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  • Comparative Cultural Economics
  • Dr. J. F. García III

  • Developed by Adam Smith and the Classical
    Economists David Ricardo, John Locke.
  • Economic institutions are the building blocks
    from which the economic system is construed.
  • All factors of production are privately owned and
    control instead of just capital. In Canada the
    government (Queen) owns the land.
  • Right of individuals to employ their talents and
    energies in the time they feel best.
  • Non economic institutions and culture have
    significant bearing freedom of religion and
    speech, press, democracy, abortion, merge, etc.

  • a system of economic organization in which
    individual persons, singly or in groups,
    privately own the factors of production and
    possesses the right to use and dispose those
    economic resources generally in whatever matter
    they choose
  • economic activities will be conducted by
    managers of firms instead of entrepreneurs
    (Joseph Schumpeter) - freedom of enterprise

  • Capital is tangible things which are not directly
    use for consumption, but instead, assist in the
    production of goods.
  • Distinguishing feature is the use in which it is
  • capitalism is not distinguish by the mere
    physical presence of capital nor relatively
    capital intensity methods of production.
  • Capitalism is not just the use of capital but
    also other FOP.

Institutions of Capitalism
  • 1. Competition.
  • 2. Protestant work ethic.
  • 3. Private property.
  • 4. Freedom of Enterprise and choice
  • 5. Competitive market.
  • 6. Individualism (what about Japan
  • 7. Government with regulatory measures.

  • Requirements
  • Competition.
  • Unlimited use of wants .
  • non-economic institutions and culture have
    significant bearing in capitalism in its
  • there should be some economic institutions in
    capitalism - private property - freedom of
    enterprise and choice - competitive markets -
    limited government - competition - individualism
    - Protestant work ethic.
  • Private Property - right of individual to control
    property and the right to enjoy the economic
    rewards that result - government protects owners

  • benefits are
  • (1) allow prices to reflect supply and demand
    (willingness, ableness, opportunity costs, and
    utility maximization),
  • (2) will show prices and costs to be efficient,
  • (3) encourages innovation, invention,
    flexibility, and decrease in the long run cost,
  • (4) encourages equitable distribution of
  • (5) provides a variety of goods and services.

  • functions
  • (1) does not refer to only tangible things
    (intellectual rights),
  • (2) encourage accumulation of private property -
    encourages the private savings of private and
    corporate income
  • (3) inheritance - generational transfer of wealth
    - separate from but attached to private property
    - not based on merit

  • Economic Institutions
  • private property
  • Freedom of enterprise
  • competitive markets - circular flow (factor
    market supply and product market demand) -
    owners of FOP and demanders of FOP and how they
    interact - to be competitive, nobody is coerced -
    free interaction - .
  • government with regulatory matters.

Conditions of Capitalism (perfect competition)
  • Product Market.
  • Factor Market.
  • Distribution of Income.
  • Consumers maximize total utilities or
    satisfaction instantaneously and without cost,
    firms likewise, maximize their total profits and
    factor owners maximize their income.
  • Consumers, firms, and FOP can enter and exit the
    market without costs or penalties.
  • There are sufficient number of firms, costumers,
    and owners of FOP in each market so everyone is
    a price taker.

American Capitalism
  • Capitalism as an existing system.
  • - it has imperfections originated in the
    private sector or attributable to the
  • - it is not pure capitalism.
  • - Largest system of production in the
  • - Endowed with variety and quantity of
    factors of production.

American Capitalism
  • There are two sources of market failure
  • Private transaction costs, economies of
    scale/scope, corporate business organizations,
    and labor unions.
  • Public public goods, public utilities and
    natural monopolies, indirect controls and
    subsidiaries, and regulations and regulatory

American Capitalism
  • Private sources of failure
  • Transaction costs search, negotiation,
    litigation, advertising, distribution, and
    transaction costs.
  • Economies of scale and scope decrease in per
    unit cost achieve by producing large volumes
    gives monopoly conditions to a firm.
  • Corporate business organization or legal business
    organizations market prices and entrepreneurial
    planning determine all decisions for profit
    maximization. It also allows for mergers.
  • Labor unions monopsony power and therefore, can
    charge higher price than otherwise.

American Capitalism
  • Public sources of cost failure (government) -
    violations of pure capitalist systems -
    government distorts prices instead of allow the
    price to be determined through equilibrium
  • Provision of Public goods free rider and
  • Public utilities and natural monopolies
    (antitrust laws) regulation of economic
    activities because monopolies create consumer
    convenience and decreases costs. .
  • Indirect controls and subsidies government
    activities which depart from competition such as
    fiscal and monetary policies (Fed) and grants.
  • Regulations and regulatory agencies government
    intervention through quasi organizations.

