Best Economic System
Nick Farris
Research Paper
5th Hour
1/8/2010
What is the Best System: The Economic System Research Paper Our culture, ideas, and beliefs all come from economics. Many people don’t realize it, but the way our society functions depends solely on its economic system. One may ask, what is an economic system? And how could it possibly dictate most, if not all, aspects of life? Simply put, an economic system is the way in which society produces and distributes goods and services to consumers. In modern times, a nation’s economic system is determined and implemented by its federal government. Hundreds of theories about economics exist, but realistically when implemented they phase into one of two categories. An economic system can’t be right …show more content…
or wrong; however, some systems do make society function more fair and efficiently than others. Economic systems are classified into two different categories: hands-on and hands- off. A hands-on economic system is one which consists of significant government intervention in order to ensure social justice and a more equal distribution of wealth. Within a hands-on system lies three sub-categories, the first being private oriented. A private oriented hands-on system consists of multiple private organizations joining together as a single governing body which implements and enforces all social, economic, and political policies. In a private hands-on systems, the private businesses and the government are one in the same. This type of system is common in fascist regimes such as Nazi Germany. The second sub-category is known as state - oriented economics. The most common form of state - oriented economics is Communism. Communism aims at creating a classless society where goods and property are publicly owned. The entire economy is centrally planned, meaning the government determines how much of a good is produced, what each good costs, and who receives them. The third and final hands-on system is called communal oriented. Similar to State oriented, communal oriented involves groups or communes allocating resources and determining the costs of goods and services. This usually takes place at a federal level and leads to a more egalitarian society. However, this type of system tends to be highly inefficient and sometimes unfair to certain groups of people. The second classification of economic systems is known as hands-off.
Hands-off systems generally allow the market to determine prices, production, and costs. Hands-off systems tend to be more efficient than hands on systems, however each system has its own flaws. Much like hands-on systems, hands-off systems have three subcategories: private, state, and communal. Hands-off private oriented systems involve no state or government intervention, it is the most basic system, however an actual private hands-off system has never been put to practice. Every aspect of the economy is left to the market, literally everything, which is not always a good thing. The advocates of this type of system believe no government is necessary and that the markets will take care of everything. Capitalism is the most common form of private oriented economics, however, society’s perception of Capitalism today is not what Capitalism was meant to be. State handsRochester Community Schools Page 2 1/8/10-off systems call for government intervention but still allow the market to determine prices and costs of goods and services. The government owns the factors of production such as land, labor, and capitol but all other economic factors such as price, distribution, and output are determined by the private sector. The third and final hands-off system is known as a communal oriented system. This system consists of decentralized co-ops that have a collective ownership on the means of production. That means, that the factors of production are owned publicly, however, the ownership of the factors is distributed equally among all regions of a certain nation. This system is the opposite of most other systems because the owner of the factors of production aren’t centralized; instead they are evenly dispersed. Usually operated at a federal level, the co-ops allow the market to determine prices, costs, production levels, and all other economic activity. This system is not very realistic because of the
difficulty of implementing it. As stated earlier, each system has its flaws when put to practice. However, some systems deal with these problems better than others. To begin with, the advantages of the most commonly used hands on system, Communism, will be examined. The largest communist state in history was the Soviet Union. By using common economic indicators like GDP, GNP, MPC, and MPS the economic status of any country, in this case the Soviet Union can clearly be identified. GDP is the tool that is most often used to measure a nation’s economy. GDP stands for Gross Domestic Product and is measured in dollars. Its components are: consumption, or how much people spend; government spending for public services and social safety nets; investments made by businesses for things like new factories; and exports, which are just goods we sell to foreign nations. So basically, GDP measures every type of economic activity within a given time frame. According to the data recorded by the UN Statistics Division, the Soviet Unions GDP increased at an annual rate of 2.2% from 1970 to 1990. That’s a solid and strong growth rate for an economy of that scale. But what does that mean for an everyday consumer? A growing GDP means people are earning more money, so people will spend more money. It means people can purchase more of what they want with increased financial security. The citizens of the Soviet Union experienced the same amount of economic growth as citizens living in any other industrialized nation at the time. The Soviets MPC or Marginal Propensity to Consume from 1970 to 1990 was .62 (Roberts). This means that for each dollar a person earned, he or she would spend sixty – two cents of it. This also means each person’s MPS or Marginal Propensity to Save was thirty-eight cents of each dollar earned. This is a fairly normal ratio, yet it shows consumer spending was exceptionally high during this time frame, which correlates to a high rate of economic growth.
