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📖1. The Theory of CapitalismLaws about resource ownership and the extent to which the government attempts to coordinate economic activity vary among economic systems from the most free (the capitalist system) to the most regimented (command system). A capitalist system is characterized by private ownership of all resources and coordination of all economic activity based on prices generated in free markets, where supply and demand are allowed to reach their point of equilibrium without intervention by the government. Productive enterprises are privately owned, and the role of the state is limited to protecting the rights to life, liberty, and property. The invisible hand of the marketplace guides the self-interest of buyers and sellers into promoting general economic well-being. Despite decentralized decision making and self-interested decision makers, free markets lead to an efficient outcome.Markets provide information about the price, quantity, and quality of products for sale—information that a potential buyer needs to make a decision. Markets also reduce transaction costs because buyers need less time to gather information and make a purchase. The interaction of the buyers and sellers is coordinated in a way that guides resources and products to their highest valued uses. Private markets may fail to safeguard private property and enforce contracts. In a completely private market, firms may collude to avoid competition. Certain industries may be most efficiently organized as monopolies, but the private market may allow such industries to charge prices higher than are socially optimal. Private firms may not find it profitable to produce public goods. Prices set freely by the market often fail to reflect the costs or benefits imposed by externalities. Private markets can lead to a very unequal distribution of income. Finally, private markets do not guarantee full employment and price stability. Due to these imperfections or market failures, there is rationale for government intervention in the economy. The seven basic roles for government are (1) protecting private property, (2) promoting competition, (3) regulating business, (4) providing public goods and services, (5) promoting positive externalities and discouraging negative ones, (6) promoting equality in the distribution of income, and (7) promoting full employment and price stability.Even strictly communist countries like China have seen the benefits of a free society with a protected private sector. Click below to listen to a 3-minute news clip from National Public Radio regarding China’s move toward private property rights.📖2. The Theory of Planned SocialismA pure command economy is characterized by a strong central state, through state ownership and political power exercising considerable influence over what is to be produced; usually the output mix favors the producer goods, public goods and military goods over consumer goods. The state dictates arrangements for production, central planning used as a mechanism to organize resource allocation.The primary source of income is labor; the egalitarian distribution of output is pursued; the socialist economy places greater emphasis on economic equity and socialization. State policies are used to offset the problems of unemployment, inflation and slow economic growth, which are perceived as inevitable under capitalism. Those who argue against planned economies assert 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)” (Planned Economy, para. 14). For example, even though the Soviet Union had its own passenger car manufacturing industry going back to the 1940s, it was not possible for a Soviet consumer to walk into a store and buy a car as 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.📖3. The Theory of Market SocialismMarket socialism has had considerable appeal over the years, probably because it has been thought to combine attractive features of socialism (a more egalitarian distribution of income) and market capitalism (the efficiency of markets). “Market socialism refers to various economic systems where the means of production or dominant economic institutions are either publicly-owned or cooperatively-owned but operated according to the rules of supply and demand.“In the Oskar Lange’s model of market socialism, prices would be determined by a government planning board through a trial-and-error approach until they equaled the marginal cost of production as to achieve perfect competition and pareto optimality. In this model, firms would either be state-owned and managed by their employees.” (Market economy, n.d., Section 2: Market Socialism) In addition, the Lange model is useful as a formal mechanism through which to discuss important issues such as the role of prices in resource allocation (Friedman 1946). “The distinguishing feature between non-market socialism and market socialism is the existence of a market in the means of production and the criteria of profitability for enterprises. Profits derived from the public enterprises can either be used to reinvest in production or finance government and social services directly and/or be distributed to the workforce or public at large through a social dividend. Unfortunately, there is limited real-world experience with any variant of market socialism. Even a variant of market socialism is not readily available for analysis.” (Market economy, n.d., Section 2: Market Socialism)
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