COMMON VOCABULARYWHAT IS POVERTY?

INSTITUTIONS OF CAPITALISMMARKET ECONOMIES

Capitalism and Institutions

Key Vocabulary

Poverty: Living on less than $1 a day- absolute

Purchasing Power Parity- relativeU.S. official poverty line= $13 a dayIncome=how much you makeWealth=stock measure

Key Vocab Cont’

GDP- Gross Domestic Product= Dollar value of goods & services produced in country

GNI- Gross Nat’l Income= money earned by an individual on commodities bought/sold

GDP is misleading; only an average But…strong correlation to quality of life Easier to measure than quality of water or air

Low, Middle, and High Income Nations

Poverty Lines, 2001

David Dollar, Development Research Group, World Bank. “Capitalism, Globalization and Poverty.” unpublished paper,written for The Foundation for Teaching Economics, March, 2003, p. 25.

David Dollar, Development Research Group, World Bank. “Capitalism, Globalization and Poverty.” unpublished paper, written for The Foundation for Teaching Economics, March, 2003, p. 25.

David Dollar, Development Research Group, World Bank. “Capitalism, Globalization and Poverty.” unpublished paper, written for The Foundation for Teaching Economics, March, 2003, p. 24.

Number of People Living on Less Than $1/day(millions)

1987 1990 1998

East Asia & Pacific

417.5 452.4 267.1

Sub-Saharan Africa

217.2 242.3 301.6

http://www.worldbank.org/poverty/data/trends/income.htm#table1

Top quintileof nations

Avg.GNI per capita lowest 10% share lowest 20% share

Luxembourg 53290 4.0 9.4

Norway 36690 4.1 4.1

United States 36110 1.8 5.2

Switzerland 31840 2.6 6.9

Denmark 30600 3.6 9.6

Ireland 29570 2.5 6.7

Canada 28930 2.8 7.5

Austria 28910 4.4 10.4

Netherlands 28350 2.8 7.3

Belgium 28130 3.7 9.5

Australia 27440 2.0 5.9

Japan 27380 4.8 10.6

France 27040 2.8 7.2

Germany 26980 3.3 8.2

United Kingdom 26580 2.6 6.6

Italy 26170 3.5 8.7

Finland 26160 4.2 10.0

Sweden 25820 3.7 9.6

Spain 21210 2.8 7.5

New Zealand 20550 0.3 2.7

Israel 19000 2.8 6.9

Greece 18770 3.0 7.5

Total 625520 68.1 168

Avg (total / 22) $28,433 3.1% 7.6%

Average Income Shares of the Poorest 10% of Nation’s Population Among Quintiles of World Nations Ranked by Index of Economic Freedom

Economic Growth improves the lives of the poor by making the pie bigger

Bigger "slices" mean higher standards of living

Consumer durables

Available to % of non-poor people in U.S.

population

Available to % of poor people in U.S.

population

Refrigerator 99.5 97.9

Stove 99.5 97.7

Color television 98.5 92.5

Telephone 97.2 76.7

Washing machine 92.7 71.7

Clothes dryer 87.3 50.2

Microwave 89.8 60.0

Dishwasher 58.3 19.6

Freezer 46.0 28.6

VCR 86.2 59.7

Air conditioner 71.9 49.6

Personal computer 28.3 7.4

Institutions of Capitalism

Institutions are “rules of the game”“rules of the game” are formal and informalShape incentives and outline expected,

accepted forms of behavior4 Institutions:

1. Private Property Rights 2. Markets 3. Rule of Law 4. Entrepreneurship

Private Property Rights

Definable, Enforceable & transferableRight to freely use and transfer possessionsDefending property rights critical10% of African land is definable and plottedWhat isn’t owned by people simply “Uganda”

or “Kenya”Peru villages- Hernando De Soto- economist-

someone at home 24/7Prop. Rights lead to incentives- value in

propertyProp. Rights lead to investment- allows people

to obtain debt, collateral is great benefit

Rule of Law

Rule of Force= AnarchyRule of Men= laws are enforced at goodwill

of enforcer (very few who can change laws)Rule of Law= both governed and governing

are subject to same set of lawsChange in laws impact our vision of future-

willingness to invest

Markets: Good or Evil?

