Types of Economic Systems

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Economy

The American economy is a free enterprise system that has emerged from the labors of millions of American workers; from the wants that tens of millions of consumers have expressed in the marketplace; from the efforts of thousands of private business people; and from the activities of government officials at all levels who have undertaken the tasks that individual Americans cannot do. 

The nation's income and productivity have risen enormously over the past 70 years. In this period, the money for personal consumption tripled in real purchasing power. The gross national product per capita quadrupled, reflecting growth in worker productivity.

Together, all sectors of the American economy produce almost $4,000 million dollars worth of goods and services annually, and each year they turn out almost $ 190,000 million more. The consumption of these goods and services is spread widely. Most Americans consider themselves members of the middle economic class, and relatively few are extremely wealthy or extremely poor. According to U.S. Census Bureau figures, 9.6 percent of all American families make more than $50,000 a year, and 7.7 percent of all American families have incomes less than $10,000; the median annual income for all American families is about $28,906.

Americans live in a variety of housing that includes single detached homes (62 percent) with a median cost of $112,500. They also live in apartments, town-houses and mobile homes. Three-fourths of all married couples own their own homes. The size of all dwelling units has increased in living space. The median number of rooms occupied in each dwelling unit has increased from 4.9 rooms per unit in 1960 to 5.2 rooms today, despite the shrinking family size. About 3.6 percent of all Americans live in public (government-supplied or subsidized) housing.

The government plays an important role in the economy, as is the case in all countries. From the founding of the Republic, the U.S. federal government has strongly supported the development of transportation. It financed the first major canal system and later subsidized the railroads and the airlines. It has developed river valleys and built dams and power stations. It has extended electricity and scientific advice to farmers, and assures them a minimum price for their basic crops. It checks the purity of food and drugs, insures bank deposits and guarantees loans.

America's individual 50 states have been most active in building roads and in the field of education. Each year the states spend some $33.31 million on schools and provide a free public education for 29.1 million primary-school pupils and 11.4 million youth in secondary schools. (In addition, 8.3 million youths attend private primary and secondary schools.) Approximately 60 percent of the students who graduate from secondary schools attend colleges and universities, 77.2 percent of which are supported by public funds. The U.S. leads the world in the percentage of the population that receives a higher education. Total enrollment in schools of higher learning is 13.4 million.

Despite the fact that the United States government supports many segments of the nation's economy, economists estimate that the public sector accounts for only one-fifth of American economic activity, with the remainder in private hands. In agriculture, for example, farmers benefit from public education, roads, rural electrification and support prices, but their land is private property to work pretty much as they desire. More than 86.7 percent of America's 208.8 million farms are owned by the people who operate them; the rest are owned by business corporations. With increasingly improved farm machinery, seed and fertilizers, more food is produced each year, although the number of farmers decrease annually. There were 15,669,000 people living on farms in 1960; by 1989 that total had decreased to 4,801,000. Farm output has increased dramatically: just 50 years ago a farmer fed 10 persons; today the average farmer feeds 75. America exports some 440.9 thousand million worth of farm products each year. The United States produces as much as half the world's soybeans and corn for grain, and from 10 to 25 percent of its cotton wheat, tobacco and vegetable oil.

The bulk of America's wealth is produced by private industries and businesses-ranging from giants like General Motors, which sells $96,371 million worth of cars and trucks each year-to thousands of small, independent entrepreneurs. In 1987, nearly 233,710 small businesses were started in the U.S. Yet by one count, some 75 percent of American products currently face foreign competition within markets in the United States. America has traditionally supported free trade. In 1989, the U.S. exported $360,465 thousand million in goods and imported $475,329 thousand million.

In 1990, 119.55 million Americans were in the labor force, representing 63.0 percent of the population over the age of 16. The labor force has grown especially rapidly since 1955 as a result of the increased number of working women. Women now constitute more than half of America's total work force. The entry of the "baby boom" generation into the job market has also increased the work force. Part-time employment has increased as well-only about 55 percent of all workers have full-rime, full-year jobs-the rest either work part-time, part-year or both. The average American work week was 41 hours in 1989.

