Economic Systems (an Economic Issue)
Let’s start our discussion of economic issues by gaining an understanding of what constitutes an economic system. In general, an economic system is a mechanism that provides for the production, distribution and consumption of goods and services for a given society. Different societies may have similar or vastly different economic systems. Some economic systems may work better for some individuals than for other individuals, and some may just simply work better than others.
No matter what type of economic system we talk about, it must have methods for answering three basic questions. These questions are as follows.
- What should be produced?
- How should it be produced?
- Who should get what is produced?
Different economic systems will have different methods of answering these questions, even if they end up coming up with the same answers. Thus, we can determine what type of economic system a society has by looking at what methods it uses to answer these questions.
In principle, there are only two pure basic types of economic systems. These are the Market Economy and the Command Economy. A mixture of these two pure basic economic systems is considered a third type called a Mixed Economy. A Traditional Economy is often considered a fourth type of economic system; even though its roots are based on one of the other types and only differs from them is in how deeply the economic system has become engrained in the society's culture.
Each of these economic systems has its advantages and its disadvantages. In a Mixed Economy, an effort is made to eliminate the disadvantages of the other systems, but its advantages are often not as strong as those for the other systems. Nevertheless, in practice, almost every economic system is some version of a Mixed Economy. Therefore, for the economy of a given society, it is usually just a matter of determining which elements have been taken from the two pure economic systems and to what degree each element is used.
A Market economy is often referred to as an Individual or a Consumer based economy and is generally associated with capitalism. It is essentially based on the self-interest of the individuals in their society. Consumers and their buying decisions drive the economy through supply and demand.
The idea behind this economic system is that consumer demand will encourage businesses to supply the needed goods and services. Therefore, in this type of economic system it is all left up to the consumer to answer the basic economic questions while the government takes a “laissez faire” or hands-off approach to economics.
In theory, this economic system can efficiently direct our resources towards what is needed by the given society. If we want more of a given good or service, our rising demand will outstrip the supply and cause the price to rise. The prospect of higher profits will encourage businesses to supply more of this good or service, which will eventually stabilize the supply and demand at an appropriate level and price.
Then, when prices stabilize, suppliers will be encouraged to keep costs down and to more efficiently use our resources so that they will be more profitable and stay in business. With the prospect of big payoffs, this system also encourages risk taking and innovation, which helps to grow the economy.
The biggest disadvantage of this system is the lack of protection for buyers, for our resources, and for our environment. When there are no limits on economic activity, greed can overtake some individuals, who will be free to do whatever they want to make money. Therefore, for too many of these individuals, their motto might be “caveat emptor” or “let the buyer beware”. These individuals may also not care about misusing or depleting our limited resources, or damaging our environment, since protecting them would eat into their profits.
This system can also create a wide difference in personal income, with a few extremely wealthy individuals and many of us who remain poor.
A Command Economy is often referred to as Centrally Controlled or a Planned Economy. In this type of economy, some part of the government would own all businesses and would direct all economic activity. This type of economic system is usually associated with a political movement such as communism.
In this system, government central planners would be in complete control of the decisions about what would be produced, how it would be produced and who would get what is produced. The idea is that the use of resources could be planned in such a way as to make the best use of those resources for the benefit of all the given society’s citizens.
In theory, having everyone in their society work together towards the same economic goals could make for a strong and efficient economy that could provide for them. The government would make sure that whatever was needed would be produced and that its resources were allocated in the most efficient manner. Everyone would have the same opportunity to earn and to buy as much as everyone else.
One problem with a Command Economy is that all individuals would earn about the same no matter how much effort they put into their jobs, so mediocrity and poor performance would often be rewarded. Although, in theory, there may not be a big disparity in the incomes of the wealthiest and the poorest in this economic system, the average person would still have less than in a Market Economy.
This system also lacks flexibility and variety. The central planners cannot see all the current changes taking place in their society nor forecast all future changes. With prices fixed and production goals to meet, there is no incentive to produce a wide variety of types and styles of goods and services nor to take risks, and innovation would be discouraged. Since consumers do not have much choice in what to buy, their purchases do not provide the government with any real feedback about what they really want.
