A lot of people argue about communism, capitalism, and socialism. These are questions of ideology. In political discussions people easily throw around the labels “socialist” or “greedy capitalist”. In the 2008 U.S. presidential election some Republicans accused Barak Obama of being a “socialist”. On the other side, some Democrats accused the Republicans of being “greedy capitalists” and “free market fundamentalists”. These accusations continued into the 2012 presidential campaign. What do these terms mean? Just exactly what is “socialism”? And just exactly what is “capitalism”? What’s the difference between them? Which one is “best”? In a sense, these are the key questions that I hope this course will help you answer. Right now, at the beginning of the course, it’s too soon to offer an answer to these questions. Instead, I will suggest that the questions are themselves too simplistic.
These are important issues. Indeed, in the course of the 20th century nations went to war over these issues. During a particularly nasty 60-year period of the 20th century, well over a hundred million people were slaughtered or died prematurely because of what were essentially disputes of economic ideology. Much of the same thinking has persisted into the 21st century. For most of this time, the ideological disputes have had their roots in the nations we now call the First World, the “Developed” or “Industrialized” Nations of the world.
We are taking a four-part approach to learning about the role of ideology in economic systems.
- First, I have written some background information in the following pages of this Jim’s Guide. This is intended to help us establish some common language and better understand what the ideological battles are about. At its simplest, the issue of ideology is over what should the role of government be in an economy.
- Second, these ideas, terminology, and concepts will be further explored in some readings from the web. Many of these readings come from Wikipedia. Links are available on a page later in this Jim’s Guide.
- Third, these battles originated in what we now call the developed world or sometimes just call it “The West”. We need to understand a little more historical perspective on just how “The West” become so wealthy, developed, and industrialized. Angus Maddison provides that perspective in the readings in his book.
- Finally, the video series Commanding Heights in Episode One will provide a brief look at the history of the 20th century and the powerful ideologies at war with each other.
Why Do We Have Economic Systems?
I have a problem. You have a problem. In fact, we all share a common problem. The problem is that we humans, being the imaginative beings we are, always want something more. No matter how well off we are, we always want something more. We always imagine that if only we had some more of something, or some of something else, we would be even better off than we are now. It could be more things like more money, more clothes, a bigger/better home, more or newer electronic gadgets, or a bigger or faster car. I have no doubt that you can think of few things that would make your life better right now! It’s not just things we want, though. We might want more time to do activities, more fame, more friends, more privacy, or more power. We always want more. Economists have a phrase for this aspect of humans: unlimited or insatiable wants.
Unlimited wants by themselves aren’t necessarily a problem. After all, they provide the motivation for us to work and produce. By working, producing, and making things, we create more and better stuff and better conditions, and that helps us satisfy our wants. What makes our unlimited longings into a really big problem is another fact that economists observe: our resources are limited. Thus, an essential feature of the human condition is that we work and produce in order to satisfy our unlimited wants, but the resources we use to produce satisfaction are themselves limited. Economists have a name for this problem: the Economic Problem.
The existence of the economic problem means that people, you and I, have to make some choices. We have to choose. Some wants won’t be satisfied. Some will. And, of course, since humans are social animals, that means our society has to make choices. Actually not only does our society face this Economic Problem and the need to make choices, all societies face the Economic Problem.
The processes, interactions, and consequences of how people make these choices is what economists study. In other words, most economists define economics as “the study of human choice in the face of scarcity”.
The Economic Problem and Economic Systems
In very broad terms, we (both as individuals and as a society), have to make four types of decisions over and over and over all the time. These four decisions are what economists call the “four fundamental questions”. They are:
- What goods should we produce with our limited resources?
- How much of those goods should we produce (quantity)?
- How do we produce them? What technology or method? Who does the work?
- Who gets to consume the goods we produce and get the benefits?