American industries have become increasingly more service-oriented. Of 12.6 million new jobs created since 1982, almost 85 percent have been in service industries. Careers in technical, business and health-related fields have particularly experienced employee growth in recent years. Approximately 27 million Americans are employed in selling. Another 19.2 million work in manufacturing and 17.5 million work for federal, state and local governments.

Recently, unemployment in the United States was calculated at about seven percent. The government provides short-term unemployment compensation (from 20 to 39 weeks depending upon economic conditions) to replace wages lost between jobs. About 80 per cent of all wage and salary earners are covered by unemployment insurance. In addition, both the government and private industry provide job training to help unemployed and disadvantaged Americans.

Planned economy

This article is about an economic system controlled or directed by the state. For proposed economic systems that employs "participatory" or democratic planning,

Planned economy (or command economy) is an economic system in which the state directs the economy.^[1] It is an economic system in which the central government controls industry such that it makes major decisions regarding the production and distribution of goods and services.^[2] Its most extensive form is referred to as a command economy,^[3] centrally planned economy, or command and control economy.^[4]

In such economies, central economic planning by the state or government controls all major sectors of the economy and formulates all decisions about the use of resources and the distribution of output.^[5] Planners decide what should be produced and direct lower-level enterprises to produce those goods in accordance with national and social objectives.^[6]

Planned economies are in contrast to unplanned economies, i.e. the market economy, where production, distribution, pricing, and investment decisions are made by the private owners of the factories of production based upon their individual interests rather than upon a macroeconomic plan. Less extensive forms of planned economies include those that use indicative planning, in which the state employs "influence, subsidies, grants, and taxes, but does not compel."^[7] This latter is sometimes referred to as a "planned market economy".^[8]

A planned economy may consist of state-owned enterprises, private enterprises directed by the state, or a combination of both. Though "planned economy" and "command economy" are often used as synonyms, some make the distinction that under a command economy, the means of production are publicly owned. That is, a planned economy is "an economic system in which the government controls and regulates production, distribution, prices, etc."^[9] but a command economy, while also having this type of regulation, necessarily has substantial public ownership of industry.^[10] Therefore, command economies are planned economies, but not necessarily the reverse.

Important planned economies that existed in the past include the economy of the Soviet Union, which, according to CIA Factbook estimates, was for a time the world's second largest economy,^[11] China before 1978 and India before 1991.

Beginning in the 1980s and 1990s, many governments presiding over planned economies began deregulating (or as in the Soviet Union, the system collapsed) and moving toward market-based economies by allowing the private sector to make the pricing, production, and distribution decisions. Although most economies today are market economies or mixed economies (which are partially planned), planned economies exist in very few countries such as Cuba, Libya, Iran, North Korea, Saudi Arabia, and Burma.^[12]

Economic planning versus the command economy

Economic planning is a mechanism for resource allocation of inputs and decision-making based on direct allocation, in contrast with the market mechanism, which is based on indirect allocation.^[13] An economy based on economic planning (either through the state, an association of worker cooperatives or another economic entity that has jurisdiction over the means of production) appropriates its resources as needed, so that allocation comes in the form of internal transfers rather than market transactions involving the purchasing of assets by one government agency or firm by another. Decision-making is carried out by workers and consumers on the enterprise-level.

This is contrasted with the concept of a centrally-planned, or command economy, where most of the economy is planned by a central government authority, and organized along a top-down administration where decisions regarding investment, production output requirements are decided upon by planners from the top, or near the top, of the chain of command. Advocates of economic planning have sometimes been staunch critics of command economies and centralized planning. For example, Leon Trotsky believed that central planners, regardless of their intellectual capacity, operated without the input and participation of the millions of people who participate in the economy and understand/respond to local conditions and changes in the economy would be unable to effectively coordinate all economic activity.^[14]

Another key difference is that command economies are strictly authoritarian in nature, whereas some forms of economic planning, such as indicative planning, direct the economy through incentive-based methods. Economic planning can be practiced in a decentralized manner through different government authorities. For example, in some predominately market-oriented and mixed economies, the state utilizes economic planning in strategic industries such as the aerospace industry.

