Title: LESSON : ECONOMIC SYSTEMS
1LESSON ECONOMIC SYSTEMS
- LEARNING OBJECTIVES
- Define what is an economic system
- Identify the three types of economic systems
- Define the term market
- Describe the three forms that a market can take
- Describe the three types of economic systems
- State the advantages and disadvantages of each,
with examples
2Economic systems defined
- Economic systems refer to the structures which
have been put in place to deal with the economic
problem (how scarce resources are allocated among
competing or conflicting wants). It involves the
ways in which a society organizes for the
production and distribution of goods and services
to satisfy the needs of its people. How the
society decides to provide for the needs and
wants of its people will influence the type of
economic system that is adopted.
3Types of economic systems
- The three main types of economic systems adopted
by countries are - The market driven economy, free market economy,
capitalist economic system, or laissez-faire
economic system, right wing system - The planned, controlled, communistic,
collectivist or command economy, left wing
system - The mixed economy, centralist.
4Market defined
- A market is an arrangement in which buyers and
sellers are brought together to transact
business. It could be a physical place or it
could be a situation or a set of conditions that
facilitates the trading process.
5The Market Driven Economy
- In this type of economy, private individuals (and
not the Govt), own the resources of the economy.
The answers to the economic questions of what,
how and for whom to produce are provided by the
price mechanism, or system.
6Key features of a free market economy
- There is very little govt interference (guidance
and financial aid to private businesses) - Market forces of supply and demand largely
determine prices - There is much competition among firms for
patronage, which keeps prices down but not
necessarily low - Unregulated use of factors of production
7Key features of the free market economy
- Ownership of all profits after payment of taxes
- By driving costs down, in order to maximize
competitiveness, the system tends to disadvantage
labour with low wages - It also tends to suppress trade unions, regarding
their demands as a curb on market freedom - By maximizing profit, it tends to promote actions
that may be against the public interest, e.g.
monopoly pricing, shoddy goods, tax evasion - Monopolies are allowed to proliferate they help
govt by paying high taxes, and may also support
political parties in fighting elections - Laws, rules and regulations have to be introduced
to protect consumers from unscrupulous traders.
8Advantages of the market economic system
- Manufacturers are free to produce what the
consumers require, and the consumers in turn are
free to spend their money as they see fit. - Decision-making is not controlled, so there is
greater participation in the decision on what is
to be produced to satisfy the needs of the
consumer. - A large variety of goods and services are
produced to satisfy the needs of the consumer.
9Advantages of the free market system
- The market economy is adaptable to changes that
arise from time to time. E.g. if there is any
shift in the demand for a product or service, the
economy can adjust to meet the new demand.
Whether it takes a short or a long time to adjust
to the new demand depends on the type of, or
nature of the goods or service involved. - There is very little govt intervention in the
market economy. As a matter of fact, there is a
lack of govt intervention. - There is a greater degree of competition as goods
and services providers scramble for a share of
the market.
10Disadvantages of the market system
- Since the making of a profit is the dominant
motive of the private sector, only goods or
services that yield the highest profit will be
produced. E.g. needed infrastructure such as
the construction of roads or bridges or the
provision of security for the defence of the
country would not find ready investment since
their use does not usually provide a profit. - Consumers could be exploited through the
imposition of high prices for essential goods if
there is insufficient competition among producers
or Govt regulation of businesses. - This system can lead to a more unequal
distribution of income, with the rich get richer
and the poor get poorer. The rich can bid up the
prices of luxuries, and resources will be used to
produce these items rather than necessities.
11Disadvantages of free market system
- The free market can lead to monopolies which can
exploit consumers by demanding higher prices for
certain goods and services because they are the
only seller in the market. - Too much money may be spent on advertising to
attract customers. - The price mechanism may work sluggishly and as a
result suppliers will react slowly to demand
changes.
