Economics

III

Economic Systems

All organized communities mix, in various proportions, market activity and government intervention. Private markets themselves differ widely in the degree of competition under which they operate, all the way from single-firm monopolies to the fierce rivalry among hundreds of retailers. Much the same point applies to government intervention, which ranges from mild and comparatively uncoercive manipulation of tax, credit, contract, and subsidy policies through mandatory controls over wages and prices to the detailed central planning of Communist countries.

Even those societies most completely committed to central planning, however, grudgingly modify official ideology by some concessions to private enterprise. For example, the former USSR allowed its farmers, although organized in collective enterprises, to market crops grown on their own small plots. During the Communist period in Poland, most farming was in the hands of individual owners. Yugoslavia experimented in worker management of factories during its Communist period.

Similar variation exists among capitalist economies. In most of them, the government owns and operates railways and airlines. Even where outright government ownership or operation is exceptional, as in Japan, the central government exerts tremendous influence over economic activity. The United States, the most devoted of major capitalist economies in terms of the free enterprise system, has nevertheless rescued faltering corporations such as Lockheed and Chrysler and has, for all practical purposes, converted a number of major defence contractors into federal subsidiaries. Many American economists have come to accept the concept of a “mixed economy”, combining private initiative with some government control.

A

Free Enterprise

The major differences between Communist and capitalist economic organization concern ownership of factories, farms, and other enterprises, as well as contrasting principles of pricing and income distribution. In most capitalist economies the majority of gross national product (GNP) is directly generated by profit-making business enterprises, farmers, and such voluntary non-governmental entities as private universities, hospitals, cooperatives, and foundations. In recent years many countries have followed Great Britain in privatizing many previously government owned enterprises, and introducing competition in many services (such as health and education). This worldwide trend towards Privatization has significantly reduced government interference in the operation of industry and reduced government influence over price setting. Indeed, the most important price controlled by public influence is the price of money—that is, the rate of interest.

Although opposition to both controls and national planning is strong in the developed world, governments have repeatedly resorted to these measures in times of emergency, such as during World War II and the Korean War. In general, however, free-enterprise economies consider state ownership of productive facilities and government interference in price setting as deplorable exceptions to the rule of private ownership and price determination through the mediation of competitive markets.

B

Central Planning

Precisely the reverse attitude towards economic central planning has been the case in China and certain other Communist countries. Although private enterprises are increasingly being tolerated, and no centrally planned economy has been able to function without some reliance on private ownership of agricultural land, the dominant ideology favours state planning over competitive price setting, at least in theory, and public ownership of factories, farms, and large retail establishments.

Strictly speaking, there is no reason why a democratic community could not freely choose to plan production, prices, and the distribution of income and wealth. In contemporary experience, however, central economic planning has generally run parallel to Communist party control of political life. Nonetheless, important differences exist in the strictness of these constraints in different Communist countries and even within the same country at different times. It is also true that capitalism has frequently been accompanied by repressive government, as for example in Chile and Brazil.

The gravest problems of capitalism are unemployment, inflation, and economic injustice. Parallel problems in centrally planned economies include underemployment, rationing, bureaucracy, and scarcity of many consumer items.

C

Liberal Socialist Economies

Falling somewhere between societies that emphasize either central planning or free enterprise are those that practice social democracy or liberal socialism. Examples of social democracy are the Scandinavian countries, Sweden in particular. Sweden organizes the bulk of productive activity under private ownership but regulates this activity closely, intervenes to protect the jobs of workers, and redistributes substantial portions of profits and large individual incomes to low-income groups. The validity of such a system has recently been thrown into doubt by increasing evidence of structural economic problems in Sweden.

On the other hand, the former Socialist Republic of Yugoslavia from the 1950s through the 1980s supplied an example of a liberal socialist society. Although the Communist party dominated, censorship was mild, emigration was easy, religion was freely exercised, and a unique mixture of state ownership, worker management, and private enterprise combined to operate a comparatively prosperous economy.

IV

Current Economic Problems

Between 1945 and 1973, the economies of the industrialized nations of Western Europe, Japan, and the United States grew fast enough to vastly improve living standards for their residents. A similarly favourable growth was registered by some, but far from all, of the developing or industrializing nations, in particular such thriving South East Asian states as Singapore and South Korea, as well as the island of Taiwan and Hong Kong S. A. R. Clearly several circumstances contributed to this almost unique historical performance. After the devastation of World War II, a substantial rebuilding boom, combined with lavish flows of aid from the United States, generated rapid growth in Western Europe and Japan. American multinationals invested heavily in the rest of the world. Perhaps most important of all, energy was plentiful and cheap.