When authoritarian regimes promote economic progress, they are likely to lose their authority, because students, intellectuals, and executives will demand greater civil and political freedom.

                                                                                    -Nobel Laureate Gary Becker[1]

Every society attempts to cope with scarcity in certain basic ways: (a) use of money to convey information about relative prices, (b) specialization according to comparative advantage, and (c) division of labor. How and when different allocative mechanisms are used determines how efficiently a society produces and delivers goods to its members. Economic systems are conventionally classified by who makes decisions and who owns which resources–crucial issues in attaining a good balance between government relative to the market system. Figure 7 summarizes four basic economic systems and lists some countries where each system has dominated, and it shows that whether resources are privately or publicly owned is not rigidly linked to whether decisions are primarily centralized or decentralized.

 

 

The Changing Structure of Economic Decision Making

 

Foundations of Capitalism

Capitalism is not like it used to be, and never was.                      Unknown

Above figure also indicates that societies previously based on centralized ownership and control are increasingly relying on market forces. But why? The foundations of capitalism are a starting point in answering this question. Capitalism is only a few centuries old, but its ideological roots first emerged when our early ancestors started staking claims to territory. Hallmarks of "pure" capitalism are private property and decentralized laissez-faire policies by government.

 

Private Property Rights

Things are often described as "owned" by someone. You probably own books, sports equipment, and perhaps a car, but what does ownership mean? Generally it means that you have certain rights to use these things in certain ways.

Fee-simple property rights, the broadest of private property rights, include rights to: (a) use a good as you choose as long as no one else's rights are violated; (b) trade or give these rights to other people; and (c) deny use of the good to others.

Many property rights, however, are much more limited. For example, you cannot shoot trespassers on your land, nor may you raise hogs in New York City–or Des Moines, Iowa. You cannot abuse your children, burn your house for the insurance money, . . . the list goes on and on. The critical point is that most property rights are circumscribed.

 

How does anyone acquire property? John Locke, a seventeenth-century English philosopher, offered the labor theory of value to justify natural property rights. The labor theory of value asserts that human labor is the source of all value. According to Locke, mixing your labor with "gifts of nature" makes land and the crops it produces valuable. Thus, he viewed improvements to natural resources as ethical cornerstones for original property rights, which could then be legally transferred to others.

 

The idea that mixing labor with natural resources creates property rights raises both moral and practical problems. Should those who encounter "gifts of nature" have property rights on a first-come, first-served basis? If you were the first to pour your blood into the sea, should the oceans and all their riches be yours? And what about rules for transferring property? Who should have property rights to things produced by employees? … by slaves? Should you own a piece of land, not by dint of personal effort, but because you inherited it from your parents who inherited it from their parents who bought it from the family who cleared the land? What if the family who cleared it murdered the previous owners? Should property rights become ever stronger over time, regardless of whether a property transfer long ago was legal or illicit? Difficulties posed by these types of questions for Locke's "natural rights" theory suggest a need for more practical foundations for property rights.

 

Basing property rights on brute force would be both violent and inefficient. If your claims held only to the extent that you have the muscle to enforce them, too many resources would be absorbed protecting your rights and aggressively trying to take from others. To avoid such problems, we grant government a near-monopoly on the use of legitimate force. Most legal scholars would argue that your property rights are determined by law–what the law says is yours is yours; neither more nor less. Society can be viewed as specifying sets of rights by law and then redefining rights through changes in statutes or legal opinions.

 

Property rights and legal rights are almost synonymous to economists. For example, zoning confers property rights that regulate how we may use land and buildings, traffic laws specify how we may drive our cars, and criminal laws limit how we may treat our neighbors. You cannot legally slander your neighbor, litter, or shout, "Fire!" in a crowded theater. Property rights are also implicit in laws establishing such things as welfare programs or tariffs on imports.

