Capitalism, also known as the market system, is one of four prominent economic systems used in the world. The market economic system uses the underlying principles that everyone has the freedom to choose and all businesses are exempt from government control. Yay freedom! But is this complete freedom good for us?
Due to the lack of government control, it is up to each individual business’s own discretion to set their prices. Thus, the effects of prices are heavily dependent on the simple concepts of supply and demand. If people want more of a certain product, the businesses will increase the price of that product in order to maximize their profit. If people want less of a good, producers will lower the price of that good or turn towards manufacturing another good in hopes of generating better sales.
The most capitalist countries in the world include Hong Kong, Singapore and Australia and the United States. Let’s take a closer look at the market structure of Hong Kong. Dr. Milton Friedman explains that Hong Kong has become a haven for people who seek economic freedom. In Hong Kong, there are few business and government regulations, which gives business owners the freedom to choose and produce whatever they would like. The main question that should be asked is whether this capitalist economy in Hong Kong is the best choice? In a country that is rapidly expanding like Hong Kong, there is a drastic divide between the social classes. In the case of a country like Hong Kong, capitalism is the best economic system because of one pertinent idea that Milton Friedman presented – the freer the system, the better off the poor people are. This helps explain why Hong Kong has a high standard of living. The capitalist economy enables the poor to generate enough money for themselves to be able to live fairly well and be happy with what they have.
Another important question to ask is whether capitalism is the ideal economic system for every country and circumstance in the world? To answer this question, we would need to first examine the three other major market systems and weigh the benefits with the drawbacks.
Let’s first discuss the traditional economic system. Found mainly in the Middle East, Africa and Latin America, the traditional economic system employs the same economic concepts as used by the Europeans when they first traded with the First Nations. The traditional economy operates on the idea of bartering. In other terms, instead of exchanging money for goods, this economy uses the idea of trading products. For example, a hunter can trade the fish they catch in order to obtain vegetables that were grown by a farmer. Now, while this seems like a very out-dated, old-fashioned economic system, there are benefits to this.
- You only produce what you need so there isn’t much surplus. This is a sustainable, environmentally friendly economic system that seeks to only produce what you need and in the case of a surplus, you can trade it with others to get different goods.
- Through bartering, you are much more likely to receive a fair and acceptable compensation for giving up something. For example, in a mixed economy, once you drive a new car for a year, that car loses around 25% of it value. This means that you are losing a significant amount of money if you choose to sell a used car after driving it for just a short time. Meanwhile, in a traditional economy, there is no monetary value for cars so a car that has only been used for one year will not have lost 25% of its value. In a traditional economy, that car will still be seen as a “new” car, and you, as the owner, will still be able to receive a fair and adequate compensation if you decide to trade this for something else.
- The traditional economy is equitable and efficient as trading allows each person to decide whether they are getting a good deal in return. If you feel like you’re not, you can just decline the trade and go somewhere else.
The obvious drawback of the traditional economic system is that it is outdated and unpopular. In a world where every country has a currency than can be used to buy goods and services, bartering has become less common. In our current state, it is impossible to just eliminate all the money we use and revert to bartering. Thus when asked if the traditional economy is a better idea than a capitalist economy, it is obvious that a capitalist economy is much more reasonable and ideal than a traditional economy.
So now that we’ve established that the traditional economy isn’t the best economic system, we can move on to the next one – the command economy, or otherwise known as communism. The command economy is drastically different from the capitalist economy. Instead of giving people the freedom to choose, all the decisions in the command economy are decided by the government. The most obvious example that immediately pops up in my head when discussing the command economy is North Korea. In North Korea, all the decisions are made by the central government, headed by dictator Kim Jong-un. Here are some of the characteristics of the general command economy, not just those pertaining to North Korea.
- The government creates an economic plan and allocates its resources according to that plan. It tries to eliminate unemployment and distribute wealth accordingly among all the citizens based on their role in the economy.
- The government owns different monopolies in specific sectors of the economy (finance, automotive etc) to eliminate competition within these sectors.
- The country emphasizes on relying on itself and discourages international trade.
