Chapter 2 – Economic Systems
Today we are going to talking about economic systems. Before I begin talking about the
economic system let's review what the definition economics is. Remember in economics we
study how individuals and societies seek to satisfy needs and wants through incentives, choices,
and allocation of scarce resources.
We know we have to make choices. We can't have it all. But how is society going to choose
what we do have and what we don’t have. For this we have setup economic systems. These
systems are setup specifically to answer the three economic questions. Now these three
questions are
What should we produce?
How should we produce it?
Who should get it?
There are different ways we can answer these which is going to come up with some different
results. It all depends on economic goals and values.
The first economic system we can talk about is for a traditional economy. Now the traditional
economies are found in the rural underdeveloped countries. These are like the Pygmies of
Congo, Eskimos, and Indian tribes. Very small groups. They do things based on the way they
have always done it. Now the advantage of this is that people have specific roles. There is
security in the way things are done. Men and women usually have very defining roles that are
very gender specific. There is no question about how you are going to do something. They do
things based on the way they have always been done. The disadvantages are that technology is
not used and it is difficult to improve and to increase their standard of living.
The second kind of economic system is a market system. This is also called free market
economy or free enterprise economy. This kind of economy it's the businesses and consumers
who decided what they will produce and purchase and in what quantities. This all comes from
supply and demand. This supply and demand in goods and services is what determines what will
be produced and at what cost. If the people want it, they w ill demand it and, therefore, it will be
supplied. Now the advantage is that you have competition to have the best products and
services. But the disadvantages that can have huge rift between wealthy and poor. There is
nothing to make sure of the equality between the two. Now note that a true market economy
does not exist. Notice I did not discuss the government. In a true market economy the
government would perform very limited functions. In the United States for example, even
though our economy is close to a market economy, we have a government that makes a lot of
decisions for us.
The next type of economy is a command economy. In a command economy the government or
the central priority is going to determine what, how and for whom goods and services are
produced. The government makes all the decisions. They decide what's going to be made, how
it’s going to be made and who's going to get it. There are two types of command economy we
can look at. There is the strong command where government makes all the decisions.
Communism would be example and would include China, Cuba, and the former Soviet Union.
In a moderate Command economy some form of private enterprise exists but the state owns
major resources. This is socialism usually. France and Sweden are examples. The disadvantages
include that you have minimal choices in this type of economy. Because the government is
deciding what to make, they don’t make what just a few people want, they make what the
majority are going to want or what the majority need. There are fewer choices of products and
there is no incentive to produce a better product or to engage in entrepreneurship. The advantage
is that it guarantees an equal standard of living for everyone. This is in theory because
corruption can exist and that can throw this off. There can be less crime and poverty in theory if
the economy does well. Also needs are provided for through the government in theory again
because remember this assumes the government will know what you need and provide it.
The final kind of economy is a mixed economy. Most countries have a mixed economy—United
States, England, Australia (most of the ones in the world). Now this is a combination of a
market and a command economy. In this economy the government takes care of peoples’ needs,
but the marketplace takes care of people’s wants. There is more of a safety net than there would
be otherwise. The advantage is the balance of needs and wants met by government and in
marketplace. The disadvantage is that citizens have to pay taxes and people do not like that.
Again, as I said before, most nations have a mixed economy including the United States,
England, and Australia. Again it includes both things. Look at these pictures here. You have
the welfare business providing a safety net for the poor, but you have a super marketing full of
goods that appeal to everyone. United States falls in this category. So these four types of
economy systems answer the three economic questions:
What should we produce?
How should we produce it?
Who should get it?
But each one is different because each country choices a different type of system because each
country has different goals, different things they value. In a command economy for example,
what the people value most is to have security and have equity or fairness. In a market economy
freedom is valued more than that and economic growth is valued. In a traditional economy
traditions are valued and security is valued. And so, it is not that one economy is better than
another (although people often disagree on that) because each one meets different goals than the
others.