While the pure numerical statistics of the Soviet Union’s economy are quite impressive, the fact is that the economy was not operating at its full potential. To an outsider, the economy would appear to be sluggish and very limited. Consumers had few choices when purchasing goods and the choices they had were often low quality and unappealing. The central planning failed miserably, which caused the Soviets to waste resources. For nearly all products in the Soviet Union, the production output was worth less than the input costs. The economic growth that the Soviet government reported didn’t help or improve the lifestyle of anyone living there. As author Paul Roberts stated, “Soviet output basically satisfied no one but the statistician measuring it.” On the opposite end of the economic spectrum lies Capitalism. Capitalism is classified as private hands off system and is the most widely used system in the world. Within capitalism lie several different variations and theories of how to practice it, but generally it’s a free market system with minimal government intervention. The United States is the largest and most successful capitalistic nation in the world. Capitalism is the only system that allows any person to open his or her own business. And, it is a relatively easy process. No other economic system allows people to start their own businesses and express their ideas more freely than capitalism. Using data studying the U.S. economy from 1970 to 1990, the same time frame as the Soviet Union data, it is easy to compare the two economies. The average annual GDP growth rate in the U.S. from 1970 to 1990 was 3.2%. In 1970, the GDP Per Capita was $18,391 and in 1990 the GDP Per Capita was $28,429 (Krugman and Wells 855-856). That is a thirty-five percent increase over a twenty-year period. An increase in GDP per capita of that magnitude truly shows the strength and prosperity of the U.S.’s economy. Also, the United States has evidence to prove these statistics. The improvement of technology in nearly all markets produced an unbelievable amount of growth that nearly everyone experienced through that time period. Although the U.S. economic growth was impressive, the overall economy had and still does have disadvantages. The income gap between the rich and poor continues to widen, which happens quite often in capitalistic nations. In 2005, data studied by Emmanuel Saez, an economist at the University of California, Berkeley, showed that the top 300,000 Americans collectively enjoyed almost as much income as the bottom 150 million Americans. Large income gaps cause both social and political instability within society, and historically leads to revolutions. Another problem with capitalism is that it doesn’t provide much support for the poor. Many capitalistic countries have a large percentage of their population living below the poverty threshold. According to Gary Andersons report on poverty in the United States, approximately 12% of America lives under the poverty line. When comparing the two systems by their numerical statistics they appear to be quite similar, both in overall growth and consumer purchasing power. Both the United States and the Soviet Union’s GDP increased at a strong and consistent rate. The Soviets had a more equal income distribution and a more egalitarian society. But, realistically the Soviets standard of living was significantly lower than the United States. It is an absolute fact that the U.S. economy was much more successful than the Soviets’. The goods that the Soviets produced were low grade, cheap, and unreliable. The policy makers flat out failed in the planning of the economy, which brings up the question, is it even possible for a centrally planned economy to operate efficiently? In conclusion, it is reasonable to generalize that any hands on system, when put to practice, will eventually turn into Communism. Just as if any hands-off system is implemented, realistically, it will turn into Capitalism. So it comes down to Communism v. Capitalism; overall, Capitalism is the better system. It allocates resources more efficiently and, most importantly, consumers can get nearly anything they want. Only in a Capitalistic nation can consumers buy anything from a solar powered motorcycle to a birthday cake for pets. Capitalism allows the voice of the people to determine economic policies. With central planning, an economy will turn into a corrupt and bureaucratic mess. Capitalism lets the consumer get what he or she wants without any economic policy maker standing in his or her way. Capitalism should be the economic system implemented by any sovereign state.