Market: institution most associated w/ capitalism; also vilified as exploitive

Although impersonal (business is cut-throat, profit driven) not necessarily exploitive

Paul Heyne argues in his work, “Moral Criticisms of Markets” in 1995 that although Capitalism may produce have and have-nots there is not a better alternative- Excerpt below:

“There have in fact been massive experiments in this century with societies committed to the abolition of . . . production through the impersonal transactions of the market system. If history ever pronounces ‘final verdicts,’ it pronounced one in 1989 on these experiments. Market systems do not produce heaven on earth. But attempts by governments to repress market systems have produced something in the 21st century something very close to hell on earth.”

Competition

Competition: profit driven; scarcity of goods leads to interaction between buyer and seller

Adam Smith “Invisible Hand”- competition is positive for buyer and seller

Critics argue it expands the claws of rich at expense of poor

Heyne argues that competition would exist in any form of economic institution Scarcity will always exist; competition exists because of

scarcity

“Another common moral objection to market systems is the objection to competition, usually thought of by the critics as an interpersonal struggle for superiority. . . . [It is instead]. . . a process – often completely impersonal . . . – of trying to satisfy whatever criteria others are using to allocate scarce goods. Scarcity means that it is not possible for everyone to have as much as they would choose to have if they were not required to make any sacrifice to obtain it. Scarcity therefore necessitates rationing, which means allocation by some set of discriminatory criteria. It follows that competition is the unavoidable accompaniment of scarcity and will consequently be found in every human society, whatever the form of its economic organization.

The question is not whether we shall have competition, but what forms it will take (emphasis added). That will be determined by the criteria used to allocate scarce goods. . . . [The]. . . criteria in a market system are usually monetary: people compete largely by offering to pay more money for what they want to obtain and by agreeing to accept less money for what they are trying to supply.

When governments . . . set up alternative systems for allocating scarce goods, competition does not stop. It merely takes new and almost always more destructive forms. . . . Even a transformation of human nature would not eliminate competition. If everyone in the society became a saint, competition would still exist because the saints would be committed to different charitable projects, and they would consequently have to devise some (saintly) way to decide how many resources to allocate to each project. Nothing can abolish competition except the abolition of scarcity. “ (Heyne 3-5)

Voluntary Exchange

Market transactions entered freely by buyer and seller

Exchange is by choice (except in cases of fraud, deception or buyer mistake)- both parties better off

Each has given up something of lesser value (personal) to obtain something of greater value

Market Competition Variables

# of firms in the marketDegree to which different products from

different producers are regarded by consumers- good or bad

Relative ease and availability of gathering information about market

Relative ease and exit from market Grain market highly competitive- many

growers, many buyers Diamond market not highly competitive

Competitive Market Economies

Best option at reducing povertyGoods & services available at lower pricesGoods are of better quality- competition forces

improvement of productsCompetition leads to more innovation; more

innovation leads to cheaper costs (technology)Producers seek lower-cost methods of production

Goods less expensive, people/consumers work less to pay for each item

What was luxury 20 years ago- more available today; cell phone costs 2% labor time as opposed to 1984

Figure 1

Source:   W. Michael Cox and Richard Alm, "Time Well Spent."   1997 Annual Report of the Federal Reserve Bankof Dallas.   http://www.dallasfed.org/fed/annual/1999p/ar97.pdf (accessed October, 2003)

Production & Job Openings

Increase in production leads to more jobsMore opportunity for poor to increase incomes as

workers As economies grow, so to does labor needsLabor needs leads to higher wages (supply and

demand)- producer needs more, must pay higher wages Sharp decline of child labor as family income increases Children in developing world can go to school 1993 survey: income of poorest 10% of people in Vietnam

increased 50% Led to increase in school enrollment & decrease in child

labor

What does it all mean?

You are ultimately the judge of the good and bad of globalization.

Do you look at the merits of competitive balance, open markets and increased production as a positive construct of society or do you view it as exploitation?