The high degree of consumer satisfactio n. In a market economy, the choice one group makes does not affect the choices of other groups. If 51 percent of the people want to buy classical music, and 49 percent want to buy rap music, people in both groups can still get what they want. Goods are usually privately owned, and pr ivately owned goods last longer than goods owned by others. For example, who would take better care of a new car or truck—the person who owns it, or the person who drives one owned by his or her boss?
The answer almost always is that the owner is the one who takes better care of his or her property. Some people may be too young, too old, or too sick to earn a living or to care for themselves. These people would have difficulty surviving in a pure market economy without assistance from family, government, or charitable groups. For example, private markets do not adequately supply all of the roads, libraries, universal education, or comprehensive health care people would like to have.
This is because private producers concentrate on providing products they can sell for a profit. Workers might worry that their company will move to another country in search of lower labor costs. Employers may worry that someone else will produce better or less expensive products, thereby taking their customers.
Chapter 2, Lesson 2 Presentation. Textbooks like to use neat categories like traditional, market, and command or socialist economies; but the real world is not so orderly. Mixed economies exist for several reasons. One is that the three major types of economic systems identified by economists--traditional, command, and market--are extreme cases that are useful for classification and descriptive purposes, whereas there is much more diversity in the real world.
A second reason for diversity is that a seismic domestic event like a revolution or a period of severe economic decline may invite change. A third reason is that nations tend to evolve over time, shedding some policies that do not work and adding new ones that do. Perhaps the most famous example of a revolution affecting economic change took place after Joseph Stalin's rise to power in Russia in Stalin's iron control of the political apparatus transformed a largely peasant and emerging industrial society into a massive command economy.
By the s, the Soviet Union was a major industrial and military superpower. Until its collapse in , the economic success of the Soviet Union's socialist economy was something that many emerging countries copied, even though they may have started with significant components of traditional or market economy structures.
Conditions were so harsh in the s that a number of non-free market programs were created, including unemployment insurance, the minimum wage, Social Security, price supports in agriculture, and even bank deposit insurance. This was an example of a predominantly capitalistic market economy evolving into a mixed market economy, an evolution that took place because a democratic political system allowed people to demand changes to the way workers and consumers were treated. When we consider political parties and economic systems at the same time, the picture often becomes muddied.
For example, the conventional name of North Korea is the Democratic People's Republic of Korea--despite the fact that there is no democracy there at all. The same is true for Laos, or the Lao People's Democratic Republic, which is also not a democracy because it is ruled by the communist Pathet Lao party. Because there are so many characteristics that a mixed economy can have, it is difficult to describe them all.
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Perhaps the most distinguishing feature of a market or capitalist economy is the private ownership of productive resources and the freedom to use them as the owner sees fit. Under socialism, private individuals own some of the productive resources, while the government owns and uses the rest. The extent of government-owned resources varies from one socialist country to the next, with most socialist countries being the ones with the most government ownership of resources.
For example, in the former Soviet Union, none of the resources were privately owned because the government owned them all. Yet another shared characteristic under socialism is that the more socialistic the country, the more likely the political system is to be communist. For example, four of the most socialistic countries today are Cuba, China, Laos, and Vietnam--all of which are communist and have no democracy.
In a traditional economy, almost all of the major decisions are made according to tradition, making progress and change very difficult. However, when people from a traditional economy come into contact with other cultures, they often adopt technologies and ways of doing things that can benefit them. When the Inuit of Northern Canada saw that rifles were more effective hunting tools than spears, rifles were readily accepted.
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Likewise, acceptance of markets and limited resource ownership may have been accepted in the same way. The mixed economies would be represented by the overlapping segments in the center of the diagram in Figure 2. Those economies with the most significant components of markets and capitalism are likely to be the most economically developed of the group.
A nation's involvement in the three major economic decisions can vary considerably. Some countries have governments that intervene only in certain key industries and leave the rest to markets. Other countries have governments that intervene much more. In the case of socialism, the more socialist a country claims to be, the more likely the possibility that its government makes all of the three major economic decisions, often with the claim that they are made for the benefit of its people. When this happens, a mixed socialist economy can turn into a socialist command economy.
Often the distinguishing characteristics of a socialist economy is that it has one-party rule. The party that rules claims to make its decisions on behalf of all citizens, but it often makes decisions on behalf of the ruling party, which is why many socialist economies are also described as command economies. Mixed economies share characteristics with all three economic systems—market, socialist, and traditional.
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Even so, it is sometimes difficult to describe them as uniquely belonging to one type of economic system or another. The communist philosophy was first laid out by the economic historian and social scientist Karl Marx and his colleague Friedrich Engels in the s. Marx viewed all of history as a class struggle between workers and property owners—a struggle that would lead to alternating periods of depression, such as the one the United States had in the s, and periods of prosperity.