Research Paper
5th Hour
1/8/2010
What is the Best System: The Economic System Research Paper Our culture, ideas, and beliefs all come from economics. Many people don’t realize it, but the way our society functions depends solely on its economic system. One may ask, what is an economic system? And how could it possibly dictate most, if not all, aspects of life? Simply put, an economic system is the way in which society produces and distributes goods and services to consumers. In modern times, a nation’s economic system is determined and implemented by its federal government. Hundreds of theories about economics exist, but realistically when implemented they phase into one of two categories. An economic system can’t be right …show more content…
or wrong; however, some systems do make society function more fair and efficiently than others. Economic systems are classified into two different categories: hands-on and hands- off. A hands-on economic system is one which consists of significant government intervention in order to ensure social justice and a more equal distribution of wealth. Within a hands-on system lies three sub-categories, the first being private oriented. A private oriented hands-on system consists of multiple private organizations joining together as a single governing body which implements and enforces all social, economic, and political policies. In a private hands-on systems, the private businesses and the government are one in the same. This type of system is common in fascist regimes such as Nazi Germany. The second sub-category is known as state - oriented economics. The most common form of state - oriented economics is Communism. Communism aims at creating a classless society where goods and property are publicly owned. The entire economy is centrally planned, meaning the government determines how much of a good is produced, what each good costs, and who receives them. The third and final hands-on system is called communal oriented. Similar to State oriented, communal oriented involves groups or communes allocating resources and determining the costs of goods and services. This usually takes place at a federal level and leads to a more egalitarian society. However, this type of system tends to be highly inefficient and sometimes unfair to certain groups of people. The second classification of economic systems is known as hands-off.
Hands-off systems generally allow the market to determine prices, production, and costs. Hands-off systems tend to be more efficient than hands on systems, however each system has its own flaws. Much like hands-on systems, hands-off systems have three subcategories: private, state, and communal. Hands-off private oriented systems involve no state or government intervention, it is the most basic system, however an actual private hands-off system has never been put to practice. Every aspect of the economy is left to the market, literally everything, which is not always a good thing. The advocates of this type of system believe no government is necessary and that the markets will take care of everything. Capitalism is the most common form of private oriented economics, however, society’s perception of Capitalism today is not what Capitalism was meant to be. State handsRochester Community Schools Page 2 1/8/10-off systems call for government intervention but still allow the market to determine prices and costs of goods and services. The government owns the factors of production such as land, labor, and capitol but all other economic factors such as price, distribution, and output are determined by the private sector. The third and final hands-off system is known as a communal oriented system. This system consists of decentralized co-ops that have a collective ownership on the means of production. That means, that the factors of production are owned publicly, however, the ownership of the factors is distributed equally among all regions of a certain nation. This system is the opposite of most other systems because the owner of the factors of production aren’t centralized; instead they are evenly dispersed. Usually operated at a federal level, the co-ops allow the market to determine prices, costs, production levels, and all other economic activity. This system is not very realistic because of the
difficulty of implementing it. As stated earlier, each system has its flaws when put to practice. However, some systems deal with these problems better than others. To begin with, the advantages of the most commonly used hands on system, Communism, will be examined. The largest communist state in history was the Soviet Union. By using common economic indicators like GDP, GNP, MPC, and MPS the economic status of any country, in this case the Soviet Union can clearly be identified. GDP is the tool that is most often used to measure a nation’s economy. GDP stands for Gross Domestic Product and is measured in dollars. Its components are: consumption, or how much people spend; government spending for public services and social safety nets; investments made by businesses for things like new factories; and exports, which are just goods we sell to foreign nations. So basically, GDP measures every type of economic activity within a given time frame. According to the data recorded by the UN Statistics Division, the Soviet Unions GDP increased at an annual rate of 2.2% from 1970 to 1990. That’s a solid and strong growth rate for an economy of that scale. But what does that mean for an everyday consumer? A growing GDP means people are earning more money, so people will spend more money. It means people can purchase more of what they want with increased financial security. The citizens of the Soviet Union experienced the same amount of economic growth as citizens living in any other industrialized nation at the time. The Soviets MPC or Marginal Propensity to Consume from 1970 to 1990 was .62 (Roberts). This means that for each dollar a person earned, he or she would spend sixty – two cents of it. This also means each person’s MPS or Marginal Propensity to Save was thirty-eight cents of each dollar earned. This is a fairly normal ratio, yet it shows consumer spending was exceptionally high during this time frame, which correlates to a high rate of economic growth.
