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Explore the advantages and disadvantages of traditional, market, and command economies, and learn how they impact the needs and wants of society.
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Chapter 2 Economic Systems
Economy • All societies have an economy, or economic system • an organized way of providing for the wants and needs of their people. • Three major kinds of economic systems exist–traditional, command, and market.
Traditional Economies • Many of our actions spring from habit and custom. • traditional economy, the use of resources, and most economic activity, comes from ritual, habit, or custom • The Australian Aborigines, and other indigenous peoples are examples of traditional economies
Advantages • The main strength of a traditional economy is that everyone knows which role to play. • Little uncertainty exists over WHAT to produce • If you are born into a family of hunters, you hunt • little uncertainty exists over HOW to produce, because you do everything the same way your parents did • Life is generally stable, predictable, and continuous.
Disadvantages • The main drawback is that it discourages new ideas and new ways of doing things. • The strict roles in a traditional society have the effect of punishing people who act differently or break rules. • The lack of progress leads to a lower standard of living than in other types of economic societies.
Market Economies • In a market economy, people and firms act in their own best interests. • A market is an arrangement that allows buyers and sellers to come together in order to exchange goods and services • Producers are always looking for things that consumers will buy • The consumer plays a key role in determining WHAT to produce.
Advantages • One advantage of a market economy is that, over time, it can adjust to change. • Changes in a market economy tend to be gradual. • During the gasoline shortages of the 1970s the consumers’ demand for large, inefficient cars decreased. • Because auto makers still wanted to sell cars, they moved resources from the production of large cars to small ones. • When gas prices finally declined in the mid-1980s, the trend slowly began to reverse.
Advantages • A second major strength of the market economy is its high degree of individual freedom. • Producers may make whatever they think will sell • They also decide the HOW question • Consumers spend their money on the goods and services they prefer.
Advantages • A third strength is the relatively small degree of government interference. • As long as competition exists, the market economy tends to take care of itself. • A fourth advantage is that decision making is decentralized
Advantages • A fifth strength is the incredible variety of goods and services available to consumers. • Almost any product can and will be produced if a buyer for it exists. • A sixth strength is the high degree of consumer satisfaction.
Disadvantages • It does not provide for the basic needs of everyone in the society • some members of the society may be too young, too old, or too sick to care for themselves. • It does not provide enough of the services that people value highly. • a system of justice, national defense, universal education, or comprehensive health care.
Disadvantages • Relatively high degree of uncertainty that workers and businesses face as the result of change.
Disadvantages • Market economies can fail if three conditions are not met • First, markets must be reasonably competitive, allowing producers to compete with one another. • Second, resources must be reasonably free to move from one activity to another. • Third, consumers need access to adequate information so that they can weigh the alternatives and make wise choices.
Disadvantages • When markets fail, some businesses become too powerful • We often have to rely on government to ensure that: • sufficient competition, • freedom of resource movement, • adequate information exist
Command Economies • A central authority makes most of the WHAT, HOW, and FOR WHOM decisions. • Economic decisions are made by the government: • The people have little, if any, influence over how the economic questions are answered.
Advantages • It can change direction drastically in a relatively short time. • There is little uncertainty in this type of economy. • Most provide minimum levels of education, health, and other public services at little or no cost to its people.
Disadvantages • It is not designed to meet the wants of consumers, even though many basic needs are provided. • The system does not give people the incentive to work hard and the results are often unexpected. • At one time the former Soviet Union set some production quotas by weight. • This resulted in workers finding ways to add weight to products, thus reducing the number of units they needed to fill the quota.
Disadvantages • The command economy requires a large decision-making bureaucracy. • Decisions cannot be made until after a large amount of paperwork. • It does not have the flexibility to deal with minor, day-to-day problems.
Disadvantages • People with new or unique ideas find it difficult to get ahead in a command economy. • Each person is expected to perform a job according to the decisions made by central planners.
Financial Goals • Every economic system has goals such as financial security and freedom to carry out economic choices. • If the system falls short, then we may demand laws to change the system until the needs are met.
