Market economy
Producers
Households
Fig.1. Simple models of economic system.
When comparing the performance of different systems, the economist can use a number of measurements: the distribution of income, growth in output, technological advance, stability, output per head and so on. However, such a comparison is unlikely to produce a conclusive or acceptable answer about the superiority of any system.
Comprehension:
1. What does economics study?
2. What is macroeconomics?
3. What is microeconomics concerned with?
4. Name three fundamental questions all communities are confronted with.
5. Give the classification of economic systems.
Summarizing.
Complete the following sentences to summarize the text above:
Economics is the study of…
In ancient Greece the word ‘economist’ meant…
There are two approaches in economics:...
Macroeconomic studies…
Microeconomics is concerned with…
The fundamental questions the society has to answer are:...
Theoretically all economic systems can be classified as…
Viewpoint:
Is it possible, in your opinion, to create an ‘ideal’ economic system?
The government and market systems
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Lead-in: Do you think Governments play an important role in the economy of their countries? Key words and phrases 1. to deliver goods – доставляти товари 2. supply of goods – поставка, запас, пропозиція товарiв 3. merit goods – товари, що уряд заохочує споживати 4. merit bads – товари, що обмежено або заборонено споживати 5. consumption of goods – споживання товарiв 6. total demand – сукупний попит 7. to foster competition – сприяти конкуренцiї
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Governments play an important role, even in market economies, for two reasons:
1. Because of the inability of the market mechanism to deliver certain types of goods.
2. Because of weakness in the market system.
The first reason concerns what are known as public goods and services. Once they are provided, their benefits extend to all members of the community. The maintenance of law and order through the police force and the judiciary and national defence through the armed services are good examples.
If the supply of these goods was left to the market mechanism – the result would be an inadequate organisation of these services.
The other reason why governments may intervene is much more complex and raises many controversial issues. Since the market system operates through prices, the government may intervene to subsidise, or even provide free, essentials such as food, housing, medical care and education. Assisting people with low incomes is not the only motive for a government to reduce market prices in this way. It may also wish to actively encourage the consumption of what are known as merit goods (education, for example).
The opposite of merit goods are merit bads – commodities such as drugs and pornography. The consumption of these products should be discouraged by the government. Finally, a competitive market economy, if left unregulated, may be subject to slumps and booms because of the periodic lack of balance between total supply of goods and services and total demand. It may require some form of government action to help correct the situation. However, the extent of government action and its method of intervention are a matter of fierce dispute, not only among politicians and social reformers but also among economists. In his book, “The Wealth of Nations”, A. Smith argued strongly in favour of the competitive market mechanism, whose ‘invisible hand’ coordinated the activities of producers and consumers.
Classical economists believed in maximum individual economic freedom and the minimum government regulation. Although they did acknowledge that where it is not possible to achieve efficiently operating markets then the government should intervene. The object of National intervention was to support and strengthen the market mechanism, not replace it completely.
The opposing view was presented by Karl Marx in a series of books published between 1848 and 1882.Marx stressed the conflicts and crises of the system. All capitalist institutions would finally be replaced by a one-party dictatorship of the proletariat, based on the National ownership of all means of production, distribution and exchange. These concepts inspired the 1917 Bolshevik Revolution and formed, until recently, the basis of Russian political thinking and action. However, Marx has been subjected to many different interpretations. China, Yugoslavia and Cuba have all built systems very different from that of the former USSR - many of which are now being reformed.
On the whole, the functions of the government in economic life can be classified into the following categories:
to preserve and foster competition
to regulate monopolies
to provide information and services to enable the market work better
to provide certain goods and services
to assure a sound monetary system
to promote overall economic stability and growth