12Disadvantages of the free market system
- The profit motive may not always lead to maximum
welfare for the society. E.g., the effect of
production on pollution and destruction of the
environment may not be considered. - Resources can remain unused if it is thought they
will not yield a profit. - When govts intervene with legislation to control
undesirable actions (e.g. controlling pollution
through large fines), firms tend to raise prices
to cover their increased costs.
13The Planned Economy
- In this type of economy, all the resources are
owned by the State (or Govt owns and controls
the factors of production). The State owns and
runs the factories, mines, farms, transportation
system, food distribution outlets, among others.
- The decision about what to produce, how to
produce and for whom are made by a centralized
planning agency.
14Key features of planned economies
- A govt central planning body oversees every
economic activity and committees are appointed by
the head of state to take charge of various
sectors of the economy - Central authorities decide what to produce, how
to produce, who gets the output and how much they
get - Command economies may be introduced as a response
to bad planning or poor distribution, but they
may also suffer from the same problems. When
production or distribution go wrong, there is no
alternative source of supply, so that rationing
can be an unwanted side-effect of a planned
economy (as experienced by Guyana for many
years). For the same reason black markets can
result, drawing on unofficial sources of supply.
15Key features of the controlled economy
- Much investment is not used on consumer goods but
on military goods (army tanks, guns, space
exploration). This was especially the case in
Russia and China - Citizens live in a highly regimented society,
with govt officials, police or even soldiers on
nearly every street corner even on farms, to
check on production - Oppression, high unemployment and poverty are
prevalent - Tightly controlled (and often poor) economic and
social conditions tend to result in
de-motivation, disaffection and ultimately
defection of citizens and a brain drain.
16Advantages of a Planned Economy
- Wastage of resources would be reduced since the
State makes the decision as to what is produced,
and directs the resources into these areas. - Profits gained from State industries may be used
to generate further production and expand
provision of public goods such as hospitals and
other welfare services. Consideration may also
be given to the improvement of general working
conditions of State employees.
17Advantages of the planned economic system
- Since profit maximization is not the motive,
there may be greater employment of resources and
the social cost may be taken into consideration.
Thus planners can ensure that adequate resources
go into the production of social (public) goods,
and advertising can be limited to providing
information only. - Since the State determines the price of goods and
the amount paid in salaries, then no group of
workers by themselves can force prices up. - Income is more evenly distributed.
18Advantages of the planned economic system
- Workers may tend to increase their efficiency
since they may feel that they are working both
for themselves and for their country. - The monopoly power of the State can be used for
the welfare of the society as a whole.
19Disadvantages of a Planned Economy
- There may be much inefficiency and wastage of
resources as the profit motive for production is
missing. E.g., there may be wastage of manpower
because large numbers of persons (officials) are
usually required to do the planning in this
system than are required in the free market
system. - Conflicts of interest arise because what the
country needs may not be what the people want - The Govt protects workers by setting a minimum
wage (which may be inadequate or subsistence)
20Disadvantages of the planned system
- The lack of scope for individual incentives may
lead to a lack of initiative. Furthermore, since
people are not free to choose what they want to
produce, how and in what quantities, initiative
and morale may be further reduced. In addition,
the State ownership of resources reduces the
incentives of the members of the society to work
harder. Since they are working for the State and
not for themselves, their effort will not be as
great. - Govt can freely intervene in areas where there
is an imbalance to protect the firm or the
consumers from unfair practices. - Production usually takes place ahead of demand
and this could lead to waste as once the
consumers needs are satisfied, they may not
purchase goods. In many instances they may find
the goods to be unattractive or of poor quality.
Furthermore, it is impossible to estimate
accurately the needs of the consumers. This may
lead to shortages of some goods and a glut of
other goods. Moreover, the Govt can impose its
choices on the rest of the society, for e.g.,
producing more military goods and fewer consumer
goods.
21Disadvantages of the planned economic system
- There is usually a large bureaucracy to
administer the workings of such a system and the
problems associated with these tend to arise.
