The market system and the command system are the two broad types of economic systems used to address the economizing problem. In the market system, also known as capitalism, private individuals own most resources, and the market coordinates most economic activity. In the command system, also known as socialism or communism, the government owns most resources, and central planners coordinate most economic activity. There is no perfect economic system; both have flaws or weaknesses, advantages, and disadvantages.
The Market System
The private ownership of resources and the use of markets and prices to coordinate and direct economic activity characterize the market system or capitalism. For this system, each participant acts in his or her own self-interest; each individual or business seeks to maximize its satisfaction or profit through its own decisions regarding consumption or production. The system allows for the private ownership of capital, communicates through prices, and coordinates economic activity through markets – places where buyers and sellers come together. Goods and services are produced, and resources are supplied by whoever is willing and able to do so. The result is competition among independently acting buyers and sellers of each produce and resource. Thus, economic decision-making is widely dispersed.
Pure capitalism is also known as laissez-faire capitalism, in which the role of the government is limited to protecting private property and establishing an environment appropriate to the operation of the market system. The term “laissez-faire” is to allow freedom to the market forces or to keep the government from interfering with the economy. The idea is that such interference will disturb the efficient working of the market system. The capitalism practiced in the United States and other countries are characterized by the government playing a substantial role in the economy. For example, in the present U.S. economic meltdown wherein some large corporations have closed shop, the government intervened to prevent a domino effect.
The U.S. economy and the rest of the world reacted to the bankruptcy of some leading corporations. Therefore, the U.S. government intervened by ‘saving’ the remaining corporations from following suit. The setup is somewhat advantageous to the general public because the government can intervene anytime for the general welfare. If it is not so, then there could be chaos and the general collapse of the system – many businesses would fall.
At present, the U.S. government not only provides the rules for economic activity but also promotes economic stability and growth, provides certain goods and services that would otherwise underproduce or not produce at all, and modifies the distribution of income. The government, however, is not the dominant economic force in deciding what to produce, how to produce it, and who will get it.
The Command System
The Command System is also known as socialism or communism, where the government owns most property resources, and economic decision-making occurs through a central economic plan. Here aboard, who is appointed by the government, directs economic activity – it commands the composition and distribution of output and the organization of production. This is sort of dictatorial. Most of the communist regimes directing or controlling economic production have never been so successful. Some have resorted to what they call a return to the ‘original’, meaning things are now clear. But actually, it is not.
In this setup, the government owns most of the business firms, which produce according to government directives. This is very disadvantageous to the general well-being. Markets will not grow. The board controls the goals for each enterprise and specifies the number of resources to be allocated to each enterprise so that it can reach its production goals. The division of output between capital and consumer goods is centrally decided, and capital goods are allocated among industries on the basis of the central planning board’s long-term priorities.
A pure command economy would rely exclusively on a central plan to allocate the government-owned property resources. During the time of the Soviet Union, the regime tolerated some private ownership and incorporated some markets before its demise in 1992. Recent reforms in Russia and most of the eastern European nations have to one degree or another, transformed their command economies to capitalistic, market-oriented systems. China’s reforms have not gone as far, but they have reduced the reliance on central planning.
Although there is still extensive government ownership of resources and capital in China, the nation has increasingly relied on free markets to organize and coordinate its economy. North Korea and Cuba are the last remaining examples of largely centrally planned economies. In these communist regimes, the markets have not grown, the economy is stagnant, and the people are suffering. Food is scarce in North Korea. People are defecting from Cuba, slipping into the Florida shores.
Nearly all the major nations now use the market system. The market economy has two groups of decision-makers: households and businesses. The government also forms the third party that makes decisions. The market system has two broad markets: the resource market and the product market.
The resource market is the place where resources or the services of resource suppliers are bought and sold. In the resource market, households sell resources, and businesses buy them. Households, or people, own all economic resources either directly as workers or entrepreneurs or indirectly through their ownership of business corporations. They sell their resources to businesses, which buy them because they are necessary for producing goods and services. The funds that businesses pay for resources are costs to businesses but are flows of wage, rent, interest, and profit income to the households.
The product market is the place where goods and services produced by businesses are bought and sold. In the product market, businesses combine the resources they have obtained to produce and sell goods and services. Households use the income they have received from the sale of resources to buy goods and services. The monetary flow of consumer spending on goods and services yields sales revenues for businesses.
In this market, there is a circular flow which suggests a complex, inter-related web of decision making and economic activity involving businesses and households. Businesses and households are both buyers and sellers. Businesses and buy resources and sell products. Households buy products and sell resources.
The theory is not helping in any way to understanding the difficult economic problems. We are facing the market economy with much enthusiasm. But we have to be sure that organizations and institutions are doing their share in helping the general public.