Economic systems - Part 1
Yvonne Harvey, Contributor

Yes, it's our time again. I hope that you are all in good health and ready to digest this lesson. The learning objective is that students should be able to differentiate among the different economic systems. In looking at each economic system, we will see how each goes about answering the three basic economic questions, what to produce, how to produce and for whom to produce. Before we go into all of that, however, we need to define the term economic system and consider some of the common goals of governments in these systems.

What is an economic system?

The term describes the ways in which a country allocates or distributes its scarce resources amongst alternative and competing wants. In other words, it is the fixed plan or programme used by a nation to utilise its resources.

Despite the characteristic differences in the various types of economic systems, their governments are concerned with the same issues. Some of these issues include:

The allocation of scarce resources amongst alternative uses

The distribution of national income amongst the country's inhabitants

The control of inflation

Economic growth

The syllabus requires that we consider four economic systems:

The free-market economy, the planned economy, the mixed economy and the traditional or subsistence economy.

This lesson will discuss the free market economy and the planned economy and next week, we will do the mixed and traditional economies.

The free-market economy (laissez-faire or capitalist economy)

Private individuals and firms own the majority of the productive resources and property, hence, they are the ones that allocate or distribute what they own.

• The question of what to produce is decided on in response to consumer demand and the price for which they can sell their goods and services.
• The question of how to produce bears in mind the motive of the producers. Their aim is to maximise profits. Therefore, in producing, they choose methods that will minimise costs whilst maximising profits.
• The goods and services produced are for those who demand them and are willing and able to pay the price being asked for them. Price is mainly determined by the market forces of demand and supply. In this system, there is freedom of choice. Private individuals and businesses are free to obtain economic resources and to produce and sell in a market of its choice. Consumers are also free to purchase, with their limited income, those goods and services they feel will satisfy their wants.
• Another feature of this type of economic system is that most of the social services, such as hospitals, schools, roads and public transport, are produced in a haphazard manner. There being little or no government enterprises means that in the free-market economy, governments provide mainly defence and security and ensure that the laws of the country are upheld and that the rights of the people are not infringed on.
  Examples of this type of system are the United States of America and Hong Kong.

The planned economy (command, state planned or collectivist economy)

• The state or government owns the scarce productive resources. Therefore, the state or the government allocates these resources.
• The state or the government produces the basic goods and services that will satisfy the needs of people and that will result in the maximisation of social welfare, rather than in the maximisation of profits.
• The government, through its planning committee, decides on how to combine the various factors of production to produce in the most efficient way, at low costs, so they can sell at prices affordable to consumers.
• The goods and services produced are for the country at large, not just for those who can afford to pay for them. A wide cross-section of persons benefit from goods and services produced in government-owned operations.
• The state or the government sets prices and determines the levels of wages in firms and industries; they also dictate production targets and the distribution of incomes and wealth.
• Freedom of choice is limited to the consumer deciding how to spend their money. They are free to buy whatever goods and services are offered for sale.
• Examples of countries which practice this type of economic system are Cuba and China.

Your homework this week is to research and write the advantages and disadvantages of the two economic systems we have considered. You may also wish to do some reading on the other two systems we will discuss next week. See you next week.

Shannon Murray (foreground) looks at a piece done by one of her peers, while a classmate in the background looks on during an art and craft exhibition at Bridgeport High School on Monday, January 28. - Anthony Minott/Freelance Photographer

Yvonne Harvey teaches at Glenmuir High School.