The needs of society has to be determined and
their provision has to be arranged by politicians
and bureaucrats (civil servants) who may not be
trained in the management of large organizations.
- Moreover, large organizations are unwieldy and
difficult to manage efficiently. This may lead
to coordination problems. E.g. in the former
Soviet Union, in spite of goods harvests there
were episodes of food shortages because there
were not enough trucks to transport the food.
22The Mixed Economy
- In this system both the govt and the private
sector participate in making the decisions
regarding what is to be produced, how to produce
and for whom to produce. The society recognizes
the important role of the govt in the provision
of certain goods and services that are
large-scale in nature, e.g. education and health,
road construction and maintenance, social
welfare, amongst others, and accepts this input.
The govt undertakes these responsibilities as
the more efficient provider of such services. - In this system, trade unions tend to play a more
powerful role and are in many instances,
responsible for a faster increase in wage and
salary rates.
23Key features of a mixed economy (in the region)
- There has been a marked rise in the formation of
non-governmental organisation (NGOs). These are
autonomous, or nearly autonomous, bodies in the
private sector that have been charged with
running or overseeing the provision of services
and goods in the public interest - Consistent with this weakening of the public
sector in the region, there has been a
strengthening of private sector participation as
govts have invited foreign companies to take on
former public sector responsibilities. In Guyana
since 1992, for e.g. more than 30 public sector
enterprises have been privatized there are now
only a handful of public enterprises
24Key features of the mixed economy
- There is more trade union activity than in a
planned economy, where trade unions might hardly
exist - A greater premium is placed on consumer
protection, and there is zero tolerance of
environmental pollution - With the growth of tourism in the region, some
industries have mushroomed not just hotel
building, hotel catering services and the
hospitality industry, but also telecommunications
(including cell-phones) and computer based
technology - Tourism has become the main attraction for most
investment, replacing traditional investment
interest, e.g. sugar, bananas or oil, according
to the country
25Key features of mixed economies
- There is a markedly high level of poverty,
unemployment and crime. This seems to be the
most persistent feature of all economic systems
that have been tried, and of all political
parties and govts - There is growing dependency on foreign aid,
imports and the transfer of technology from
developed countries. TT and Jamaica, for e.g.,
regularly get financial and other types of
assistance (e.g. ships and aircraft to fight the
drug trade) from the USA and Britain, and cheap
loans from Canada, China, Germany and the OPEC
countries
26Advantages of the mixed economic system
- The state can intervene in areas of the economy
through the passing of laws to protect citizens
from unfair trading practices. - Both govt and private sector can cooperate in
the delivery of certain services through
franchising as seen in the transport sector and
hospital catering. - It is believed by some that this form of economy
is more equitable since it avoids the creation of
huge numbers of poor people (through the
activities of trade unions who represent
workers).
27Disadvantages of mixed economies
- One disadvantage often levelled at this system is
that the State should not participate in business
enterprise since they are not efficient managers
of resources. - Too much govt regulation may dampen the free
enterprise spirit. - Some Sate-owned industries are allowed to operate
inefficiently thus wasting resources. - Where govt intervenes in the market by setting
maximum or minimum prices, this may cause either
excess demand or supply which may be difficult to
regulate in the long run.
28Comparison of the three economic systems
- The goal of all three economic systems is the
efficient allocation of the societys scarce
resources between competing wants. - The market economy also tries to preserve
individual choice in the allocation of those
resources. Market economies usually have
democratically elected govts. - Planned economies strive for equality in the
distribution of resources among members of the
society, in addition to their efficient
allocation. They also try to produce adequate
amounts of social goods which would not be
produced by the pure market economy. - The mixed economy recognizes and tries to solve
this by leaving those activities which can be
efficiently done by the private sector in their
hands. The activities which the private sector
cannot undertake efficiently are handled by the
govt.