While the pure numerical statistics of the Soviet Union’s economy are quite impressive, the fact is that the economy was not operating at its full potential. To an outsider, the economy would appear to be sluggish and very limited. Consumers had few choices when purchasing goods and the choices they had were often low quality and unappealing. The central planning failed miserably, which caused the Soviets to waste resources. For nearly all products in the Soviet Union, the production output was worth less than the input costs. The economic growth that the Soviet government reported didn’t help or improve the lifestyle of anyone living there. As author Paul Roberts stated, “Soviet output basically satisfied no one but the statistician measuring it.” On the opposite end of the economic spectrum lies Capitalism. Capitalism is classified as private hands off system and is the most widely used system in the world. Within capitalism lie several different variations and theories of how to practice it, but generally it’s a free market system with minimal government intervention. The United States is the largest and most successful capitalistic nation in the world. Capitalism is the only system that allows any person to open his or her own business. And, it is a relatively easy process. No other economic system allows people to start their own businesses and express their ideas more freely than capitalism. Using data studying the U.S. economy from 1970 to 1990, the same time frame as the Soviet Union data, it is easy to compare the two economies. The average annual GDP growth rate in the U.S. from 1970 to 1990 was 3.2%. In 1970, the GDP Per Capita was $18,391 and in 1990 the GDP Per Capita was $28,429 (Krugman and Wells 855-856). That is a thirty-five percent increase over a twenty-year period. An increase in GDP per capita of that magnitude truly shows the strength and prosperity of the U.S.’s economy. Also, the United States has evidence to prove these statistics. The improvement of technology in nearly all markets produced an unbelievable amount of growth that nearly everyone experienced through that time period. Although the U.S. economic growth was impressive, the overall economy had and still does have disadvantages. The income gap between the rich and poor continues to widen, which happens quite often in capitalistic nations. In 2005, data studied by Emmanuel Saez, an economist at the University of California, Berkeley, showed that the top 300,000 Americans collectively enjoyed almost as much income as the bottom 150 million Americans. Large income gaps cause both social and political instability within society, and historically leads to revolutions. Another problem with capitalism is that it doesn’t provide much support for the poor. Many capitalistic countries have a large percentage of their population living below the poverty threshold. According to Gary Andersons report on poverty in the United States, approximately 12% of America lives under the poverty line. When comparing the two systems by their numerical statistics they appear to be quite similar, both in overall growth and consumer purchasing power. Both the United States and the Soviet Union’s GDP increased at a strong and consistent rate. The Soviets had a more equal income distribution and a more egalitarian society. But, realistically the Soviets standard of living was significantly lower than the United States. It is an absolute fact that the U.S. economy was much more successful than the Soviets’. The goods that the Soviets produced were low grade, cheap, and unreliable. The policy makers flat out failed in the planning of the economy, which brings up the question, is it even possible for a centrally planned economy to operate efficiently? In conclusion, it is reasonable to generalize that any hands on system, when put to practice, will eventually turn into Communism. Just as if any hands-off system is implemented, realistically, it will turn into Capitalism. So it comes down to Communism v. Capitalism; overall, Capitalism is the better system. It allocates resources more efficiently and, most importantly, consumers can get nearly anything they want. Only in a Capitalistic nation can consumers buy anything from a solar powered motorcycle to a birthday cake for pets. Capitalism allows the voice of the people to determine economic policies. With central planning, an economy will turn into a corrupt and bureaucratic mess. Capitalism lets the consumer get what he or she wants without any economic policy maker standing in his or her way. Capitalism should be the economic system implemented by any sovereign state.