In a Mixed Economy, the government would play a bigger role than in a Market Economy and the consumer would play a bigger role than in a Command Economy. Today, most economies are Mixed Economies. The Market Economies have moved toward more government control to better protect its consumers, its resources and its environment. The Command Economies have moved toward more consumer freedoms to encourage productivity and innovation.
In theory, the right mix of free enterprise and government control could eliminate the disadvantages of the other systems while keeping most of their advantages. Risk taking, innovation and productivity would all be rewarded, so individuals could improve their personal economic condition. Consumers could have a wide variety of types and styles of goods and services while being protected from poorly made or dangerous products. Supply and demand would encourage the efficient use of our resources while the government protects them and our environment for future generations.
In practice, when a society moves towards a Mixed Economy, they begin to lose some of the advantages of their Market Economy or Command Economy while not eliminating their disadvantages completely. In the United States, there is a constant battle between those who want more government regulation and those who want less regulation for our mainly Market Economy. In Russia and in China, there have been backlashes against the inequalities resulting from their moves toward more Market based economies and a move back toward Command Economies.
A Traditional Economy is often referred to as a Family or a Community based economy. At one time in their past, the individuals in their society may have evolved their economic system into a Market, Command or Mixed Economy, in response to the conditions that existed then. Over time, the economy became intertwined with the cultural values and norms of the society. If the economy worked, then that society’s culture provided little incentive for and a lot of resistance to change. That culture ends up determining what must be produced, how it will be produced, and who will get what is produced.
In the past, there may have been very good reasons for doing things in certain ways. Over time, the economy would have been tested many times and the kinks would have been worked out. Since the economic system had proven to work in the past, then that society is likely to continue doing things the same way. If the same conditions still exist, then the economy should continue to be very efficient and effective, and the community’s economy should continue working and its citizens may even prosper.
The problem is that economic conditions may change. Different things may need to be produced. Better production methods may become available. Better ways to distribute the goods and services that are produced may need to be employed. Unfortunately, it may take economic strife and strong leaders to encourage a society with a Traditional Economy to change its culture and make the needed economic changes.
Before our modern age, the economies of each local community had to be mostly self-sufficient. It was very expensive to move goods from one place to another, so trade was mostly restricted to luxury items or items that would otherwise not be available. In theory, any economic system could work just about as well as any other economic system in one of these small self-sufficient groups.
Consumers in a small Market Economy should be able to provide the necessary oversight that would control the producers. Anyone who tried to make inferior merchandise would soon be out of business, since everyone would soon hear about how bad their merchandise was. In addition, anyone who tried to misuse resources or damage the environment would have run the risk of ending up being hurt by their actions just like everyone else and being called out for their actions.
Planners in a small Command Economy should be able to manage the current economy and to plan quite easily. There just would not be that much for them to plan or to control, so it would not be that difficult for them to do. In addition, they would have easy access to all the consumers in their community, so it would not be that hard to find out what consumers needed and wanted.
Although the economies of these pre-modern communities had the potential to work quite well, it did not mean that they always did. For example, these smaller pre-modern economies lacked access to greater resources and innovations and were more vulnerable to the dangers of natural disasters, wars and mismanagement than the larger and more interdependent economies of today.
Over time, better transportation and advances in technology have allowed our economies to increase in size and reach. We no longer live in small self-sufficient communities. We have gone from economies mostly devoted to providing the necessities of life to economies mostly devoted to providing the myriads of new goods and services needed to survive in the modern world and to fulfill all our wants and desires.
We are also now dependent on and competing with other communities from all around the world. Our economy is now influenced and even controlled by all these other economies. We are almost to the point where we could talk about there being just one big global economy.
For the most part, our current economic systems are pretty much just slight variations of the economic systems that were developed at a time when our economic world was a lot smaller and simpler than it is today. Although there have been many new theories about how our economies do and should function, nothing much has changed with the basics. Our economies have simply gotten bigger and more technological. In theory, all these existing economic systems could still work on a small scale, but none of them can adequately handle the vast size and complexity of the global economy that now exists in our modern world.
