The Slovak Economy Today: How Capitalistic Is It?

Throughout the history of mankind, economic systems have evolved in every society to deal with the economic choices that were forced upon man by the scarcity of resources. One type of economic system that has evolved is the system of pure market capitalism. Forms of capitalism existed as early as the Middle Ages in the Middle East and parts of Europe (Buchholz, 1999; Capitalism, 2007; The History of Capitalism, 2007).

Modern industrial capitalism had its beginnings in the middle eighteenth century with the beginning of the industrial revolution which began in Britain and spread from there to other parts of the world. In his 1776 book, The Wealth of Nations, Adam Smith touted the benefits of the individual pursuing his own self-interest in a capitalistic market system. According to Smith, by pursuing his own self interest in a market economy man “intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no 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.”

By the end of the 19th century, the evolution of capitalism gave rise to the corporate form of ownership, a rise in the size of business firms, and a decline in competition. Beginning in the 1870s industrialized economies began to experience wide swings in the the level of economic activity. Periods of economic prosperity were followed by periods of recession and depression. The business cycle was born. Beginning in 1929 and continuing through the 1930’s the entire capitalist world was plagued by a prolonged period of economic depression. Followers of Karl Marx confidently predicted the demise of capitalism during much of this period (Buchholz, 1999; Capitalism, 2007; The History of Capitalism, 2007).

It appeared that the prophecy of the Marxists might indeed become a reality with the occurance of the Russian Revolution in 1917. Eventually, this revolution lead to the creation of a statist socialist system. Private ownership and control of the resources was abolished and the state established total control over the economy. By the late 1940’s various types of statist systems were established in the countries of Eastern and Central Europe and in China (Buchholz, 1999; Capitalism, 2007; The History of Capitalism, 2007).

Between the mid 1940’s and 1989 (the period known as the “Cold War”) there was intense competition between U.S. market capitalism and Soviet style statism. However, by the end of the 1980’s, Soviet style statism or socialism collapsed. In the 1990’s the trend nearly everywhere has been toward the adoption of the capitalistic market economic system (Heyne, Boettke, & Prychitko, 2006).

In this assignment we will review the article entitled Capitalism: Theory by Houman Shadab to become familiar with the main characteristics of capitalism. Then we will go to the Heritage Foundation’s Index of Economic Freedom. We will first examine the factors that the Heritage Foundation uses to determine the degree of economic freedom in a country. Then we will look at the degree of economic freedom in Slovakia compared to other countries in the world.

Thinking About It As An Economist

After reading the article Capitalism: Theory by Shadab answer the following questions:

1. What does the author mean when he says that capitalism is based on the principle of individual rights?

2. According to the author, how does the individual benefit others when he pursues his own self-interest?

3. According to the author, why is capitalism the only moral social system?

4. According to the author, what is the proper role of government in a capitalist economic system?

5. According to the author, what are the only acceptable limits that can be placed on man’s freedom in a capitalist economic system?

6. According to the author, what type of economic system is the opposite of the capitalist economic system? How does the author describe this system?

Go to the Heritage Foundation’s Index of Economic Freedom site and click on the tab entitled “Explore The New Methodology” on the left hand side of the page. After reading this selection answer the following question:

7. List and briefly describe the 10 economic freedoms that the Heritage Foundation uses to create the Index of Economic Freedom.

Go to the Heritage Foundation’s Index of Economic Freedom site and click on the tab entitled Executive Summary and answer the following questions:

8. Refer to Chart 4. What is the relationship between economic freedom and GDP per capita?

9. Refer to Table 1. What percentage of all countries are free, mostly free, or moderately free?

10. Refer to the table entitled Index of Economic Freedom World Rankings.

a. Which five countries are the most economically free?
b. Which five countries are the most economically unfree?
11. Refer to the table entitled Index of Economic Freedom World Rankings. Where does Slovakia rank in terms of the economic freedom index?

12. Refer to the table entitled Index of Economic Freedom World Rankings. Using the 10 measures of economic freedom compare Slovakia with the Czech Republic, Hungary, and Austria, and Ireland.

13. Download the English language version of the report. Go to pages 335-336 of the report. Answer the following questions:

a. In what areas of economic freedom does Slovakia rank high?
b. In what areas of economic freedom does Slovakia rank low?