Another example of this is the utilization of dirigisme, both of which were practiced in France and Great Britain after the Second World War. Swedish public housing models were planned by the government in a similar fashion as urban planning. Mixed economies usually employ macroeconomic planning, while micro-economic affairs are left to the market and price system.

The People's Republic of China currently has a socialist market economy in place. Within this system, macroeconomic plans are used as a general guidelines and as government goals for the national economy, but the majority of state-owned enterprises are subject to market forces. This is heavily contrasted to the command economy model of the former Soviet Union.

Planned economies and socialism

In the 20th century, most planned economies were implemented by states that called themselves socialist. Also, the greatest support for planned production comes from socialist authors. For these reasons, the notion of a planned economy is often directly associated with socialism. However, they do not entirely overlap. There are branches of socialism such as libertarian socialism and market socialism, that reject economic planning as a substitute for market allocation. All of these tendencies usually reject centralized ownership, referring to such as state socialism or state capitalism, and instead advocate decentralized ownership based on worker cooperatives and worker self-management.

While many socialist currents advocated economic planning as an eventual substitute for the market for factors of production, socialists define economic planning as being based on worker-self management, with production being carried out to directly satisfy human needs, and contrast this with the concept of a command economy of the Soviet Union, which they characterize as being based on a top-down bureaucratic administration of the economy in a similar fashion to a capitalist firm.^[15] The Command economy is distinguished from economic planning, and different theories for classifying the socioeconomic system of the Soviet Union exist; most notably a command economy is associated with Bureaucratic collectivism, State capitalism, State socialism or Coordinatorism.

Furthermore, planned economies are not unique to Communist states. There is a Trotskyist theory of permanent arms economy, put forward by Michael Kidron, which leads on from the contention that war and accompanying industrialisation is a continuing feature of capitalist states and that central planning and other features of the war economy are ever present.^[16]

Transition from a planned economy to a market economy

The shift from a command economy to a market economy has proven to be difficult; in particular, there were no theoretical guides for doing so before the 1990s. One transition from a command economy to a market economy that many consider successful is that of the People's Republic of China, in which there was a period of some years lasting roughly until the early 1990s during which both the command economy and the market economy coexisted, so that nobody would be much worse off under a mixed economy than a command economy, while some people would be much better off. This 'success' was coupled with a massive disparity between rich and poor and a disturbing new level of corruption, and 90% of Chinese billionaires are related to members of the Communist Party.^[17] Gradually, the parts of the economy under the command economy decreased until the mid-1990s when resource allocation was almost completely determined by market mechanisms.

By contrast, the Soviet Union's transition was much more problematic and its successor republics faced a sharp decline in GDP during the early 1990s. One of the suggested causes is that under Soviet planning, price ceilings created major problems (shortages, queuing for bread, households hoarding money) which made the transition to an unplanned economy less easy. While the transition to a market economy proved difficult, many of the post-Soviet states have been experiencing strong, resource-based economic growth in recent years, though the levels vary substantially. However, a majority of the former Soviet Republics have not yet reached pre-collapse levels of economic development.

Still, most of the economic hardship that struck many of the former East Bloc countries and the post-Soviet states comes from the program of shock therapy. The idea behind this program is to convert from a centrally planned economy to a market economy in a short space of time. This means mass-scale privatization, budget cuts and liberalization of economy and finance regulations. This shock therapy program was implemented in several former communist states like Poland and Russia.

Iraq, after the fall of Saddam Hussein following the 2003 invasion of Iraq, is currently experiencing the transition from a command economy under Hussein to a free market economy.^[18] Iran is currently privatizing companies.

Stability

Long-term infrastructure investment can be made without fear of a market downturn (or loss of confidence) leading to abandonment of a project. This is especially important where returns are risky (e.g. fusion reactor technology) or where the return is diffuse (e.g. immunization programs or public education).

Meeting collective objectives

Planned economies may be intended to serve collective rather than individual needs: under such a system, rewards, whether wages or perquisites, are to be distributed according to the value that the state ascribes to the service performed. A planned economy eliminates the individual profit motives as the driving force of production and places it in the hands of the state planners to determine what is the appropriate production of different sets of goods.