Financial Goals • In the United States, people share seven major economic and social goals. • Economic Freedom • Economic Efficiency • Economic Equity • Economic Security • Full Employment • Price Stability • Economic Growth
Economic Freedom • People place a high value on the freedom to make their own economic decisions. • People like to choose their own occupations, employers, and uses for their money. • Business owners like the freedom to choose where and how they produce.
Economic Efficiency • People recognize that resources are scarce and that factors of production must be used wisely. • If resources are wasted fewer wants and needs can be satisfied. • Decision making must be efficient so that benefits are greater than costs.
Economic Equity • Americans have a strong sense of justice, impartiality, and fairness. • equal pay for equal work. • it is illegal to discriminate on the basis of age, sex, race, religion, or disability in employment. • advertisers should not be allowed to make false claims
Economic Security • Americans desire protection from such adverse economic events as layoffs and illnesses. • States have set up funds to help workers who lose their jobs. • On the national level Social Security covers most working people.
Full Employment • When people work, they earn income for themselves while they produce goods and services for others. • As a result, people want their economic system to provide as many jobs as possible.
Price Stability • High rates of inflation discourage businesses from borrowing and spending. • Price stability makes budgeting easier • Inflation vs. Fixed Income
Economic Growth • Growth is needed so that people can have more goods and services. • Because the nation’s population is likely to grow, economic growth is necessary to meet everyone’s needs.
Future Goals • As our society evolves, however, it is entirely possible that new goals will be added. • Think about technology that didn’t exist 10, 20, 50 years ago
Mixed Economy • Mixed economies come about when people from one type of economy come into contact with other cultures and adopt their technologies and ways of doing things, or when people are unhappy with the way their economy is performing. • In a mixed economy, the state’s involvement in economic decisions can vary considerably. • A mixed economy includes characteristics of traditional, command, and market economies.
Communist economies are based on the theoretical ideal of communism, in which everyone contributes according to their abilities and consumes according to their needs. • There has never been a true communist economy; those who claim to be communist are actually a version of extreme socialism. • In mixed socialism, the government owns and controls some, but not all, of the basic productive resources. • Mixed market economies are market economies that have elements of socialism or traditional economies. • The United States is considered a mixed market economy.
Advantages of mixed economies include: • Providing assistance for people who might be left out of the country’s economic progress • Faster growth than command economies • Disadvantages of mixed economies include: • Higher tax rates to support social benefits • Limited availability of services or decreasing quality of services • Lower efficiency than pure capitalism • Governments are likely to see market-oriented reforms as a threat
Global transition to Capitalism The transition of communist and socialist economic systems to capitalism has been the dominant economic trend of our lifetime. Privatization is necessary for the conversion of state-owned property to private ownership. The ruling party in a communist or socialist economy fears the loss of political power during a transition to capitalism. Citizens have to learn to make their own decisions, take initiative, interpret prices, and fend for themselves in free markets. Many countries underestimate the costs of converting to capitalism.
In Russia, the decades-long transition to capitalism has resulted in the current market-based economy, with the exception of government-controlled energy, natural resource, and defense-related industries. • After the failure of the Great Leap Forward, China was influenced by successful market economies in Asia and today is undergoing some privatization and other capitalistic endeavors. • In Latin America, socialism still exists in Venezuela and Argentina, but Chile has made the transition to capitalism. • After the Soviet Union collapsed, many Eastern European countries transitioned to capitalism, including Poland, Hungary, the Czech Republic, and Slovakia.
Compared to the U.S. government, the Japanese government is much more involved in the day-to-day activities of the private sector. • By opening its markets to world trade, South Korea has progressed from one of the poorest countries in Asia in the mid-1950s to a leading producer of electronics and automobiles today. • The government in Singapore has focused on a few select industries, pouring money and resources into pharmaceuticals, medical technology, and financial and high-tech industries. • Taiwan has always depended on economic planning and was one of the early economic powers in Asia, but its centralized planning may hamper future economic growth.
