Optional: Extract from Videotape “Introduction to Macroeconomics” - oil price shocks of the 70’s

 

I-3. Types of Economic Systems

Every society has worked out a way to answer the question of What, How and Who. These economic systems, as they are called, generally fall into one of three categories: traditional, command and market economies.

The Traditional Economy.

As the name implies, the answers to the What, How and Who questions are decided by tradition in these economies.

Traditional economic systems are usually found in the more remote areas of the world. Such systems may characterize isolated tribes or groups, or even entire countries. They are less common today than they were in earlier decades. Typically, in a traditional economy, most of the people live in rural areas and engage in agriculture or other basic activities such as fishing or hunting. The goods and services produced in such a system tend to be those that have been produced for many years or even generations. They are produced as they always have been. In short, the questions of what the traditional society produces and how it is produced are determined by very slowly changing traditions.

Who gets to keep what is produced in such an economy? Since there is little produced, there is little to go around. Most individuals live near a subsistence level: They have enough to sustain them but little more than that. In some years, when the harvest is poor, some will not be able to subsist and will either leave the society or die. In better years, when the yield is high, there may be more than enough to allow subsistence. When such a surplus exists, it will be distributed traditionally. For example, the bulk of the produce might go to a tribal chief or large landholder, while the balance is distributed according to custom.

The Command Economy.

Countries such as the Soviet Union, Albania, and China are examples of command economies. Groups of high-level technicians, made up of engineers, economists, computer experts and industry specialists known as "planners," advise political leaders who develop and implement a plan for the entire economy.

Essentially, it is the planners who decide what goods and services will be produced. If they want ship production expanded and mining operations cut back, they issue the orders to do so. If more food is needed, the planners might direct tractor production to be increased or fertilizers to be imported from the West. Those same plans might also encourage labor to remain on the farms and direct that transportation and storage facilities be made available to move and hold farm products.

How are goods produced in a command economy? The planners decide which products will be made. They decide where to locate a new truck assembly plant and whether the factory will use more labor or more modern machinery.

It is the planners, too, with guidance from the country's political leadership, who decide who will receive the goods and services produced. By setting wage rates for everyone, as well as interest rates, profits and rents, the planners directly answer the question: Who will receive the goods and services produced?

The Market Economy.

When the fastest-rising young rock group, the And-So-Forths, appeared recently in a televised concert, they wore old-fashioned saddle shoes. That week shoe stores around the country reported receiving calls for saddle shoes "like the And-So-Forths wear." Although some of the storekeepers thought the first customers to ask for the strange shoe style were joking, they soon got the message. Before long, saddle shoes could be seen in most of the nation's shoe stores.

The events described in the paragraph above probably would not have taken place in a traditional or a command economy. Changes in clothing styles in a traditional society could occur only over a period of many years. Those who make the decisions in a command economy might give in to public pressure and produce saddle shoes, but it is their decision to make. In a market economy, or free enterprise system as it is sometimes called, it is likely that if consumers really want saddle shoes, they will get them.

A market, or free enterprise, economy is one in which the decisions of many individual buyers and sellers interact to determine the answers to the questions of What, How and Who.

In addition to buyers and sellers, there are several other essential elements in a market economy. One of these is private property. By "private property" we mean the right of individuals and business firms to own the means of production. Although markets exist in traditional and command economies, the major means of production (firms, factories, farms, mines, etc.) are usually publicly owned. That is, they are owned by groups of people or by the government. In a market economy the means of production are owned by private individuals. Private ownership gives people the incentive to use their property to produce things that will sell and earn them a profit.

This desire to earn profits is a second ingredient in a market economy. Often referred to as the profit motive, it provides the fuel that drives sellers to produce the things that buyers want, and at a price they are willing to pay.

The profit motive also gives sellers the incentive to produce at the lowest possible cost. Why? Because lower costs enable them to (1) increase their profit margins, the difference between cost and selling price, or (2) reduce prices to undersell the competition, or (3) both.

Economists often compare markets to polling booths. However, unlike the booths in which people vote for politicians, markets provide a kind of economic polling booth for buyers to cast their votes (in the form of purchases) for the goods and services they want. Producers who interpret the votes correctly by producing the things that buyers demand can earn profits. Those who interpret the voting incorrectly, producing too much or too little, or charging a price that is too high or too low, do not earn profits. In fact, they often lose money.