The government can harness land, labor, and capital to serve the economic objectives of the state. Consumer demand can be restrained in favor of greater capital investment for economic development in a desired pattern. The state can begin building a heavy industry at once in an underdeveloped economy without waiting years for capital to accumulate through the expansion of light industry, and without reliance on external financing. This is what happened in the Soviet Union during the 1930s when the government forced the share of GNP dedicated to private consumption from 80 percent to 50.0 percent.^[19] As a result, the Soviet Union experienced massive growth in heavy industry, at the expense of massive starvation.

Comparison with capitalist corporations

economy command market china

Taken as a whole, a centrally planned economy would attempt to substitute a number of firms with a single firm for an entire economy. As such, the stability of a planned economy has implications with the Theory of the firm. After all, most corporations are essentially 'centrally planned economies' aside from some token intra-corporate pricing. As pointed out by Kenneth Arrow and others, the existence of firms in free markets shows that there is a need for firms in free markets; opponents of planned economies would simply argue that there is no need for a sole firm for the entire economy. Anarchist theorists like Kevin Carson however point to the numerous ways in which government intervention in the market magnify economies of scale, offsetting the natural inefficiencies of centrally planned economies by means of privileges and historical subsidies granted by force, and argues that in a truly free market corporations wouldn't exist.

Advantages over market economies

An advantage of a planned economy, one which was among the most important for socialist economists of the early 20th century, is that it is not subject to major pitfalls of market economies and marked-oriented mixed economies. A planned economy, in theory, does not suffer from business cycles; it does not experience crises of overproduction such as the one that was believed to have contributed to the Great Depression. From the modern perspective, it does not result in asset bubbles - massive misallocations of resources such as the dot-com bubble of the late 1990s or the housing bubble of mid-2000s.

The other aspect is that a centrally planned economy can provide public goods which would not have been available at all, or might require explicit government provision, in a market economy, resulting in a mixed economy. In a mixed economy, the government would have to achieve this goal through taxation or inflation. In a planned economy, state planners would allocate state resources toward public goods and state projects.

Disadvantages of economic planning

Inefficient resource distribution: surplus and shortage

Critics of planned economies argue that planners cannot detect consumer preferences, shortages, and surpluses with sufficient accuracy and therefore cannot efficiently co-ordinate production (in a market economy, a free price system is intended to serve this purpose). For example, even though the Soviet Union had its own passenger car manufacturing industry going back to 1940's, it was impossible for a Soviet citizen to simply walk into a store and buy a car-the entire output of all car manufacturing plants was allocated for years in advance. From the modern viewpoint, such a shortage indicates a mismatch between supply and demand-suggesting that planners have misjudged the demand for the product, the equilibrium price, or both. An imbalance, which would have been corrected naturally in a matter of years in a free-market economy, persisted for decades, while central planners turned a blind eye on it.

This difficulty was first noted by economist Ludwig von Mises, who called it the "economic calculation problem". Economist Jбnos Kornai developed this into a shortage economy theory (advocates could claim that shortages were not primarily caused by lack of supply).

A problem of surpluses exists. Surpluses indicate a waste of labour and materials that could have been applied to more pressing needs of society. Critics of central planning say that a market economy prevents long-term surpluses because the operation of supply and demand causes the price to sink when supply begins exceeding demand, indicating to producers to stop production or face losses. This frees resources to be applied to satisfy short-term shortages of other commodities, as determined by their rising prices as demand begins exceeding supply.

It is argued that this "invisible hand" prevents long-term shortages and surpluses and allows maximum efficiency in satisfying the wants of consumers. Critics argue that since in a planned economy prices are not allowed to float freely, there is no accurate mechanism to determine what is being produced in unnecessarily large amounts and what is being produced in insufficient amounts. They argue that efficiency is best achieved through a market economy where individual producers each make their own production decisions based on their own profit motive.

In particular, it is possible to create unprofitable but socially useful goods within the context of a market economy. For example, one could produce a new drug by having the government collect taxes and then spend the money for the social good.It is possible to see things of value being produced by the state taxing and using those funds to undertake projects which are believed to be social goods, but not to see what social goods have not been produced due to wealth taken out of the hands of those who would have invested and spent their money in other ways according to their own goals.

