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The Battle of the Three Isms

world

It is so easy to get overwhelmed thinking about the term “economic system.”  As the words roll off my tongue I envision millions of pieces of string connecting everyone in the world, from the lady running the ice cream parlour down the street, to the wealthy CEO in a tall skyscraper somewhere, to the people who govern our countries and make decisions from which we all are affected. Each string representing an economic transaction of some kind, and each one of us tangled somewhere in between.

The length and arrangement of these strings, however, are determined by the underlying economic system in place. How can we determine which arrangement is the best? How can we tug at these strings in a way that causes the least harm to others and produce thriving, independent economies?

This question has been answered on several occasions by many historians, economists, and political leaders, who believed that their ways of thinking were the best ways to run their countries. However, the search for the right answers still continues and there is a decision to be made by the end of this blog post. So let’s begin what I like to call “The Battle between Three Isms” (cheesy name, I know).

First of all, we should define what we are looking for, and the criteria upon which we will be able to make the decision between our three candidates. An economic system is an organized way in which a country allocates resources and distributes goods and services across the whole nation or a given geographic area. Any economic system must answer three fundamental questions:

  1. What goods and services do we produce?
  2. How do we produce goods and services?
  3. For whom do we produce goods and services?

After we understand the answers to these questions, we must also look at how efficient and how equitable each economic system is, and if there are any trade-offs involved with implementing one system over the other. Now it’s time to meet our contestants!

 

capitalism.png
About the Contestant: A free thinker, a very competitive businessman who values profit over EVERYTHING else, however, is very adaptive to the world around him.

 

Contestant A: Mono the Capitalist (Market Economy)

Our contestant, Mono the Capitalist is the one behind many of the richest, fastest growing economies in the world today. The United States, Canada, the United Kingdom, Germany – are some of the most prosperous nations in the world, and their economy is heavily based on Mono’s beliefs and ideals. Mono believes that a country’s trade and industry should be controlled by the private owners for profit, rather than by the government or the state. The private owners can control the factors of production, and they derive their income from their ownership. This characteristic of Mono’s capitalist view provides ordinary people with the incentive to maximize profit, helping the economy grow as a whole. That’s why Mono always says “Greed is good!”

Answering the Three Fundamental Economic Questions

Capitalism is based on the principles of a market economy, in which economic decisions are guided by the changes in prices that occur as economic transactions take place. Economic decisions are influenced by what consumers will buy, or as consumers express their preference for certain goods and services, they are produced. Since we know that the factors of production are owned privately by sellers, they will try to produce goods and services as cheaply and efficiently as possible in order to make a profit. Therefore, all of the fundamental economic questions are answered by individuals, and not by the government, which is essential in understanding a capitalist economy.

  1. What goods and services do we produce?

Businesses base decisions on supply and demand and consumer preferences.

  1. How do we produce goods and services?

Businesses control factors of production, therefore they decide upon how to produce goods.

  1. For whom do we produce goods and services?

Goods and services are made for the buyer, by the seller, in which both benefit through a voluntary transaction.

Equity vs Efficiency

Mono founded capitalism on the idea that the good of the whole society depends upon freedom of choice, competition, and the right of every individual to pursue wealth for his or herself. However, when it comes to efficiency and equity, capitalism does not check every box.

Let’s first talk about efficiency. This is something that Mono’s capitalism does extremely well. An economy is efficient when it takes all opportunities to make some people better off without making other people worse off. Capitalism allows the individuals who run businesses to control production and distribution of goods and services. Since their primary goal is to make a profit, this encourages firms to be more efficient, cut costs, and create new products that people want. If firms fail to keep up, they will go out of business, and this is exactly what causes them to continue to make more and more profit.

Equity, on the other hand, means that everyone gets his or her fair share and that the benefits of resources are distributed fairly among the members of society. However, capitalism isn’t concerned with equity. Capitalism is a race, a race to make a profit, and if you don’t run, you won’t benefit from it. Capitalism allows everyone to start at the same line, but the speed that you run is entirely up to you. That is why capitalism is often criticised for being cruel to the disabled, the elderly and the poor, who have a major disadvantage in this race, and therefore do not have an equal opportunity to benefit from it.

Advantages of Mono the Capitalist

  • Capitalistic economic systems provide limitless opportunity for each individual. It is the only economic system that allows every individual to have an equal chance of success, regardless of inherited social class. This incentive of guaranteed success provided by capitalism drives hard work, perseverance, and hope.
  • Since a market economy runs on the basis of supply and demand, it ensures that the most desired goods and services are produced for buyers.
  • Goods and services are produced in the most efficient way possible, earning the maximum profit for businesses and a low price for buyers.
  • Capitalism results in the overall increase of innovation and economic growth due to its fundamental competition which exists between businesses. Firms are forced to continue to innovate to spark the interest of consumers and remain competitive.

Disadvantages of Mono the Capitalist

  • Since capitalism forces people to compete with one another, it has no real system to care for those who are at an inherent competitive advantage.
  • Making money and profit is at the heart of any capitalistic economy, therefore the need to compete may not allow human resources to be optimized. For example, a child who might otherwise discover the cure for cancer might instead work at McDonald’s to support her low-income family.
  • Capitalistic economies seem to place a price on everything, as this economic incentive is enough for people to put almost anything up for sale. In a society where everything is for sale, life is harder for those who cannot afford it. In addition to this, placing a price on certain things can promote certain attitudes towards them. Paying kids to come to class on time may make them be more punctual, but they may begin to take advantage of these incentives when this is something that should come naturally.
communism.png
About the Contestant: Worships the State, has a stable job, not looking for any real progress or improvement in life or in the economy.

