Economic Systems
The 3 Economic Questions What? How? Who?
Traditional Economies Based on custom
Little innovation or change Subsistence standard of living
Command (Socialism, Communism) Public (govt) ownership of land, capital Central economic planning Distribution of resources Output decisions Wage and price controls
Weaknesses of Command Economies Failure to achieve allocative efficiency Lack of incentives (profit motive) Large bureaucracy for economic planning Those with new or unique ideas are stifled
Market (capitalism, free enterprise) Economic incentives – profit motive Voluntary exchange Economic freedom Private property rights (including intellectual property)—protected by legal contracts Self-interest Competition (including right to fail)—the “invisible hand” Creative destruction (Joseph Schumpeter)—new products and production methods destroy old products, firms Limited government role
Weaknesses of Market Economies Failure to achieve economic security Failure to achieve equity Market failures—failure to produce the right amount of certain goods and services, or failure to allocate resources to the production of certain goods and services
Mixed economies Market system dominates: Australia US Switzerland Hong Kong
Market systems with extensive social welfare programs: Sweden Norway Germany Netherlands
Extensive government intervention in the market: North Korea Cuba