Economic systems

What is an economic system?

= regulates how societies or governments organize and distribute available resources, goods and services across a geographic region or country.

→ they are influenced by cultural, historical and political context and vary from country to country.

What are the three main types of economic systems?

• Free market system

• Planned system

• Mixed economy / Social market economy

What is the free market system also known as? What is special about it + example?

• capitalist system or the laissez-faire (Machen-lassen) system (man überlässt das System sich selbst)

• no country has a pure capitalist system

  → best example of a nearly pure free market system → US

What are two features of a free market system?

• no government interference (Eingreifen) in the workings of the economy.

• price mechanism is its main feature: prices of goods and services are determined by the demands of the customers and the willingness of producers to supply them.

• resources are owned by individuals, not the state.

What are two advantages of the free market system?

• incentive (Ansporn/Motivation): people are encouraged to work hard, because it’s possible for individuals to become very wealthy.

• choice: people can spend and earn their money how they want, they can choose to set up their own business, or who they want to work for.

• competition: through competition, less efficient producters are priced out of the market. → leads to lower prices, innovation, uniqueness, better quality, greater choice for the customer

What are two disadvantages of a free market system?

• unequal distribution of wealth: the wealthier members of society have most of the economic power, while the poorer members have less influence.

  → US: gap between poor and rich

• no welfare system or social “safety net” for the disabled, the elderly, the sick, the unemployed, large families, single parents …

  → US: no society systems, no health care …

• profit motive: profit is all-importat to producers, may ignore social costs of production, like pollution or unemployment.

  → US: ignores the climate change …

• favouritism / nepotism (Bevorzugung / Vetternwirtschaft): success of business depens of favouritism that is shown to it by the government in the form of tax breaks (Steuererleichterungen), government grants

  → US: Trump’s best friend is Elon Musk, got his career boosted through Vitamin B

• Formation of monopolies (when a single seller dominates the market): without competition, companies can charge as much as they want.

  → Google, Ecosia, Post, railways (less selection [DB or DHL], therefore competitors can charge what they want)

What is the planned system also called + example?

• also known as the command system or the collectivist system (Zentralverwaltungswirtschaft → alle Ressourcen werden zentral von Regierung verwaltet)

  → e.g. North Korea, Cuba (many former countries like Russia, Poland, Czech Republic used to be a planned economy)

What are two features of the planned system?

• the factors of production are controlled by government on behalf of producers and consumers.

• relies exclusively on the state: government will decide what and how much is made, how and where it is made and how distribution takes place.

• price levels are not determined directly by supply and demand but are fixed by the government. → every business then has to charge that exact price!

• planned economies tend to be more self-sufficient (selbstversorgend) → take less part in international trade

  → e.g. North Korea or Cuba: produce most on their own, no connections to others, alone.

• long-term plans are made, taking into account future needs and population changes.

What are two advantages of the planned system?

• education, social security, pensions, health care for everyone are free!

• equal distribution of wealth and income (state provides a minimum level of payment to all individuals. → no one can get rich or poor, no one can own property to accumulate wealth.

• use of resources: central planning can lead to full use of all factors of production → reducing waste or unemployment (everybody on factor labour is used)

• production is for need rather than profit: planners decide what is needed and what is produced.

What are two disadvantages of the planned system?

• reduced competition: companies that control most of supply of some goods may choose to restrict supply, keeping prices artificially high. With other suppliers, they may agree to fix certain prices → not determined by supply and demand.

• production of standardised goods and shotages of goods: little variety and choice for consumers and long queues outside state shops.

  → DDR: standardised goods: Trabi, shortage of goods: bananas

• lack of motivation as there is no profit, no incentive to motivate entrepreneurs.

• lack of individualism (no free choice of what to consume)

• isolation

  → e.g. North Korea, Cuba

• vast bureaucracies, employing a large number of people: are needed to supervise, coordinate and carry out plans.

• planners often get things wrong: can lead to shortages of goods and surplus of others or the waste of valuable resources.

• often poor standard of living compared to other economic systems.

• risk of abuse of power through a totalitarian regime = no democracy.

What is the mixed economy also called + example?

• also called social market economy (capitalism with freedoms, light capitalism)

• Germany

What are two features of a mixed economy?

• includes elements of both free market and planned system.

• government operates and controls the public sector (= gov., provides / pays systems we benefit from, education, healthcare …).

• the private sector (= comapnies) is regulated: i.e. influenced by the price mechanism but also subject to some gov. control.

What are two advantages of a mixed economy?

• incentive (Motivation): there’s a private sector in which individuals can make a lot of money.

• necessary services are provided: healthcare, pensions, unemployment benefits, social security benefits, free education, subsidies (Subventionen).

• competition: low prices of goods in the private sector + great variety and choice for consumers.

  • → BUT: government makes sure there’s fair competition (Bundeskastellamt => sichter wirtschaftlichen Wettbewerb, damit es Monopole gibt)

What are two disadvantages of a mixed economy?

• large monopolies can still exist in the private sector: competition does not really take place

  → national railways or post (only few companies to compete with)

• bureaucracy and “red tape” (Papierkrieg): since there’s a public sector

  → so much needs to be documented, everything in analogue versions.

  → a bit free market, gov. presses many regulations.