References

Buchholz, Todd G. (1999). New Ideas From Dead Economists. New York: Penguin Putman.

Capitalism. (2007, October 22). In Wikipedia, The Free Encyclopedia. Retrieved October 23, 2007 from http://en.wikipedia.org/wiki/Capitalism.

Heyne, Paul, Boettke, Peter, & Prychitko, David. (2006). The Economic Way of Thinking. Upper Saddle River, New Jersey: Pearson/Prentice Hall.

Kane, Tim, Holmes, Kim R. & O’Grady, Mary Anastasia. (2007). 2007 Index of Economic Freedom. Retrieved October 21, 2007 from The Heritage Foundation Web Site: http://www.heritage.org/research/features/index/index.cfm.

Shadab, Houman. (2007). Capitalism: Theory. Retrieved October 23, 2007 from http://www.civilitas.gr/books/ok/Capitalism.pdf.

Smith, Adam. The Wealth of Nations. The Literature Network. Retrieved October 20, 2007 from http://www.online-literature.com/author_index.php.

The History of Capitalism. (2007, October 12). In Wikipedia, The Free Encyclopedia. Retrieved October 23, 2007 from http://en.wikipedia.org/wiki/History_of_capitalism.

Smoking and Cigarette Taxes in the Slovak Republic

According to news reports by TMCnet and the Slovak Spectator, the Slovak cabinet, in August 2007, proposed a bill to raise the excise taxes on cigarettes beginning in 2008. If the excise tax proposal is approved by the parliament, the minimum excise tax per pack of cigarettes will increase from SK34 to SK42, a 23.5 percent increase. The price of a pack of the most popular brands of cigarettes will increase from SK50 to SK60. In 2006 there were 4.3 billion (215 million packs) of cigarettes sold in the Slovak Republic. According to the Finance Ministry, if the proposal is approved, it is expected to generate additional tax revenue in the amount of SK1.2 billion. In 2006 the Slovak government collected about SK11.5 billion in revenue from the excise tax on tobacco.

According to data available from the World Health Organization available at GLOBALLink, a website maintained by the International Union Against Cancer, 41.1 percent of Slovak males and 14.7 percent of Slovak females ages 15 and older were daily smokers in 1998. For Slovak youths between the ages of 15 and 16, 35 percent of males and 26 percent of females were daily smokers in 1999.

In an April 2005 article entitled “ Life in EU without tobacco?” The Slovak Spectator, reports the results of a poll conducted by the Slovak Statistical Office in December 2004. The poll results indicate that Slovaks accept tobacco and alcohol as legal drugs. The poll results also indicate that as many as 28 percent of Bratislava’s youth are daily smokers and that that smoking is most prevalent among blue collar workers and the unemployed. Smoking is least prevalent among women and senior citizens.

A Gallop Organization world poll entitled “Smoking Rates Around The World“ that was conducted in August 2007 found that 31 percent of Slovaks aged 18 and older indicated that they smoked the day before the interview. The incidence of smoking was 28 percent in all European Union countries combined, 24 percent in the United States, 33 percent in the Ukraine, and 37 percent in Russia.

In an article entitled “Why do Europeans Smoke More Than Americans?” The Economist summarizes the research on this question by Harvard University economists David Cutler and Edward Glaeser. According to The Economist article, the two economists concluded that Americans smoke less because they are more likely to believe that smoking is harmful to their health than are Europeans. The authors conclude that between 20 and 40 percent of the differences in smoking rates between Americans and Europeans can be attributable to these belief differences.

Proponents of higher excise taxes on cigarettes argue that, in addition to generating revenue for the government, the tax serves to reduce the incidence of tobacco use, especially among younger people. They argue that the higher tax increases the price of cigarettes. Because of the higher cigarette prices many young people who already smoke will stop smoking and those who are not smoking will not begin to smoke.

Opponents of the higher excise taxes argue that higher cigarette taxes lead to increased black market activity in cigarettes. They also argue that the higher taxes will unfairly burden lower income groups.

Thinking About It As An Economist

1. Use demand and supply analysis to explain how the increased tax on cigarettes would affect the market for cigarettes in the Slovak Republic. Illustrate your answer graphically.


