Chapter 2

Economic systems:

The way that a group, community of people, or nation organizes itself for production is known as economic systems: traditional economic system, command economic system, market economic system and mixed market economic system.

Traditional Economic System:

A traditional economic system is one in which people’s economic roles are determined by  behaviors handed down to present from the past. People’s ways of production remain unchanged, that is, today’s producer and workers do the same work as those of their parents and grandparents.

Societies that produce goods and services in traditional ways are found today in some parts of South America, Asia, and Africa. There people living in an agricultural village plant and harvest their own food on their own land. And the way they produce clothing and shelter are almost exactly the same as those used in the past. Tradition is the only thing that decides what these people have to do in order to earn living. Tradition also decides the way (the how) their work is to be performed.

Command Economic System:

In a command economic system, the main decision maker is the government. No person may independently decide to open and run any kind of business. The government decides what goods and services are to be produced. And the government sells these goods and services. The government also decides how the talents and skills of its workers are to be used.

Market Economic System:

A market economic system is one in which a nation’s economic decisions are the result of individual decisions by buyers and sellers in the market place. Countries in Western Europe are said to have a market economic system. The economic system being applied in Vietnam now is also a market oriented one. When you earn your BA degree or a higher degree, a Master’s degree or a PhD, you may go to work where you choose, if a job is open. In a market economic system, people are free to go into business on their own. Suppose that you decide to open a business. You will risk the money you have saved or borrowed in the hope that you will be successful. The price that you charge for your goods or services will be influenced by the prices charged by your competitors (other businesses selling the same items). The success that you have will depend on the demand by consumers for your goods. You may do extremely well. But if people do not want what you are selling, you will go out of business.

Mixed Market Economic System:

Most of the economic systems in the world are mixed market economies. This means the market alone does not decide how all goods and services. We call this system a mixed market economy. For example, public education, road maintenance, police and fire protection, and national defence are services provided by governments. But privately owned businesses produce the school textbooks, the road building materials, the fire trucks and police cars, and even the planes that governments buy and use. In these situations, resources that might otherwise have been used to produce goods and services for private use were used for public use. In mixed economic system, governments may step in and interfere with the market’s operation. They do so to protect consumers, help workers, business firms, and farmers and provide for the aged, the sick and the needy.

In a mixed market economy, close interactions between the public sector (the government owned sector) and the private sector (the market) are encouraged.

The Classic School:

As a coherent economic theory, classical economics starts with Adam Smith, continues with the British economists Thomas Robert Malthus and David Ricardo, and culminates in the synthesis of John Stuart Mill, who as a young man was a follower of Ricardo.

Adam Smith: In his famous treatise, The Wealth of Nations, Adam Smith argued that private competition free from regulation produces and distributes wealth better than government-regulated markets. Since 1776 when Smith produced his work, his argument has been used to justify capitalism and discourage government intervention in trade and exchange. Smith believed that private businesses’ seeking their own interests organize the economy most effectively, “as if by an invisible hand.”

All classical economists shared Smith’s strong suspicion of government and his ardent confidence in the power of self-interest represented by his famous “invisible hand”, which reconciles public benefit with individual pursuit of private gain. From Ricardo, classicists derived the notion of diminishing returns, which held that as more labour and capital were applied to land, yields after “a certain and not very advanced stage in the progress of agriculture steadily diminished”.

Through Smith’s emphasis on consumption, rather than on production, the scope of economics was considerably broadened. Smith was optimistic about the chances of improving general standards of life. He called attention to the importance of permitting individuals to follow their self-interest as a means of promoting national prosperity.

Thomas Malthus: Thomas Malthus’ studies on the growth of population led to the development of the field of demography. Malthus (1766-1834) believed that the population would naturally increase faster than the amount of food that could be produced to feed them. He advocated sexual abstinence or restraint to control population increases and acknowledged the role of plagues, wars, and epidemics in containing overpopulation. Malthus specifically suggested that people marry later and have small families. Due to these ideas, economics earned its name as “the dismal science.”

Malthus, on the other hand, in his enormously influential book An Essay on the Principle of Population (1878), imparted a tone of gloom to classical economics, arguing that hopes for prosperity were fated to founder on the rock of excessive population growth. Food, he believed, would increase in arithmetic ratio but population tended to double in each generation. As a consequence, starvation is hard to avoid. Malthus proposes an escape from this dismal situation by applying measures for birth control.