Types of Economic Systems in Political Economy - Essay Example

Introduction Economics is a large and complex term that describes how individuals, groups, institutions and the government at large make decisions on the allocation of limited resources to several competing wants. In any economy, there are always many competing wants from citizens, which the state is mandated to fulfill effectively, however, in their bid to fulfill this needs, they are always confronted by few and unlimited resources, for this reason, a choice steps in (Gregory & Stuart 2013 35). Economics has several branches that that deal with how this important economic question is answered in the fields that they represent. Political Economics According to the history of economics, political economy is a terminology that was originally used to describe the processes of production and trade in various goods and services, as well as their associations with the law, customs, and the government. The government came into the picture because of its key objective to its citizens ‑ that is the distribution of national income and wealth to all people in all its regions within its boundaries. The term political economy is said to have found its origin in the 18th century, during this time, it was referred to as the study of states or polities, and hence its present name – political economy. Following this historical development, it is evident that the political economy in modern times deals with the way governments make decisions on the distribution of income and wealth to its citizens to spur growth and development. In addition, political economics looks at how various political forces play a role in shaping various economic policies of a country, especially with regard to distributional conflicts relating to resources and management of political institutions. It examines how governments make their overall expenditure, investing in various sectors with the objective of improving the citizens’ well-being. Types of economic systems In general, there are multiple components of economic systems that are characteristics of different countries, it is important to have this understanding since the interaction of these different economic systems can be coherent or result in some kinds of instabilities. The process of decision making over various economic factors determines the use of economic inputs, which comprise of factors of production, distribution of the resulting output, the level and extent of centralization in the process of decision-making as well as those who make the particular decisions. Decisions regarding economic factors and their characteristics can be carried out and affected by industrial councils, the government through its agencies as well as private owners. It is important to understand that every economy is a special system with a fundamental objective of allocating resources geared towards exchange, production, distribution as well as consumption. In addition, each of these economic systems is made stable by a blend of threat and trust which are the results of various institutional arrangements. In order for any economic system to run efficiently and satisfactorily, it must be able to provide answers to several questions in the economic context. For instance, the problem of scarcity of resources requires carefully thought out and reasoned answers to such questions as; what to produce, how to produce it, and who gets what is produced. An economic system provides the basis upon which answers to these fundamental questions can be established, however, it is important to understand that different economic systems answers these questions differently. The capitalist economic system Capitalism is an economic system in which economic activities are facilitated by means of production that are largely in the hands of private individuals and operated at a profit, for this reason, some of the important features of these economic systems include accumulation of capital, presence of many competitive markets as well as wage labor. In addition, pricing is also an important feature that characterizes this system; in this case, parties to the transaction determine the prices at which assets, goods, and services are meant to be exchanged (Degen 2008 65). Across different capitalist economies, there is huge variance in the degree of competition, the role of intervention and regulation as well as the scope of ownership of factors of production, these factors that bring differences in the way different capitalist economic systems are run. The capitalist economic system has been carried out and practiced in the world by broader processes of globalization such as imperialism, the system spread fast such that by the nineteenth century it had become dominant in most of the global economic systems (Robbins 2007 235). Later, the system has grown and expanded, rising to become the encompassing worldwide in the 20th century. The socialist economic system In contrast to capitalism s socialist economic system, on the other hand, operates on the basis of social ownership, which makes the foundation for means of production, in this case, it can operate on autonomous co-operatives or direct ownership effectively. In this type of economic system, markets are relied upon in the process of allocation of goods and services among several economic units; in this case, the designation market socialism is made good use of (Hanson 2003 105). It is important to understand that when planning is used, this economic system is designated a planned socialist economy, it is important to understand that various non-market forms of socialism usually comprise of an accounting system that is based on calculation in-kind or a measure of labor-time as the means to value resources and other goods and services. Keynesian economics As far as economics is concerned, it goes without mention that great advances that have been witnessed have been associated with the name and works of Keynes, a British economist. The most important works that were made and written by John Keynes were published during the time of the Great Depression that affected most countries in Europe and other parts of the world (Ragan & Richard 2008). It is during the Great Depression times that Keynes came up with the “General Theory of Employment, Interest and Money,” a work that received sharp criticisms from the orthodox neo-classical tradition that was prevalent in those times. Keynes was instrumental in spearheading