Each society or country creates rules, laws, and institutional arrangements to help decide these questions. Economists refer to these institutional and legal arrangements as an economic system. There are many economic systems. Strictly speaking, every country and society develops their own economic system as part of their culture and development. But there are, of course, some general patterns to economic systems. The better known economic systems you may have heard of are “capitalism”, “communism”, and “socialism”. Other people classify economic systems into “command systems” vs. “market systems”. These are very simplistic labels, as we’ll learn later in this course. There are actually many different varieties of capitalism and of socialism, for instance.
Criticisms of this Idea of “Economic Problem”
There are critics of modern economics that object to this foundation, this assumption of scarcity. They observe that not everything is scarce – some things can be produced in nearly unlimited quantities at nearly free costs, such as making electronic copies of files. Other critics object to the implication that people are or must be greedy. Both of these objections result from misunderstanding the issue of scarcity. When economists observe that people have unlimited wants, we are not saying that people are greedy. We are simply observing that people always think their condition could be improved. It doesn’t necessarily mean that they want more stuff, although that does describe a lot of people. Even a selfless saint is likely to feel that they would be better off if they had more time or money to help others. We can always imagine ways to become better off.
Likewise, while it is true that modern technology has brought the cost of some items to nearly zero, and that there may be some resources, such as the sun’s energy, which are unlimited (or seemingly so), it doesn’t invalidate the “resources are limited” observation. Virtually everything we use to satisfy our wants requires a mixture of resources, and most resources are limited. If nothing, else, our time is strictly limited. We get 24 hours in a day. So even if you were the richest person in the world, you would have to make some choices. Even if you could buy any merchandise you wanted, you still need time to consume it. And time is limited. What we are going to study in microeconomics, is how people make choices, given these limited resources, in order to make their life as best as they can.
Key Ideas and Terms from Economics
We’ve already begun to use some of the basic terminology of economics. The way economists model or describe human activity is to imagine that all economic activity is divided into two types: consumption and production.
Consumption is the main point of existence – it is the satisfaction of our wants, such as eating, sleeping, playing games, being entertained, etc. Consumption usually involves the using-up of some stuff: goods. Goods are usually thought of as material things, like food, video games, TV’s, houses, cars, clothes, cell phones, movies, etc. But technically, “goods” can also include services such as being waited upon, or having your hair cut, or having your car washed. Some goods just appear in nature – like fruit on a tree. Some goods are considered “private” because the benefit of consuming them can be limited to one person (society may allow that person to “own” the good). But some goods are “public goods” because their benefits extend to many people, regardless of whether they own it. Instead of thinking of just individuals consuming goods, economists recognize that humans usually live in small groups such as a family. These small groups which make joint decisions about their consumption are called households. It’s usually good enough to think of a “household” as being the people who all live together. Sometimes, as in the case of bachelor living alone, a household may only include one person. In other cases, such as a large family living together in the same house, a household might include several individuals. The typical structure of households is one way that countries often differ from each other economically. When goods are bought or sold between two people it is called an economic transaction or trade. Sometimes the consumption of a good brings either benefits or harm to a third-party that wasn’t either the buyer or seller. This is called an externality. An example of an undesirable externality might be the pollution released by a factory that fouls the air everybody breathes. How a country handles externalities is another way economic systems vary.
Most goods require some humans to engage in production. By production, we mean the work activities of combining resources to create a desirable good. Of course there is an enormous, even innumerable, number of different resources. Typically economists classify resources into three types: land, labor, and capital. Some economists also classify “entrepreneurial spirit” or “risk-taking” as a fourth resource. Land is actually just any type of naturally occurring resource: land, dirt, minerals, the ocean, the air and atmosphere, animals, etc. Labor is broadly defined to include all human effort directed towards production, regardless of how the laborer gets paid. Finally, capital refers to goods that have been produced in the past with the intent of using them to produce more goods. For example, tools, factories, trains, highways, inventories, and even software and computers are considered capital. In some discussions, capital will also refer to the financial capital such as stocks, bonds, savings accounts, etc. Strictly speaking though financial capital should not be considered true capital. True capital is the tools & equipment. Financial capital allows a business to buy the real true capital.