FU Capitalism vs Socialism Discusion
Description
Prior to beginning work on this discussion,Read Chapters 1 and 2 of Macroeconomics: Private and Public Choice.Read Chapter 7 of Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics.For this discussion,Define capitalism and socialism and provide examples of countries for both structures.Next, discuss why capitalism and socialism are currently being spotlighted in U.S. politics giving the pros and cons to each organizational structure. Be sure to be specific and give supporting facts, not just opinions.Finally, address the question: Does capitalism create wealth inequality and is this necessarily a bad outcome?Your initial response should be a minimum of 200 words. apa format. please cite references References Gwartney, J. A., Stroup, R. L., Sobel, R. L., & Macpherson, D. A. (2018). Macroeconomics: Private and public choice (16th ed.). Retrieved from https://www.cengage.comTamny, J. (2015). Popular economics: What the Rolling Stones, Downton Abbey, and LeBron James can teach you about economics. Retrieved from https://www.redshelf.com
3 attachmentsSlide 1 of 3attachment_1attachment_1attachment_2attachment_2attachment_3attachment_3.slider-slide > img { width: 100%; display: block; }
.slider-slide > img:focus { margin: auto; }
Unformatted Attachment Preview
Chapter Introduction
Focus
What is scarcity, and why is it important even in relatively
wealthy economies?
How does scarcity differ from poverty? Why does scarcity
necessitate rationing and cause competition?
What is the economic way of thinking? What is different
about the way economists look at choices and human
decision-making?
What is the difference between positive and normative
economics?
Economist, n.A scoundrel whose faulty vision sees things as they really are, not as
they ought to be.
Daniel K. Benjamin, after Ambrose Bierce
Welcome to the world of economics. In recent years, economics has often been
front-page news, and it affects all of our lives. The boom and bust of the housing
market, the recession of 2008 and the slow recovery, interest rates near zero, a
volatile stock market, falling oil and gasoline prices, the soaring costs of a college
education and poor job opportunities for graduatesall of these have been in
the news and have turned the lives of many American upside down. Economics
will enhance your understanding of all of these topics and many more. You will
soon see that economics is about much more than just financial markets and
economic policy. In fact, a field trip to the fruits and vegetables section at your
local grocery store could well be filled with more economics lessons than a trip
to the New York Stock Exchange.
In a nutshell, economics is the study of human behavior, with a particular focus
on human decision-making. It will introduce you to a new and powerful way of
thinking that will both help you make better decisions and enhance your
understanding of how the world works.
You may have heard some of the following statements: The soaring federal debt
is mortgaging the future of our grandchildren, and it will bankrupt the country if
we do not get it under control. The Chinese and Mexicans are stealing our jobs
and paralyzing our economy. Budget deficits stimulate the economy and promote
employment. A higher minimum wage will help the poor. Making college tuition
free for all will promote economic growth and lead to higher earnings. Are these
statements true? This course will provide you with knowledge that will enhance
your understanding of issues like these and numerous others. It may even alter
the way you think about them.
The origins of economics date back to Adam Smith, a Scottish moral philosopher,
who expressed the first economic ideas in his breakthrough book, An Inquiry into
the Nature and Causes of the Wealth of Nations, published in 1776. As the title of
his book suggests, Smith sought to explain why people in some nations were
wealthier than those in others. This very question is still a central issue in
economics. It is so important that throughout this book we will use a special
Keys to Economic Prosperity symbol
in the margin to highlight sections that
focus on this topic. A listing of the major keys to prosperity is presented inside
the front cover of the book. These keys and accompanying discussions will help
you understand what factors enable economies, and their citizens, to grow
wealthier and prosper.
Outstanding Economist
The Importance of Adam Smith, the Father of
Economic Science
©Bettmann/CORBIS
Economics is a relatively young science. The foundation of economics was laid in
1776, when Adam Smith (17231790) published An Inquiry into the Nature and
Causes of the Wealth of Nations.
Smith was a lecturer at the University of Glasgow, in his native Scotland. Before
economics, morals and ethics were actually his concern. His first book was The
Theory of Moral Sentiments. For Smith, self-interest and sympathy for others
were complementary. However, he did not believe that charity alone would
provide the essentials for a good life.
