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
 Marija Beg, PhD

Class follows the book: Rosser & Rosser (2004)

Comparative Economics in a Transforming World Economy
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
Introduction

• Market capitalism - an economic system that allows

private property rights and a free market with a minimal
state
• Dynamic efficiency (technological dynamism) of market
capitalism is the greatest appeal to countries seeking to
emulate its success

• Theory vs Practice - pure version of the market capitalist

system does not exist!
Introduction
• Three economies that come closest to the ideal of pure
laissez-faire market capitalism:
1. Hong Kong
• High growth rates with very low unemployment
• Indicative planning (almost political authoritarianism)
• 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
• More state-owned enterprises that supply about 28% of government
revenues
• Not a properly functioning democracy
Introduction
3. New Zealand
• Major wave of tariff reductions, privatization of formerly state-owned
enterprises, more general deregulation, and reduced social safety nets
in 1984.
• 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
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
The theoretical efficiency of market
capitalism
• 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
The theoretical efficiency of market
capitalism
• What about equality of income distribution?
• 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

• The tendency for market capitalism to have unequal

distribution of wealth and income is one of the main
arguments against it
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
Monopoly
• There is no competition
• „natural” monopoly
• Technological dynamism -
it is argued that more
competitive industries will
be more technologically
progressive
• Monopolist could have
more R&D – how to
motivate it?
Monopoly
• 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
• 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)
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?
Collective Consumption Goods
• Third source of inefficiency for laissez-faire equilibrium
• Also known as public goods
• nonexcludability and nondepletability of consumption
• 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 have both private
and collective aspects (e.g. education, airports, roads,
garbage collection, libraries)
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 posses
adequate information
• Ultimately, the problems of imperfect and asymmetric
information remains unresolved for all economic systems
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 role of labor unions
• The USA - unionized workers are paid more than
nonunionized workers, this may contributed to the
weakening of unions (cca 20%)
• 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
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
• Capitalism as legal cover for certain exploitative institutions
• Regardless of the initial distribution of wealth in society, interest-based
financial intermediation leads to its concentration

• Interest rate problem?

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