Strengths of US Capitalism
  • Flexibility.
  • Raising standard of living.
  • Individual opportunity.
  • Technical progress.
  • Economic development not just growth but also
    happiness, standard of living, health, education
    mortality rate and variety.

Weakness of American Capitalism
  • Shortcomings of institutions when promoting human
  • Pecuniary vs. human values (monetary vs.
    non-monetary values).
  • Unemployed resources.
  • Inequality.

Future of American Capitalism
  • Continue preservation of rights and freedoms.
  • Democratic political institutions prevail.
  • Long run economic growth of real national income
    (4 or higher).
  • Advance production technology and full employment
    of all productive resources.
  • Application of wage labor regulation.
  • Relative price stability.
  • Control of inflation, unemployment, budget
  • Can give long range goals despite not being a
    planning system.
  • country has to big of a size of production to
    make predictions.
  • In reality oligopolies and administrative prices
  • Fiscal and monetary policies are avenues through
    which capitalism may acquire its goals.
  • Increase and constant government regulations may
    seriously impair the system in the long term.
  • Difficult to preserve each private individuals
    interest rights.
  • Automatic competition of large firms and large
    capital investment.

  • Best example of capitalist welfare system with
    Social Democratic Government.
  • is a market system dominated by a Social
    Democratic Party.
  • socialism through gradual reform to socialism,
    rather than revolutionary change (most European
    have gone through gradual but revolutionary
  • democracy is a route to the establishment of
    socialism in Sweden - transformation from
    old-style capitalism to contemporary managed
  • democratic socialism meant, traditionally,
    government ownership of industries (Nazi

  • Six policies used in Sweden
  • monetary and fiscal policies.
  • private ownership and price system.
  • means associated with socialism - planning
    (rejected in 1994).
  • equality - reduction in inequalities of income,
    wealth, and occupation.
  • allocation of resources between private and
    public sectors.
  • power and participation of private associations
    L.O. (confederation of trade unions) and S.A.F.
    (employers association).

  • Four types of government Economic Planning
  • 1. provision of government services
    education, medicine, housing, national
  • 2. macroeconomic aggregate plans.
  • 3. government owned enterprises.
  • 4. guidance of private sector and
    stabilization of income.

Swedens environment Culture
  • Geography has been kind to Sweden, relatively
    isolated in the Scandinavian peninsula.
  • The Swedes had not participated in major war save
    for the fight against Napoleon.
  • Spare the economic and human devastation of WWI
  • Neutrality has allow them to devote only a small
    share of the national income to military and
    military related expenses (23).
  • Rich in natural resources timber, wood pulp,
    iron, gold, fishery, services.

  • Social democracy socialism through gradual
    reform of capitalism rather than violent
  • Unlike USA, Russia, and Germany but very similar
    to Japan.
  • Population has a high degree of ethnic and
    religion homogeneity.
  • 96 of population are Germanic Scandinavian of
    the Lutheran faith.
  • Serf-lord never took place because servants
    maintained their freedom.
  • Heavy welfare state where the income is
    redistributed from one cultural group to another
    and the haves can not be distinguish from the
    have nots.

  • Solidarity of Swedish workers and welfare state
    policies have provided stable prices, low
    inflation, low unemployment (2) and economic
  • Like Japan, Sweden has penchant cooperation and
    consensus rather than conflict and litigation.
  • Fiscal stabilization methods with tax advantages
    during economic stagnation.
  • Institutional form of income policies with wage
    policies, trade unions, and association of

Swedens Democratic Socialism
  • Democracy as a route to the establishment of a
    socialist economy and extension of democracy from
    politics into the economy, industry, and society
    at large.
  • It is part of the transformation from the old
    style capitalism to contemporary managed
  • Traditional democratic socialism meant government
    ownership at least of strategic and basic
    industries, and government planning on means
    beyond the market to values establish as basis to
    control private, public, and economic power.

Managed Capitalism in Sweden
  • Monetary and fiscal policies.
  • Private ownership and market prices.
  • State polices control industry and comprehensive
  • Equality reduction of inequality of income,
    wealth, and position (occupation).
  • Allocation of resources between private and
    public sectors.
  • Power and participation of private organizations.