Marx thought that the working class would eventually rise up and overthrow the property owners. In this ideal community, no government would be needed and could therefore be eliminated. In order to get there, however, Marx thought that a society would pass through a period of socialism that would require a strong government that served the needs of the people.
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This is why so many of the so-called communist governments in China, the former Soviet Union, Cuba, and other places around the world frequently described themselves as being socialist, as if they were stepping-stones needed to reach the eventual ideal of communism. In a communist system, labor is organized for the common advantage of the community, and everyone consumes according to his or her needs.
As for a true communist economy, there are none in the world today, and there have never been any in the past. Communism still remains a theoretical ideal in the minds of many revolutionaries, even though in practice it has never been reached. According to Karl Marx, socialism is the stage of economic and political system necessary for a country to reach the ideal of communism. Under socialism, the government owns and controls some, but not all, of the basic productive resources. In most socialist economies, the government provides some of the basic needs of its people, such as education, jobs, transportation, and health care.
There are a number of mixed socialist economies today. China has a mixture of traditional, command, and market economies. While tradition has a strong influence in rural areas, the government makes many of the major economic decisions and owns the major factors of production.
Cuba and North Korea are similar to the former Soviet Union, where a socialist government once controlled almost all resources. Venezuela made a dramatic turn toward socialism when Hugo Chavez became president in He embarked on a policy of land and wealth redistribution, along with nationalization of domestic and even multinational corporations. Firms that were nationalized included telephone, electric utilities, leading steel companies, food processing plants, and even banks. Most of the nationalization was done by either confiscating or purchasing firms from their former owners.
President Chavez died in before his nationalization was complete, leaving an economy that had a mix of socialism, capitalism, and tradition. There are many examples of mixed market economies, especially in democratic countries, where people have the ability to influence the makeup of the economy. In Norway, the government owns the basic petroleum industry. It then uses the revenue from selling oil to other nations to keep its domestic gas prices low, finance education, maintain roads, and provide social welfare for its citizens.
Because the government controls one major industry, it is a mixed economy based on capitalism and markets with some elements of socialism. However, the population objected to the high taxes needed to support its social programs, so the country cut back on these expenditures in the s. It is now a mixed market economy because it has not given up all of its socialist programs.
Because of generous welfare benefits in Denmark, Germany, and France, these countries also qualify as having mixed market economies. In fact, any country that provides significant welfare benefits would qualify, especially if the benefits received by citizens were paid for with taxpayer's money. South Korea, India, and Thailand also have mixed economies that combine traditional economies with elements of command and market economies. Finally, the United States also falls into the category of being a mixed market economy.
This is because many of our free market features are combined with traditional and socialist elements. As for tradition, many children follow their parents into their parents' occupations. As for elements of socialism, the United States has federal programs that make disability payments to people injured on the job or programs that provide nationwide health and retirement payments for millions of people.
Programs like these apply to large groups and are paid for with taxpayer dollars but the programs by themselves do not make the United States a socialist economy. Mixed economies are a fact of life and can be found all over the globe, and they offer advantages and disadvantages to those who live in them. Countries that have mixed economies seem to have them because of the benefits the mixed components offer. For example, during the s China's economic growth was poor in comparison with its neighboring countries Japan, South Korea, and Hong Kong. Shortly after Chairman Mao Zedong's death in , China's leaders undertook a modernization of China's economy that involved a heavy dose of capitalism, or "capitalism with Chinese characteristics" as it was often described.
China became one of the fastest growing economies in the world and the world's second-largest economy. To maintain its growth, China has endorsed various capitalist measures such as markets, competition, profit, and international trade. Still, China is controlled by its communist party, and the government owns all factors of production. Similar changes are also happening all over the world, including the countries of North Korea, Cuba, and even in the former Soviet Union. The advantages of mixed economies are not restricted to communist-controlled command economies.
In the democratic countries of northern Europe, countries like Sweden, Denmark, Germany, and Norway have maintained extensive socialistic programs that offer generous education, employment, and health benefits even though their economies are based on capitalism and free markets. In the United States, socialist-sounding programs like widespread health insurance exist side-by-side with competitive markets and the ownership of private property.
Mixed economies with a strong component of socialism tend to provide more services to consumers than do traditional command economies. For example, Germany and the Scandinavian countries offer a wide range of social benefits that includes medical coverage, free education, and even generous vacation time. The problem is that these programs are not free, so the countries must find a way to pay for them. One way to cover the costs of these programs is through taxation.