 

Thus, laws govern the ways we use of both our own and our neighbors' property. Government in a capitalist society establishes who owns what and how ownership rights can be transferred. Naturally, changes in rights accompany changes in laws–just as laws create property rights, they can take them away. But too frequent legal changes may create uncertainty and discourage production and investment.

Socialism is capitalism's most significant challenger.

Socialism holds that most non-human resources should be owned by the state, acting as a trustee for all the people in society–and not by private individuals.

Differences between capitalism and socialism also tend to be pronounced in specifying appropriate roles for government.

Laissez-Faire Policies

That government is best which governs least.     Thomas Jefferson

Feudal monarchs ruled by "divine right," claiming they were chosen by God to lead their countries. Even so, their policies often failed. Vexed by stagnation in seventeenth-century France, Louis XIV's finance minister sought advice from a leading industrialist. The manufacturer immediately responded, "Laissez-nous faire," meaning roughly, "Leave us alone." Laissez-faire has ever since been a rallying cry for those who believe the market system works best with minimal government.

 

But what specific roles should government play? Nearly everyone recognizes needs for national defense and police protection.[2] In the economic sphere, a laissez-faire government only specifies property rights and enforces contracts. Under pure capitalism, private individuals own virtually all resources and control their uses. Thus, decision-making is private and decentralized. Market prices determine the range of choices available to us, given our budgets, which in turn depend on the resources we individually own.

 

Private property and laissez-faire policies distinguish capitalism from alternative systems. Capitalism's defenders cite many virtues of the price system, but the two most important are freedom and efficiency. Capitalism, it is argued, allows people maximum freedom because it requires only minimal government. A tradition predating the American Revolution abhors "Big Brother" government as an enemy of freedom.

 

Capitalist firms compete for profits by trying to produce better products at lower costs and prices. How a society governs economic activity pivots on a different type of rivalry. From the 1917 "October Revolution" that swept Marxists into power in the Soviet Union through the 1980s, international relations were dominated by competition (at times, in the form of war) between communist countries and nations based on mixed capitalism. Communism replaces the decentralized decisions of a market system with central planning.

Under Marxist communism, central planning (centralized decision-making) accompanies socialist resource ownership in a command economy.

The Soviet Union relied on rigid central planning from 1929 until modest reform began in the 1960s. China has been ruled by communists since they won a civil war in 1949, after which central planning was quickly instituted. But dismay about stagnation under planning mounted. Rampant shortages and long queues to acquire food or shoes, for example, became routine. Most Soviet citizens waited in lines for as much time as average Americans spend watching TV.

 

Experiments with market forces (privatization) have recently swept through most former "Iron Curtain" countries. Why is communism being abandoned? One reason is that relative prosperity under different systems becomes clear when magazines and radio or TV signals cross national borders. International broadcasts made it obvious to Soviet citizens that their living standards were falling ever further behind those in more market-oriented economies.[3] The transition, however, has not been an easy one, and the political system at this time can hardly be referred to as stable.

 

Information Processors

 

Central planning hides data that would be disseminated widely in a market economy. One way to retain power is to monopolize information, so secrecy is also common under all forms of totalitarianism. But sustained growth requires information flows across all levels of society and between centers for production. Shared information is vital for advancing technological frontiers. (Otherwise, all scientists would be forced to start by reinventing the wheel.) Thus, closed societies tend to stagnate and seldom compete successfully when pitted against open societies.

 

The isolation of closed societies usually drives them into ruts, using the same policy recipes over and over. For example, public buildings are uniformly drab when built according to architectural standards established by central planners decades ago. The result? In 1994, an American tourist observed that, "buildings all over the ex-communist world look like Cabrini-Green" (a Chicago public housing project notorious for ugly, dysfunctional architecture.)

