What? How? and for whom?

Command is essentially a political system, and political systems tend to rely on force and coercion to get things done. The most common command systems of the twentieth century were the communist countries. In these command systems the communist party tended to make all the decisions. For example, the former Soviet Union had a five year plan that stated the production goals of the society (we will make two million tractors), thereby answering the question of what to produce. Then, they would issue a three year plan setting out how these goals would be met. (We will have one big factory in the capital make all two million tractors. It will have 300 workers.) This answers the how question. The central party might then say who has priority in getting the output (Only party members will get tractors), answering the for ‘whom’ question.

Command systems tend to be more concerned with the politics of a decision instead of the efficiency of a decision. A certain group might get a good or service (for whom) because they represent political support (e.g. a navy base is established in Bath, which is entirely land-locked). Or, some type of good might only go to political supporters (vacation cottages on the Black Sea went to high communist party members).

The Market System is essentially a system based on individual actors following their own self-interest. You may think that the obvious choice for answering the key economic questions. In fact, it is not all that natural, indeed it is the least used system in terms of human history. One of the reasons people are uncomfortable with the market system is that without anybody coordinating the allocation of resources, important things might be overlooked. It’s hard to accept that all this will happen without someone in charge. Without someone in charge, how does the market get things done? Adam Smith called this phenomenon the invisible hand.

Sometimes the market system is called the price system. High prices of goods signal to producers that society wants more of these goods and low prices serve as a signal that producers want less of those goods. Or, price signals determine the answer to the “what to produce” question.

Prices also answer the question of how to produce. Suppose we have an abundance of one resource, let’s say rocks, and a relative scarcity of another resource, let’s say iron. In a market system rock prices will be low and iron prices will be high. So when it comes to deciding which to use in making tools, the rocks have it. The only way a society would use iron to make a tool would be if the price of the good made by the tool were so high that it “covered the cost” of the more expensive iron. But, this high price of iron would also lead people to make more iron, thus lowering its price and making it more practical for making iron tools over time. This is one of the beauties of the market system, it makes sure scarce resources go to those activities where they are needed the most, and at the same time it provides incentives to solve problems of scarcity. This is one of the reasons why the market system is considered the more efficient of the three economic systems.

Imagine the same problem in a traditional system. At first rocks would be used to make tools. This would become the tradition. People would then be discouraged to make tools with iron. And they would also be discouraged in finding ways of making iron more cheaply. This is why new technologies are slow to develop and slow to spread in traditional economies.

The ‘for whom’ question is also answered in a similar fashion. Individuals consume based on how much money they have, and this is based on the price of the resources they sell. They will make sure these resources go to the highest bidder and not lay idle. This is not only true for their labour, but for any other resource they own. So, the more you produce in those areas society values the most (as signalled through a high price) the more you can consume.

Prices not only provide a signal to producers, they also serve as a rationing device. When there is not enough of a good to go around, the price is bid up. This causes those people who don’t value the good as highly, or can’t afford the good, to not get it. This exclusion will continue until there is a match between how many goods there are and the number of people who get the good. This brings up the equity question. Is it fair that some people are excluded from consuming a good because they are poor? Sometimes it is fair and sometimes it is not.

Whether it’s fair or not, it is always the case in a market system that there will be unevenness in levels of income. If each of you start at zero wealth today and were given £10,000, this time next year some of you would have more and others would have less. Some individuals may invest the money in a bank and gain a return. Others may speculate and buy stocks and shares. Those who invest in shares may do very well, or they might lose everything. Still others, may use the money to start a business . Undoubtedly there will be others who take the £10,000 and spend it on going out, socialising and buying clothes. The one’s who choose this option may have a good time but are unlikely to be wealthier in a year’s time. The nature of the economic system is that there will be winners and losers.

When faced with scarcity, people are better off if they work together. When they work together, they must have some underlying organization to determine what to produce, how to produce and for whom to produce. The organization, or system, can be broadly placed into three categories, traditional, command, or market. While all systems are mixed, one usually is predominate.

Mixed economy is an economy which combines regulated capitalism, a limited number of planned economy institutions, as well as certain socialist measures and state ownership of some sectors of the economy, such as:

• social security
• environmental regulation
• labour regulation

The Free-Market System

All the resources are privately owned, and the PRODUCTION is by private firms aiming to make a Profit. The forces of supply and demand fix the PRICES of goods + services, e.g. The more apples there are, the lower the price. The more people wanting apples, the higher the price. The GOVERNMENT just keeps the country safe with an Army, Navy, Air Force, Police Courts, etc. and does very little else.

Advantages

1. Consumers get the products they want, through supply and demand.
2. No massive bureaucracy.
3. Profits ensure efficiency, enough production and the sort of production.
4. Competition ensures low prices and new technology.
5. Monopolies won’t last – other firms will join in.

Disadavantages

1. The inequality of rich + poor continues
2. Profits become more important than people.
3. Some goods and services won’t be produced well.
4. Competition can cause waste and inefficiency.
5. In real life, monopoly does exist.
6. Pollution, noise, smell, ugliness, etc. all get worse.

The Planned System

The government/state owns all RESOURCES, and takes the job of estimating people’s NEEDS + WANTS, and of organising production to satisfy these needs + wants. Prices are thus fixed by the government, not by market forces (supply and demand).

Advantages

1. All basic necessities produced for everyone, as are essential services.
2. No bureaucracy wasting money – they’re only making sure the system works properly.
3. People don’t need profits as an incentive; working for the community is enough, and will prevent pollution, etc. as well as inefficiency,
4. No waste on luxuries until everyone has the basic essentials, or on useless competition.
5. The people control the economy …. So no unemployed.

Disadvantages

1. It is difficult to estimate people’s needs and wants.
2. The bureaucracy needed to organise production will be large and inefficient.
3. No profits will mean laziness, and people not trying as hard as they might.
4. People lose their freedom to choose.
5. Technology will not advance very fast, and prices will stay high because of no competition.

The Mixed System

The resources are mostly owned by private companies, who organise most of the production of goods and services but ….. The government owns and controls the basic industries and spends money on helping people with health, education unemployment benefit etc. The idea is to combine the best points of the other two systems. People are free to choose what is produced and consumed, but the government makes sure problems are minimised while social welfare is maximised.

Aims

1. To produce goods and services, a free market system ignores.
2. To provide goods and services more efficiently than other systems.
3. To avoid great inequalities of wealth, to give everyone a minimum standard of living and equality of opportunity.
4. To protect people from monopolies.
5. To control pollution and social problems.
6. To get full employment and low inflation.
7. To help the regions
8. To improve our trade.
9. The achieving of constant economic growth.