As a result, personal income taxes are higher in almost all major European countries than they are in the United States. The other way to cover these costs is to produce less of something else. So, the cost of generous welfare programs can be absorbed by shifting resources away from other projects.
How does an economic system help a society deal with the fundamental problem of scarcity? Suppose you run a company that makes and sells smart phones. If the stores in which your phones are sold cannot stock enough phones to meet customer demand, what would you do? Would you produce more phones or fewer phones? Would you change the price of your phones? The dominant economic trend of our lifetime has been the transition of communist and socialist economic systems to capitalism. It has been a transition of epic proportions, and it shows few signs of slowing down. As countries make the transition, the final form of capitalism they adopt will reflect many of their own cultural and social values.
That is one reason why so many different faces of capitalism exist in the world today. Some of the former transitioning countries, such as Chile, Russia, and the former Soviet bloc countries of Eastern Europe, have almost completed their transition to capitalism. When an economy becomes large and complex, a capitalist market-based system is the most efficient way to organize production and provide the necessary economic incentives.
Even so, economies that are not capitalist often find that the transition to capitalism is difficult. Simply put, capitalism is the most powerful engine for generating wealth the world has ever seen. Because of capitalism, countries or regions as culturally diverse as Germany, Japan, Singapore, South Korea, Sweden, the United States, and the special administrative region of Hong Kong have greatly increased their productivity and have experienced exceptional economic growth.
In a world that is becoming increasingly connected by the media, people everywhere are aware of—and even begin to want—some of the wealth that capitalism in other countries can generate. In contrast, the collapse of the Soviet Union indicates that communism as an economic system has reached an evolutionary dead end. Pure capitalism can be harsh and may not be attractive to everyone, but in democratic nations, people can modify capitalism to meet more of their economic and social goals. However, there is no guarantee that countries attempting a transition to capitalism will be able to do it smoothly, or that they can do it at all.
This is because there are so many hurdles to negotiate. A key feature of capitalism is the ownership of private property. Private property is also important because people take better care of property they actually own. In Poland, Hungary, and the Czech Republic, this transition was accomplished by using vouchers. In practice, vouchers were either given to the citizens of a country or sold at very low prices. State-owned companies could then be converted to corporations, and the corporate stock could be auctioned for vouchers.
As vouchers were exchanged for certificates of ownership, the ownership of state-owned enterprises was transferred to private hands. Under communism, the Communist Party was the ruling class. When countries transitioned to capitalism, the party feared that it would lose much of its political power as a new class of entrepreneurs and capitalists took over.
In these countries, the voucher system worked reasonably well to redistribute wealth to new leaders. In other countries, Communist leaders grabbed a large share of vouchers and thus a large portion of ownership in many privatized companies. In the most blatant cases, some of which occurred in Russia after the collapse of the Soviet Union, the ownership of companies was directly transferred to politicians who were influential during the transition period.
As a result, former political leaders traded their political power for economic power in the form of resource ownership, and so the old ruling group simply became the new ruling group. In the case of Russia, the members of the old ruling party had a difficult time actually giving up their power. People in countries that transition to capitalism have to adjust to a whole new set of incentives. They have to learn how to make decisions on their own, take initiative, interpret prices, and fend for themselves in free markets. Many of these adjustments are enormous, often even prohibitive.
For example, workers used to getting the same salary regardless of how hard or how often they come to work have to learn that they will get fired if they do a poor job. Factory managers have to learn to pay back loans they took out from banks, and they have to learn to pay their bills on time. The costs of capitalism during the Great Depression, for example, included instability, unemployment, and social unrest. At that time, the United States did not have the economic policies and social welfare programs needed to lessen the devastation.
Now that such assistance exists in the United States, most economists agree that another Great Depression will not occur here. The same cannot be said for the countries in transition. They have not yet developed the automatic stabilizers and the social welfare nets that cushion the instabilities of capitalism. During transition, nations will experience the instabilities of early capitalism long before they experience the benefits. Despite the transitional problems, most nations and regions all over the globe are moving toward capitalism.
Some have a little further to go than others, but may eventually get there; others appear to have gone about as far as they ever will go. To see why the transition to capitalism has been so difficult for Russia, it helps to understand how the economy was managed during the Soviet era. During that period, the government controlled economic activity with Five-Year Plans. It tried to manage the economy by assigning production quotas to all Soviet industries.
Planners then sought to ensure the growth of the economy simply by increasing the quotas given to the farms and factories. Despite its efforts, central planning eventually failed. The Soviet economy had become too complex and large to be managed by a single planning bureaucracy. Shortages appeared everywhere, workers were often unpaid, and many people lacked the incentives to work. Under the restructuring, plant managers had more freedom to pursue profits, and small business was encouraged.