Smith stressed that free exchange and competitive markets would harness selfinterest as a creative force. He believed that individuals pursuing their own
interests would be directed by the invisible hand of market prices toward the
production of those goods that were most advantageous to society. He argued
that the wealth of a nation does not lie in gold and silver, but rather in the goods
and services produced and consumed by people. According to Smith, competitive
markets would lead to coordination, order, and efficiency without the direction
of a central authority.
These were revolutionary ideas at the time, but they had consequences. Smith’s
ideas greatly influenced not only Europeans but also those who developed the
political economy structure of the United States. Further, Smith’s notion of the
invisible hand of the market continues to enhance our understanding of why
some nations prosper while others stagnate.
1-1What
is Economics About?
Economics is about scarcity and the choices we have to make
because our desire for goods and services is far greater than
their availability from nature. Would you like some new clothes,
a nicer car, and a larger apartment? How about better grades
and more time to watch television, go skiing, and travel? Do you
dream of driving your brand-new Porsche into the driveway of
your oceanfront house? As individuals, we have a desire for
goods that is virtually unlimited. We may want all of these
things. Unfortunately, both as individuals and as a society we
face a constraint called scarcity that prevents us from being
able to completely fulfill our desires.
Scarcity is present whenever there is less of a good or resource
freely available than people would like. There are some things
that are not scarceseawater comes to mind; nature has
provided as much of it as people want. But almost everything
else you can think ofeven your timeis scarce. In economics,
the word scarce has a very specific meaning that differs slightly
from the way it is commonly used. Even if large amounts of a
good have been produced, it is still scarce as long as there is not
as much of it freely available as we would all like. For example,
even though goods like apples and automobiles are relatively
abundant in the United States, they are still scarce because we
would like to have more of them than nature has freely
provided. In economics, we generally wish to determine only if a
good is scarce or not, and refrain from using the term to refer to
the relative availability or abundance of a good or resource.
Because of scarcity, we have to make choices. Should I spend the
next hour studying or watching TV? Should I spend my last $20
on a new cell phone case or on a shirt? Should this factory be
used to produce clothing or furniture? Choice, the act of
selecting among alternatives, is the logical consequence of
scarcity. When we make choices, we constantly face trade-offs
between meeting one desire or another. To meet one need, we
must let another go unmet. The basic ideas
of scarcity and choice, along with the trade-offs we face, provide
the foundation for economic analysis.
Resources are the ingredients, or inputs, that people use to
produce goods and services. Our ability to produce goods and
services is limited precisely because of the limited nature of our
resources.
Exhibit 1 lists a number of scarce goods and the limited
resources that might be used to produce them. There are three
general categories of resources. First, there are human
resourcesthe productive knowledge, skill, and strength of
human beings. Second, there are physical resourcesthings like
tools, machines, and buildings that enhance our ability to
produce goods. Economists often use the term capital when
referring to these human-made resources. Third, there
are natural resourcesthings like land, mineral
deposits, oceans, and rivers. The ingenuity of humans is often
required to make these natural resources useful in production.
For example, until recently, the yew tree was considered a
trash tree, having no economic value. Then, scientists
discovered that the tree produces taxol, a substance that could
be used to fight cancer. Human knowledge and ingenuity made
yew trees a valuable resource. As you can see, natural resources
are important, but knowing how to use them productively is just
as important.
Exhibit 1
A General Listing of Scarce Goods and Limited Resources
History is a record of our struggle to transform available, but limited, resources into
goods that we would like to have.
Scarce Goods
Food (bread, milk, meat, eggs, vegetables,
coffee, etc.)
Clothing (shirts, pants, blouses, shoes, socks,
coats, sweaters, etc.)
Household goods (tables, chairs, rugs, beds,
dressers, television sets, etc.)
Education
National defense
Leisure time
Entertainment
Clean air
Pleasant environment (trees, lakes, rivers,
open spaces, etc.)
Pleasant working conditions
Limited Resources
Land (various degrees of fertility)
Natural resources (rivers, trees, minerals,
oceans, etc.)
