Economic Systems, Mixed Economies & Globalisation – Comprehensive Study Notes

Economic Systems – Core Questions

• Central definition: “Economic system” = the way a nation controls and distributes its factors of production (F.O.P.) – land, labour, capital, entrepreneurship.
• Three foundational questions every system must answer:
  • WHAT goods and services are produced?
  • HOW are they produced?
  • FOR WHOM are they produced / distributed?
• Each economic model offers different mechanisms and incentives to answer those questions.

Planned (Command/Centrally-Planned) Economy

• Key premise: Government owns ALL resources and makes ALL economic decisions.
• Decision-making body = central planning authority; private ownership is absent.

Advantages

• \text{High employment rate} – State strategically allocates labour to achieve full employment.
• Universal access to basic services (health-care, education, housing, utilities).
  • Quality often mediocre because price is not profit-motivated.
• Equal distribution of output and income – attempts to minimise economic inequality.
• Administered prices – the state sets prices to achieve social goals rather than profit.
• Income from state-owned F.O.P. accrues to the government, theoretically benefitting society at large.

Disadvantages

• Resource-use motivation problem: because every asset is “everyone’s,” individuals lack incentive to conserve or innovate.
• Limited consumer choice – narrow product range; non-priority desires unmet.
• No private upward mobility – citizens cannot accumulate capital or improve economic status independently.
• Informational overload – central planners face immense data requirements, often leading to shortages/surpluses.
• Technological stagnation – weak entrepreneurial rewards slow innovation.

Practical / Ethical Significance

• Works best for public-good industries (defence, mass transit) but struggles in consumer sectors.
• Historically associated with socialist / communist states (e.g., former USSR, North Korea).

Market (Capitalist / Free-Enterprise) Economy

• Guiding mechanism: Decentralised decision-making by private individuals & firms.
• \text{Ownership of F.O.P.} \rightarrow \text{Private citizens + businesses}
• Government role = minimal (“night-watchman” state) – enforces property rights, contracts, basic regulation.
• Labour environment: unionised workforce common in democratic, industrialised examples (e.g., USA).

Resource Allocation

• Determined by supply & demand through price signals.
• Leads to large variety and quantity of goods & services.
• Competition disciplines firms, spurs efficiency.

Distribution Mechanism

• Driven by profit motive – goods flow to buyers who can pay; wages flow to labour valued by market.
• Political corollary: freedom of movement, speech, association nurtures entrepreneurial climate.

Advantages

• Upward mobility – individuals can work hard, innovate, and accumulate wealth.
• Strong entrepreneurship due to direct financial rewards; fuels R&D and tech progress.
• Wide product variety & rapid response to consumer preferences.
• Private resource ownership encourages sustainable use to protect long-term asset value.
• Skill development accelerates to keep pace with technological change.

Disadvantages

• Unequal wealth distribution – “rich get richer” dynamic; poverty persists.
• Monopoly risk – dominant firms can restrict output, raise prices.
• Public-good undersupply – little profit in roads, basic health, etc.; requires government intervention.
• Cost-cutting externalities: layoffs, automation, environmental damage.
• Potential worker exploitation; bargaining power imbalances.
• Large-firm advantage – capital scale, lobbying influence hinder small entrants.

Mixed Economy (Hybrid Model)

• Combines market forces with government intervention to correct market failures & promote equity.
• Multiparty democracy typical; both public & private sectors own F.O.P.

Ownership Pattern

• Nationalisation: Government owns key/strategic industries (power, steel, transport).
  Example: South African power utility \text{Eskom}.
• Privatisation: Private sector may own/operate profitable infrastructure (e.g., toll roads – “eToll”).
• Workforce remains unionised.

Resource Allocation & Distribution

• Supply & demand sets most prices and guides production.
• Government collects taxes to fund social goals (grants, pensions, infrastructure).
• Distribution aims at both profit AND public interest.

Advantages

• Taxes finance social safety nets (social grants, pensions → poverty relief).
• Public spending on infrastructure (roads, stadiums, airports) improves productivity.
• Entrepreneurship still encouraged; private sector drives growth.
• Labour rights protected through legislation & unions.
• Public works programmes provide direct & indirect employment.
• Privatised infrastructure often higher quality & safety (well-maintained toll roads).

Disadvantages

• State-owned enterprises (SOEs) are sometimes unprofitable, burdening taxpayers (e.g., \text{SAA} airline, \text{Eskom}).
• Nationalisation risk deters foreign investors (mining uncertainty, capital flight).
• High tax burden on working/middle class to finance social mandates.
• Militantly active unions can spark strikes → investment & productivity losses.
• Toll fees from privatised roads raise transport costs for consumers & logistics firms.

Globalisation

• Definition: Integration of world economies via trade, investment, technology, and labour flows; enabled by advances in transport & communication (“shrinking world”).

General Advantages

• Firms can compete globally, accessing new markets → larger product variety, efficiency gains.
• Labour mobility – professionals may work anywhere, increasing income opportunities.
• Capital mobility – investors allocate funds to high-return regions, fostering development.

Unequal Playing Field – 1st vs 3rd World

• Growth in trade can widen the gap between developed (1st world) and developing (3rd world) countries.

Benefits to 1st World Countries

• Possess greater capital & skills, enabling high-value manufacturing from imported raw materials.
• Developing nations export natural resources cheaply; developed nations process & resell at higher margins.
• Rich governments afford subsidies → lower production costs; developing-world firms struggle to compete → closures, \text{unemployment}.
• Strong exchange rates make it costly for poorer nations to import advanced goods, reinforcing dependency.

South Africa’s Context

• Described as dualistic economy: simultaneous 1st-world (advanced finance, telecoms) and 3rd-world (informal sector, rural poverty) characteristics.

Ethical / Practical Implications

• Risk of resource extraction dependency in poorer countries – “commodity trap.”
• Potential race to the bottom in labour & environmental standards as nations compete for investment.
• Cultural homogenisation vs local identity preservation.

Conceptual Connections & Exam Tips

• Planned ↔ Market spectrum: Mixed economies occupy intermediate points; no country is 100% pure form.
• Use the three core questions (WHAT, HOW, FOR WHOM) to compare systems in essays or data-response questions.
• Remember incentive structures: ownership (private/public) fundamentally shapes motivation for efficiency & equity.
• Link globalisation discussion to comparative advantage theory and terms of trade questions.
• Incorporate numerical examples: e.g., if a subsidy lowers marginal cost from \$10 to \$7, supply curve shifts right – analyse welfare effects.

Quick Formula Reminders

• GDP (Income approach): GDP = Wages + Rent + Interest + Profit + (Indirect\ taxes − Subsidies) – shows how factor payments differ across systems.
• Gini Coefficient (inequality measure): G = \frac{A}{A+B} – typically lower in planned economies, higher in market economies.

Real-World Illustrations & Case Studies

• Cuba (Planned): free healthcare/education yet chronic shortages and limited consumer goods.
• United States (Market-oriented): Silicon Valley innovation but growing income inequality and healthcare access issues.
• South Africa (Mixed): Eskom crises, social grants system, vibrant private banking sector.
• China (Transitional): From command to “socialist market economy,” leveraging globalisation to lift >800\text{ million} out of poverty.

Possible Exam Essay Structure

1. Define each economic system.
2. Contrast ownership, allocation, distribution.
3. Evaluate advantages & disadvantages with examples.
4. Discuss globalisation’s impact, especially on dualistic economies.
5. Conclude with policy suggestions: balancing efficiency, equity, sustainability.