Study Note - Economic Systems

Economic SystemsAn economic system is a network of organisations used by a society to resolve the basic problem of what, how much, how and for whom to produce.

Free market economy:

Where households own resources and markets allocate resources through the workings of the price mechanism. An increase in demand raises price and encourages businesses to switch additional resources into the production of that good or service. The amount of products consumed by people depends on their income and household income depends on the market value of an individual’s work. In a free market economy there is a limited role for the government. Indeed in a pure free market system, the government limits itself to protecting the property rights of people and businesses using the legal system and it also seeks to protect the value of money or the value of a currency.

Planned or command economy:

In a planned or command system typically associated with a socialist or communist system, scarce resources are owned by the government. The state allocates resources, and sets production targets and growth rates according to its own view of people’s wants. In such a system, market prices play little or no part in informing resource allocation decisions and queuing rations scarce goods.

Mixed economy:

In a mixed economy, some resources are owned by the public sector (government) and some resources are owned by the private sector. The public (or state) sector typically supplies public, quasi-public and merit goods and intervenes in markets to correct perceived market failure.

Some examples to research:

Economic Reform in Cuba
In a move away from state economic planning, the Cuban government has allowed restaurants to serve up to 50 customers at a time - more than twice the previous limit.The red tape involved in running private taxis has also been removed, and employment taxes have been suspended. until the end of 2011 to encourage budding entrepreneurs.

Life inside North Korea

Sue Lloyd-Roberts has produced some remarkable reports for television over the years. Few can be as impressive as the ones available on BBC Our World and BBC Newsnight tracking her time in North Korea. She tries to gain an insight into the daily existence of people in North Korea and, despite the constant presence of government minders and security officials; she discovers private markets which for many can be the difference between a meagre life and starvation. The North Korean authorities refuse to acknowledge the existence of these markets but they are the inevitable result of the complete failure of the state planning system. She meets some North Korean defectors who are still coming to terms with the ultimate culture shock.

Here are some links to Sue Lloyd-Roberts’ reports

Glimpses of real North Korean life behind the facade
Sampling North Korea’s version of the internet
North Korean defectors on the ultimate culture shock

China’s Economic Plans – State Direction for Growth and Development

The Chinese government has five year plans focused on economic growth and development and policies designed to re-allocate scarce resources into chosen sectors. In the summer of 2011, the Chinese authorities announced that seven industries would be given special emphasis and extra resources over the next five years. The seven “new strategic industries” are:

• Alternative fuel cars and fuel cell batteries
• Biotechnology including biomedicines and marine biology
• Environmental and energy-saving technologies
• Alternative energy including Next-generation nuclear power plants, solar power, wind power, smart grids and bioenergy
• Advanced materials including rare earth, high-performance steel, high-performance fibres, nano and superconducting materials
• New-generation information technology Cloud computing, high-end software
• High-end equipment manufacturing Aircraft, high-speed rail, satellites and offshore equipment