The Future of the Market - Essay Example

Economy Economy is the correct and effective use of available resources. It is concerned with all the activities related to production and distribution of goods and services in a specific geographical region. According to British economist Robbins, L (2006), "Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” Economics is essentially the study of how society manages its scarce resources. Every government irrespective of the form of government, who is running the government and the type of economic system, has to answer three basic economic questions. These questions concern the allocation of available resources for different purposes. Any economic system must decide the allocation of available resources among the producers, the mix of output and the distribution of the same output. This allocation must be decided no matter what the scale of economy and the level of development is (Econguru, Online). All societies are gifted with resources by the nature and previous generations. These resources are primarily scarce. It is the responsibility of every economy, every government to decide how to use the minimum resources available most effectively in order to satisfy human wants. Resources must particularly be allocated among producers who transform the resources into goods and services, which in turn must be distributed effectively to households which have needs. The three basic economic questions are, what to produce, how to produce and for whom to produce (Jan, C, M, 2001). All economies and businesses must decide what goods or services to produce with the limited resources available to them. A society or economy must decide how much food and shelter to produce in order to meet the needs of its population and businesses should decide how much of the goods and services to produce. For example any economy is in charge of producing the basic needs of people such as food grains, meat (in some countries), water, milk and housing. These are the basic essentials that the population requires. The second question is how to produce. There are several ways to produce a good or service of good quality. An economy must decide it should take on the production and sale of goods and services by itself or hand part of it over to businesses. It must decide whether the production of such goods must take place within the country or must be outsourced to other countries. Lastly it must decide whether the production should be labour or capital intensive. For example, some services such as essentials, roadways, railways etc are retained and produced by the government, while the production of other goods and services such as clothing, consumer goods etc are given over to businesses. The final question to be answered is for whom to produce. Each good or service is produced for the consumption of someone. The economy must decide for whom it is going to produce a particular good or service. For example while essentials such as food grains, milk etc are produced and targeted towards the entire population, certain luxury products such as air conditioners, cameras, hotel industry etc are targeted towards a select percentage of the population. There are several contrasting aspects between a Market economy and a Command economy. A market economy is essentially based on division of labour, where the prices of goods and services are established based on a free price system set by supply and demand (Altvater, E, 1993). In a market economy, producers and manufacturers produce goods based on the amount of demand they perceive to exist amongst consumers. Consumers subsequently pay for the items based on the supply. For example gold is in great demand, but is scarce, hence it is expensive. Market economy is otherwise known as capitalism. Capitalism was an ideology put forth by the 18th century thinker Adam Smith. He proposed the idea that the more people of different nations engage in trade with each other, the less likely they are to go to war with each other. He also put forth the idea that governments of nations should not interfere with the economy as it may disrupt trade and hinder people’s ability to prosper. He also claimed that instead of the government running an economy, an invisible free hand called the market would. Market economy has several characteristics. Firstly private property rights are stringently enforced despite these rights resulting in many poor people and few wealthy people. Secondly, the government has a very limited role to play in the economy. Entrepreneurship and risk taking result in large financial gains. Individuals and private companies own businesses and industries. The producers decide what to produce depending on the demand existing among consumers and consumer tastes, trends, wants etc and productivity results in increased personal wealth. Lastly the economy is entirely based on supply and demand. Examples of market economy include the United States where the taxes are low and supply is determined by demand, Singapore where businesses decide how and what to produce etc. Market economies are often criticized of resulting in unequal societies with many poor people and few wealthy individuals. Also since this type of economy encourages free trade, it results in many large private companies to exploit labourers and resources. Market economies also give rise to economic monopolies, where one company controls one business sector and stops competition thus resulting in increase in prices (Montgomery Blair High School). A Command economy is an economic system where the government or the worker’s council manages the economy of the country. The Encyclopedia Britannica (2007) defines command economy as, “an economic system in which the means of production are publicly owned and economic activity is controlled by a central authority that assigns quantitative production goals and allots raw materials to productive enterprises.” Critics of market economy felt that a revolution was needed in order to combat few people ruling over large masses. This revolution came about through an ideology known as Communism which promoted an economy known as command economy. In a command economy, the government is in charge of controlling all aspects of the economy. Karl Marx was the founder of the communist ideology which claimed that as long as a business owning class existed, oppression would continue to exist in the society. Command economy also has different characteristics and they distinctly differ from Market economy. Firstly the government has full control of all the economic aspects as opposed to market economy where the role of the government in economy is limited. Secondly in command