What are the advantages of a command economy? Well in a command economy, the economic plan created by the government answers the three economic questions. Therefore, the citizens do not have to worry about anything other than following the plan. As well, as there is limited unemployment, you are more likely to find a job, albeit it might not be what you want to do. Another benefit of the command economy is that it tries to eliminate the barriers that would created against people with disabilities or the less fortunate in a market economy. In a command economy, you will still be given a role in the economy even if you are born with a disability that prevents you from doing certain jobs. Everyone is given an “equal” chance at helping the country towards achieving its economic plan.
However, the command economy is neither efficient nor equitable. Since there is no true command economy, everyone is still paid differently based on their skills and contribution to the economy. Hence, by giving some people more money than others, you are in effect making them better off. Furthermore, as seen in many command economies in the past, they are not built to last on their own. The collapse of the command economy in the USSR as well as the transition to a mixed economy in the countries of China and Cuba have signified that more and more countries are adopting capitalist views.
An easy comparison can be made between North Korea and South Korea. North Korea’s command economy generates a significantly lower GDP ($28 billion) than South Korea’s mixed, bordering capitalist, economy ($1 trillion). Back in the 1960s, South Korea was regarded as one of the economically poorest countries in the world. Following its transition from a command economy to a more market oriented economy, South Korea was able to increase its GDP by a huge amount.
Due to the lack of successful command economies, it is safe to say that adopting a command economy is obviously not the best idea. While current command economies are moving towards becoming more capitalistic, it is unwise to go in the opposite direction.
The last prominent economic system that deserves a long look is the mixed economy. A mixed economy is essentially the combination of the traditional, command and capitalist economies. The mixed economy allows people to have a general freedom to choose, while the government regulates certain aspects of the economy in order to protect the people and the market. The mixed economy is the most widely found type of economy in the world, with most countries having a mixed economy to a certain extent. In fact, even Hong Kong, considered the most capitalist country in the world, can be considered as having a mixed economy because there is still some government interference in their economy. Here are some of the advantages of a mixed economy:
- The laws of supply and demand help dictate the prices of goods so customers get the best value for their purchases and producers still generate as much profit as they can.
- The government has the role of improving defense and technology, which will help increase the safety of the country.
- The three economic questions are still given to the people to answer as they have the freedom to choose what, how and whom to produce to.
Of course, there are still disadvantages when it comes to the mixed economy. One disadvantage largely depends on how big of a role the government has on the economy. For example, if the government creates too many restrictions, the freedom for the people will decrease. As well, the government could invest too much money into technology or defense, which will in turn put the country in debt. Unfortunately, the mixed economy is neither efficient nor equitable. As there is still freedom of choice for producers, there will always be those who will be well off while others are struggling. The freedom to choose means that if the demand just isn’t there for your good, then you will become worse and worse off as time passes. .
Overall, the mixed economy is still considered a viable option as the best economic system. It takes into consideration the best factors from the market, command and traditional systems and uses them to create a well-rounded economic system.
So now that I have mentioned each economic system, it is time to determine what is truly the best system. Based on pure economic systems, there is no best out of the three. Each pure system has its flaws:
- A pure traditional economy completely neglects the use of money as a medium of exchange and it completely depends on each person’s ability to be able to create what they need for trading (If a growing season is bad, then there aren’t many vegetables you can trade).
- A pure command economy completely neglects the freedom of choice for people and is very restrictive. People are not given the opportunity to sell whatever they would like and this often leads to an overproduction of one good and underproduction of another.
- A pure market economy completely opposes any interference from the government. Without any regulations, it is impossible to control the market if something fishy is going on and no advances in government controlled fields would occur.
When looking at the best economic system, I think of a mixed economy that is slightly more capitalist and less traditional. It is important to give people the freedom to choose whatever they want to produce but at the same time, people are greedy, so it is important to have just enough government regulation to ensure that everyone and everything is operating fairly. As our society develops and new technology and ideas are being introduced, the importance of the traditional economy continually decreases, therefore in my opinion, there really isn’t that much of a need for traditional ideals other than trying to make the economy efficient and equitable. A combination of the different economic systems ultimately trumps each individual system by itself.