Contestant B: Krab the Communist (Command Economy)

Our second contestant, Krab the Communist, not to be confused by his friend Buzz the Socialist, currently governs countries such as China, North Korea and Vietnam, which claim to be communist states. Communism is considered to be one of the extensive economic ideologies, tracing back to the first hunter-gatherer societies, Ancient Greece, and modern communism in 19th century Russia. In a nutshell, Krab’s communism aims to replace private property and a profit-based economy with a society in which all property is publicly owned and each person works and is paid according to their abilities and needs. In a communist system, the State is responsible to provide work and compensation, and the production and distribution of consumer goods. Krab imagines a complete communistic society without class divisions, which would be based upon the principle “From each according to his ability, to each according to his needs.”

Advantages of Krab the Communist

  • It is obvious at this point that the largest advantage of communism is that it embodies equality. There is no social class system at all, and as such, citizens have the peace of mind that everyone is equal.
  • There are advantages for those who have an inherent competitive disadvantage, such as the elderly, children or the physically and mentally disabled, as they will be able to live just like everyone else.
  • Communism eliminates business monopolies since the government owns and controls all businesses and the price at which goods are sold.

Disadvantages of Krab the Communist

  • A lack of personal growth is a great disadvantage when it comes to communism. Since all people are equal efinancially and there is no social status, this may demotivate professionals to do a good job because there is no incentive for them to continue to work hard.
  • People are treated as commodities, which can be ordered at whim due to the extent of government power within communistic economies.

 

socialism
About the Contestant: Friends with the State, has a stable job, believes in the welfare of the community as a whole, and very cooperative.

 

Contestant C: Buzz the Socialist (Command Economy)

Our final contestant, Buzz the Socialist, is one whose ideas and morals have been embedded in many of the most prosperous and happy countries in the world, including Belgium, New Zealand, and the Netherlands. It seems to be that Buzz’s ideas are proving to be a great decision for these countries, but what exactly is socialism, and how is it different than its counterpart, communism? Socialism is defined as a type of economic system in which the means of production, distribution and exchange of resources should be owned or regulated by the community as a whole. Socialism is based on the idea that humans are naturally cooperative, and it is a less aggressive form of communism. Like communism, socialism’s main focus is on equality, but workers earn wages they can spend as they choose, while the government operates the means for production.

Advantages of Buzz the Socialist

  • In a socialistic economy, the issue of income inequality is less, because of the absence of private ownership. Everyone works hard and is paid as per their skills and ability.
  • Similar to communism, one of the benefits of socialism is that it is free from monopolistic practices, and exploitations of consumers by large corporations are not possible.
  • More freedom is provided to citizens in comparison with communism, as individuals are allowed to spend their income the way they choose to.
  • The six basic needs in life are met within a socialist economy, which provides a sense of security for the people living in the country.

Disadvantages of Buzz the Socialist

  • It is due to competition that an economy becomes prosperous, and without it, producers are not forced to use their talents and skills to create quality goods and services, and consumers cannot have the product at a relatively cheap price. This means that the economy does not grow rapidly as it would in a capitalistic economy.
  • There is also a lack of freedom as there would be in a communistic economy, as individuals do not have many essential freedoms, such as freedom of enterprise, and freedom of choice of occupation.

Answering the Three Fundamental Economic Questions (Command Economy)

Communism and socialism are based upon the principles of a command economy, in which production, investment, prices and incomes are determined centrally by a government. This means that all economic decisions are centralized, giving citizens of such a country no real influence on the economy. Governmental planning groups determine things such as the prices of goods or services and the wages of workers.

  1. What goods and services do we produce?

The government decides which goods and services are needed, and consumer preferences have no influence on what is produced.

  1. How do we produce goods and services?

The state has control over all factors of production, therefore the way goods and services are produced is completely in the state’s hands.

  1. For whom do we produce goods and services?

The distribution of goods and services is decided by the government.

Equity vs Efficiency (Command Economy)

Equity is the principle upon which the two types of command economies operate. When Karl Marx and Frederick Engels originated the first few ideas of modern communism, they wanted to end the exploitation of the masses by the few. The goal of the command economy was to eliminate the class distinctions among people, making them all equal to each other – not necessarily prosperous or happy, but equal. Simply put, it is the idea that everyone in a given society receives equal shares of the benefits derived from labour, and distributes the wealth of society so that the poor can rise, and the rich can fall to the level of the middle class.

Although it may seem like a command economy proposes the creation of a perfect world, it’s far from perfect. Yes, everyone would have food and shelter, and a true communistic or socialistic society would be free from oppression, but we trade all our freedom for a little bit of security. Due to the government having control over all factors of production, communistic and socialistic economies are also highly inefficient. There is no reason to cut costs, or to innovate, no incentive for workers to work harder, or to make more money because the wealth is to be redistributed again, and again. There is no real reason to do anything, no real progress.

So who wins?

After this very exciting discussion, I think I have come to a conclusion about who will win this “Battle of the Three Isms.” Drumroll, please! Contestant A and Contestant C! Mono the Capitalist and Buzz the Socialist! After analyzing the advantages and disadvantages of all three economic systems, it is obvious that a combination of Mono’s efficiency and Buzz’s equity will provide the best opportunity for an economy to grow while maintaining freedom for the individual and equality for society as a whole.

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