6. Find synonyms and antonyms (if any) to the words given.

firm	fund raising	liquidation
limited	funds	separation
investment	company	loss
assets	restricted	withdrawal
merger	payment	unlimited
stock	inventory
bond	obligation
dividend	revenue
profit	take over

IV. Economic systems

Any society no matter what stage of development it has reached or how it is organised is faced with three fundamental problems:

1. What commodities shall be produced? To which of the many alternatives shall scarce resources he devoted and how much of each shall be produced? Remember the importance of opportunity cost.

2. How shall the goods be produced? How will production be organised, what methods will be used and by whom will the goods and services be produced?

3 For whom shall the goods be produced? More accurately how shall they be distributed among the population once they have been made?

Since the means are scarce there has to be some system to distribute resources in such a way that the objectives can be attained. In primitive economies Man uses that which is surplus to his own requirements from among the goods he has already and exchanges them for the other goods and services he needs. The weakness with the barter system is not only that it depends on a double coincidence of wants but it is also very restrictive. The market which develops is very localised one and so the range of goods exchanged is very limited. The development of money as a common denominator of value plus improvements in transport have overcome both these handicaps so that now a Brazilian with surplus coffee will sell it for money knowing that ultimately someone, somewhere in the world will buy it. We say that there is a market for coffee and here we see the difference between a complex world-wide commodity market and a small local one based on barter.

Free enterprise

The capitalist system has evolved slowly over many years from the simple type when a few men, such as the capitalist clothiers of the Middle Ages, owned the stocks of raw materials and finished goods and arranged for other men to carry out the actual productive processes and transport them to their outlets. By the mid-eighteenth century the system was firmly entrenched in Britain and it was this which was eulogised by Smith. The system is characterised by the many working for the few and it is motivated by profit. Businessmen, either singly or in companies, decide what to make, when and how to produce it. They engage the factors of production, so incurring costs, in the hope of making a profit. The theory holds that the profit motive determines the allocation of resources; the various prices commanded by the factors reflect their relative scarcities, thus factors tend to move from those pursuits where the rewards are low to where they are high. Thus the consumer is sovereign for if the market demands more of a particular product so that greater profits are made then more factors are engaged in that occupation.

Factor earnings decide who is to receive the goods produced. If firms produce better goods or improve efficiency, or if workers make a greater effort, they receive a high reward, giving them more spending power to obtain goods in the market.

In this way the price system acts, as it were, like a marvelous computer, registering people's preferences for different goods, transmitting those preferences to firms, moving resources to produce the goods, and deciding who shall obtain the final products. Thus, through the motivation of private enterprise, the four problems inherent in economising are solved automatically.

Since it is not the task of the economist to make judgement of one system against another, he must also point out that there are items to be entered on the credit side of the account. The first of these must be that if in any overall plan there is a degree of in-built rigidity it therefore follows that the free enterprise system having no such central blueprint must by its very nature be flexible. The decisions regarding the original questions posed when and what to produce are made by businessmen acting independently. It is argued that it is entirely the entrepreneur's choice how he conducts his affairs. If he has a "hunch" that there is likely to be demand for a certain product he can go ahead and produce. If he is successful he makes his profit, if not he bears the loss, whereas the State might not have been prepared even to embark on the scheme because of the possibility of loss. Consequently since the economy runs itself the State does not have to expend resources simply on planning and seeing that the plan is made effective.

Similarly it is argued that just as the entrepreneur is spurred on by the possibility of profit so too workers need some additional incentive if they are to accept more responsibility or work harder. Many commentators have pointed out the developments within the command economies. In the early days of those regimes workers were prepared to work for the good of the State and the advancement of the community but as the immediate problems were overcome or as some workers felt that the State was not doing enough for them individually it became evident that the philosophy of equality had its deficiencies. Following further appraisal of the workings of the capitalist system the modifications have taken the form of various incentive schemes for both worker and management and in the case of agriculture for greater personal involvement, e.g. in Cuba the agricultural workers once again work their own holdings and sell their produce to state marketing organisations.

Defects of the market economy

In practice the market economy does not work quite so smoothly as this. Nor are its results entirely satisfactory. First, the competition upon which the efficiency of the market economy depends may break down. An employer may be the only buyer of a certain type of labour in a locality. If so, he is in a strong position when negotiating rates of pay with individual workers. The state may therefore have to intervene, e.g. by stipulating a minimum wage. Similarly, on the selling side, one seller may be able to exclude competitors. This puts the consumer in a weak position because he cannot take his custom elsewhere.

Second, some vital community goods, such as defense, police, justice and national parks, cannot be adequately provided through the market. This is mainly because it would be impossible to charge a price since 'free-riders' cannot be excluded.

Third, competition may not be through the price system but by brands, and the whole weaponry of advertising for which the consumer ultimately pays for to say that he does not pay for the cost of advertising the detergents is the same as saying that he does not pay the wages of the workers who produce them. However, apart from the costs of advertising there are questions arising from the fact that advertising is designed to create demand. This surely cuts across the original supposition that resources will tend to move into the production of those goods consumers want. It is more a case that consumers are made to want those goods that businessmen want to produce, i.e. those which are profitable.

Fourth, competition itself may sometimes lead to inefficiency. Small units may not be able to secure the advantages of large-scale production. Duplication of research and competitive advertising may waste resources. Uncertainty as to rivals' plans may hold back investment.

Fifth, in practice the price mechanism may function sluggishly, through imperfect knowledge or immobility of factors of production. As a result, supply is slow to respond to changes in demand.

Sixth, the firm in pursuing its own interest does not maximise the well-being of the community if in the production of utilities it also creates disutilities for Society as a whole. It is only since we have become so conservation-minded that we have been fully conscious of the harmful side-effects of uncontrolled industrial development. The out-pourings of industrial effluent have turned rivers such as the Rhine into open sewers, lakes have been polluted until their waters are "too thick to drink and not quite thick enough to walk on", the dump­ing of mercury and other poisons have threatened the safety of sea food and the pollution of the air by zinc-smelters and the like has contributed to disease. These also must be included on the debit side of the free market system.

Seventh, in a market economy where individuals decide what to produce, resources may remain unemployed because firms as a whole consider that profit prospects are poor or the demand for exports falls.

Lastly, the consumers with the most money have the greatest pull in the market. As a result, resources may be devoted to producing luxuries for the rich to the exclusion of necessities for the poor. While this is really brought about by the unequal distribution of wealth and income rather than by the market system, the fact is that the latter tends to produce, and even accentuate, such inequality. Efficiency is achieved through the profit motive: owners of factors of production sell them at the highest possible price, while firms keep production costs as low as they can in order to obtain the highest profit margin.