession, presuming it is an honorable one
- Rightly acquired wealth is approved of in this system
- One should be modest in the enjoyment of wealth
- One should pay one’s workers a just wage
- One should charge just prices for one’s output
- One should be efficient and not wasteful
3. Proper Consumption
Prohibited consumption of
- Pork
- Nonritually slaughtered animals
- Alcoholic beverages
Prostitution and gambling are forbidden
52
Trade in certain goods is also prohibited (pork, drugs, alcohol, as well as e.g. activities related to pornography and
other immorality, etc.), because it belongs to prohibited activities (haram / sin)
Everything that is not forbidden is permissible (halal)
4. Gharar, or the Avoidance of Chance

The prohibition against gambling led to a more general prohibition against gharar
- Translated variously as chance or uncertainty
One is not to make contracts when the outcome cannot be predicted

- Speculation, forward markets, and lotteries are forbidden
This prohibition developed later and is not to be found in the Qur’an – its basis is the specific forbidding of a
particular game of chance in the Qur’an
The forbidding of contracts involving gharar has led to controversy regarding two specific areas – insurance and
sharecropping rents
In insurance, there are three schools of thought:

1. Insurance is acceptable because it involves reducing risk for a group using the law of large numbers and is
thus different from gambling which involves an individual choosing to create additional personal risk
2. Insurance is gharar and therefore unacceptable
3. Third view objects to life insurance but not to other forms of insurance - general outcome of this controversy
is suspicion of private provision of insurance and support for public provision instead
As for land, some approve of land rent in all forms; some disapprove of rent in all forms; others disapprove of fixed
rents while approving of sharecropping (riba vs qirad/ gharar)
5. Qirad, or Profit Sharing
A deep issue for Islamic economics that remains unresolved is the line between disapproved-of chance taking
(gharar) and approved-of risk sharing through profit sharing (qirad)
Approved profit sharing involves no additional risk if agreements are clearly spelled out to minimize uncertainty
The basis for accepting profit sharing comes from a tradition that the companions of the Prophet practiced it, as did
the Prophet Muhammed himself in his early business activities
Nothing is specifically said of it in the Qur’an
Wide variety of specific profit-sharing arrangements have been allowed in the various codes – one universally
accepted that has received much attention from current Islamic economists is called mudarabah
Mudarabah
- An Islamic form of venture capitalism
- There is a financier (e.g. Islamic bank or entrepreneur) who provides an agreed-upon sum of money or
possibly goods (later they receive an agreed-upon share of subsequent net profits)
- The funds are used as payment for goods or services
- If the enterprise fails, the investor loses all invested funds while the second party loses what was put in as
labor time
In practice, such arrangements have been undermined by fraud and dishonesty by entrepreneurs in reporting profits
to investors
6. Riba, or the Forbidding of Interest

The core demand of most Islamic economists is the prohibition of interest
- Riba in Qur’an means “increase or addition” but is accepted as meaning interest → some argue that it only
refers to an increase beyond some acceptable level (minority opinion)
- Interest payments violate the fundamental Islamic requirements of brotherhood and justice because often
interest is oppression and exploitation by the rich of the poor
- The rich should take care of the needy, but interest income flows from the poor to the rich
53
- This tends to make the interest-receiving rich idle and unproductive, a parasite class
- It leads to economic stagnation (rich have lower average propensity to consume)
- Interest costs are passed on to consumers as higher prices
Focusing on profit sharing rather than interest shifts the focus to the entrepreneur and thus stimulates genuine
economic growth while removing a source of cyclical fluctuation
Forbidding interest leads to a closer link between savings and investment, and reduces destabilizing speculation 
The most serious criticism:
- forbidding interest will lead to insufficient savings and hence insufficient real capital investment and
economic growth
- problem with allocation of capital if there is no price for it (could the answer be a central planner?)
5.6. The Practice of Islamic Banking

