Essay Plans

What are the assumptions under the Capitalist economy? Compare the workings of the Capitalist economy with the command economy.

SYNOPSIS:

POINTS:

Define Capitalism:
... an economic system in which individuals privately own productive resources (land, labour, capital) and possess the right to use these resources in whatever manner they choose subject to legal restrictions. These legal restrictions themselves are kept to the minimum.

The Capitalist economy addresses the basic problem in economics (scarcity) thus:

a.	Consumer sovereignty - spending determines production.
b.	Producers are motivated by profit.
c.	Perfectly substitutable resources are combined in the cheapest possible way (for a particular standard of quality).
d.	The discipline of the market place will ensure that only the most efficient firms survive.
e.	Goods are distributed according to income. In the production, incomes are generated. A person is paid according to the value that society places on the product/service.
f.	The exceptions - handicapped staff - arise according to the welfare extended by the government (representing the people).

Inherent in the Capitalist economy are the following:

a.	Private Property Ownership of property is vested in individuals or groups of individuals. Individuals have their property rights protected.
b.	Role of Government Provides defence legislation to protect the individual eg. over property rights, issuing money.
c.	The pricing system Central to this is the interaction of supply and demand prices signal the value of resources. ASSUMPTION: no market failure, no barriers to movement.
d.	Self interest Maximising income. Satisfaction/profit.
e.	Competition Assumes many sellers and buyers. This limits the achievement of self-interest as competition will keep profits/income down. Assumes also freedom of entry/exit.
f.	Free enterprise/free choice No restrictions in the matter of buying inputs or producing outputs.

In the command economy the Economic problem is addressed thus:

a.	What to produce is decided by the government - representing the people.
b.	How to produce is also decided by the government who co-ordinate all aspects of productive activity.
c.	Wage-rates are decided by the central government - thus purchasing power also.

IN THEORY a command economy may be efficient just as a market economy BUT one of the major problems is that planning requires a considerable degree of information about the quantity and quality of inputs.
The command system concentrates on what to produce and may ignore what consumers require (and also quality).
The advantages of the market economy thus include economic efficiency, consumer sovereignty and decentralised decision-making. But this is based on the assumptions detailed above: in the real world we may have producer sovereignty, with markets dominated by trade unions and big business. Also certain goods eg. defence may not be provided. A centralised economy MAY reduce unemployment at the expense of efficiency and reduce the inequality of incomes. The market economy is essentially value neutral so such questions as to whether it is right that the rich can go to a private crammer taking the board and syllabus of their choice at a time of their choice (subject to certain restrictions) and thus receive a huge shove in life, are ignored.