Comparative Economic Systems
Various economic systems exist with different goals, such as promoting equality or facilitating rapid growth. The structure of an economy within a country is heavily influenced by its political landscape and the values held by its population. However, it is important to note that the economy of any country is subject to change over time, and its position within these broad economic categories can also evolve accordingly.
Market Economies
Market Economies are economic systems where production is determined by a system of prices and profits. This is also called the laws of supply and demand. These economies are subject to relatively little direct control by a government or economic planner, allowing people and businesses to try to distribute resources to maximize wealth. Market economies also have a certain level of income inequality. This is partially because profit is a large motivator behind how resources are allocated. This profit motive often leads to individuals and businesses accumulating higher income and wealth compared to others.
Capitalism
Capitalism can be defined as a type of market economic system where there is minimal government regulation. Instead, the economy operates primarily under the influence of market forces. In a pure form of capitalism, companies that are inefficient or unpopular tend to lose customers to their more competitive counterparts. This constant competition provides companies with the incentive to consistently innovate.
This principle also extends to environmental practices and business ethics. If consumers are not supportive of companies that engage in heavy pollution or worker exploitation, they will choose to support other businesses instead. Conversely, companies that prioritize environmental sustainability are likely to attract customers who value the environment. Similarly, the pricing of goods and services is subject to market forces, where companies with high prices will typically lose customers to those offering lower prices.
The labor market is also dictated by the market. This means that workers get hired and are paid both according to their productivity. Their replacement cost, or how many other workers the firm can hire who are just as productive, is also a major factor. This gives incentives to workers to obtain new skills and renegotiate their salaries as they become more productive.
Criticisms of Capitalism
There are many movements emphasizing the problems with the capitalist economic system. One major problem is how the economy copes with large monopolies, or companies that are able to put all of their competition out of business. If a company has a monopoly, customers are not able to switch to a competitor if they do not like the company’s business practices. It also removes much of the incentive to keep prices low and to innovate.
This economic system can also be difficult for workers. If a worker starts with low skills, it can be very hard to save the time and money to build new skills to increase their income. This means that low-skill workers can be trapped with no way to increase their skills. This leads to greater income inequality as the rich can get richer because they have the means to do so. At the same time, more and more workers with low skills means that their replacement cost is very low, pushing wages farther down.
Market Socialism
Socialism is not a clear economic system itself, but market socialism is a form of a market economy that places emphasis on equality. The main characteristic is that the means of production, meaning the factories, farms, and resources, are at least partially collective. In other words, everyone in the economy has some partial ownership. However, people still decide what kind of business they want to start, and companies still decide their levels of production and what they will produce.
This economic system sometimes says that no companies can earn a profit. Instead, all revenue that is more than costs is distributed between everyone in the economy, called a social dividend. Other times the profit is instead distributed only to the workers in the factory who earned the profit. Giving workers and managers a bigger incentive to work harder and continue to innovate. In both cases, there is an incentive to earn more profits, either for the sake of everyone in the economy or just for the workers who are earning them.
Workers in market socialism are paid only according to their productivity, and not their replacement cost. As part of the social dividend, workers are given some degree of ability to build new skills (sometimes including free education).
Criticisms of Market Socialism
The biggest problems with this economic system are practical. Some overseeing agency needs to be responsible to distribute the social dividend, which has a high chance of being corrupted or playing favorites. There is also a huge disagreement about how it should be distributed between the population (see: the socialist calculation debate). It is difficult to decide how much of the profits should be re-invested in growth and how much should be distributed back to all the workers. In a pure capitalist economic system this is determined by the invisible hand. Companies that re-invest generally grow more that their counterparts, but this does not apply in a socialist system.
One issue with full employment in a socialist system is that workers are paid solely based on their production, without considering replacement costs. Consequently, each worker ends up costing more in comparison to a capitalist system. This, in turn, leads to a scenario where fewer individuals can be employed to achieve the same level of production, resulting in higher unemployment rates. Moreover, the profits generated at this level of production are also diminished, leaving less available for reinvestment.
While the least skilled workers may experience greater benefits in a market socialism economic system compared to a pure capitalist system, it remains uncertain whether the reduced reinvestment and lower profits would improve or worsen the circumstances for middle-income workers. However, the reduced total number of employed individuals is inevitable, and it’s important to note that people who are not working but still earning a social dividend are not as beneficial to the economy as those who are actively working and contributing to production.
Market Economies In The World
In the real world, most countries adopt a mixed economic system, incorporating elements of both capitalism and market socialism. While countries in North America and Europe are predominantly market economies, none of them can be categorized as a fully capitalist or market socialist systems. Rather, they exist somewhere in the middle.
Even in countries that identify as capitalist, certain controls are implemented to prevent the excessive concentration of power by monopolies. Additionally, taxes on profits and high-income individuals are levied to fund social programs such as unemployment benefits, universities, and environmental protection. These programs can be seen as a form of social dividend.