Machines and other human-made physical
resources
Nonhuman animal resources
Technology (physical and scientific recipes
of history)
Human resources (the knowledge, skill, and
talent of individual human beings)
As economist Thomas Sowell points out, cavemen had the same
natural resources at their disposal that we do today. The huge
difference between their standard of living and ours reflects the
difference in the knowledge they could bring to bear on those
resources versus what we can. Over time, human ingenuity,
discovery, improved knowledge, and better technology have
enabled us to produce more goods and services from the
available resources. Nonetheless, our desire for goods and
services is still far greater than our ability to produce them.
Thus, scarcity is a fact of life today, and in the foreseeable
future. As a result, we confront trade-offs and have to make
choices. This is what economics is about.
1-1aScarcity
and Poverty are
Not the Same
Think for a moment about what life was like in 1750. People all over the
world struggled 50, 60, and 70 hours a week to obtain the basic
necessities of lifefood, clothing, and shelter. Manual labor was the
major source of income. Animals provided the means of transportation.
Tools and machines were primitive by today’s standards. As the English
philosopher Thomas Hobbes stated in the seventeenth century, life was
solitary, poor, nasty, brutish, and short.
Throughout much of South America, Africa, and Asia, economic
conditions today continue to make life difficult. In North America,
Western Europe, Oceania, and some parts of Asia, however, economic
progress has substantially reduced physical hardship and human
drudgery. In these regions, the typical family is more likely to worry
about financing its summer vacation than about obtaining food and
shelter. As anyone who has watched the TV reality
show Survivor knows, we take for granted many of the items that
modern technological advances have allowed us to produce at
unbelievably low prices. Contestants on Survivor struggle with even
basic things like starting a fire, finding shelter, and catching fish. They
are thrilled when they win ordinary items like shampoo, rice, and toilet
paper. During one episode, a contestant eagerly paid over $125 for a
small chocolate bar and spoonful of peanut butter at an auctionand
she considered it a great bargain!
The degree to which modern technology and knowledge allow us to
fulfill our desires and ease the grip of scarcity is often taken for
grantedas the castaways on the CBS reality series Survivor quickly find
out when they have to struggle to meet even basic needs, such as food,
shelter, and cleaning their bodies and clothes.
Monty Brinton/CBS Photo Archive/Getty Images
It is important to note that scarcity and poverty are not the same thing.
Scarcity is an objective concept that describes a factual situation in
which the limited nature of our resources keeps us from being able to
completely fulfill our desires for goods and services. In contrast, poverty
is a subjective concept that refers to a personal opinion of whether
someone meets an arbitrarily defined level of income. This distinction is
made even clearer when you realize that different people have vastly
different ideas of what it means to be poor. The average family in the
United States that meets the federal government’s definition of being in
poverty would be considered wealthy in most any country in Africa. A
family in the United States in the 1950s would have been considered
fairly wealthy if it had air conditioning, an automatic dishwasher or
clothes dryer, or a television set. Today, the majority of U.S. families
officially classified as poor have many items that would have been
viewed as symbols of great wealth just 65 years ago.
People always want more and better goods for themselves and others
about whom they care. Scarcity is the constraint that prevents us from
having as much of all goods as we would like, but it is not the same as
poverty. Even if every individual were rich, scarcity would still be
present.
1-1bScarcity
Necessitates
Rationing
Scarcity makes rationing a necessity. When a good or resource is
scarce, some criterion must be used to determine who will receive it and
who will go without. The choice of which method is used will, however,
have an influence on human behavior. When rationing is done through
the government sector, a person’s political status and ability to
manipulate the political process are the key factors. Powerful interest
groups and those in good favor with influential politicians will be the
ones who obtain goods and resources. When this method of rationing is
used, people will devote time and resources to lobbying and favor
seeking with those who have political power, rather than to productive
activities.
When the criterion is first-come, first-served, goods are allocated to
those who are fastest at getting in line or willing to spend the longest
time waiting in line. Many colleges use this method to ration tickets to
sporting events, and the result is students waiting in long lines.
Sometimes, as at Duke University during basketball season, they even
camp out for multiple nights to get good tickets! Imagine how the
behavior of students would change if tickets were instead given out to
the students with the highest grade point average.
In a market economy, price is generally used to ration goods and
resources only to those who are willing and able to pay the prevailing
market price. Because only those goods that are scarce require
rationing, in a market economy, one easy way to determine whether a
good or resource is scarce is to ask if it sells for a price. If you have to
pay for something, it is scarce.