a revolutionary way of economic thinking, in this approach; he managed to overturn older ideas that were characteristic of neoclassical economics, in his analysis, Keynes held that free markets had the ability to provide full employment automatically, but only if workers were flexible and effective in their demands for wages. In his analysis of the economic theory, Keynes postulated that the level of aggregate demand in the economy was significant in determining the level of economic activities, in this understanding, inadequate demand had the potential to cause prolonged periods of high unemployment. As far as the role of the state was concerned, Keynes argued its intervention is an important moderating “boom and bust” cycle of various economic activities. It is important to appreciate that Keynes was active in advocating for the use of fiscal and monetary policies and approaches in the mitigation of the effects of economic recessions and depressions in an economy. The concept of Investment in an unstable capitalist economy Capitalist economists have some important characteristics; output, employment as well as prices are liable to fluctuate with complicated and evolving financial structures, in this regard the solution calls for an effective understanding of how profit-seeking businesspersons and bankers transform an initially robust financial system into a fragile one. The market systems that are used in the determination of financial relations and valuing assets provides important signals that are important and conducive to instability and realization of particular economic instability, to this effect, it is important to understand that periods of stability in a modern capitalist economy are not static, rather, they are transitory. In the neo-classical tradition, economics planning and execution are based on various systems, decisions regarding savings and investments are determined by the influence of interest rates. In this regard, it is evident that an economic system by its nature would tend to produce an automatic equilibrium between savings and investments. Keynes came up with a different approach to savings and investments in a capitalist economy, he shuttered the symmetry advanced in this argument, this was by severing the link between savings and the resulting rates of interest In his analysis of the two concepts, Keynes made it clear that savings and investments were two factors completely independent of each other; in fact, different groups of people with reason took them different from each other. For this reason, it is evident that if the rate of interest happened to drop out of the account of savings, it would still maintain an important place in the investment analysis. Keynes made argued that in the capitalist economy, the volume of private investment would is determined two important and considerations; first is the cost of borrowing and second is their predictable rate of return, that, if the expected net yields go above the cost of capital, capital expenditure in this context becomes worthwhile. Alternatively, if the rate of interest exceeded the expected rates of return, then, it is clear that expenditure on important capital resources like a plant, equipment, and other inventories would not be undertaken. Keynes’s interpretation of savings and investments provides an element of continuity, however, this continuity between Keynesian and other neo-classical economic systems should not cover up an important difference in their analysis and interpretation of expected rates of return. It is important to understand that Keynes had this association in mind but the capital stocks continued to grow and expand, he anticipated that rates to the additional units would also respond by falling. However, another matter that proved relevant to his analysis of investment decisions came into the surface – the expectations of entrepreneurs in the economy. Keynes made an emphasis that the most important contusion that was relevant to the meaning and significance of marginal efficiency of capital, on this note, it ensued on the failure to see that it wholly depends on the prospective yield of capital, and not on its current yield as earlier perceived. In order to make other economists understand his thoughts on how investment expenditure is carried out in the capitalist economy, Keynes came up with the General theory. This theory places the investment function at the central stage of analysis, in a bid to explain the reasons why the market capitalist does not necessarily attain the desired full employment level at equilibrium. In so doing, Keynes places the neo-classical theory of the firm as the micro-foundations for his concept of the marginal efficiency of capital that happens to be sloping during this time, in fact, this is the central determinant for an underemployment equilibrium position. Keynes makes an effort by going ahead to develop a theoretical proposition as to particular reasons for this volatility when it comes to investments. He makes a close examination of the prevailing state of confidence that entrepreneurs have as far as their investment decisions are based on long-term expectations. According to Keynes, these expectations usually arise from the entrepreneurs’ past experiences in the process of investments, this means that there is a comparative different that exists between different entrepreneurs. The concept of investment in a capitalist economy is a matter that can be determined by multifaceted factors, this is according to Keynes’s understanding of its important to achieving full employment in an economy. Therefore, it cannot be feasible to claim that it is a function of certain factors; rather its particular cause and influencing factors have to be keenly analyzed separately and with finality. It is thus important to acknowledge that Keynes has been instrumental influencing various economic policies with regard to investment and other economic functions in economic systems. Bibliography Degen, R. 2008. The Triumph of Capitalism. New Brunswick, NJ, Transaction Publishers. Gregory P, R & Stuart R, C. 2013. The Global Economy and its Economic Systems, New York, Cengage Learning. Hanson, P. 2003. The rise and fall of the Soviet economy: An economic history of the USSR, Pearson Education, Harlow. Ragan, C, T & Richard G. L. 2008. Microeconomics. Pearson Education Canada, Toronto. Robbins, R. H. 2007. Global problems and the culture of capitalism. Allyn & Bacon, Boston. Read More