Kinh tế học vĩ mô - Chapter 2: The history of economic systems

The History of Economic SystemsChapter 2 AppendixLaugher curveSocialism is the longest path from capitalism to capitalism.Evolving Economic SystemsCapitalism and socialism have not existed forever.Capitalism came into widespread existence in the mid-1700s; socialism came into existence in the early 1900s.Evolving Economic SystemsBefore capitalism and socialism other forms of economic systems existed:Feudalism dominated the Western world from about the 8th to the 15th century.Feudalism is an economic system in which traditions rule.Evolving Economic SystemsFeudalism gave way to mercantilism.Mercantilism is an economic system in which government determines the what, how, and for whom decisions by doling out the rights to undertake certain economic activities.Evolving Economic SystemsMercantilism remained the dominant economic system until the Industrial Revolution.Industrial revolution – a time when technology and machines rapidly modernized industrial production and mass produced goods replaced handmade goods.Evolving Economic SystemsCapitalism evolved from the Industrial Revolution in 1700s.Industrial revolution led to a decrease in power of small producers and increase in power of capitalists.The Need for Coordination in an Economic SystemEvery economic system needs coordination.In his 1776 classic, Wealth of Nations, Adam Smith argued that markets could coordinate the economy without the active involvement of government.The Need for Coordination in an Economic SystemMarkets coordinate economic activity by using the price mechanism to direct individuals' self-interest into society's interest.Evolutionary Changes Within SystemsBoth capitalism and socialism are constantly evolving with changes in social customs, political forces, and the strength of markets.Evolutionary Changes Within SystemsCapitalism evolved into welfare capitalism—an economic system in which the market operates but government regulates markets significantly.Evolutionary Changes Within SystemsThe opposite took place in some socialist nations in the 1980s—socialism integrated capitalist institutions into its existing institutions.In the 1990s, most of the former socialist countries have undergone transition to market oriented economies based on private property.A Blurring of the Distinction Between Capitalism and SocialismRecent events point to a blending of economic systems.A Blurring of the Distinction Between Capitalism and SocialismIf this trend continues, the 21st century will see the emergence of a single general type of economic structure; it will be a mix of socialist and capitalist institutions.Feudal Society: Rule of TraditionFeudalism developed in the 8th and 9th century. The Lord of the manor was the protector; serfs were working the land.Feudalism was a tradition based societyFrom Feudalism to MercantilismMercantilism developed with the development of trade and markets in the 15th century.The power of the society shifted from manors to towns.From Feudalism to MercantilismIn mercantilism, traders supported the king, who in turn protected their interests.The role of government increased during this period.From Mercantilism to CapitalismIndustrialists or capitalists were the business people who have acquired large amounts of money and use it to invest in business.Craft guild members were artists in their own crafts.From Mercantilism to CapitalismThe economic power base shifted from the guilds to industrialists.Coordination of the economy by government was deemed necessary by the craftsmen.Industrialists considered the market capable of coordination on its own – no government was needed.From Mercantilism to CapitalismLaissez-faire policy is an economic policy of leaving coordination of individuals’ wants to be controlled by the market.Adam Smith’s invisible hand theory supported the industrialists’ view.The Industrial RevolutionThe invisible hand worked; capitalism thrived.Machine production began to increase enormously in the late 18th century, almost totally replacing hand production.This phenomenon has been termed the Industrial Revolution.The Industrial RevolutionEventually, modern economic institutions replaced guilds.Modern capitalism evolved by the 19th century.From Capitalism to Socialism Capitalism was marked by significant economic growth but also by human abuses of the working class who were producing for the elite few.This led to criticism of the capitalist market economic system.From Capitalism to SocialismThe best known critic of capitalism was Karl Marx, a German philosopher, economist and sociologist.Marx developed an analysis of the dynamics of change in economic systems, in the 19th century.From Capitalism to SocialismMarx saw an economy marked by tensions between economic classesThe proletariat class – the working class andThe capitalist class (businessmen)From Capitalism to SocialismThe capitalist class made profits by exploiting the working class.Marx believed that this exploitation would lead to revolt by the proletariat who would overthrow the capitalists.From Capitalism to Welfare Capitalism?However, evolutionary changes brought about regulation to protect the working class.Economic safety net was developed in capitalist economies. Examples arePublic welfareUnemployment insuranceFrom Feudalism to SocialismContrary to Marx’ predictions, capitalism did not evolve into socialism.Marx’ socialist ideas took root in feudalist Russia instead.State socialism was created – a system based on central planning and command.Economic TransitionIn the 1990s most Eastern European socialist economies started a path of transition to a market-based economic system.The History of Economic SystemsEnd of Chapter 2 Appendix