1-1cThe
Method of Rationing
Influences the Nature of
Competition
Competition is a natural outgrowth of scarcity and the desire of
human beings to improve their conditions. Competition exists in
every economy and every society. But the criteria used to ration
scarce goods and resources will influence the competitive
techniques employed. When the rationing criterion is price,
individuals will engage in income-generating activities that
enhance their ability to pay the price needed to buy the goods
and services they want. Thus, one benefit of using price as a
rationing mechanism is that it encourages individuals to engage
in the production of goods and services to generate income. In
contrast, rationing on the basis of first-come, first-served
encourages individuals to waste a substantial amount of time
waiting in line, while rationing through the political process
encourages individuals to waste time and other resources in
competing with others to influence the political process.
Within a market setting, the competition that results from
scarcity is an important ingredient in economic progress.
Competition among business firms for customers results in
newer, better, and less expensive goods and services.
Competition between employers for workers results in higher
wages, benefits, and better working conditions. Further,
competition encourages discovery and innovation, two
important sources of growth and higher living standards.
1-2The
Economic Way of
Thinking
It [economics] is a method rather than a doctrine, an apparatus of the mind, a
technique of thinking which helps its possessor to draw correct conclusions.
John Maynard Keynes
One does not have to spend much time around economists to
recognize that there is an economic way of thinking.
Admittedly, economists, like others, differ widely in their
ideological views. A news commentator once remarked that
any half-dozen economists will normally come up with about
six different policy prescriptions. Yet, in spite of their
philosophical differences, the approaches of economists reflect
common ground.
That common ground is economic theory, developed from
basic principles of human behavior. Economic researchers are
constantly involved in testing and seeking to verify their
theories. When the evidence from the testing is consistent with
a theory, eventually that theory will become widely accepted
among economists. Economic theory, like a road map or a
guidebook, establishes reference points indicating what to look
for and how economic issues are interrelated. To a large degree,
the basic economic principles are merely common sense. When
applied consistently, however, these commonsense concepts
can provide powerful and sometimes surprising insights.
1-2aEight
Guideposts to
Economic Thinking
The economic way of thinking requires incorporating certain
guidelinessome would say the building blocks of basic economic
theoryinto your own thought process. Once you incorporate these
guidelines, economics can be a relatively easy subject to master.
Students who have difficulty with economics have almost always failed
to assimilate one or more of these principles. The following are eight
principles that characterize the economic way of thinking. We will
discuss each of these principles in more depth throughout the book so
that you will be sure to understand how and when to apply them.
1. The use of scarce resources is costly, so
decision-makers must make trade-offs. Economists
sometimes refer to this as the there is no such thing as a free lunch
principle. Because resources are scarce, the use of resources to produce
one good diverts those resources from the production of other goods. A
parcel of undeveloped land could be used for a new hospital or a
parking lot, or it could simply be left undeveloped. No option is free of
costthere is always a trade-off. A decision to pursue any one of these
options means that the decision-maker must sacrifice the others. The
highest valued alternative that is sacrificed is the opportunity cost of
the option chosen. For example, if you use one hour of your scarce time
to study economics, you will have one hour less time to watch television,
spend social networking, sleep, work at a job, or study other subjects.
Whichever one of these options you would have chosen had
you not spent the hour studying economics is your highest valued
option forgone. If you would have slept, then the opportunity cost of this
hour spent studying economics is a forgone hour of sleep. In economics,
the opportunity cost of an action is the highest valued option given up
when a choice is made.
It is important to recognize that the use of scarce resources to produce a
good is always costly, regardless of who pays for the good or service
produced. In many countries, various kinds of schooling are provided
free of charge to students. However, provision of the schooling is not
free to the community as a whole. The scarce resources used to produce
the schoolingto construct the building, hire teachers, buy equipment,
and so oncould have been used instead to produce more recreation,
entertainment, housing, medical care, or other goods. The opportunity
cost of the schooling is the highest valued option that must now be given
up because the required resources were used to produce the schooling.
When a scarce resource is used to meet one need, other competing
needs must be sacrificed. The forgone shoe store is an example of the
opportunity cost of building the new drugstore.
Reprinted with special permission of King Features Syndicate
By now, the central point should be obvious. As we make choices, we
always face trade-offs. Using resources to do one thing leaves fewer
resources to do another.
