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The development of a model of government makes it possible for people to have an economic system. The rights of citizens and amount of economic freedom they enjoy is directly related to the type of political system in their respective countries.

People living in a democracy would have more economic choice than people living under a dictatorship.

All countries, both large or small, rich or poor, dictatorship or democracy face the same economic problems and questions.

Simply stated, there are three basic economic questions that governments must face:

(1) What should be produced?

(2) How should products be produced?

(3) For whom should these products be produced?

In other words, who gets the hamburger and who gets the choicest steak?

The established government of a country must face the task of satisfying the unlimited wants and needs of the people with the limited resources that are available.

A reminder that the SCARCITY of resources will influence the economic policies of a government.

If we picture what economics is, we might think of people trying to make a living. They work to produce goods or services that other people want and are willing to buy.

In return for the value they create, they get paid and can then buy things they want. In the simplest society, people work to produce either all or most of the things they and their family want and will consume directly.

In a more complex society, people are more specialized and must exchange the goods or services they produce for goods and services that other people produce.

This allows people to satisfy many more wants than they could satisfy if they themselves had to create everything they needed and wanted.

When we look at people as part of a family, society, or a part of a great nation, we know they have material wants and needs they seek to satisfy.

In a democracy, we as citizens are expected to participate, at least indirectly in decision making. In voting for representatives in a political party, citizens are endorsing certain principles and supporting particular solutions to problems that face society.

Should the rain forest be burned down to create more farmland?

Should the government build housing for the poor?

Should a company that employs thousands of people and pays a huge sum of taxes be allowed to pollute a river?

Many of the actions of a government will have an economic impact on the citizens.

A knowledge of economics is essential for wise policy making. Government officials who do not understand the consequences of their actions will not likely reach their goals.

We have already determined that a country's economic system will provide the answers to the three basic economic questions. The answers will not be the same for each country because of the available resources and the model of government.

Economic systems are usually divided into three categories:

and market or free economic systems.

Today, few if any, economic systems are fully traditional, fully controlled, or fully free. Most are a mixture of two or more types.

As you read this material, ask yourself the following questions:

What are the main features of each of the three basic economic systems? How do they relate to their forms of government?

TRADITIONAL ECONOMY

In a traditional economic system, the three basic economic questions are answered, "As we have always done." In other words, nearly all economic decisions are based on age-old traditions, customs and beliefs with families working together for survival.

Traditional economies are still prevalent in many Third-World countries.

CONTROLLED ECONOMY

In a controlled economic system, the average person has little influence on how the basic economic questions are answered. The questions of what to produce, how to produce, and for whom to produce are basically answered by a group of government planners.

Before 1992, the countries of the Soviet Block in eastern Europe were under controlled economic systems. The government would decide what consumer goods should be produced. The price of these consumer goods was set by the government planners.

(Europeov)

After the fall of the Soviet Union, some of the Eastern European countries adopted many aspects of the market economic systems while retaining a large amount of government control.

Even Communist China has adopted aspects of a market economy.

Remember, in a controlled economic system, the decisions about what to produce are made by government planners. The individual has little choice but to follow the planners' decisions.

MARKET or FREE ECONOMY

In a market - or free - economy, the average person has much to say in the making of economic decisions. By buying or not buying goods and services, consumers help to provide answers to the basic economic questions. A look at the market, or capitalist, economy of the United States will help you understand these concepts.

In free market or capitalist economy, the producers of goods and services, reacting to consumer choices, provide most answers to the basic economic questions.

Auto makers will probably not sell many cars that get only 2 miles per gallon.

However, we must understand that our government also plays a role in the marketplace. Government usually plays a limited role in our market economy.

At all levels, local, state, and federal, governments collect taxes.

These taxes pay for certain public goods and services, such as roads, schools, and so on.

Government has three economic functions:

efficiency, equity, and stability.

In the efficiency function, the government attempts to correct for market failures like monopolies.

In the equity function, the government uses a process such as income redistribution to assist the poor or handicapped.

In the stability function, the government attempts to keep the economy from being too high or too low.

In our present-day world, three principal economic systems compete with capitalism, the economic model of the United States. They are socialism, communism, and market socialism.

Each of these economic systems will be different, depending on the type of government that is in place. A socialist economy may be present in a democracy or a dictatorship.

Each of these economic models, like capitalism, must concern itself with the scarcity and allocation of resources.

In a socialist economy, the basic problems of scarcity and allocation of limited resources are solved by production for use or need rather than production for profit.

With most of the means of production owned and controlled collectively, usually by the government, production can be planned and distribution organized to assure fairness for all of the people.

The socialist theory argues that the basic economic questions should be answered by the government.

The socialist (communist) model was developed by Karl Marx. Marx was born in the German Rhineland in 1818.

Marx saw history not as a meaningless succession of events but as a social change resulting from the struggle of classes.

Marx argued that all wealth is produced by labor, with the other factors of production either passive or also the result of labor.

In other words, the factors of land, capital, and management could not exist or be used without the labor of the workers.

The factor of labor is what gives something its value.

Capitalists are able to accumulate large amounts of wealth because workers are not paid the full value of what they produce.

Surplus value, in the opinion of Marx, is the difference between what the workers produce and what they earn.

As this process continues, the middle class disappears and society becomes divided between capitalists (the people who take advantage of the workers) and the workers.

Most socialists theorized that economic and social progress should be made by peaceful evolution.

Marx believed the transition from capitalism to communism would follow a particular pattern and would be accompanied by a violent and bloody revolution against the government.

The communist economy seeks to end capitalism by revolution; whereas the socialists wish to do it through the ballot box. This is the difference between a democracy and a dictatorship.

In the economic systems of socialism and communism, the government will have a large influence on the economy but will differ on the amount of freedom the people have to choose what they want to buy.

(polspec)

The basic issue both politically and economically is the degree of freedom allowed to the individual. In the chart we can see the complete political spectrum as it moves from left to right.

At the extreme left, we see the complete freedom of the individual with the absence of any governmental control. Such a condition, the absence of government, is called anarchy.

At the extreme right, citizens have lost their freedom to a totalitarian government that has complete control over every aspect of their lives. In an absolute monarchy there is rule by only one person.

In an oligarchy only a few people rule, whereas in a democracy the many rule. The political spectrum defines the extent of personal freedom the citizen has in relation to government authority.

In the above figure we see the economic spectrum. Here the difference lies in who decides the answers to the basic economic questions. What? How? and For whom?

Mixed capitalism, sometimes called welfare capitalism, favors decisions by consumers but allows for some central planning. As we move toward the left from mixed socialism to socialism to communism, central planning increases and reliance on the market mechanism declines.

At the extreme left, we see total central planning where the government makes almost all the decisions and the choices of consumers are given little attention.

Our economic spectrum is not complete unless we include the ownership of wealth. In the graphic below we see complete private ownership on one side and complete collective ownership on the other.

Although no countries have either of these extremes, classical capitalism calls for a maximum of private ownership and communism calls for a maximum of collective ownership, particularly of capital goods.

Again we see the different degrees of stress on ownership of wealth given by mixed capitalism, mixed socialism, and socialism.

This concludes our discussion of the relationship of modern economic systems to different types of governments. Governments at all levels have a tremendous influence on the economic stability of a country.

We will examine other economic issues including taxes and fiscal and monetary policies.