Great Britain Declining Capitalism
  • Reasons for declining capitalism
  • Failure to maintain a technological lead.
  • Slow in capacity to produce energy, chemicals,
    steel, and other major and integral industries.
  • Government laissez faire policies in advance
    technology and production.
  • Financial power was attributed to the spirit of
    middle class but the third generation declined
    symptoms (apathy).
  • Government encouragement of mergers.
  • Labor legislation and union growth.
  • Fraud, negligence, and monopolistic banking
    practices and financial regulations.

Great Britain
  • Not a socialistic state but a mixed capitalism
    with failures such a social reforms and
  • Government discretionary policies have allowed
    socially owned industries.
  • Social security system, unemployment
    compensation, welfare and retirement programs are
    less comprehensive than other developed countries
    such as Japan, Germany, and Scandinavia.

Great Britain
  • Power resides in different degrees with the
    consumer, the firm or some social collective
    (local, regional or national) government.
  • Private firms are free to determine their output
    and input mixed in pursuit of profit
  • Individuals have the right to freely choose
    employment and what he/she wishes to consume.
  • Firms are small in most industries.
  • Nationalized industries are market oriented.
  • Government intervenes in the economy but it is
    limited to changing the environment of doing
    business and induced people to do things rather
    than forcing them.

Great Britain
  • Capitalist economy with a strategic sector of
    socially owned industries.
  • The locus of decision making is principally
    private and decentralized with a number of social
    programs running directly by a subsidized levels
    of the government.
  • The market signals and directs the activities of
    most economic actors with even the socially owned
    industries responding to the market forces and
    dealing thorough markets with the private sector.

  • Great exporter of ideas through the physiocrats,
    natural economic order, policy of laissez-faire,
    circular flow model, national economic planning,
    and indicative planning.
  • Indicative planning was established after WWII to
    improve the operations of the market mechanism
    through cooperation and exchange of information
    among all sectors of the circular flow.

France Indicative Planning
  • Compliance with plan is voluntary but it is
    encourage by government financial and regulatory
    actions and by relatively new system of plan
  • Modern mixed economy with a unique blend of
    economic institutions.

Frances criteria of Mixed Economy
  • Private vs. Public sectors
  • Private ownership is predominant but the public
    sector by US standards is quite large, the state
    owned public utilities, energy industry,
    airlines, railroads, control interest on
    petroleum, autos, aircrafts, banks, large sector
    of insurance industry, and other major
  • Approximately 40 of GDP flows through the
    central government including goods and services
    and transfer payments.

Frances criteria of Mixed Economy
  • Power
  • Economic power (market and circular flow) in
    France resides both in the individual consumer
    and private firms as well as the state.
  • The private decision maker is free to choose
    his/her employment and consumption patterns.
  • The private firm is free to determine its output
    and input mixed.
  • Collective decision making has a powerful
    influence in the nature of private decisions.

Frances criteria of Mixed Economy
  • The state is able to modify many parameters
    entering into the private decision making and
    thus able to modify the decisions themselves by
    using the following techniques
  • Indicative planning.
  • Planning organizations.
  • Planning cycles.
  • Monetary and credit controls.
  • Taxes and tax policies.
  • Wage controls.
  • Development of income policies.
  • Social welfare.
  • Regional planning.

Frances criteria of Mixed Economy
  • Resource allocation among competing uses
  • signals of resource allocation is done by the
  • despite extensive government influence in the
    economy and national plans, few economic actions
    are the result of the direct order of the
  • government intervene in the market by altering
    the demand and supply conditions but this
    intervention is reflected in the changing costs
    of doing business and influence the profitability
    of the private sector.

  • Mixed capitalism characterize by social market
    economy, neoliberalism, and codetermination.
  • Private property predominates but the government
    owns and runs wide variety of enterprises.
  • Although the great majority of economic decisions
    are made by individual consumers and firms,
    collective decision making has a significant
    impact on the structure and direction of the
  • Government influences the economy through the
    operation of a large budget.

  • The market carriers the economic decisions,
    public as well as private.
  • Although the state sector is large, most state
    owned enterprises act independently and are
    concerned with their profitability.

Germans Neoliberalism
  • Luidwig Erhart and Walter Ericken.
  • Alternative philosophy to laissez faire, total
    planning of China, or partial planning of France
    and Sweden.
  • The efficiency of the price system combined with
    competition and monetary stability and the need
    of the government interference.
  • The government primary responsibility is to
    promote competition by removing trade and market
    barriers, state controls, and by dissolving
    economic groups.
  • Price stability is ensure only by the government
    responsibilities to conduct monetary policies.