Consider one final example. Mandatory air bags in automobiles save an
estimated 400 lives each year. Economic thinking, however, forces us to
ask ourselves if the $50 billion spent on air bags could have been used in
a better wayperhaps say, for cancer research that could have
saved more than 400 lives per year. Most people don’t like to think of air
bags and cancer research as an either/or proposition. It’s more
convenient to ignore these trade-offs. But if we want to get the most out
of our resources, we have to consider all of our alternatives. In this case,
the appropriate analysis is not simply the lives saved with air bags
versus dollars spent on them, but also the number of lives that could
have been saved (or other things that could have been accomplished) if
the $50 billion had been used differently. A candid consideration of hard
trade-offs like this is essential to using our resources wisely.
2. Individuals choose purposefullythey try to
get the most from their limited resources. People
try not to squander their valuable resources deliberately. Instead, they
try to choose the options that best advance their personal desires and
goals at the least possible cost. This is called economizing behavior.
Economizing behavior is the result of purposeful, or rational, decisionmaking. When choosing among things of equal benefit, an economizer
will select the cheapest option. For example, if a pizza, a lobster dinner,
and a sirloin steak are expected to yield identical benefits for Mary
(including the enjoyment of eating them), economizing behavior implies
that Mary will select the cheapest of the three alternatives, probably the
pizza. Similarly, when choosing among alternatives of equal cost,
economizing decision-makers will select the option that yields the
greatest benefit. If the prices of several dinner specials are equal, for
example, economizers will choose the one they like the best. Because of
economizing behavior, the desires or preferences of individuals are
revealed by the choices they make.
Purposeful choosing implies that decision-makers have some basis for
their evaluation of alternatives. Economists refer to this evaluation
as utilitythe benefit or satisfaction that an individual expects from
the choice of a specific alternative. Utility is highly subjective, often
differing widely from person to person. The steak dinner that delights
one person may be repulsive to another (a vegetarian, for example).
The idea that people behave rationally to get the greatest benefit at the
least possible cost is a powerful tool. It can help us understand their
choices. However, we need to realize that a rational choice is not the
same thing as a right choice. If we want to understand people’s
choices, we need to understand their own subjective evaluations of their
options as they see them. As we have said, different people have different
preferences. If Joan prefers $10 worth of chocolate to $10 worth of
vegetables, buying the chocolate would be the rational choice for her,
even though some outside observer might say that Joan is making a
bad decision. Similarly, some motorcycle riders choose to ride without
a helmet because they believe the enjoyment they get from riding
without one is greater than the cost (the risk of injury). When people
weigh the benefits they receive from an activity against its cost, they are
making a rational choiceeven though it might not be the choice you or
I would make in the same situation.
3. Incentives matterchanges in incentives
influence human choices in a predictable way.
Both monetary and nonmonetary incentives
matter. If the personal cost of an option increases, people will be
less likely to choose it. Correspondingly, when an option becomes more
attractive, people will be more likely to choose it. This vitally important
guidepost, sometimes called the basic postulate of economics, is a
powerful tool because it applies to almost everything that we do.
Because consumers respond to incentives, store owners know they can
sell off excess inventory by reducing prices.
©Magicinfoto/Shutterstock.com
Think about the implications of this proposition. When late for an
appointment, a person will be less likely to take time to stop and visit
with a friend. Fewer people will go picnicking on a cold and rainy day.
Higher prices will reduce the number of units consumers will want to
purchase. Attendance in college classes will be below normal the day
before spring break. In each case, the explanation is the same: As the
option becomes more costly, less is chosen.
Similarly, when the payoff derived from a choice increases, people will
be more likely to choose it. A person will be more likely to bend over
and pick up a quarter than a penny. Students will attend and pay more
attention in class when the material is covered extensively on exams.
Customers will buy more from stores that offer low prices, high-quality
service, and a convenient location. Senior voters will be more likely to
support candidates who favor higher Social Security benefits. All of
these outcomes are highly predictable, and they merely reflect the
incentives matter postulate of economics.
Noneconomists sometimes argue that people respond to incentives only
because they are selfish and greedy. This view is false. People are
motivated by a variety of goals, some humanitarian and some selfish,
and incentives matter equally in both. Even an unselfish individual
would be more likely to attempt to rescue a drowning child from a
three-foot swimming pool than the rapid currents approaching Niagara
Falls. Similarly, people are more likely to give a needy person their
hand-me-downs rather than their favorite new clothes.