economy the concept of private property is illegal. This is much in contrast with market economy where private property rights are strictly enforced. Thirdly in command economy, supply and demand are determined by the government which has sole control over the economy and are not determined by the producers perception or consumers’ wants and trends which is the case in a market economy. Industries and businesses are owned and controlled by the government. Goods and services of all types are produced and distributed only by the government. Allocation of resources is also carried out only by the government. Individuals and businesses are not allowed to own, monopolize or control any particular industry or sector. Hence entrepreneurship and risk taking is neither permitted nor rewarded like in a market economy (Montgomery Blair High School). Examples of command economy include former Soviet Union where the government killed small property owners and distributed their land equally among the people and Cuba where people are given rations of food from government food supply chains as opposed to buying them from stores. There are many criticisms of command economies. Firstly command economies are inefficient as unproductive workers are rewarded due to the equally pay system. Since all workers are paid equally, workers start becoming unproductive. Command economies give rise to illegal markets since the government controls the production and distribution of goods. Lastly command economies are not competitive at a world level as entrepreneurship and competition is always discouraged. Russia and China are the two main economies which have been attempting to move away from central planning. However this transition brought about an entirely new set of problems for both the countries. When the Soviet Union collapsed in 1991, the communist leaders could no longer keep the command economy going. Hence it began moving towards a market economy. With this attempt came about mass privatization with local elites took over former SOEs and increased their authority regionally and price liberalization. But this transition was not easy. It gave rise to inflation, arrears, dramatic increase in income, increase in income inequality, increase of shadowy economy, and government budget deficits where state revenues dropped and tax rates were raised. The government had to additionally take measures to cope with all of these problems in addition to making the transition (University of Minnesota). Likewise China began to move towards a market economy in the late 1979. The reunification of Hong Kong with China in 1997, induced China to shift to a market economy. The first major step in this transition was the introduction of the responsibility system of production in agriculture, where families were allowed to do farming in a piece of land and keep the profits they earned to themselves. Restrictions on foreign trade were relaxed and joint ventures were encouraged. With increase in incomes, better incentives and quick growth in service and industrial sectors the people of China began to get a taste of being a consumer market. However with this transition China began to face many new problems. Like Russia Inflation was the biggest problem faced by the Chinese people. Along with new opportunities that arose with the movement towards a market economy, unequal income distribution, crime, corruption, Western cultural styles etc became issues that the government as well as the people had to contend with. Hence the state owned non-agricultural enterprises and major industries. Therefore in 1980China was became a mixed economy (Country Studies, Online). Many European countries today have mixed economies. Mixed economies subsist somewhere between market and command economies. A mixed economy is one where major industries such as utilities, health care, major manufacturing industry etc are owned and controlled by the government, while individuals are allowed to own other smaller businesses. In a mixed economy a citizen is taxed more than in a market economy but less than in a command economy. Mixed economies are often preferred by many European countries because of the balance that it allows in all aspects of the economy. It takes the best from both market and command economies to strike the right kind of balance and achieve progress. In a mixed economy property is controlled both by the government and by individuals. The government controls the larger, most important industry while individuals own and control smaller businesses. Consumers as such have a wide variety of choices with respect to goods and services. Taxes are levied from all citizens to make provisions for welfare, free university tuition and free healthcare services. The productivity of workers is much less here than in market economy but more than what is found in command economy. These are the primary reasons why some European countries prefer mixed economies. Examples of mixed economies include France, where health care is free and studies cost less, but taxes are high. Private industries in France include Air France and Peugeot. United Kingdom is another example of mixed economy where health care is again free and university costs are less. However citizens can take up private health insurance and study in private universities (Montgomery Blair High School). References Altvater, E. (1993). The Future of the Market: An Essay on the Regulation of Money and Nature After the Collapse of "Actually Existing Socialism. Verso. pp. 57. Country Studies. China: The Economy. Country Studies Website. Retrieved 26 May 2009. http://countrystudies.us/china/83.htm Econguru. Introduction to Economics: Chapter 2. Econguru Website. Retrieved 26 May 2009. http://www.econguru.com/introduction_to_economics/scarce-resources-unlimited-wants.html Encyclopædia Britannica. (2007) Command Economy. Encyclopædia Britannica Online. 11 June 2007. Jan, C M (2001). Business economics for Entrepreneurs. Gaebler.com. Retrieved 26 May 2009. http://www.gaebler.com/three-basic-economic-questions.htm Montgomery Blair High School. Compare the Difference Between Market and Command Economic Systems: An Exploration of Capitalism, Socialism and Communism. Economic System Web Quest. Retrieved 26 May 2009. www.mbhs.edu/~grossmam/Social%20Studies%20Course%20Material/Economic%20System%20Web%20Quest.ppt Robbins, L (2006). The Definition of Economics. Conservative Resources. Retrieved 26 May 2009. http://www.conservative-resources.com/definition-of-economics.html University of Minnesota. Soviet Union: Myth and Reality of Command Economy. Lecture 13. Retrieved 26 May 2009. www.econ.umn.edu/~lepetyuk/Econ4337/lecture13.pdf Read More