Economic Systems and Economic Goals Economic Concepts Pt.3: Economic Systems and Economic Goals

A) Economic Systems All countries use an Economic System, an organized way of providing for the wants and needs of their people. The way a country’s society organizes itself will determine the type of economic system that county will have. Three major kinds of economic systems exist: Traditional, Command, and Market Economies. In practice, however, almost all economies of the world today combines elements of all three. In a society with a Traditional Economy, the use of scarce resources and nearly all other economic activity stems from rituals, traditions or customs. Individuals in this economy are generally not free to make decisions based on what they want or would like to have. An Example of this is women in Botswana Africa who weave baskets by hand based on methods handed down to them by their ancestors. An Advantage of Traditional Economy is that you know WHAT, HOW and FOR WHOM to produce. Disadvantage: No new ideas used for production. In a Command Economy, a central authority or Govt. makes all major decisions about WHAT, HOW, and FOR WHOM to produce. A command economy can be headed by a king or a dictator. Most command economies severely limit private property rights; thus people are not allowed to own their homes, businesses and other productive resources. Examples of this type of system is North Korea and Venezuela. In a Market Economy, people are free to make economic decisions in their own best interest. In Economic terms, a Market Economy is an arrangement that allows buyers and sellers to come together to buy and sell goods and services. A market economy is characterized by a great deal of freedom. People can spend their money on the products they want or need the most, which is like casting dollar “votes” for those products. By casting these “dollar” votes, producers of goods are able to understand which products people want the most, which tells producers WHAT to produce for consumers. A market economy is often described as being based on Capitalism, which is an economic system where private people own the factors of production. Advantage: It gradually adjusts to change & allows a high degree of freedom. Disadvantage: It does not provide for everyone.

Traditional Economy

Command Economy

Market Economy

B) Mixed Economies While textbooks can easily identify neat categories like traditional, command and market economies, in the real world today, it is not so orderly. Most countries have what’s called Mixed Economies, which are systems that combine elements from all three types. One example of this is Socialism, which is a mixed economic and political system in which the Govt. owns and controls some, but not all, of the basic productive resources. In socialistic countries, the Govt. also provides some of the basic needs for all of its people, such as housing, welfare, education and health care. An extreme form of Socialism is Communism, a political and economic system where all property is collectively, not privately, owned by the Govt. In a communist system, labor is organized by the Govt. for the common advantage of the countries societies. In practice, however, communist Govt.’s have become so involved in economic decisions that they are often called Command Economies. Some Govt.’s provide only for basic needs such as defense, a justice system, and universal education (like a true Capitalist Economy). However, the more mixed a country’s economy is, the more it will become involved with and make major economic decisions, often with the claim that it is being done for the betterment for all of the people in its society, (a Mixed Capitalist-Socialist Economy).  In a successful Mixed Economy, Govt.’s should intervene only in certain key sectors or industries and leave the rest to the business markets. If the Govt. intervenes too much, a Mixed Economy can turn into a Command Economy. An advantage of a mixed system is that it provides assistance for some people who might otherwise be left out. However, a disadvantage of this system is that while it does provide more services, the costs for these benefits can mean higher costs for all citizens overall.

C) Economic and Social Goals All Economic Systems have goals. These goals provide countries a way to guide economic and social decisions that they make. In the U.S., people share many broad economic and social goals. Four Economic goals are: Economic Freedom: Americans traditionally place a high value on the freedom to make their own economic and social decisions. They like to choose their own occupations, employers, and uses for their money. Business owners like the ability to choose where & how they produce. Economic Efficiency: Most Americans recognize that resources are scarce and when factors of production are wasted, fewer goods and services can be produced and fewer wants and needs can be satisfied. This reason is why economic decision making by the people and the Govt. must be efficient. Economic Equity: Americans have a strong tradition of justice, impartiality and fairness. Many people for example, believe in equal pay for equal work. At the national level, we have established the Minimum Wage, which is the lowest legal wage that can be paid to most workers. Economic Security: Americans desire protection from such adverse economic events as layoffs and illness. As a result, the Govt. has set up programs to help workers who lose their jobs through no fault of their own and many workers have insurance plans to cover illnesses or accidents. Furthermore, Congress has set up Social Security, a federal program of disability and retirement benefits that covers most working people. Retirees, widows, disabled persons and elderly are eligible for its benefits.

D) More Economic and Social Goals Full Employment: When people work, they earn income by producing goods and services for others. Without jobs, people cannot support themselves or their families, nor can they produce output for others. Thus, Americans want as many jobs, which will provide an adequate pay for their work, provided as possible. Price Stability: Another goal is to have stable prices on goods and services. If Inflation occurs, which is a rise in the general level of prices over time, workers will need much more money to pay for basic needs like food, clothing and shelter. When inflation occurs, Americans who live on a Fixed Income, an income that does not increase even though prices go up, will find that bills are harder to pay. Economic Growth: The last major goal of most Americans is economic growth. Most people hope eventually to have a better job, a newer car, their own home and the ability to retire comfortably in the future. What is this called? Overall, Economic Growth enables more people to have more goods and services. Because America’s population is likely to increase in the future, economic growth is necessary to meet everyone’s needs. The seven goals we have discussed so far are the ones on which most Americans seem to agree on. As our society evolves, however, it is possible for new goals to develop. In the end, we are the ones who will decide on the goals that are most important for America.

E) Resolving Trade-Offs Among Goals Americans, and our elected representatives, often have different ideas about how to reach our nation’s Economic goals. However, these ideas often conflict with each other. For example, a policy to keeps foreign-made shoes out of the U.S. could help achieve full employment in the U.S. shoe industry. However, this could work against individual freedom if people have fewer choices of shoes to buy. What about Minimum Wage? Should businesses be legally enforced to provide minimum wage? So then, how are Trade-Offs among Economic goals resolved? In most cases, Americans often compare their estimate of the costs to the benefits and then vote for political candidates who back their position. People, businesses and Govt. are usually able to resolve conflicting opinions about these goals. Fortunately, the economic system of the U.S. is flexible enough to allow choices, accommodate compromises & still satisfy the majority of Americans. Is there a compromise on health care? In a democratic society, Govt. policies usually reflects the will of the majority of its people. As a result of this, many Governmental functions reflect Americans desire to modify their economic system to be able to achieve their economic goals. For example, a program such as Social Security and Minimum Wage reveal how Americans have, over time, modified their Capitalist economy into an almost Mixed System.