Chapter One

ECONOMIC SYSTEMS

Capitalism: Adam Smith & The Wealth of Nations (1776) Communism: Karl Marx & Das Kapital (1886)
Mixed Economy

The Free Market of Adam Smith

The uniform, constant and uninterrupted effort of every man, to better his own condition, the principle from which national and public as well as private opulence is originally derived, is frequently powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of government, and of the greatest errors of administration.

- Adam Smith

How Does This Happen?

Buyers and sellers negotiate prices in a free market and carry out transactions of buying and selling that leave all parties mutually

better off.

Capitalism

System based on Free market

Capital: owned by a minority of individuals Private Property rights: legal right to use this capital for private gain Market system (Supply & Demand factors)
To determine distribution of goods & services To allocate resources

To establish income levels, wages, rents & profits

Govt. Role is limited Ex: USA, UK etc.

A Startling Idea
Economic order can emerge as the unintended consequence of the actions of many people, each seeking his own interest. -Milton Friedman

Communism According to Marx

The natural evolution of communism after capitalism State owns all factors of production and distribution. Ex: Cuba The workers reap the profits from their labor rather than subsistence wages

Question?

Why did the people of the United States choose markets as the means to organize economic activity?

MIXED ECONOMY
Indias experience since the First Five Year Plan Equal importance to private and public sector. However, major factors of production and distribution are owned and managed by the state. Success or Failure?Debatable issue Ex: India, France and Holland

POVERTY

Absolute Poverty: Measured as total number living below a specified min level of real income/poverty line(people who are unable to satisfy basic needs)

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Human Poverty Index (HPI)

UNDP HPI measures poverty in terms of 3 deprivations-of life(percentage of people unlikely to live beyond 40 years),of basic education(as measured by % of adults who are illiterate), & of overall economic provisioning(% of people without access to health services & safe water+% of under-weight children under 5) [Source:HD report 2001, UNDP]

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Poverty characteristics

Rural Poverty, Women & Poverty, Ethnic Poverty Rural Poor as % of population is 79%(India), 80%(Malaysia), 37% (Mexico), 96%(Kenya). Women make up majority of worlds poor. Minority ethnic groups are poor (Latin America etc.

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INCOME DISTRIBUTION AND PLANNING - POLICY OPTIONS

1. Altering the distribution of income to change factor prices (eg: relative price of labor, ensuring min.wages) 2. Progressive Distribution of Asset Ownership (Classic case: Land reforms): Purpose is to transform tenant cultivators into small holders who will then have incentive to raise production and improve their income.

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INCOME DISTRIBUTION AND PLANNING - POLICY OPTIONS

3. Reducing income distribution at the Upper levels through progressive income and wealth taxes (Rich required to pay larger % of their income in taxes than poor and high indirect taxes on cigarettes and beer) 4. Direct Transfer Payments & Public Provision of Goods and services (Ex: Public Distribution system in India). Subsidies for farmers, Pension and policies to keep price of essential foodstuffs low.

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INDIAN SCENARIO
The impact of planning strategy of the last 2 decades on social sector indicate significant improvements - yet, there is need to improve the quality of life. Govt expenditure for social services has more than doubled from Rs.11,631 crore in 95-96 to Rs.35,478 in 0304. As per the Planning commission estimates, there was a significant decline in proportion of people living below poverty line, from 51.3% (77-78) to 26.1% (99-00).

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COUNTRY CASES

Cases: US & CANADA INDIA & POLAND

CUBA & VIETNAM

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