Germans Neoliberalism
  • Neoliberalism is compatible with government
    redistribution of income, social welfare programs
    and measures, and environmental control.
  • Market equilibrium may be government manipulated
    including changing in technology and demand
    conditions, and countercyclical policies.

German codetermination
  • Workers are given a voice in the management of
    their companies.
  • Employees are able to participate in management
    through work councils and through representation
    on corporate supervising boards.
  • Work councils are in charge of job evaluations,
    overtime, breaks, holiday schedules, recruitment
    selection, dismissal, training, and safety of

Germany social market economy
  • Social Market Economy (SME) created after WWII
    with one of the most extensive welfare systems in
    the world which combines market system efficiency
    with the decency of the welfare state.
  • SME is based on a rejection to central planning
    and an affirmation of the market system with an
    active effort to abolish cartels and establish
    competition, a supply side fiscal policies, a
    monetary policy dedicated to price stability, and
    extensive social welfare system.

  • Modern economic growth was launched in 1868, when
    the Meiji restoration abolished feudal controls
    and opened the nation to foreign trade and
  • Market economy based on the feudal Samurai
  • After the devastation of World War II, rapid
    economic growth resumed in the 1950's and 1960's,
    caused first by the growth of the capital stock
    and then by the contributions of knowledge and
    technology, the growth of the size and quality of
    the labor force, economies of scale, and the
    shift of laborers from primary production to
  • The Japanese economy was shaken by the oil shocks
    of the 1970's, the bubble economy of the late
    1980's, and the collapse of the bubble during the
    early 1990's. Now it is passing through a
    difficult process of administrative reform and

  • The business community is organized in a dual
    market structure very large businesses and very
    small businesses with few in the middle.
  • Many of the big companies are members of zaibatsu
    and keiretsu conglomerates, which provide
    protected markets and financing for their members
    and exert considerable influence over
    governmental policies.
  • The small companies are centered in distribution
    and subcontracting they serve to reduce labor
    and inventory costs and to absorb the effects of
    business cycles for the larger firms.

  • The labor market, which is credited with much of
    Japan's success, is organized around a relatively
    docile network of company unions that participate
    in a semi-decentralized system of collective
    bargaining known as the Spring Labor Offensive.
  • The lifetime employment system, which applies to
    more than one-quarter of the work force,
    strengthens the family spirit of enterprises and
    may encourage technological innovation, but it
    reduces labor mobility and may impose a burden on
    employees who are not covered by the system.
  • Support for lifetime employment seems to be
    waning among both employers and employees.
  • Pay is strongly influenced by seniority and a
    relatively large proportion is paid in bonuses.
    The latter may help to explain the high savings
    rate and the low unemployment rate in Japan.

  • Led by the Ministry of International Trade and
    Technology (MITT) and centered on the large city
    banks, the Japanese financial system played a
    pivotal role in the growth miracle and in the
    rise and fall of the bubble economy.
  • Individual families were encouraged to save by
    the convenience and tax advantages of the postal
    savings system.
  • Today, Japan is passing through a "Big Bang"
    program of financial reforms, designed to
    strengthen the efficiency and competitiveness of
    the system.
  • The government plays a limited role in the
    economy in direct taxation, expenditure, and
    nationalization. It plays an important role,
    however, in regulation lending, and the
    formulation of indicative plans and industrial

  • The Japanese culture is influence by three values
    of Confucianism ethics which are of particular
    interest loyalty, reciprocal obligations, and
    honesty in dealing with others. This creates
    ethics of hard work and cooperation between
    management and labor for the good of the company.
  • Reciprocal obligations and honesty fosters trust
    between companies and sellers in Japan, and
    therefore, long-term relationships which help
    with inventory reductions, quality control and
    joint designs to improve organizational
  • Individual entrepreneurial lacks because it is a
    product of individual mind-set and not groups. On
    the other hand, the United States values
    individualism and innovation, e.g., biotechnology
    and computers.

Japans indicative planning
  • Uses the market to coordinate short run decisions
    in combination with plan to coordinate long run
  • Includes broad goals for the entire industries
    over a long time horizon.
  • Private companies are not legally required to
    comply with plan targets, but the government may
    use fiscal and monetary policy instruments to
    encourage voluntary compliance.
  • The government plays a limited role in direct
    taxation, expenditure, and nationalization.
  • It plays an important role, however, in
    regulation, lending, and formulation of
    indicative plans and industrial policies.
  • Japan uses quality control circles.

economics 331 comparative CUltural Economics
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