Economic Systems

“The more the state "plans" the more difficult planning becomes for the individual.”

-Friedrich Von Hayek

“The theory of Communism may be summed up in one sentence: Abolish all private property.”

-Karl MarxSlide 1 of 14

In every economy, several key questions must be answered

What should we produce?

Who should produce it and how

will they do it?

Who gets to consume it?

Slide 2 of 14

These questions are answered by an economic system

Each of these questions is answered by the economic system of each country.

An economic system is a set of institutional arrangements and

mechanisms that are designed to respond to the economizing problem.

In other words, these systems help us allocate our scarce resources to

determine what is produced, how it is produced, and who gets the output!

In some cases, this system relies on a

central government or

authority to make all these

decisions.

In other cases, the

market makes these

decisions.

We’ll cover this concept

now and revisit it later

in this presentation.

Slide 3 of 14

The concept of an economic systems is a Key Learning Outcome. These systems

help us decide how to allocate resources!

Economic Systems have two polar extremes

The Market System involves private ownership of resources and the use of

markets to direct economic activity. The government is not the dominant force in

determining what is produced, the market is.

The polar opposite alternative is a Command System. It involves

government ownership of resources and central planning to direct production.

The government is the dominant force in determining what is produced.

Slide 4 of 14

A command economy

There are numerous examples of recent or current command economies.

1980 China

North Korea

U.S.S.R. Slide 5 of 14

There are some advantages of a Command Economy

• All factors of production are used to produce goods deemed important to “the state”.

• A planned economy is typically immune from the business cycle.

This allows large projects to easily be undertaken.

There are few economic “ups and downs” given that economic activity is directed.

Slide 6 of 14

There are also disadvantages

• Shortages. An inaccurate level of resources could be allocated to certain goods or services

• Command systems provide no incentive for innovation

• Individual desires are secondary to societal desires

That means people will wait in line!

Why invent something if you won’t reap the rewards!

You may want to be a doctor, but if the state needs a railroad, you might end up helping to build it!

Slide 7 of 14

A classic characteristics of a command economy: lines

• At the end of the U.S.S.R.’s existence, the average soviet waited in line for 1-2 hours per day.

Source: Schwarz, Barry. Waiting, Exchange, and Power, The Distribution of Time in Social Systems

• It was estimated that the Soviet population spent 30 billion hours a year in line.

That is the equivalent of idling 14 million workers a year.

Sold Out

Slide 8 of 14

The market system also has advantages and disadvantages

Advantages:

Production decisions are made by individuals based

on price signals.

The system gives strong incentive for innovation.

Proponents would say that this guy is the best guy at knowing

how many hot dogs to bring….not a central

government.

If you can invent it and patent it, it is yours and you earn the profit from

its sale.

Slide 9 of 14

… and disadvantages

Disadvantages:

Income disparity – big differences in income from rich to poor often develop.

Social wants and needs are secondary.

Proponents would say that those that take the risk

deserve the benefit.

For example, this system is less capable

of handling environmental issues.

Slide 10 of 14

• One way to measure this is by reviewing the Economic Freedom Index– Published by the Heritage Foundation– Measures ten factors of economic

freedom including trade, business conditions and property rights

One key aspect of a capitalist society is that it has an active but limited government

The U.S. does well in this measure

The higher the score, the more “Economically free” a country is!

North Korea does not. Slide 11 of 14

2007 Economic Freedom Index

Based on this measure, the U.S. is one of the most “economically free” countries.

That suggests that the US government is limited (relatively speaking).

Slide 12 of 14

In summary

Societies must answer some fundamental questions: What is produced, how is it produced, and who gets to consume it.

These questions are answers with each society’s economic system.

In some cases, as in a market economy, individuals are free to make these

decisions on their own.

In other cases, as in a purely command economy, these decisions are made by a

central authority.

Slide 13 of 14

So…Is the U.S. a pure market system?

No, our government intervenes in some cases to correct for issues that the market may ignore.

A pure market system would not be interested in

providing food stamps.

A pure market system would not subsidize public

transit to reduce traffic.

A pure market system would not care for elderly

that were unable to provide for themselves.

Slide 14 of 14