Unit 1
Unit 2
Introduction to Economics
As individuals, the choices that we make are relatively simple. When we consider this from the point of view of an entire country, the choices become far more complex. Different economic systems have been developed over time.
Traditional or Subsistence Economy
Rarely seen today, a subsistence economy is one that is self sufficient. It is generally based on a system of barter, where people exchange goods and services directly rather than via the medium of money. Under this system, the decision of how to allocate resources is made by individuals, rather than through a central authority. The problem is that this system will generally only work when the goods and services being exchanged are of a relatively simple nature. As soon as more sophisticated products are introduced into the market, it is almost impossible to work out how much they are “worth”.
Capitalism
The concept of capitalism suggests that people are free to choose the way in which they will allocate their resources. If I own land, then I can choose to use that land in any way that I like. If I am acting in a manner that an economist would consider “rational”, then I will allocate that resource in a way that will maximise my own standard of living. This choice will be based on the belief of how I can gain the highest return. In this case, I will do whatever I can to receive the best price for my resource. If people need access to an office block more than they need access to a car park, then they will probably be willing to pay more for the rent of an office than they will to park their car. In this way, in seeking to maximise my own standard of living, I am actually providing the good or service that is preferred by the economy.
This theory was first developed by Adam Smith at the end of the eighteenth century. Smith wrote that acting in self interest was actually the best way of ensuring that the overall needs of society are met.
The key concepts associated with capitalism are the right to own property, and the ability to make decisions about the way in which your property is used. Most countries around the world adopt this economic system today.
Planned Economy
Around the world, there are many people who are critical of the capitalist approach to resource allocation. These people believe that when individuals act with their own interests in mind, it is possible (or even likely) that the overall good of the community will suffer.
As a result, in the twentieth century there were many countries which adopted the idea of a planned economy. This is exactly as it sounds – the decisions in regards to the allocation of resources are made by a central planning agency. China, the former Soviet Union, many African countries and Cuba were all operated in this way. Cuba is still a pure planned economy. The purest examples of an economy of this type are the kibbutz communities which exist in Israel. In these groups, people do not have private property rights. In fact, some of the groups even wash the clothes communally, and then people go and take whichever clothes they need from a central pile. This is the pure application of the philosophy first espoused by Karl Marx: From each according to their abilities, to each according to their needs.
The market system is not perfect, and there are some goods and services that must be provided by the government. For example, we want all children to go to school, and so we expect the government to make sure that there are schools available. We refer to these situations as either merit goods or public goods. However, after the collapse of the Soviet Union in 1991, most other planned economies around the world recognised that the economic gap between socialist countries and capitalist countries was getting wider. The debate today is not really about capitalism versus socialism. Today we ask to what extent the government should intervene, and which products should be supplied by the government.
Mixed Economy
Finally, there are some economies that are classified as “mixed”. These are countries that maintain some elements of both a planned economy and a capitalist economy. In general, these are countries that are in the process of changing from a planned economy to the market system. For example, China is in this situation at the moment.
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