These opponents of central planning argue that the only way to determine what society actually wants is by allowing private enterprise to use their resources in competing to meet the needs of consumers, rather those taking resources away and allowing government to direct investment without responding to market signals. According to Tibor R. Machan, "Without a market in which allocations can be made in obedience to the law of supply and demand, it is difficult or impossible to funnel resources with respect to actual human preferences and goals."

If the government in question is democratic, democratically-determined social priorities may be considered legitimate social objectives in which the government is justified in intervening in the economy. It must be noted that to date, most if not all countries employing command economies have been dictatorships or oligarchies - few or none were democracies. Many democratic nations, however, have a mixed economy, where the government intervenes to a certain extent and in certain aspects of the economy, although other aspects of the economy are left to the free market.

Suppression of economic democracy and self-management

Central planning is also criticized by elements of the radical left. Libertarian socialist economist Robin Hahnel notes that even if central planning overcame its inherent inhibitions of incentives and innovation it would nevertheless be unable to maximize economic democracy and self-management, which he believes are concepts that are more intellectually coherent, consistent and just than mainstream notions of economic freedom.

As Hahnel explains, "Combined with a more democratic political system, and redone to closer approximate a best case version, centrally planned economies no doubt would have performed better. But they could never have delivered economic self-management, they would always have been slow to innovate as apathy and frustration took their inevitable toll, and they would always have been susceptible to growing inequities and inefficiencies as the effects of differential economic power grew. Under central planning neither planners, managers, nor workers had incentives to promote the social economic interest. Nor did impending markets for final goods to the planning system enfranchise consumers in meaningful ways. But central planning would have been incompatible with economic democracy even if it had overcome its information and incentive liabilities. And the truth is that it survived as long as it did only because it was propped up by unprecedented totalitarian political power."^[21]

Without economic democracy their can be troubles with the flow of knowledge as is shown with the initiative for backyard furnaces and other efforts in the Great Leap Forward

Economics in China

The official support of a market-based economy that came from Deng Xiao Ping in 1992 has resulted in a more open system of trade for China, and subsequently a huge growth spurt in China's economy. The economic reforms which Deng instigated culminated in a "socialist market economy", a term which was actually incorporated into the Chinese constitution during the National People's Congress in March 1993. Since that time, China's economy has experienced a substantial boost in regards to living standards, quality of food and spendable income. 

While these elements expand opportunities for U.S. exporters, factors such as inflationary pressure, irrational foreign exchange controls, and restrictive trade practices have created numerous barriers. In fact, China's official Gross National Product (GNP) posted a 12.8 percent real growth rate in 1992 to about US$435 billion, or about US$371 for each of China's 1.172 billion people- urban incomes grew at a real rate of 8.8 percent. Rural incomes also grew, but at a slower rate of 5.9 percent. 

These figures, however, may be tainted by the disproportionate distribution of income and wealth that permeates China. The Chinese, after all, have lower human rights standards than the United States and the poor definitely suffer the consequences. Add to that the immense size of the Chinese population, and suddenly any estimates of wealth, buying power, or economic conditions appear to be quite diminished in their reliability. In the end, these figures are based on national averages, which creates a fictional middle class majority that simply does not exist. Realistically, a very large proportion of China's economic growth comes from the collective and private sector, and not the subsidized state sector. 

In addition, China continues to maintain an illogical foreign exchange mechanism, utilizing both an official exchange rate and a "swap center" rate, which is influenced even further by the black market rate - none of which can be properly measured. Other barriers include the fact that it can sometimes be hard to decipher the rules regarding license requirements, as well as what type of inspections are required. For those commodities which are still restricted at the central government level, there is also confusion as to which agency has the ultimate authority. These difficulties can be managed, but necessitate perseverance and diligence on the part of U.S. exporters. 

The market and price reforms made by the China Communist Party in 1993 also fueled dynamic changes in China's economic environment, especially in regards to agriculture. With the population of China increasing by approximately 17 million people every year, it is easy to see why China can only meet demands by increasing the number of agricultural and food product imports it receives. Today, there are over 80,000 grain and edible oil markets as well as numerous fruit and vegetable markets in China importing products for the domestic market. China has signed agreements which force them to loosen the restrictions on foreign trade, which has had a very positive impact on U.S. trade relations with China, especially in regards to food products. 