As hundreds of thousands of followers of the And-So-Forths descended upon their local shoe stores in search of saddle shoes, the store managers did their best to find the hot new item. They did this because they knew that the sales of these shoes would add to their profits. Manufacturers soon learned about the calls for the new shoe style from their wholesale customers and did their best to satisfy the requests because they too were interested in profits.

Mixed Economies.

What most distinguishes command economies from market economies is the role of government and the ownership of the means of production. We have seen that in command economies factories, farms, stores, and other productive resources are government owned. We have also noted that the economic questions of What, How, and Who are answered by government planners. In contrast, market economies look to the decisions of individual buyers and sellers to answer the same questions, and the means of production are privately owned. Government plays a relatively minor part in this model.

There are, however, no "pure" market economies in the world today. While we can say that markets account for most economic decisions in this country, government has been playing an ever-widening and important role. For example, 50 years ago, government purchased 15 percent of all American goods and services. It now purchases 20 percent.

This blend of market forces and government participation has led economists to describe our economic system and those of most other democratic countries as mixed economies.

Recent changes in the economies of the Soviet Union, China, and certain other communist countries, have served to bring elements of the market into those command economies. As the number of privately owned businesses has increased, economists have begun to refer to those nations as having “mixed economies.”

Exercise 1. Translate from English into Russian and back:

1. The free market allows individuals to pursue their self-interest without any government restrictions.
2. The command economy allows little scope for individual economic freedom since most decisions are taken centrally by the government.
3. In a mixed economy the government and private sector interact in solving economic problems. The government controls a significant share of output through taxation, transfer payments and the provision of goods and services such as defence and the police force. It also regulates the extent to which individuals may pursue their own self-interest.

Exercise 2. Discuss.

1. Most economists would prefer to categorize the U.S. economy as a mixed economy. Why don’t they call it a market economy?

2. Suppose in your previous life you were an economic advisor to Nikita Khrushchev of the Soviet Union. How did you, as a central planner, decide what, how and for whom to produce goods and services in a country of roughly 123 million people at the time?

3. What is the meaning of “free” in free market?

4. Proponents of free market systems argue that free enterprise leads to more efficient production and better response to changing consumer preferences. But others point to the fact that markets are not perfect. Why aren’t markets perfect?

Exercise 3. Write a short essay on one of the following topics:

1. The strength of the marketplace and motivations for government involvement.

2. Russia – from plan to market.

Exercise 4. Understanding a lecture: Yates, Unit 3.

1. You are now going to hear part of a lecture, divided into short sections to help you understand it. As you listen, answer the questions below.

Section 1

Complete the following statement with the words the lecturer uses:

· Markets are _________________through which prices influence how we ____________________.

· Note down how many kinds of economy the lecturer is going to talk about.

Section 2

· Note down the first kind of economy.

________________________________________________________________________________

· Is this statement correct or incorrect?

In this kind of economy the government decides what should be produced and what should be consumed.

Section 3

· Is this statement correct or incorrect?

To plan this kind of economy is very simple.

· Note down the country that is an example of this kind of economy.

________________________________________________________________________________

· Is this statement correct or incorrect?

In this kind of economy the government does not own factories or land.

Section 4

· Note down the kind of economy the lecturer is talking about.

________________________________________________________________________________

· Is this statement correct or incorrect? “You cannot become a millionaire in this kind of economy.”

· Note down the country that is an example of this kind of economy.

________________________________________________________________________________

Section 5

· Note down the kind of economy the lecturer is talking about.

________________________________________________________________________________

· Which two sections of society interact in this kind of economy?

________________________________________________________________________________

· Is this statement correct or incorrect? “Most countries have economies of this kind.”

 

 

2. Make sure you know the English equivalents to the collocations below:

- командная экономика

- планирующий орган

- центральное планирование и руководство

- свободный рынок

- вмешиваться

- преследовать собственные интересы

- превышать благосостояние

- создавать новые рабочие места

- государственное вмешательство

- смешанная экономика

- государственные ограничения

 

3. You should also write a summary of the lecture, based on your notes.

 

Exercise 5. Listening (from Guide to Economics, unit 3 C, F and unit 4 C, F) –