SST3771-ABED: 6.1.1 Economic Systems Review

©Image Courtesy Trey Ratcliff, Stuck in Customs Quotation from Chester Bowles

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What is an economic system?

Why do we need one? Economics is often called the "science of scarcity" because the world does not have unlimited resources yet we place almost limitless demands on the resources that exist. An economic system is the way a society organizes the production, distribution, and consumption of goods and services. Who gets to make the stuff we use? Who gets to buy it? Are there rules for making, buying, and selling the things we need and want? If there are rules, who makes them?

Just as political systems, our economic systems are based on ideologies-ideas about how the world should be, which are based on beliefs and values. Economic systems can be based on individualism or collectivism. They can be based on the idea that the individual is of the utmost importance and personal freedoms should guide the way societies manage their resources, or they can be based on the idea that the community and its collective interest is most important.

Please watch the following video explain scarcity:

"Scarcity, the Basic Economic Problem", Jason Welker, You-tube

Capitalism is the dominant economic system in the world today based on individualism including the principles of individual rights, working in self-interest, and owning private property with a very limited role for government. Communism is based on the principles of collectivism, including economic equality and public property with a strong role for the government.

However, capitalism and communism are ideas. In reality, almost all economic systems are somewhere along the left-right continuum as indicated by the graphic shown below and inside the back cover of your text book.

For example, the United States is a capitalist system, yet the government makes rules to protect the environment and to offer certain public services such as public education. A communist country such as China allows individuals to own property and buy and sell goods and services for a profit. Even during Soviet rule in the former USSR, people were allowed to own private property.

The diagram demonstrates the role of government in the economy. Economic systems on the right exhibit more freedom for the market while those on the left exhibit more reliance on government to manage economic affairs.

In an economic system based on collective interest and responsibility, the government has a greater role in providing regulations for businesses, establishing higher rates of taxation, and providing more government-funded services to benefit society. Government spending ranges from building and maintaining roads, to providing health care, child care, pensions, and education, to offering incentives for small business. In an economic system based on individual rights and freedoms, individuals and corporations have larger roles. Businesses are less regulated, consumers and the environment are are less protected, and rates of taxation are lower and, correspondingly, fewer dollars are spent on programs to benefit all society.