Notes2 - ECON 4337 Comparative Economic Systems Week 2 The...

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Unformatted text preview: ECON 4337 Comparative Economic Systems Week 2 The Theory and Practice of Capitalism Adam Smith (1723-1790) The Theory and Practice of Market Capitalism Overview Market economies: How and when did they emerge? Is pure market economy possible? Historical and recent examples: What are the conditions for a Laissez Faire economy? The Theory and Practice of Market Capitalism Overview How would you identify a free market capitalist system? The Theory and Practice of Market Capitalism Overview How would you identify a free market capitalist system? Government/GDP Ratio (?) The Theory and Practice of Market Capitalism The Theoretical Efficiency of Market Capitalism: Mercantalism Laissez Faire Adam Smith: Invisible Hand – Describes how markets work and why they are efficient Market Failures The Theory and Practice of Market Capitalism Quick Note about nature of Laissez Faire Are free markets just reflection of natural laws on society? (Natural Selection, Social Darwinism…etc) Yes: Herbert Spencer No: Douglas North: Market economies need well defined property rights, laws, rules (market institutions) All these institutions are implemented by government Polanyi: Markets are not natural, organic – They are forced, just like other systems The Theory and Practice of Capitalism The Theoretical Efficiency of Market Capitalism: Adam Smith’s “Invisible Hand”: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard for their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.” (The Wealth of Nations, 1776) The Theory and Practice of Capitalism The Theoretical Efficiency of Market Capitalism: Adam Smith’s “Invisible Hand”: A man pursuing his own self- interest is “led by an invisible hand to promote an end which was not part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.” (The Wealth of Nations, 1776) The Theory and Practice of Capitalism The Theoretical Efficiency of Market Capitalism: Adam Smith’s “Invisible Hand”: “Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of society, which he has in view. But the study of his own advantage naturally... leads him to prefer that employment which is most advantageous to the society.” (The Wealth of Nations, 1776) The Theory and Practice of Capitalism The Theoretical Efficiency of Market Capitalism: • The First Welfare Theorem of Welfare Economics: “A complete, competitive, full information general equilibrium is efficient.” The Theory and Practice of Capitalism...
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This note was uploaded on 03/26/2011 for the course ECON 4337 taught by Professor Staff during the Spring '08 term at Minnesota.

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Notes2 - ECON 4337 Comparative Economic Systems Week 2 The...

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