 

Political freedom and decentralized markets expedite technological advances and flows of information. Anyone who has explored Internet databases quickly realizes that far more information is available on most topics than anyone could completely digest. One result of modern communications and expanding international trade is that, although significant regional variation remains, open societies have become more internally diverse, with ever broadening ranges of choices available regardless of where people live. For example, American fast food outlets are more available around the world than ever before, but so are restaurants featuring Chinese, Mexican, Vietnamese, Italian, Thai, or Ethiopian cuisine. Another result is that open societies are increasingly prosperous, and closed societies are being pressured to match their success.

Converging Systems?

Exposure (communication and trade) facilitates political and economic imitation of successful patterns. Dramatic advances in standards of living in Western Europe, North America, and some Pacific Rim countries (e.g., Japan, Korea, Taiwan, Hong Kong, and Singapore) have publicized the gains available from allowing market forces to channel specialized production and exchange.

 

Reforms to decentralize decisions in the USSR accelerated in 1986, when then President Gorbachev launched policies for more internal freedom and greater accommodation with the United States and its allies. He learned, however, that political and economic freedom is addictive. The results? Gorbachev lost power while communist regimes toppled like rows of dominoes during 1989-1992 in Afghanistan, Albania, Bulgaria, Czechoslovakia (now split in two), Hungary, Mongolia, Nicaragua, Poland, Romania, Russia (the USSR dissolved into 15 independent nations), and Yugoslavia (rocked by civil war and shattered into three countries).

 

The few old-line communist regimes that still linger on are under fire in Cuba, China, and North Korea. China and most of the 15 countries carved out of the USSR increasingly rely on market forces in hopes of matching growth recorded in Europe, North America, and much of the Pacific Rim. China gradually began to decentralize economic decisions in 1978. In the early 1980s, China stopped being a net importer of rice and grain and became a net exporter. Political freedom remains problematic in China, but introducing the market system has transformed it into the world's second largest economy. If China sustains recent 10+ percent annual growth rates, its economy may surpass that of the United States by the year 2020.

 

Pressures for modernization have not been limited to economies once ruled by central planners. Throughout the Americas, Europe, Australia, and New Zealand, there is a broad trend toward privatization–trash collection, highway construction, maintenance of public roads and buildings, the operation of prisons and public hospitals, and some educational activities are among functions traditionally performed by government but increasingly contracted to private firms. The drive for political and economic freedom also prompted more democratic policies in several South American nations and South Africa. And a united Germany now figures prominently in economic and political developments in Europe.

 

The expanding scope of international trade and modern telecommunications is reducing differences among people and countries. Superior new technologies spread rapidly and are adapted to local conditions in almost all societies. International trade increasingly makes goods that are available anywhere available everywhere. But progress is not always smooth.

Barriers to Economic Progress

Market systems require structures of property rights roundly condemned by traditional socialists as leading to an unfair and exploitative class system.[4] Rapid transition from a familiar to a radically different economic system can be chaotic, eliciting outcries from some–especially those who were on top under the old system–for a "return to the good old days." Thus, policies in former communist countries vacillate while moving towards greater reliance on markets, reflecting changes in the balances of political power between supporters and opponents of reforms. Figure 8 indicates how some countries are faring under mounting pressures for efficiency, political freedom, and international competitiveness.

 

All societies blend elements of both capitalism and socialism, so people everywhere live in mixed economies. For example, in the United States, socialism appears in the form of government-provided education and highways, and subsidized medical care for impoverished children, the aged, disabled.

 

When trends away from rigid central planning are coupled with the growth of economic regulation in societies that have long relied on markets, it appears that "we" may be becoming slightly more like "them" while "they" are becoming a lot more like "us." However, privatization is a strong trend in nations with traditions of mixed capitalism, and, in recent years, deregulation in many industries has been another trend in relationships between government and business. Thus, economies everywhere seem to be moving towards greater reliance on decentralized capitalism, but not necessarily along a smooth path. In countries characterized by mixed capitalism, government policies often reflect attempts to achieve what some people perceive as greater equity. But where efficiency is our primary goal, we tend to rely on the marketplace to provide most goods.

 

 

Dynamic Changes in Our Global Economy

 

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