How different types of economic system have attempted to resolve these issues

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Last updated: April 21, 2019

The basis of the central economic problem is the dilemma of what to produce,how to produce it and for whom to produce it for.Many economic systems have been applied,with these problems in mind,however,this essay is aiming to evaluate whether the practice of these systems do the theory justice.At one extreme is a free-market economy,or capitalism,which relies on the private ownership of its economic resources and the market system.At the other extreme is the command-economy(socialism,communism)which uses the public ownership of its resources and central planning.Economies in the real world lie between these two extremes and are hybrid systems,or mixed economies.Every day decisions are made as to how individuals and national economies use their available resources.The central economic problem is basically the fact that there are insufficient resources to satisfy all possible needs.Supply is finite,while demand is infinite.The use of scarce resources involves opportunity cost,which is the next best alternative.For example,the opportunity cost of using a certain raw material might be another raw material.Because resources are scarce and the opportunity cost is involved,society must make the most of the resources as they are being main(optimization),and decide how to allocate them to different uses.The function of an economy therefore,is to aim to maximise utility of scarce resources.The three issues then,are what to produce,how to produce them and for whom to produce.There are two solutions to the central economic problem,the free-market & command methods.Both have had varying levels of success.The main actors in planned economies are the government,the consumers and the workers.Therefore,the motivational basis of the command system,is the individuals’ good will toward others,not their own self-interest.In principle,society decides what,how,and for whom to produce.Under a planned economy,the state owns all means of production apart from labour.Ideally this system aims to plan the input and output of resources flowing in and out of the economy in order to set production targets of how much to produce.However,this system of central management,especially when used for large countries such as the Soviet Union,has tended to become over-complex within the network of planners.Legitimate forecasting to produce peak output is difficult,relying on planners knowing the most adequate way to produce good and services.This relies on them having a good enough production function for each industry.However,unpredictable elements such as the weather can disrupt the allocation process,occasionally causing short-term recess.It is through planning that the resources are allocated within a command-economy.This market mechanism allows consumers limited freedom to buy products.Planners may decide to constrain the price boundaries of goods in order to enable all consumers to afford it,unlike the free-market economy,where prices eventually rise to the point where demand equals supply,and is outwith the spending power of some consumers.Command economies in practice however,excess consumer demand and result in insufficient quantities of goods to cover everyone.If price allocation boundaries are placed on essential foods,then shops run out of food,causing acute malnourishment among those whom dont manage to obtain it.The corruption of Communist economies therefore cannot be due to monopoly power.Rather,the centralized command-economy,lacks a price system.Most command economies have a weak or non-existent information network to make decisions and incentives to try and move toward greater efficiency.One of the problems is because it has simultaneously to concentrate on political and technological power,leading to an inefficiently managed economy.Occasionally this leads to a diseconomy of scale,or uneconomic growth.Command economies have become commonly associated with Communist regimes,mainly owing to their political power,its effect on the conciousness of the west and because of the eventual collapse of the Soviet block.However,other political systems have been associated with planned economies.Countries are going through recess such as Third World countries which have used 5 year plans,although admittedly,they relied on the output of free-market economies.War can trigger temporary or long-term change in an economic system.An example of this would be Britain during the Second World War which was run very much as a planned economy.Stalin’s totalitarian Soviet regime illustrates the command economy powerfully due to the dramatic consequences.He believed the country needed to industrialize and become powerful because he felt afraid that capitalist western democracies might to invade the USSR and destroy its communist rule.A five year plan was set up to help develop the country’s heavy industry and capital which was the USSR’s main weakness.This was done at the expense of consumer goods to try and increase the standard of living of the Soviet people.The first two five year plans were the most drastic.From 1928 until 1937 the Soviet economy made progress in several areas.Steel manufacture increased significantly,coal mining,oil drilling,and other energy related industries increased,production of machinery intensified,chemical production was raised,production of massive amounts of military weapons was established,thousands of factories were built(1500 during the first five year plan alone)and whole cities were constructed.It is clear that the main aim of the regime was to bring the Soviet Union into the industrial age.However,this development came at a very high humanitarian cost.Through Stalin’s abusive regime,people lost their civil liberties and were restrained in their jobs by the means of a passport system.Geographical and occupational re-location of workers is common in planned economies,and essentually strips individuals of any freedom of choice.As well as the occupational restrictions enforced,subsistence goods were sold at inflated prices by the state in order to generate capital.This eventually led to a wider monopoly.Command economies restrict the mechanism by which businesses compete with each other,leaving no choice of brands for the consumer.This monopoly resulted from state interference,which led to the eventual destruction of enterpreneurial incentives.Resulting from this,was a severe lack of quality goods available to the consumers.The over-manipulation then continued with the peasants robbed of their grain by the state.The live stock was slaughtered,putting further financial strain on the peasants.Grain was sold by the state,in order to buy machinery and tools from the west.Resistance on the side of the peasants only resulted in brutal treatment by the Soviet military,so they had no choice but to follow their orders.The result of these grain sales was the death of over six million peasants in Siberia and Ukraine in 1932 and 1933.Another indication of the excessive control was the collectivization of farms in order to increase the states control over them.In this case,self-interest overlapped humanitarian sympathy,to the extent that the communist principle of working for the ‘common good’ was entirely ignored in favour of dictatorial greed.Command economies have had poor growth rates,especially in the past 20 years,despite reducing societal