ECONOMICS: ECONOMIC SYSTEMS ‘Concepts Communism All economic and social activities are controlled by a government that allows only one political party in a country. Capitalism ‘An Economic system where people are free to trade | their goods and labour at the highest worth and where the government intervenes to a lesser degree. Monopolies A single seller of goods for which no substitute exists. Exploitation ‘When people are either used or misused. Competitive market A model of an industrial structure in which many business undertakings compete with each other to provide a specific product for which there is a great demand by consumers. ‘Ownership The right to possess property. Privatisation When the government sells more than 50% of its, shares in a state-owned undertaking to the private ‘sector. Globalisation The worldwide exposure and interaction of economies with trade being the key element. 1.1 Economic systems ‘An economic system is a mechanism through which the problem of scarcity and choice is addressed. It facilitates communication between producers and consumers. The three major economic systems used in the economy are: * Aplanned (command or directed) economic system * Atrue market system (market economy) + Amixed economic system 1.1.1 A planned (command or directed) economic system During the 1800's Kar! Marx developed an economic philosophy in Europe that explained how capitalism operates. He announced that the workers class was being exploited in the capitalistic economic system. In a planned economy, resources are allocated by the state by means of a planned process. Planned economies are also known as command and socialistic economies. Prominent countries in a planned economy are China, Cuba and North Korea. In a planned economy the state handles the communication between producers and consumers. - In this economic system the government makes all decisions about which goods and services are to be delivered. In a planned economic system the government possesses all the factors of production and everyone works for the government. In this system the government endeavours to avoid inequalities between people being either very rich or very poor. Everyone should experience the same level of comfort.11.2 Market economy During the 1700's the market economy developed between Europe and the rest of the world as a result of fast growing trade between these countries. Governments started imposing restrictions on trade to limit competition. Adam Smith, A British economist, proposed a system of free trade. He is referred to as the father of capitalism as his ideas led to a market economy. Countries such as the USA, Japan, Singapore and Australia use this system. In a market economy most of the products and services that are in demand by society are provided by private profit-driven undertakings. The forces that drive this system are supply and demand, Communication will be at its best if these forces are free and state interference is limited. It works automatically. Consumer preference is identified, resources are utilised by undertakings for production in order for needs to be satisfied and consumers decide which products they prefer. A pure market economy however, does not exist because the state always exercises a certain degree of control. 4.1.3 Mixed economy Mixed economies originate from planned and market economies due to governments realising that the two pure systems also have disadvantages. It was realised that government could exercise better control in certain areas of the economy and that the private sector could exercise better control in other areas. South Africa has a mixed economy. In 2010 South Africa was the 28" largest economy in the world and in 2016 the 40" largest economy according to the global GDP.1.2_ Advantages and disadvantages of economic systems ‘Advantages Disadvantages Planned economy Itfunctions consciously: resources are distributed by the state where and when itis needed. Basic needs are satisfied e.g. policing, education, roads. ‘Wastage is limited e.g. duplication of products and services is eradicated because no competition exists. Advantages of mass production are retained due to the use of monopolistic undertakings. Advertisements are used to inform consumers rather than attempting to persuade them. Full employment — all workers are employed in order for their labo to be utilised, even if itis not profitable The quantity and variety of goods and services offered is limited thus consumer choices ate also limited itis difficult to motivate ‘workers to produce high quality products and deliver good services as production targets are very high. Distribution of income — the state can decide on any proportion of income to be distributed Human rights - the economy leaves little space for individual freedom. it operates automatically — the forces of supply and demand drive the market. Consumers have a wide variety of choices because of competition between businesses. Innovation is driven by high quality products and services resulting in maximum profitability. Economic growth is sustained, if the state can maintain optimal conditions such as pricing, the rate of exchange and profits generated by businesses, in a stable way. Distribution of income and prosperity — in the economy, resources are allocated to those with buying power and driving force. It enables them to work regardless of the reward. Workers can be exploited especially when an oversupply of labour exists, Ahhigh rate of unemployment could exist especially in times of recession. Environmental problems arise asa result of the abuse of resources due to the greed of people. In this system excessive consumption leads to more refuse which is a direct result of profiteering by businesses. The government has a certain degree of control over basic needs which means that these services are reasonably stable and safe. The production process is mostly private and {or this reason quality is better and higher, resulting in cheaper products. Workers have more freedom of choice as ‘well a the advantage of unions and labour Jaws that prevent exploitation, itdoes not contribute as much to eradicating inequalities and to support the poor, as ina planned economy. Producers and consumers do not have as much freedom of choice as in a market economy because to a certain degree, state control is prevalent in production.1.3 Characteristics of economic systems Economic characteristics Planned economy Ownership. All factors of production excluding labour, belong to the state. No private property exists. Motivation. It is accepted that all consumers and businesses including the state, cooperate unselfishly towards communal advantage or to the advantage of the community. Planning. Resources are allocated according to a planned process. In other words the state allocates labour to work and prescribes to consumers what to use. Ownership. The factors of production are owned by consumers. At the base of this lies the right of ownership and privatisation which strengthens this characteristic. Free entrepreneurship and choice. Consumers and businesses can buy or sell their possessions freely on the market. The state does not place much pressure on sales. Workers can decide for whom they want to work, Home owners can sell their properties if and when they want to (property right). Entrepreneurs can start their own business undertakings. Competition. Competition originates when economic entities are free to utilise their resources as they wish. Motivation. Self-interest and self-favouring is the driving force in the market economy. Consumers strive towards maximum prosperity while producers strive towards maximum profitability. ‘Ownership. Most of the factors of production are owned by consumers, organisations and producers. The state can also possess some of the production factors. Competition. Competition is retained in the private sector and a large variety of products and services are produced. In SA competition is regulated by the Competition Act. Motivation, Consumers and producers in the private sector are driven by self-interest. On the other hand the public sector is driven by the “welfare” of the community. State interference. State interference takes place to ensure that social and welfare objectives are realised and sees to it that markets operate and improve (to eliminate oligopolies, monopolies) through legislation