The government distributed vouchers to citizens so that they could purchase ownership shares in companies being privatized. Eventually Russia opened a stock market, which made the ownership of capital by private individuals a reality in a country that once preached the evils of private property. Under the first regime of President Vladimir Putin, privatization began to slow. Under the guise of fighting corruption, Putin used his power to regain centralized control of key energy and mineral industries.
The period of transition to capitalism is now over for Russia. Under the second presidency of Putin, the country can be described as having a market-based economy with the exception of energy, natural resource, and defense-related industries, which the government controls. That year the Chinese Communist Party, under the leadership of Mao Zedong, gained control of the country. Over the next few decades, China modeled itself after the Soviet Union, adopting a series of Five-Year Plans to manage its growth.
This ambitious and radical Five-Year Plan forced farmers off their land to live and work on large, state-owned communal farms. The Great Leap Forward was a disaster. The agricultural experiment failed, and the economy never came close to achieving the planned degree of industrialization.
Other plans followed, but by the late s China finally decided to abandon the Soviet model. By the early s, the influence of other successful market economies in Asia—especially in Hong Kong—was too much for China to ignore. Today China is privatizing some industries, introducing market reforms, and otherwise acting in a capitalistic manner. Many prices are still regulated and many industries are state owned, although many state-owned firms have been given more autonomy. At the same time, China is faced with some problems that may slow its growth.
How do we become economically literate? A Stock Index is not all that different from a farmer going out into the field and checking on the progress of a few selected plants to see how the crop as a whole is doing. Speaking of economic bailouts, trillions of dollars are being spent by governments around the world, with much more probably to come.
Why is it so important to save everyone from banks to carmakers to insurance companies? Many would go under anyway, even during normal times. Inefficient carmakers, for example, are eventually replaced by the ones that know better how to efficiently produce vehicles that the public wants to buy. But banks and major insurance companies, like AIG, because they provide the liquidity and stability to the economy at large, need to be treated as special cases.
Without the money that banks provide in the form of loans and credit, the economy would grind to a halt. But which ones do we save and which ones should be allowed to fail? Many politicians and economists have begun calling for nationalization of banks and major industries. How would nationalization work? A government can simply take control of a bank-or any company-by acquiring a majority of the voting shares. The government can then use its controlling shares do whatever is necessary to bring the bank back to health.
When things have settled down, the government can then reprivatize the bank by selling its shares back to the public, and hopefully not lose too much money in the process. What, in your opinion, is the best way to solve the problem? Actually, neither of the options I described above is going to solve the current crisis completely, or cheaply. There are a lot of other bad assets out there-credit card and other consumer loans, for example.
Even commercial property is headed south. Where will all this money come from? In the United States, it comes from two primary sources: Treasury and the Federal Reserve. The other main source of funding for the bailout programs comes from the Federal Reserve. Many politicians have argued that free market, neo-liberalism ideas are dead. The idea that markets can be allowed to regulate themselves has been pretty much debunked by the current financial meltdown.
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The banks and rating agencies that allowed trillions of dollars to be invested in sub-prime loans to borrowers who had no ability to pay off their mortgages is a scandal of epic proportions. Treasury Bills, demonstrates the radical turn away from market-based investment-at least in the short term. More government control and government regulation-will it create a bigger state? Or a more effective one? What is needed is a healthy dose of government oversight without unhealthy interference of governments in global markets.
In your new book, you write a lot about free trade. Many unemployed workers complain about jobs moving somewhere else, and growing deficits with China can make Americans and Europeans more concerned about free trade. Do you think isolationism can have a surge in the coming years? And the French government has put isolationist conditions on its bailout of domestic carmakers.
Even the Swiss are encouraging domestic banks to loan to locals. The reasoning is simple: The end result is even more jobs being lost and consumers having to pay more for inefficientlyproduced domestic products. We only have to look back at the disastrous results of isolationism during the Great Depression. Trade wars are easy to start but extremely difficult to stop. Without access to foreign markets, many farms and factories-in the developing world especially-will have to close down, leading to massive job layoffs. Do you think the next decade will be a less globalized one, with more barriers among the countries?
Or is globalization unstoppable? Globalization is not unstoppable. During financial and economic crises, the first thing many investors and companies do is retrench.
When rich-country investors lost a bundle in U. This led to catastrophic drops in markets from India to Russia to Brazil. To make things even worse, by converting their investments to U. The irony is that the United States market was responsible for the crisis, but it was the developing world that suffered the most. How do you expect emerging markets will do in the years to come?