· 3 min read
Economic Systems and Macroeconomics - Crash Course Economics - 3
Placeholder
Like rolling stones tell us, we can’t get all that we want. because there are limited resources so we have to make choices.
There are 3 types of resource according to Karl Marx.
- Land
- Labor
- Capital
And economic system allows for
- What we produce?
- How we produce it?
- Who gets it?
There are two types of Economy based on who controls the resources and what the system allows.
- Command Economy
- Free Market Economy
Adam Smith said
It’s not from the benevolance of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own self interest.
Command Economy is controlled by the government. It decides what to do.
Free Market Economy is where a companies decides what they can produce based on the profits they receive.
Invisible Hand: The unintended social benefit resulting from individual actions.
Free Market Economy leads to “invisible hand” where you as a result of paying for something that leads to profit good things happen.
For example, if 1 of 2 competing car brands make better products, they’ll have all the capital and incentives of the free market i.e. more profits. Thus to compete the other brand has to innovate. #invisibleHand
Similar is not the case with command economy. Government can make a car and have no competition but it doesn’t have any special need to innovate.
Planned/Command Economy is not all bad. Because there are many things Free Market economy can’t handle.
Things like Security, Roads, Education, etc are all things needed for a good functioning free market economy but can only be provided via Government i.e. Command Economy.
Also, government intervine where Free Markets are failing. For example, it can provide regulation on car safety standards or how much pollution is allowed or how should the workers be paid. All of these, saves more money in the long run.
North Korea is a command economy. New Zealand is a free market economy with very few taxes. Most economies of the world are mixed.
And many economies are and have been changing. For example, Canada 🇨🇦 went from mostly free market to providing Universal Healthcare.
While, China 🇨🇳 went from mostly socialist economy to free market.
Modern economies are neither completely free or planned, there’s a spectrum of government involvement.
We should not fix ourselves to one ideology or another and rather focus on what get’s the job done at the time.
It doesn’t matter if a cat is black or white, if it caches mice, it is a good cat. ~ Deng Xiaoping
While we could absolutely abolish many things like poverty with a command economy, remember that in economic terms we always have trade-offs because we always have scares limited resources.
So, spending money to abolish poverty could lead to less money spend on health care or less money on security so a war that leads to more poverty!
Circular Flow Model
There is also a circle ⭕️ where
Indivuals Purchase from Businesses. This way business get’s money.
To purchase from business, individual need money.
so individually provide their labor to the business. So individuals now have money.
Government steps in between to provide facilities to both businesses and individuals. And to get their money they tax both individuals and businesses.
wealthIsAlwaysTransfered because only government can generate more money. - Andrew Tate