Economic Systems in Practice

More Questions than Answers

Economic systems are extremely complex and varied. Simple debates about Capitalism vs. Socialism are just that: simple. They fail to capture the variety and complexity of an economic system. A world of difference may exist in the details. Often little differences may have large, subtle implications for the larger economy. In practice, two countries may both have systems that could essentially be characterized as “Free Market Capitalism” and yet be very different in many ways.

For example, both the U.S. and Canada can be considered Free Market Capitalist systems. Indeed, in any multi-nation comparison, the U.S. and Canada are considered very similar systems. Yet in Canada, healthcare is paid for by the government for all. In the U.S., healthcare (subject to some deductibles) is paid for by the government for only those over age 65. (Note: The implementation of the Affordable Care Act, so-called “Obamacare”, will make it possible for more Americans to get health insurance but it will not substantially alter the previous statement). Americans under age 65 must buy their own healthcare or have it paid for by their employer. Of course, most Americans choose to take part of their “paycheck” in the form of employer-paid health insurance. There are many implications of this difference. As a nation, Canada devotes far fewer resources to healthcare yet it achieves a longer average lifespan than Americans. The major part of the difference in resources devoted (costs) to healthcare results from administrative inefficiencies. Since there is only one insurer in Canada (the government), medical offices spend very little on billing and administrative efforts. In Canada, doctors report far fewer hours spent working on administration and more hours spent with patients than doctors report in the U.S. On the other hand, elective surgeries such as cosmetic surgery or knee replacements for people who can walk experience wait times in some areas in Canada because Canada has a shortage of specialists in these fields. Thus, some Canadian patients who can afford it, sometimes choose to go out of the country to get their elective surgeries. Another, more subtle implication of this simple difference is that workers in Canada are more likely to experiment with starting their own business or quit to get a better job than in the U.S. Why? In the US, quitting your present employer means losing your healthcare benefits. Starting your own business in the U.S. is more expensive since it requires you to pay for your own healthcare. In Canada, an employee can quit to start a business knowing they still have healthcare.

Using simple labels such as “Socialist” or “Capitalist” glosses over important differences. Let’s continue the example of healthcare and Canada and the U.S. Many political commentators in the U.S. claim Canada is “socialist” or at least has “socialist medicine”. But does it really? In Canada, doctors establish independent business practices just like in the U.S. They choose their patients and make their own decisions. Hospitals are locally owned and managed. Both hospitals and doctors compete for patients. The government in Canada acts as a giant healthcare insurance company. In contrast, Britain also has “socialist medicine”. But in Britain, the government actually owns, manages, and operates many doctors’ offices and hospitals through an agency called the National Health Service. In Britain, doctors (some of them) are actually employed and managed by the government. It would appear Britain is “more socialist” right? But in Britain, wealthy people who pay for services themselves can go to private practice doctors that aren’t affiliated with the government – a very capitalist-market arrangement. The simple labels cover up more than they help illuminate.

To continue the health care example, many people claim the U.S. has a market system for healthcare. They claim this is good since “markets achieve efficiency”. But what type of market system does the U.S. have? Microeconomic theory is very clear. “Efficiency” only happens in a market when the market is competitive. And competition requires many competitors, free entry, free exit, perfect information, and choice. Yet in many US cities there are only one or two corporations owning the hospitals. In many states, one insurance company controls over 80% of the market. The American Medical Association, through medical school accreditation, limits the number of new doctors allowed into the market each year. Virtually no US consumers of healthcare (patients) know the prices or costs of what they “buy”. Can we really say the US system for healthcare is competitive? If we can’t, then it’s deceptive to assert the benefits of free markets exist in healthcare. Monopoly markets do not bring efficiency and choice.

Economic Systems Just Kind of Happen

So if we want to go beyond simple labels and beyond ideologies we need to ask more questions. What kinds of questions? Well, I find it useful to think in terms of “designing an economic system”. In reality, societies rarely sit down and consciously try to “design” their economic system (the Russian revolution of 1917 is maybe the exception). Typically an economic system is the result of the political ideologies of the political leaders, the practical reality of the country’s economic situation, their history, their religion, their culture, their interaction with the rest of the world, and even their technology. Economic systems emerge from this mix. And political leaders generally react, not lead.

Yet it is useful to think of ourselves as being put in charge of a new nation and given the task of creating an economic system. If we imagine such a scenario, we can then start brainstorming all the questions and issues we would have answer as part of our “designing an economic system”. These questions and issues are the ones that we can use in comparing existing economic systems.

Note: Economists often use the term “institutions” in describing aspects of an economic system. Institutions are not organizations per se, but rather the term refers to “the rules of the game”. In other words, “institutions” are the laws, rules, customs, and habits by which a particular society organizes itself.

If you had to design an Economic System, what questions would you need to answer?

Questions – Resources, Wealth, and the Current Economy

  • What are the most common resources the nation has?
  • What natural resources? Do they use them themselves or export them?
  • What kind of labor resources? Number? Men or women? Participation rates? Education? Skills?
  • What kind of capital resources? Factories? Types? Products? Who owns it?
  • What kind of human capital? Are they innovative? Educated?
  • How wealthy is the nation?
  • What is GDP? Real GDP? per Capita?
  • Unemployment rates? Can they create jobs for all?
  • Is the economy growing? How fast?
  • What has GDP been in the past? Why did it change?
  • What are living standards?
  • What is the distribution of income?
  • How extensive is poverty or disease?
  • How healthy are the people?
  • What is life expectancy?
  • Does the nation trade?
  • With whom? What goods?
  • What are terms of trade?
  • What do they export? Import?

Questions – Structures and Institutions

  • What are dominant economic institutions?
  • Who owns what?
  • What is the distribution of income and wealth?
  • Who has the power?
  • How is production managed and planned? By whom? Corporations? Small businesses? Government agencies? Households?
  • How big are these productive organizations? How are the managed and governed?
  • How is the government chosen? What is the political system?
  • How are the poor, aged, children, sick and disabled cared for? Who provides for them?
  • How is healthcare provided?
  • How are people fed and housed?
  • How is property handled? Private ownership? Communal ownership? How does it vary by type of property? What does the government own/control?
  • How much does the government regulate business and banking? Who really controls the regulatory process?
  • How free are individuals and households to engage in trade? Are markets common? What are they like? Are they competitive?
  • How free are individuals and businesses to produce and sell for a profit?
  • How are prices determined? By government? By supply and demand? By large corporations? By outside institutions like the World Bank?

Questions – Culture, Religion, Philosophy, History

  • What has been the political history? Stable? Violent or peaceful? Wars? Revolutions?
  • What role does religion play in the society? Does it affect the economy? How?
  • What shared values and goals do the people of the nation have? What do people in the country value the most? How do they define “the good life”?
  • How diverse is the economy? What is the role of women and minorities? Is power shared? If so, how?
  • Is the society more concerned with equity (fairness) or efficiency (having more goods)?
  • Is the country and society exposed to other countries and societies? Or is it insular and isolated?

I am sure you can add to this list. I encourage you to think about it and add your own questions. These are the questions to ask yourself when you begin your own comparison of different economic systems.

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