For Economies Differ in KindFree Markets, Command, and Mixed Economies and Why Economics Matters to You!

What is Economics? Economics is the study of productivity,

distribution, and the consumption of wealth in a society.

Because every nation has a variety of resources and a different style of government, the way a country manages its economy varies from place to place.

The United States, for example, is a mixed economy which favors free market capitalism. Cuba, on the other hand, is a command economy which favors communist policies.

American Style Capitalism

How do economies create wealth? Wealth is created in societies by the way they manage their factors of production – and by which factors of production are available in a given place at a given time.The factors of production include: I. Land: Natural resources like water,

timber, coal, iron ore, or oil.II. Labor: Human resources like workers and

entrepreneurs who invest. III. Capital: Man-made resources like

machines or tools used to produce goods.

LandLand may just be a really fine piece of real estate in downtown Manhattan. Or, it might be a rich plot of land like the Comstock Lode. It may be a piece of land with valuable timber, water, or valuable resources like coal, oil, and iron ore. Or, an area which will soon see a railroad built across it, like the Gadsden Purchase did in the 1850s. Where you build your business matters!

Labor: Human Resources and Entrepreneurship

The people who work determine how productive that company will be. But they have needs as well. Every employee must satisfy his or her own basic needs, which means that they will have demands of the business. Entrepreneurs are essential in a capitalist economy, because they invest their money in order to found companies. In doing so, they take a major risk. Only if their company is successful will they make a profit. Many entrepreneurs fail several times before they succeed. Some never succeed.

Capital: Resources of Productivity

Capital refers to the man made goods that are used to increase the productivity of the company: buildings, factories, computers, and tools which are used by laborers in order to produce goods. When capital is combined with efficient labor, the productivity of a company will increase dramatically, and – if there is a demand for the goods the company is making, enormous profits may follow.

Scarcity… What drives prices.

Scarcity in an economy is what determines the value of goods to one degree or another. Where products are abundant, their monetary value is low. But where products are scarce, their value may increase dramatically. Consider the value of water in Virginia. As a relatively abundant resource here in 2015, it’s pretty cheap. On the other hand, consider the value of diamonds. They are scarce – and therefore quite valuable.

Questions Which Must Be Answered by Every Society’s Economic System…

1. What goods and services should be produced?

2. For whom should goods and services be produced?

3. How should goods and services be produced?

4. How many goods and services should be produced?

Replace “goods and services” with any important item in our economy: cars, gallons of gasoline, pounds of sugar, eggs, or pairs of shoes. Decisions are made about all of these.

How we answer these questions determines our style of economy…

There are three basic styles of economic systems:

The Economic Continuum: Command Economies Mixed Economies Free Market Economies

Marxism Socialism “The Welfare State”Capitalism

Leninism Modern Scandinavia The United States*

Maoism

Cuba “Laissez-Faire”

* NOTE: The United States, although committed to free markets and capitalism, is clearly a Mixed Economy in practice: income taxes, Social Security, health care, etc.

Free Market EconomiesAmerican profess to aspire to a Free Market Economy, but since there are obvious problems of economic exploitation which are associated with this model, it’s not ever perfectly adhered to. Nevertheless, Americans attempt to protect the most important aspects of free markets, which are known to produce the best results for a society in the long run.

No Government Intervention

Private Ownership of Businesses

The Profit Motive

Competition

Consumer Sovereignty and Individual Choice

Adam Smith: The Wealth of Nations

Adam Smith’s The Wealth of Nations was a treatise which argued that free markets would usually satisfy all of the needs of an economy – simply because it was in the self-interest of all members of society to do so. If people were left alone by the government, they would go about satisfying basic needs, as if an “invisible hand” was a work. To quote Smith: “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.”

1. No Government Intervention

While many businesses would like for the government never to intervene in the economy, there are too many examples of corrupt business practices for the government to simply abdicate it’s role in managing the economy. Anti-Trust Laws, for example, and tax policies are just two examples of how the government in the United States does intervene in the nation’s economy.

2. Private OwnershipTo a large degree, the United States government does intervene to protect private property rights. Being secure in one’s property is a main goal of our government, and securing property rights against seizure from the government – or any other force – is something Americans prioritize – usually!

3. The Profit Motive

Why do entrepreneurs risk their life savings in order to establish a business and provide consumers with goods and services? Why provide jobs and employ Americans? Because you get to keep the profits, of course! The profit motive works!

4. CompetitionAmericans all benefit from competition in our society. When companies have to compete with each other to provide consumers with goods and services, two positive results quickly emerge: the quality of goods and services goes up, and the prices of goods and services go down. Who benefits? Consumers.

5. Consumer Sovereignty & Individual Choice

Consumers get to choose both what goods and services they want to have and what jobs they would like to work. If you’re not satisfied by the price or quality of a product, don’t buy it. If you are not satisfied with $10.00 an hour without benefits working at a restaurant, you can change jobs. (The only downside: you may end up unemployed in a free market capitalist system, which has dire consequences.) There are no guarantees of success in a capitalist system.

Command Economies Central Government

Ownership – No Private Ownership of Business.

Lack of Consumer Choices – No Competition against Government Products.

No Private Ownership of Businesses – No Profits for Individuals.

Karl Marx & Fredrick Engles: The Communist Manifesto

The Communist Manifesto is not simply an economic plan, it’s a tool for interpreting history and predicting the future, according to those who buy into its premise. “Workers of the world, UNITE! You have nothing to lose buy your chains!” Marxism spread to many nations and many alternative forms: Leninism, Maoism, or variations of the system in Cuba or Vietnam.

Mixed EconomiesTo be fair, more or less every economy is a mixed economy. It’s almost impossible to practice a pure form of either free market capitalism a communist-style, command economy. In a mixed economy: 1. Individuals and businesses decide both determine

the goods and services which will be provided for the private sector.

2. The government controls spending in the public sector: for example, the military, road construction, or welfare services.

The greater the role of the government in determining the economic decisions of the state, the closer it is to a command economy. If the government is less involved in the economic decision-making, it’s more of a free-market economy.

Democracy and Capitalism

Democratic institutions allow capitalism to thrive. By allowing anyone to start a business and allowing choice on the part of entrepreneurs, consumers, and laborers, democratic governments tend to support free markets. When there are excesses – or when one person’s wealth threatens the liberty of the commonwealth, adjustments are made.

Authoritarian Systems and Command EconomicsAuthoritarian governments have the power to compel people to work certain jobs and produce specific goods. Where people have no liberties, they cannot make choices about their government or their economies. Thus, command economies go hand in hand with dictatorships and authoritarian regimes.

Economic Conditions That Sustain Democratic InstitutionsThese are the Economic Conditions that sustain Democratic Institutions: 1. Prosperity2. Relatively Equal

Distribution of the Wealth

3. Private Ownership of Property

4. Market economics

Social Conditions That Support Democratic Institutions

These Social Conditions Support Democratic Institutions: 1. Literacy2. Equality3. Compromise4. Individual

Rights

Ideological Conditions That Support Democratic Institutions

Ideological Conditions That Support Democratic Institutions: 1. dignity and worth of

the individual2. inalienable rights to

life, liberty, property, are protected

3. due process for all citizens

4. balance between majority rule and minority rights.