Economic systems Notes

Why Do Economic Systems Exist?

1. Every society must answer three connected questions:
   1. What to produce (which goods and services)?
   2. How to produce (which methods, technology, and organization)?
   3. For whom to produce (who receives the output, and on what basis)?
2. These questions matter because scarcity (limited resources) forces trade-offs.
3. So, even if a society has "a lot" of a resource, it is never unlimited.

What Are The Two Broad Ways to Run an Economy?

Many real economies are mixed, but a core distinction is how decisions are made.

What Are Command Economies?

Three key components are slavery, feudalism, and fommunism

Slavery: production through coercion

1. In slavery, individuals are deprived of freedom and forced to work by someone who has power granted (or tolerated) by society.
2. Slavery has been used to achieve economic and political goals, including domestic service, crop production, and large construction projects.

Feudalism: land, hereditary titles, and serfdom

1. Feudalism developed prominently in Medieval Europe (and also existed in places such as Russia and Japan).
2. The economy was organized around land ownership and hereditary rule:
   1. A monarch and nobles (lords) controlled most land.
   2. Production was mainly agricultural, with some manufacturing (tools, weapons, textiles, carpentry).
   3. Most people were peasants or serfs with few rights.
      1. Serfs were typically tied to the land.
      2. They were not exactly property in the way enslaved people were, but they lacked freedom to move to better opportunities.
      3. With limited rights and education, many had little choice but to work the land and produce for the landowner.

Communism and central planning: a modern command model

1. The most recent major system to develop that involved central planning was communism.
   1. In the nineteenth century, Karl Marx and Friedrich Engels argued that capitalism in rapidly industrializing cities led to worsening conditions for many workers and to rising inequality.
2. In their original view, a capitalism would contain forces that undermine it.
   1. Like competition pushing prices down and businesses trying to cut costs, including workers' wages.
   2. In their original view, a socialist revolution would move control of production to workers and, over time, the state would "wither away" as people made decisions communally.
   3. In practice, twentieth-century revolutions that claimed to be socialist or communist did not reach this stage, and decisions about production typically remained centrally planned.

What Are Market Economies and Capitalism?

1. Over time, especially from the Renaissance onward in much of Europe, a growing middle class of merchants, traders, and skilled manufacturers emerged.
   1. Many were no longer tied to land like peasants, so they moved to cities and worked in manufacturing and trade.
   2. Political changes (including revolutions challenging monarchies) were closely connected to demands for greater freedom to own property and shape economic futures.
2. In capitalism, ownership is mainly of capital rather than land.
   1. Capitalists (owners of capital) invest in businesses and employ workers to transform raw materials into goods and services that can be sold.
3. A famous argument associated with market capitalism is that people's self-interest can help coordinate economic life.
   1. For example, producers supply goods because they benefit from selling them, not necessarily because they feel personally responsible for each buyer's wellbeing.

Why Are Most Real Economies Are Mixed?

1. In practice, few countries are purely command or purely market.
2. Most are mixed economies, combining market decision-making (prices, competition, consumer choice) with government roles (laws, taxation, public services, regulation, and sometimes state-owned industries).
3. A useful way to compare countries is to ask:
   1. How much does the government own (land, firms, resources)?
   2. How much does the government plan (production targets, prices, wages)?
   3. How much freedom do individuals have to start businesses, choose jobs, and buy and sell?