Just how far can we push the idea that incentives matter? If asked what
would happen to the number of funerals performed in your town if the
price of funerals rose, how would you respond? The incentives matter
postulate predicts that the higher cost would reduce the number of
funerals. While the same number of people will still die each year, the
number of funerals performed will still fall as more people choose to be
cremated or buried in cemeteries in other towns. Substitutes are
everywhereeven for funerals. Individuals also respond to incentives
when committing crimesprecisely the reason why people put signs in
their yard saying This house protected by XYZ security.
4. Individuals make decisions at the margin.
When
making a choice between two alternatives, individuals generally focus
on the difference in the costs and benefits between alternatives.
Economists describe this process as marginal decision-making, or
thinking at the margin. The last time you went to eat fast food, you
probably faced a decision that highlights this type of thinking. Will you
get the $1.50 cheeseburger and the $1.00 medium drink, or instead get
the $3.00 value meal that has the cheeseburger and drink and also
comes with a medium order of fries? Naturally, individual decisionmaking focuses on the difference between the alternatives. The value
meal costs 50 cents more (its marginal cost) but will give you one extra
food itemthe fries (its marginal benefit). Your marginal decision is
whether it is worth the extra 50 cents to have the fries. If you pay
attention, you’ll notice yourself frequently thinking at the margin. Next
time you find yourself asking a salesclerk, How much more is this one?
when you are choosing between two items, you are doing a marginal
analysis.
Marginal choices always involve the effects of net additions to or
subtractions from current conditions. In fact, the word additional is
often used as a substitute for marginal. For example, a business
decision-maker might ask, What is the additional (or marginal) cost of
producing one more unit? Marginal decisions may involve large or
small changes. The one more unit could be a new factory or a new
stapler. It is marginal because it involves additional costs and additional
benefits. Given the current situation, what marginal benefits (additional
sales revenues, for example) can be expected from the new factory, and
what will be the marginal cost of constructing it? What is the marginal
benefit versus marginal cost of purchasing a new stapler? The answers
to these questions will determine whether building the new factory or
buying the new stapler is a good decision.
It is important to distinguish between average and marginal. A
manufacturer’s average cost of producing automobiles (which would be
the total cost of production divided by the total number of cars the
manufacturer produces) may be $25,000, but the marginal cost of
producing an additional automobile (or an additional 1,000
automobiles) might be much lower, say, $10,000 per car. Costs
associated with research, testing, design, molds, heavy equipment, and
similar factors of production must be incurred whether the
manufacturer is going to produce 1,000 units, 10,000 units, or 100,000
units. Such costs will clearly contribute to the average cost of an
automobile, but they will change very little as additional units are
produced. Thus, the marginal cost of additional units may be
substantially less than the average cost. Should production be expanded
or reduced? That choice should be based on marginal costs, which
indicate the change in total cost due to the decision.
People commonly ignore the implications of marginal thinking in their
comments, but seldom in their actions. Thus, the concept is far better at
explaining how people act than what they say. Students are often
overheard telling other students that they shouldn’t skip class because
they have paid to enroll in it. Of course, the tuition is not a factor
relevant at the marginit will be the same whether or not the student
attends class on that particular day. The only real marginal
considerations are what the student will miss that day (a quiz,
information for the exam, etc.) versus what he or she could do with the
extra time by skipping class. This explains why even students who tell
others they paid too much for the class to skip it will ignore the tuition
costs when they themselves decide to skip class.
Decisions are made at the margin. That means that they almost always
involve additions to, or subtractions from, current conditions. If we are
going to get the most out of our resources, activities that generate more
benefits than costs should be undertaken, while those that are more
costly than they are worth should not be undertaken. This principle of
sound decision-making applies to individuals, businesses, governments,
and for society as a whole.
5. Although information can help us make better
choices, its acquisition is costly. Information that helps
us make better choices is valuable. However, the time needed to gather
it is scarce, making information costly to acquire. As a result, people
economize on their search for information just like they do anything
else. For example, when you purchase a pair of jeans, you might
evaluate the quality and prices of jeans