Given our current economic problems, it seems obvious that we need to create a new economic system. With the size and reach of our modern economy, one might think that we need to design a new economic system that we might call a Global Economy, which would embrace our globalization. For many of us, there are benefits to having more markets to sell and to buy goods, services, and raw materials. Unfortunately, globalization has exponentially increased the difficulty of adequately managing economic activity. In fact, we might say that the root cause of many of our modern economic problems lies in the fact that our economies have swung too far towards globalization.
The solution can therefore be found in finding a new economic system that combines those benefits that are gained from globalization with the benefits that came from having smaller and more manageable economies. This new economic system will need to handle a lot. It will need to be able to produce all the new goods and services needed in our modern world, to allow all of us the opportunity to accumulate wealth, to provide us all with some financial security, to protect our resources and environment, and to adapt to any future economic changes. Although this sounds like a tall order to fill, it is theoretically simple.
Basically, we could start with the concept of divide and conquer. We would divide up our global economy into much smaller sized economies that would be far more manageable. Then, we would want to level the playing field, so that the same rules that apply to goods and services produced in the local economy are applied to those goods and services sold locally, even when imported from someplace else. Finally, we would want to add some oversight to ensure that all the communities are playing fairly with each other and are protecting our resources and our environment.
To get a better idea about how this new economic system might function, we can use a sports analogy. For this analogy, we could probably use any team sport such as football, baseball, basketball or soccer. Each local economy would be a team. The local citizens would be the players. The local government would be the coach. The state and national governments would be the league, which would write the rules. The police and the courts would be the referees, who would ensure fair play.
Like in a sports team, the members of an economic team would need to work together to ensure that they can play a good game. The local government along with its citizens would plan their plays and set their team strategy. Some football teams may play a running game while others may play a throwing game. Some basketball teams may play man-to-man while others play a zone defense. In a similar way, some local economies may have more of a Market Economy while others have more of a Command Economy.
For a sports team, individual athletes compete for and earn desired spots on the team. For the local economy, workers and businesses would compete for jobs and market share in the economy. Each worker and business, like each player, would work towards doing their best individually, but would also work together to help the local economy prosper.
Sports teams also have trainers. It is important that each player has the needed skills to play the best game possible. In a similar fashion, our local economies need to ensure that they have the needed schools and that their citizens can all get the education they need to contribute to the local economy.
Each sports team may play on many different playing fields or courts. In a similar way, local economies must compete in many different places around the world. Only a few of these local players may travel to these other playing fields, but they need to be sure that the rules of the game remain the same. Our government, law enforcement, and courts must monitor economic activity so that they can penalize any person, business or local economy that does not play fair or that breaks the rules.
There are many different names that could be used for this new economic system. For instance, we could emphasize its reliance on small manageably sized local economies, its team approach, its effort to balance the playing field globally, or its use of government coaches and referees, but none of these or the other ones that I thought of presented a complete picture. In addition, many of the best names were already used to describe some other type or aspect of an economy.
The two names that seemed to fit best were Community Economy and Team Economy, since they would play up the need for the local community to work together as a team. Unfortunately, Community Economy might be confused with a Traditional Economy and Team Economy doesn’t clarify what kind of team. I also thought about calling it a Cooperative Economy to play up the cooperation between the public and private sectors, but this might have been confusing, since there will still be strong competition between businesses and individuals locally and globally.
I then thought about highlighting the moderator roles that our communities and governments would play in coaching, training and refereeing the economy. In addition, one of the big features of this new economic system would be its ability to moderate economic activity in order to prevent the extremes of recession and overheated growth. Therefore, I decided to call this new economic system a Moderated Economy. (Of course, I am still open to any suggestions for a better name.)
Although I believe this new economic system could improve our lives and the world, it may not be that easy to get everyone to change. Most of the world’s economies have started to take on some of the characteristics of Traditional Economies. They have become so much a part of their cultures that they may be hard to change. Therefore, we might need some economic strife and strong leaders to make this change. Fortunately, or unfortunately, the economic strife is already here, so now all we might need is to find leaders who are strong enough and willing to make the needed changes. I will talk more in depth about this Moderated Economy in the next section.
Moderated Economy -
Describing how a Moderated Economy might work.
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