inequality.The reasons for this are the lack of choice and lack of economic freedom,resulting in a sever lack of competitional incentive.Low incentives discouraged any reasonable level of production and therefore downgraded the overall effectiveness of the command-economy.In conclusion,it can be said that despite with the aim to eradicate inequality this economy limits production to state owned companies,creating a monopolistic economy.What actually occurs is that there is no competition,so people lack long-term aims,become complacent,lack the will to work,and add to the many contributing factors of an inneffective economy.The evaluation of Stalin’s regime dealt largely with the agricultural system of the Soviet Union at that time.A modern example of the failings of the command-economy is Romania.Central planning targets again proved unrealistic,leading to imbalanced imports and exports and lack of consideration for the local conditions.On the other hand the free market system comprises of millions of consumers and producers, who are motivated by pure self-interest.Consumers aim to increase their well-being and productiveness,while businesses will try to make as much private gain as possible.They will only be able to do this by providing the goods and services that the people in the society want and need.The government on the other hand is commonly assumed to be motivated by the interest of the overall community,although this claim is controversial.Nearly all the main factors of production within the economy are privately owned.Through the legal system,the government upholds the rights of citizens to own their property.The principle of free enterprise is also encouraged within this form of economy.Producers,have the rights to buy and sell goods as they wish and compete with other producers.If economic units are free to allocate their resources as they wish,then competition will exist.Decentralised decision making is one of the main features of market economy.Agents here are free to choose how and where they wish to allocate resources.The main capitalist characteristics are the profit motive,consumer sovereignty,free competition and prices set by the forces of supply and demand .These ideas were first expressed by Adam Smith,a famous 18th century Scottish philosopher.In a free-market economy,what is to be produced is decided by the consumers.Consumers are sovereign and have choice as to where to cast their spending votes.For example,if consumers suddenly decide to buy more clothes instead of package holidays,then the clothes companies will recieve abnormal profit,profit which is over the normal level for the industry.If this is a long term occurence,this will lead to change in the demand for workers,buildings and raw materials from one industry to another.The key success of this structure is the profit motive.Whereas,the command system relies on the government to intervene and decide where the resources are allocated,a free-market economy lets the consumers decide where they wish to allocate their spending.In the free-market,commericals advertise brands to increase their chances of consumer allocation towards their specific company,while causing rivalry and competition between other companies.How the goods are to be produced are decided by the individual agents.Consumers will buy from the producer that sells for the lowest price.Therefore,prices are kept as low as the company can afford in order to survive in the market place.This determines how the goods are produced and firms will aim to use the lowest cost methods in order to stay in buisness.Free-markets therefore encourage product effeciencyFor whom the production will take place depends on how consumers spend their money.This depends on level of wealth and income one has.Ownership and the factors of production determine consumer income.Those with high income can afford to buy more products while those with low income can only afford to buy a few products.Market economies typically produce disproportionate shares of what is produced.Although,capitalism encourages free will,the government intervenes into areas not covered by the market mechanism such as public goods,which are not provided by the market.The government is also responsible for the issue of money and the continuance of its value,ensuring an adequate legal framework and allocation of property rights to an economic unit in society.This minimal level of intervention also ensures economic power is not abused.Good illustrations of capitalist economies are the United States and Japan.The US economy is the most affluent in the world,but Japan has the highest growth rate of gross domestic produce(see appendix).Even some of the mixed European economies have had faster growth rate per year that the USA.In fact,Japan used to be a Third World country.This highlights the importance of the capitalist system.Another benefit enjoyed by the USA and Japan systems is the freedom of choice for the consumers.They can choose whatever brand they want,unlike in the planned economy.Buisnesses have the opportunity to accumulate wealth by competing with rival competitors on homogeneous goods,or competing on other factors such as quality if the good is non-homogeneous.Incentives are high,which increases the quality of the goods and the running of the companies.Competition has resulted in the less effecient companies being driven out of business,improving the overall standard,and increasing the economies overall capital output.The GDP growth rate of the Japan proves that the economy is improving all the time.An example of some of the problems of capitalism,is when in the 1980’s when Reagan took control of the USA with the objective of improving the economy.Reagan took away high taxes and government interference in the marketplace.Reagan’s plans actually did have effect on economic growth,this proves the effectiveness of capitalism tackling the economic problem.In a free-market economy the choice is not available to all as it may be out of financial reach for the poorest members of society.Markets tend to be oligopolistic in nature,however the domination by few large firms can also lead to the demise of many smaller firms creating a monopoly.Despite the restoration of incentives,there were failures of the US economy.The percentage below the poverty line was perhaps an indication of the increase in the rich-poor gap.The first half of the 1980’s saw an increase from 24.5 million to 32 million.This proves that income and wealth inequalities are inevitable if incentives are to be increased.Many have questioned however,whether Reagan did more for the rich of America than the overall economic performance.These are some of the concerns which this strategy aimed to address,but unfortunately,they subsequently failed.Lying between free-market and command economies are hybrid economies like in Sweden.Both free-market and government planning allocate high proportions of resources.This balance though,is controversial.The dilemma is whether higher private spending power is more important than better public services.In conclusion it can be argued that in order to solve the central economic problem the free-market system is most effective,despite inequalities.The relatively poor performance of command economies illustrates that central control and organisation of an economy is impossible due to the increasing complexity within its structural framework.

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