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Man and Society
Topic 10
Social Institutions II: Economic Institutions
Dr. Yuki Miyake
School of Social Innovation
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Today’s Topics
• Major Economic Institutions: Capitalism and Socialism
• Other economic institutions
• Deindustrialization
• Microfinancing
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Major Economic Institutions: Capitalism and Socialism
Economic Systems
• Through industrial revolution mainly in England during 1760 and 1830, our society
entered into industrial society.
• Before industrial revolution, it is called pre-industrial society.
• Basic types of economic system in pre-industrial society: hunting-and-gathering societies,
and agrarian societies.
• Basic types of economic system in industrial society: capitalism and socialism
Capitalism
• In preindustrial societies, land was virtually all wealth.
• In the industrial society, people need investment.
• Thus, bankers, industrialists, and those who have money became the most powerful
economic source.
• Capitalism is an economic system in which the means of production are held largely in
private hands.
• Its main incentive for economic activity is the accumulation of profits. 2
• In 18th
century, the main principle of capitalism was laissez-faire (= let them do)
promoted by Adam Smith.
• Under the principle, people could compete freely, with minimal government intervention
in the economy.
• Today, the form of capitalism has changed a little.
• Even today, private ownership and maximization of profits are the most important
characteristics of capitalism.
• But different from laissez-faire, government regulation is often found in economic
activities in order to protect consumers, workers, and company’s investors etc.
Monopoly in Capitalism
• Today, different from the era of laissez-faire, a monopoly also exists.
• Monopoly is a practice where a single business firm controls a certain market from
pricing, quality, to availability.
• In many industries, a few companies dominate the field and keep new enterprises from
entering the market place.
• (e.g. ____________________ monopoly of computer business)
Figure 1 and 2: Monopoly by Microsoft Corp.
• Under the era of globalization today, multinational corporations have spread the
capitalistic pursuit of profits around the world.
• Developing countries are often not ready for sudden inflow of foreign capital, and it can
get damage.
Socialism
• Socialist theory was refined by Karl Marx and Friedrich Engels.
• A socialist economic system attempts to eliminate economic exploitation of the working
class that emerged through the industrial revolution.
• Thus, under socialism, means of production and distribution are owned collectively
rather than privately.
• Its basic objective is to meet people’s needs rather than to maximize profits. 3
• Socialists disagrees laissez-fair philosophy.
• Instead, they think that the central government should make basic economic decision as a
representative of the people.
• Therefore, government owns all major industries.
• For the social service program, socialist countries offer government-financed medical
care to all citizens.
• In theory, the profit from collectivity is used for health care, housing, education, etc.
Communism
• Marx believed that socialist states would eventually “wither away,” and evolve into
communist societies.
• Under communism, all property is communally owned and no social distinctions are
made on a basis of people’s ability to produce.
• Recently, the Soviet Union, China, Vietnam, Cuba, and nations in Eastern Europe sought
for communist systems, but have not attained its ideal type yet.
Notes: Economic system today
• Today, in practice, the economies of most countries are a mix of elements from three
major systems: capitalism, socialism, and communism.
Other Economic Institutions
Changing Economies
• So far, capitalist societies have grown toward concentration of ownership by giant
corporations, especially multinational corporations.
• However, today, there are two different trend are observed, showing change in the
economy.
• Those are, deindustrialization in the developed countries and the rise of microfinancing
in developing countries.
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Deindustrialization
• Deindustrialization refers to the systematic, widespread withdrawal of investment in
basic aspect of productivity, such as factories.
• Giant corporations move its factories to more profitable place such as other part of the
country, or out of the country (offshoring).
• This means the change of the targets of investment, and need for labor decreases along
with automate production by technological advance.
• Deindustrialization often involves relocation, but it often takes a form of corporate
restructuring as well, when companies seek to reduce costs in the face of growing
worldwide competition.
• A corporation may reduce or abandon less productive divisions. Wages and salaries may
be frozen.
• Increasing automation also means the end of some work. These are also called as
downsizing.
Figure 4: What are the differences between outsourcing, offshoring and nearshore
outsourcing?
Figure 5: US IT Company’s Offshoring in India
Figure 6: New business services jobs moving to low-cost geographies, 2012-2016
Impact of Deindustrialization
• The impact of deindustrialization is serious.
• Plant closings lead to high unemployment in a community.
• The unemployed people have a problem to pay house or car loan, giving up buying
health insurance or saving for retirement, or even giving up another child.
• Stores in the community also lose customers.
• The local governments decreases tax income and have to cut social services.
Microfinancing
• Microfinancing means lending small sums of money to the poor in developing countries
so that they can invest their small business and come out of the poverty.
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• Borrowers use the money to buy tools, equipment, etc. (Bamboo to make stools, yarn to
weave into cloth, or cows to produce milk.)
• The recipients are poor people who ordinarily are not able to qualify for banking
services.
• Typically, the loans are less than $100, often as little as $12.
• Microfinancing was started by the Grameen (means village) Bank founded by economist
Muhammad Yanus in Bangladesh.
• In the midst of famine in 1976, he lent $27 to a group of villagers asked him for help. It
was a starting point.
Figure 7: Professor Yanus talk with some of Grameen Bank's borrower
Figure 8: Microloans helped this small textile business in Bangladesh
Figure 9: Professor Muhammad Yanus, a founder of the Grameen Bank
• The Grameen Bank has now extended credit to nearly 7 million people.
• The idea has spread, and has been supported by multinational organizations such as IMF
or profit banks like Citigroup.
• In total, it is estimated that microfinancing has reached to 60 million people in the world
by 2007.
• It is said that 90% of the recipients of microcredit are women.
• Women’s economic status is found to be strongly related to the well-being of their
children, and the key to a healthy household environment.
• For these contributions to society, the UN proclaimed the international Year of
Microcredit in 2005.
• Furthermore, Mr. Muhammad Yanus was awarded the Novel Peace Prize in 2006.
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