 |
Left to themselves, people will evolve ways to solve the problems of production and distribution of goods. One problem, however, is that people are not often left to themselves! Groups in society that have seized or inherited an advantage will try to institutionalize their advantage, creating some form of nobility or privileged class. Seeking to extend their power and wealth, they will try to control people and resources in other places, reserving the benefits of trade to themselves. When the few have inherited wealth and privilege, the many, who have nothing but their labor, become impoverished. And then, as technological improvements increase the power to produce wealth, the gulf between rich and poor widens still further. As societies become more complex and interconnected, they are increasingly prone to periods of booms and busts. When these problems become severe enough, societies try to solve them as best they can, by implementing some form of economic system.
An economy that is plagued with a chronic problem of poverty, which flares up into recurring periods of industrial depression, seems to be staring right into the face of the "problem of scarcity" -- the question of how to satisfy unlimited human desires with limited resources. In the attempt to come up with a sensible plan for solving these problems, economic systems try to answer three basic questions: What goods should the community produce? How should these goods be produced? For whom should these goods be produced?
Perhaps society can best solve its problems by using a laissez-faire or "hands off" policy. It would answer the three basic questions very simply. What goods should be produced? The goods that consumers want to buy. How should they be produced? By private enterprise, guided by profits. For whom should they be produced? Whoever can afford to pay for them. This strategy would lead society to a "market" or "capitalist" economic system, in which all of the factors of production were privately owned, and the government, or community, exerted the least possible influence over private economic decisions.
But problems can arise. In every so-called capitalist economy, the problems of poverty and boom/bust cycles have deepened as technological and material progress went on. This observation led Karl Marx to theorize that the capitalist economy could not be sustained, that it was only a stage in a larger historical process. Marx thought that industrial workers would become so downtrodden and alienated that they would eventually throw off the control of the capitalists and seize the means of production (land and capital) to create a new form of economy. In the socialist economy that would follow, most economic decisions would not be made for private gain, but in the communal interest of the entire society. This would lead to a "planned economy", in which decisions about production and distribution would be made by the government.
When people speak of contrasting "economic systems" today, they almost always refer to these two opposing ideals: the market economy and the planned economy. The trick is, though, that no "economic system" has ever been purely one or the other. Nations have sought to enforce absolute fairness by establishing a planned economy, but tremendous inefficiencies forced them to allow a good deal of private decision-making. Others tried to leave the free market alone, but widespread poverty and deep depressions compelled them to adopt various forms of "central planning". National economies today fall somewhere along a continuum between laissez-faire and central planning.
It appears as though fairness and efficiency are at odds with each other, and nations must sacrifice some of one to get more of the other.
There is one other category of economic system -- the traditional economy, in its various forms. It lies outside the range of free-market vs. planned economy. Traditional economies are not "economic systems" in the sense that they have been imposed in an attempt to solve chronic problems. Instead, they are practices that have slowly developed out of the cultural and religious values of a community, for dealing with the questions of what to produce, how to produce, and for whom to produce it. Traditional economies tend to function perfectly well as they always have, until outside influences begin to upset their age-old balances.
In the confrontation with outside influences, traditional economies are most often outgunned by far stronger financial, political and military forces. This has led to tremendous problems in developing countries. For example, land ownership in many African societies has well-established patterns, maintained by councils of tribal elders, with rigorous means for adjudicating disputes and enforcing rules. But there is no legal document that confers ownership. When a "Western-style" government is imposed, legal proof of ownership is called for -- and when it can't be produced, the whole land-tenure system is thrown into chaos.
Economic systems have been devised in an attempt to deal with chronic problems that have plagued political economy since before the start of the industrial revolution. All of the economic systems used today fall somewhere between the opposing ideals of a completely free market (which is a highly efficient engine of production) and a fully planned economy (which is a way to implement equal distribution of wealth). When traditional economies come into contact with modern financial and political systems, they usually cannot withstand the intense pressure to change.
No economic system yet implemented has ever been fully effective in dealing with the chronic problems of poverty and the boom/bust cycle. Most people believe that in terms of economic policy, fairness and efficiency are fundamentally at odds. Is that a universal fact? Or does it just seem so because that is how it's always been. We will return to this question in the final lesson of this series, in which we will see how Henry George attempted to design an economic system in which the goals of fairness and efficiency can both be met.
Background Questions
- What are the basic economic questions addressed by an economic system?
- What are the two opposing ideals of an economic system?
- Why did Marx believe that capitalism was a phase that would not last?
- List some ways in which your country's economic system functions as a free market.
- List some ways in which your country's economic system functions as a planned economy.
- Why is it difficult for traditional economies to maintain their old ways, after they come in contact with outside influences?
| Activities for this lesson | Back to Economics lessons | Discussions | Home |