If proper Islamic banks are not allowed to charge interest, how can they make money?
- The answer is to finance and support the various allowed qirad or profit-sharing arrangements such as
mudarabah
Such an approach effectively makes Islamic banks the equivalent of non-Islamic mutual funds – someone depositing
money in an Islamic bank de facto becomes part owner of the various enterprises to which the bank has lent money
This is the idealistic view.
There are many different allowable arrangements, some of which can be made to function almost exactly like
standard interest
In most Islamic banks, probably the most widely used such arrangement is Murabaha
- The financier buys goods for the producer and then sells them to him at an agreed-upon inflated price,
which is to be paid back to the financier at an agreed-upon later date. This is viewed as legitimate by most
Islamic economists because the financier bears risk during the period in which he owns the goods
But this period can be reduced to an infinitesimal time span and most practicing Islamic banks do keep such periods
very short, thereby sharply reducing their own risk
This approach may make a mockery of the whole business thus some Islamic economists argue that this method and
similar ones should not be used widely
In any case, self-identified Islamic banking is a dramatically growing phenomenon
Finally, there seems to be a problem regarding the profitability of Islamic banks
An increased trend toward the more interest-like lending arrangements like murabaha rather than the more
profitsharing ones like mudarabah
Summary and conclusion

The new traditional economy presents itself as an ideal that combines the efficiency of the market with the
humanity of socialism
Alienation is eliminated as economic motives are subordinated to religion
Research shows that the connection between Islam, presented as the most developed form of the new traditional
economy within religions, and the economy is weak
Economists predict the spread of Islamic economies
54

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Soizic Hoffelinck Comparative Economic Systems

Table des matières

CHAPTER 1 : HOW DO WE COMPARE ECONOMIES?................................................................................................ 5

CHAPTER 2: THE THEORY AND PRACTICE OF MARKET CAPITALISM........................................................................16

CHAPTER 3: THE THEORY AND HISTORY OF MARXISM & SOCIALISM..................................................................... 23

CHAPTER 4: CORE ASIAN ECONOMIC SYSTEMS......................................................................................................31

CHAPTER 5: ISLAMIC ECONOMICS AND THE ECONOMICS OF OTHER RELIGIONS....................................................43

5.1. WHAT IS THE TRADITIONAL ECONOMY?.........................................................................................................43

5.6. THE PRACTICE OF ISLAMIC BANKING.......................................................................................................................51

CES and approaches to it

Two points of view can be studied from

More state or less state?

A brief history of economic systems

In the 1970s : doubt about both systems

Outcome: what was the underlying philosophy of your allocation system?

CHAPTER 1 : HOW DO WE COMPARE ECONOMIES?

Reasons he based his opinion on :

Challenges to Fukuyama’s Idea:

systems Korea, Iran…).

Evolving Economic Systems in the 21st Century

In 2008 a new chapter of comparative economic systems appears

Impact of Recent Events:

1.2. Mixed economy continuum (according to the economic freedom index)

Level of social services, government control over business and taxes

1.3. How Do We Classify Economies?

What is the ownership system’s relationship to allocative mechanisms?

Is it possible to have command without planning?

5. Income Redistribution and Social Safety Nets

Is the equity-efficiency trade-off false?

6. Role of Politics and Ideology

Another competing ideology – New Traditionalism (especially Islamic fundamentalism)

CRITERIA FOR EVALUATING ECONOMIES

3. The composition of output

General Condition/Performance of Various Economies

The last 3 groups still do not win in any category

Role of government in various economies

1.4. New comparative economy

Djankov brings the idea of the institutional possibilities frontier (IPF)

Graph – each point on the IPF is an institution

Frederic Pryor concludes:

Example of extractive societies:

1.4.1. "Corona" economics

1.5. SUMMARY AND CONCLUSIONS

CHAPTER 2: THE THEORY AND PRACTICE OF MARKET

The Theory and Practice of Market Capitalism

2.2. THE THEORETICAL EFFICIENCY OF MARKET CAPITALISM

If Pareto optimality holds the economy is on its production possibilities

*Maximum quantity is produced with the given resources and technology

2.3. LIMITS TO THE EFFICIENCY OF LAISSEZ-FAIRE MARKET

2.3.3.Collective Consumption Goods

Also known as public goods

2.3.4. Imperfect Information

2.4. THE ROLE OF LABOR UNIONS

2.5. MACROECONOMIC INSTABILITY OF MARKET CAPITALISM

2.6. THE PROS AND CONS OF MARKET CAPITALISM

CHAPTER 3: THE THEORY AND HISTORY OF MARXISM &

Conundrums of the Soviet economy:

3.2. THE DEVELOPMENT OF SOCIALIST IDEOLOGY

3.2.2. Utopian Socialism (18th and 19th century)

Utopian Socialism (18th and 19th century)

The Marxian* Worldview

3.3. Marxism as a Quasi-Religion

3.4. The Hegelian Dialectic

The result of this struggle should be transformation into socialism