OUTLINE -- CHAPTER 4

Pure Capitalism and the Market System: The Market and the 5 Es

CHAPTER GOALS:

• Understand WHY countries around the world are moving to capitalism [Structural Adjustment]
• Understand the problems that may accompany structural adjustment
• Learn the basic characteristics of a capitalist economy
• Explain the connection between capitalism and the 5 Es

REVIEW:

• Structural Adjustment Policies
  • Privatization
  • Promotion of Competition
  • Reduced Role of Government
  • Removing Price Controls
  • Freer Trade and Convertible Currency
  • Foreign Investment
  • Other
• Goals of SAPs
  • full employment
  • low inflation
  • economic growth
    
• Problems
  • Inflation
  • Falling output and living standards
  • Inequality and social costs

I. Capitalist Ideology

A. Basic Characteristics

1. private property and economic growth
2. markets and prices
3. role of self interest: the PROFIT incentive and efficiency
4. freedom of enterprise and choice
5. competition = capitalism
6. limited role for government

B. private property and economic growth

C. markets and prices

1. prices GUIDE resources
   [pickups driving to Florida with plywood]
2. prices RATION goods and services
   [high prices after a hurricane encourage people to conserve]

D. role of self interest: the PROFIT incentive and efficiency

1. Introduction: government or private business?
2. "greed" and productive efficiency
3. "greed" and allocative efficiency
4. "greed" and economnic growth

E. freedom of enterprise and choice

1. definitions
2. efficiency and growth

F. competition = capitalism

1. what is competition?
   1. a. large numbers
      b. free entry and exit
      c. produce standardized products
2. monopolies and inefficiency

G. limited role for government

1. what IS the role for government?
2. economic goals: 5 Es

II. The Market System at Work

A. Introduction

1. Why is the world moving toward capitalism?

2. What problems might they encounter?

B. The Market and the 5Es

1. Economic Growth

2. Allocative Efficiency: Producing what consumers want

a. Capitalism and incentives

(1) more profits = produce more

(2) losses = produce less

(3) consumer sovereignty and "dollar votes"

b. Captitalism tends to achieves allocative efficiency

3. Productive Efficiency: Producing at a minimum cost

a. Captialism and incentives

(1) profits = total revenues - total cost

(2) minimizing costs means more profits

b. Capitalism tends to achieve productive efficiency

4. Equity

5. Full Employment

C. Summary:

1. Capitalism provides the incentives (profit) for a PRODUCTIVELY EFFICIENT use of resources

2. The price mechanism provides for an ALLOCATIVELY EFFICIENT use of resources

3. Capitalism does not have a mechanism to assure EQUITY. This may be a role of government

4. Economists disagree over whether capitalism will guarantee FULL EMPLOYMENT.

5. The move toward capitalism has resulted in high rates of ECONOMIC GROWTH in many countries. Profits, private property, and freedom of enterprise and choice promote growth