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: Basic Characteristics

A. private property and economic growth
B. 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]

C. 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

D. freedom of enterprise and choice

1. definitions
2. efficiency and growth

E. competition = capitalism

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

F. limited role for government

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

II. The Market System at Work

A. The Five Fundamental Questions and the Four "Es"

1. match the following:

HOW MUCH WHAT HOW FOR WHOM HOW ADAPT

PROD. EFF. ALLOC. EFF EQUITY FULL EMPLOYMENT

• 2. ANSWER
  3. Allocative Efficiency: What consumers want
  • a. more profits = produce more
    b. losses = produce less
    c. consumer sovereignty and "dollar votes"

  4. Productive Efficiency:

  • a. How to produce?
    b. lower costs = more profits

  5. For Whom?

  • a. distributing total output
    b. rationing function of prices

  6. How does the system adapt to change?

  • a. guiding function of prices
    b. profits and technological advances

B. The Case FOR the Market System
(Capitalism and the "invisable hand")

1. achieves allocative efficiency - WHY?
2. achieves productive efficiency - WHY?
3. may not achieve equity?
4. economists disagree over whether capitalism achieves full employment?
5. in the long run capitalism seems to achieve more economic growth - WHY?

C. Summary:

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

   The price mechanism provides for and ALLOCATIVELY EFFICIENT use of resources

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

   Economists disagree over whether capitalism will guarantee FULL EMPLOYMENT.

   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

   1.