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Economic systems
The economic system in a nation dictates how they answer they key economic questions: who gets what resources; who makes what; and who gets what products? Throughout the span of time there have been attempts to answer these questions in the most logical way as it is the economic system that defines nations political and even moral values as well as either creating or destroying the wealth and welfare of its citizens. However there is currently two main schools of thought on this subject. The communist and the capitalist both the antithesis of the other however are often linked with ideas taken from both sides. So what are they? How do they work? Why is one not seen as obviously better than the other? The answers to these questions will give us an insight on the foundations of modern economics.
A communist government controls the market therefore chooses how to allocate resources, what to produce, how to produce it and how to allocate the produce. These go to the extent of the soviet government which made a list of twenty million products that were wants and needs of their economy and then they chose how to allocate the produce. The most communist governments generally choose the allocation of jobs, homes cars and so on. China is currently a communist government however it has many free markets which help international trade and are giving them substantial growth. This however is peculiar as free markets are at the core of capitalist ideology so is it fair to say china is still communist? Perhaps a deeper look into what capitalism is will help divulge some answers.
Capitalism is an economic system that allows the allocation of resources, production of goods and distribution of goods to be allocated by the market forces of supply and demand. It’s market’s lack government regulation. However this total individual control is rare, most counties with very free markets have what’s know as a night watchman state: the government is used to provide protection against theft, enforces private contracts, assure property rights and provide national defence. This often extends to offering “key” services such as a National Health Service or education service which the government provides using tax funds.
There are may advantages to each system for example in a communist system they try to make sure that every body gets the same advantages of everybody else but still allow for specialization in production thus they can seem fairer as it values all humans as equals and with capitalist systems Vast imbalances in opportunity encourage revolt, which disrupts and destabilizes the system.
Communism can be successful to make sure everybody has adequate basic resources as in environments with plentiful resources; communism provides all members with their survival needs, creating a stable social environment. However in times of scarcity, resentment of non-economically-productive members of society increases, causing a destabilizing effect on the society and economy.
Advantageously in communism members that cannot participate economically - due to disabilities, age, or periods of poor health - can still impart wisdom, emotional support and continuity of experience to the system. This comes freedom from work provides opportunity for some societal members to explore non-economically-productive pursuits, such as pure science, math and non-popular arts. Capitalism however provides a fiscal incentive for the improvement of productivity in all markets; this is especially important in the labour market as it will also improve efficiency of the good and services market. This is unlike the socialist system where people who do a lot easier work are paid the same amount which can be seen as unfair and de-motivates many people. This makes socialism internally unstable.. Also due to a lack of incentives, socialistic systems tend not to be competitive, making them externally unstable.
Another disadvantage of a command economy is that in times of plenty, immigrants are drawn to the free resources offered by the socialistic systems, while potentially adding nothing economically productive. However this can lead to cheap labour in free markets making the cost of production lower increasing efficiency and therefore revenue for companies. Unfortunately this leads to lack of demand for local labourers who expect higher pay which is a problem in the UK because of the streams of workers migrating from within the EU.
The market forces cause prices to tend towards the equilibrium value (the point at which the demand and supply meet) which is the most efficient use of resources as the is neither a surplus of supply or more demand than the supplier are willing to offer. The lack of the demand and supply makes it difficult to judge what people want so there are often needless surpluses of goods and shortages in supply.
It is also calculatedly mathematically that in a non-cooperative game which happens often in business and free economies where people are working against each other to reach a Nash equilibrium requires the pursuit of self-interest, which result in the most stable conclusion. As humans are (arguably) rational being in pursuit of self interest, it can be argued that the most stable system comes from everybody being in competition with each other. A good example of this thinking is the prisoners dilemma where the most safe thing to do is betray. However this has been proven to not work as often as the calculations would predict as humans don’t behave as rationally as possible. In fact the only people that behave almost always in the predicted way are economists themselves.
The pursuit of self-interest aids the society in a way many people aren’t aware of. Adam Smith refers to them as being guided by an “invisible hand”. However if people in power restrict competition the can monopolize enabling them to drive up prices. So which system is fairer? Who is right; Marx who said “The meaning of peace is the absence of opposition to socialism” or Milton who believed “The greatest advances of civilization, whether in architecture or painting, in science and literature, in industry or agriculture, have never come from centralized government.” unfortunately it is not within the scope of this text to give my own thoughts or truly answer this, I believe however that history does tell us that those nations that strive for freedom in every sense of the world often succeed economically.
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Originally submitted by Dadeyemi on TSR Forums.