In China, as in many countries throughout the world, the rise in incomes and living standards has perpetuated a notable increase in the per capita consumption of meat, fruits and vegetables, and most especially, processed and convenience foods is increasing. In major urban markets, and most noticeably in Beijing, Shanghai, and Guangzhou, consumers are literally "eating up" fast foods, convenience foods, and packaged food products. The elimination of price subsidies for grain, pork, milk, eggs and other products has caused some increase in price, however this increase has caused little, if any, dissension. This means that not only can Chinese consumers better afford to pay higher prices, but are willing to, in order to increase the number of alternatives that are available to them. Consumers in China today are demanding quality and variety in the food they buy and the U.S. market is more than happy to fulfill their needs. Unfortunately, there are still about 300 million people in China's urban population who have not yet caught up with the rapid growth of the Chinese economy. The good news for U.S. exporters however is that as long as the economic trends in China continue to improve, more and more markets will continue to open up. The bad news is that the high tariffs, technical barriers and general lack of clarity that products of major interest to U.S. exporters, such as beef, nuts, and fruit, have received only minimal reductions in tariffs despite the many promises from China that international trade will be made more cost-efficient. Quarantine barriers also officially prohibit U.S. fruit and most fresh vegetables from entering China, due to fear of fruit fly contamination. However efforts are being made to permanently remove all restrictions that cannot be scientifically justified. 

China also maintains quotas on many products, but the quotas seem to be somewhat flexible. In truth, figuring out exact quota amounts is often very difficult. Therefore, when evaluating the U.S. market position for consumer ready products, China Customs data is the only source that provides comparable China Import data for the United States and other countries. There is still however a lot of discrepancies in figures, and it is assumed that the China market is larger than indicated by U.S. and Chinese statistics. 

While market research is not exactly a prevalent practice in China, some evidence has shown that an American label does significantly help boost product sales. Subsequently, dishonest importers have been known to put U.S. labels on other countries' products because it makes the item sell better. This not only skews statistical data, but could have a strong negative impact on the U.S. economy if the matter were to get out completely out of hand. Labeling requirements are not very restrictive at the moment, but the U.S. and China are working to eradicate this fraudulent behavior being perpetrated. The China market for American products is swiftly freeing itself from strict government control. The amalgamation of rapid economic growth and market reforms is has fueled the interest in American products on the part of the Chinese consumer. It is predicted that the hotel and restaurant industry will continue to be the major market opportunity for U.S. meats, wines, frozen potatoes, condiments and a plethora of other related products. In addition, the telecommunications, financial and other service markets also offer great potential for U.S. exporters. In spite of the plethora of trade restrictions which still limit the overall import market in China, the latest trends are pointing toward simplifying admission into the Chinese market. The number of trade corporations, and factories, for example, has gone sky high in the recent past. Because of its struggling economy, most emphasis in past China trade relations was based on exporting. There is currently is a continually increasing interest in importing products for the domestic market. 

Foreign trade corporations that were at one time part of a strict government structure are now able to expand their scope of business and deal in more products and distribute to more outlets than ever before. While still associated with some level of the Chinese government, these corporations must now turn a profit and are subsequently becoming more active in importing U.S. products. In virtually all cases, these importers are also distributors. This has introduced an element of competition in the import sector that did not exist just a few years ago. It also means that at least some of these potential importers/distributors are not familiar with U.S. products or international trading practices. . In addition, the elimination of price controls and the establishment of wholesale markets has allowed China to achieve a better balance between supply and demand. One of the most recent notable developments in regards to China's trade regulations is that, China and the U.S. finally signed a deal which allowed China to enter the World Trade Organization. This agreement will benefit the U.S. in a number of ways, including the new freedom of foreign investors to partake in China's internet market, and manufacturers are now allowed to import and export their products without overt governmental interference. 

Economic reform and the establishment of a "socialist market economy" have virtually revolutionized trade between our two countries. Therefore it is vital that good relations with China are maintained so that both economies can experience the benefits of higher quality living. 

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