At the same time, individuals and companies are allowed to retain profits and have some degree of income inequality. The exact balance between capitalism and market socialism varies among countries, wherein some nations have higher tax rates, regulations, and social benefits compared to others.
Command Economies
Command Economies describe economic systems where a central planning agency determines what and how much is produced. The planner also determines how much of each resource is allocated to each person in the economy. Money and currency generally play very small roles in this type of economic system.
Feudalism
Feudal economic systems describes much of the world before 1800. The primary source of economic activity is farming, with any industrial production limited to Cottage Industry. In a feudal system, a hierarchical structure exists, consisting of an upper class comprising kings, lords, and knights who exercise control and authority. These privileged few govern over a larger peasant class, primarily engaged in farming and agricultural activities. The peasant class typically lacked individual rights and freedoms, and they were generally unable to leave the land owned by their respective lord without obtaining permission.
Profits are generally very small and are kept by the ruling classes, with re-investment limited only to what is necessary to keep the population alive and working. There may also be a merchant class that lives in cities and engages in trade, but these are the special cases and do not comprise a large part of the economy.
All production was determined by the lords and kings, who instructed the peasant class on what to produce. This included what kinds of crops to harvest, as well as what types of products to make for the cottage industry. This resulted in the most extreme income inequality, with the rich owning everything and the poor left as little more than slaves.
Feudal societies generally do not exist today, apart from some small pockets in extremely under-developed parts of the world.
Communism
Communist economic systems are also known as non-market socialism. The factories and materials are owned entirely by everyone in the economy. The central planning agency determines how much of each item is produced, and who gets the finished products. For example, the central planning agency would decide how many shoes are produced, and then distribute the shoes to all the people it determines needs them the most.
People are paid a certain amount by the government, and then are allowed to buy only certain types of items. If they want something that they do not have permission to buy, they need to request permission. The central planner takes their requests, and uses them to determine which factories are producing how much of each item. Since the central planner is deciding how much of each item is being produced, they generally also choose what kinds of work people do. In theory, this is based on people’s strengths – strong, healthy workers might be manual laborers, while very smart people would be researchers. People are given a set of jobs to choose from based on what the economy needs the most of at that time.
The strength of communism is that the central planning agency can try to distribute all resources to obtain absolute peak efficiency, producing what is needed of every item and using any extra resources for development and social benefit. The hope is that with careful planning, there will be less wasting of resources, and instead of profits being distributed, all savings goes directly towards growth. There is also strength in equality, theoretically all people are equal in a communist economic system, and prosper equally with growth.
Criticisms of Communism
Communism is generally not popular in the West because of the high value placed on individual freedoms. In a communist system, people cannot decide what companies to start, companies cannot choose their level of investment or production, and generally people cannot choose what they want to buy. Historically, communist economic systems arose out of countries that were previously feudal, meaning the majority of the population (the peasant class) did not have a history of personal freedoms to begin with. This meant that the restrictive nature of the central planning agency was not a new burden.
Communism is also characterized by shortages of many popular goods, and surpluses of junk. This happens because people need to ask the central planner to increase production of a good, and it can take months or years before those goods to be produced. Until the new goods are produced, there is a shortage. If the population wants an improved version, or it has fallen out of style, by the time the goods are produced, it is junk by the time it comes out of the factories. This usually leads to large black markets of illegally-traded goods.
In the real world, communist economies face significant challenges with corruption. Factory managers and workers have a strong incentive to sell goods on the black market instead of delivering them to the central planner. This exacerbates the already limited supply of goods. Even the central planners themselves can easily become corrupt, as they have the authority to distribute more goods to their friends and family. Additionally, individual workers may struggle to find motivation to work harder. In a market socialist economic system, workers can be motivated by both personal profits and a social dividend. However, in a communist system, individual profits are entirely removed, and the social dividend does not significantly increase with the increased effort of a single worker.
Command Economies In The World
Full command economies are fairly rare in the world today. An example of a purely communist economic system is North Korea. Other countries, like Cuba, still maintain a central planning agency, but have begun to introduce more elements of market economies.
How Economic Systems Relate To Development
The paths that countries take towards development from a Feudal-type agricultural economy are heavily influenced by the type of economic system they adopt. In general, feudal economies that see a gradual rise in the influence and power of merchant classes in cities tend to evolve into capitalist economies. On the other hand, if the peasant classes gain control of power, either through revolution or a military takeover, the economy typically begins its development under communism.
Countries that adopt capitalist economic systems eventually face pressure from their citizens to introduce measures to prevent exploitation and regulate the power of monopolies. Up until 1900, the United States was generally regarded as a capitalist economy. However, during this time, laws were implemented to restrict the influence of monopolies, establish minimum wages, and safeguard the environment. These protective measures have become more robust and stringent over the years.
By contrast, Cuba, which was a market economy until 1950, underwent a communist revolution in large part in reaction to the extremely strong control monopolies (like the United Fruit Company).