2. If the government wants to generate substantial revenue from the cigarette tax, would it be best if the demand for cigarettes were highly elastic or highly inelastic given supply elasticity? Explain and illustrate your answer graphically.
   
   
3. If the goal of the cigarette tax were to reduce smoking among the Slovak population, would it be best if the demand for cigarettes were highly elastic or inelastic? Explain and illustrate your answer graphically?



4. Would an increased tax on alcohol affect the demand for cigarettes? Explain.



5. Most studies of the demand for tobacco products in middle income countries have found the overall price elasticity of demand to range from -.5 to –1 (Chaloupa, et al, 2003). Assume that the demand for cigarettes in Slovakia is -.75. If the average price of a pack of cigarettes increases from SK50 to SK60, by how much would the quantity demanded of cigarettes change as a result of the tax?



6. The price elasticity of demand for tobacco products in high income countries has been estimated to range from -.25 to -.5 (Chaloupa, et al, 2003). Recall from question 5 that the estimated demand elasticity for middle income countries is between -.5 and –1. Why do you think the demand for cigarettes is less elastic in high-income countries than in middle-income countries?



7. Do you think that the elasticity of demand for cigarettes for young Slovaks would be higher or lower than the overall elasticity of demand for cigarettes in Slovakia? Explain your answer.



8. Is the proposed cigarette tax progressive, regressive or proportional? Explain.



9. Does cigarette smoking entail any external (spillover) costs? If yes, identify them.



10. If cigarette smoking imposes external (spillover) costs, will the free market result in overproduction, underproduction, or optimal production of cigarettes? Illustrate your answer graphically.



11. Why do you think that a larger percentage of Americans than Europeans believe that smoking is harmful to their health?



12. In addition to raising the cigarette tax, what other methods could be used to reduce cigarette smoking among the Slovak population?
    
    Learning More About It
    
    The review article entitled “ Alcohol and Cigarette Taxes” by Grossman, et al, (1993), which is cited in the reference list below, provides a detailed review of the economic literature dealing with most aspects of tobacco and alcohol use and taxation. The article is written in non-technical language and contains a detailed review of the literature on the issues of alcohol and tobacco use and taxation. The article also contains a very detailed list of references. The article was published in 1993. Nevertheless, since it is relatively easy to read and addresses most of the major economic aspects of alcohol and tobacco use and taxation, it is an excellent source for students who wish to become more informed about the economic aspects of alcohol and cigarette use and taxation.
    
    References
    
    Cabinet Agrees To Raise Tobacco Tax Next Year. (2007, August 22). The Slovak Spectator. Retrieved September 24, 2007 from http://www.slovakspectator.sk/.
    
    Chaloupka, Frank J., Hu, Teh-wei , Warner, Kenneth E., Jacobs, Rowena & Yurekli Ayda. (2003). The Taxation Of Tobacco Products. (chapter 10). The World Bank. Retrieved September 27, 2007 from http://www1.worldbank.org/tobacco.
    
    Grossman, Michael, Sindelar, Jody, Mullahy, John, & Anderson, Richard. (1993). Policy Watch: Alcohol And Cigarette Taxes. The Journal of Economic Perspectives, 45(4), 211-222.
    
    Jurinová, Martina. (2005, April 11). Life In The EU Without Tobacco? The Slovak Spectator. Retrieved August 29, 2007 from the http://www.slovakspectator.sk/.
    
    Slovak Cigarette Prices To Grow As Of 2008. (2007, August 27). TMCnet NEWS. Retrieved September 24, 2007 from http://www.tmcnet.com/.
    
    Smoking Rates Around The World. (2007, August 17). The Gallop Organization. Retrieved September 26, 2007 from http://www.gallupworldpoll.com/.
    
    Tobacco Control Country Profiles 2003: Slovakia. (2003). Global Link.
    Retrieved September 27, 2007 from http://globalink.org/.
    
    Why Do Europeans Smoke More Than Americans? (2007, April 27). The Economist Print Edition. Retrieved October 10, 2007 from http://economist.com/finance/displaystory.cfm?story_id=E1_GRGTRQR.