The Foundations of Free Enterprise
by Allen, Armstrong, and Wolken
Alternative Economic Systems
The process by which these questions are answered is the economic system in action. Although all societies face the same problems, they have not chosen the same economic system. Why? Mainly because an economic system is more than simply a way of making decisions. It is a way of life, and differences among economic systems reflect a wide variety of values concerning individuals and society.
Unfortunately, one value cannot be proved superior to another. Value judgments are matters of faith or philosophy. They are not based on objective logic. This issue is further clouded because nearly all societies simultaneously hold values that conflict with one another. For example, in India cows are used only for their muscle power or their milk. Because they are considered sacred animals, they cannot be slaughtered to provide meat for starving people. To achieve the goal of feeding people (with beef protein) would require an unacceptable sacrifice of the deeply rooted belief in the cow as a sacred animal. This conflict between the value of maintaining human life and the value of the cow as a sacred being has resulted in a subordination of the maintaining-human-life value to the cow-as-sacred value. Hierarchical arrangements of deep-seated values vary enormously from culture to culture. Since the specific form of the economic system reflects value patterns of a society, it is not surprising that we find a great diversity among the world’s economic systems.
Though there are many different economic systems in the world, each is designed to coordinate the economic activities of its members. To do so, each society relies to varying degrees on traditions, commands, and markets.
The oldest way of coping with economic problems is that of tradition. In traditional economies problems are solved by following guidelines suggested by social customs, religious traditions, and morals of the culture. Sons follow in fathers’ occupations, and many tasks are considered exclusively male or female. The fruits of production are distributed according to such traditional criteria as age, sex, and other characteristics not necessarily related to personal productivity. In such arrangements birth is the dominant factor in determining one’s role and status in life.
Traditional solutions have historically dominated primitive, agrarian societies. Today they are a significant feature of less-developed countries. Though tradition is a workable guideline in some societies, it does not work well when an economic system grows and becomes more complex. Accordingly, when complexity occurs we have seen tradition give way to other economic systems. But some traditions persist even in more complex societies. Indeed, all modern-day industrialized economies have elements of tradition carried down from earlier generations. Tipping waiters and bellhops, exchanging gifts, rights of seniority, sons following their fathers, and women remaining in the home are just a few examples of tradition-bound economic practices present in our economy today.
As they grew, many traditional economies gradually developed markets to make it easier for individuals to exchange goods. Many of the earliest merchants and peasants met in a certain section of town to buy and sell goods. A peasant would bring wool from his sheep or vegetables from his garden and offer them for sale. With the money received he would purchase things he needed, perhaps some finished cloth or something he had not grown for himself. Many American cities have farmers’ markets today similar to these market places of old.
In today’s complex economies we use the term market in a more general sense than as a reference to a specific section of a town. When we say market we simply mean individuals making independent decisions which result in voluntary exchanges. When we purchase a record album in a store we are actively involved in a market. We purchase the album because we feel it’s worth the price. The store sells because it will benefit by selling the album at that price. Both the buyer and the seller voluntarily agree to the exchange. Both feel they will be better off by doing so. If either party feels he will not benefit by the exchange, the sale will not be made. Through these voluntary transactions we make our wants known to makers of the products we buy. If we buy lots of Elton John records, this tells the record company we like what it is doing. In response to our action, more Elton John records will be sent to dealers. These transactions also help to determine the prices of products. These prices reflect the value we place on various goods and services. The market system, then, coordinates the activities of millions of people. Information from millions of individual transactions acts to guide resources to their most valuable uses.
To this point we have used the term “market economies.” Today these economic systems are also frequently called “capitalistic,” “free enterprise,” and “private enterprise.” Though there are subtle differences among these terms, they can be regarded as having essentially the same meaning.
A command system of economic decision making is quite different from a market system. Instead of resources moving into alternative uses as a result of the independent decisions of individuals, their use is directed by government order. Usually such orders are a part of some overall plan as to what the economy is expected to accomplish. The Soviet Union uses five-year plans for this purpose.
A command system places the individual in a position subordinate to the government plan. Many economic decisions are made by a central planning authority. These planners decide what will be produced, how it will be produced, and how it will be divided among the members of the society. In doing this, the planning committee, rather than the individuals in the economy, decide which goods and services are produced and which are not. These decisions may ignore the preferences of consumers.
Some final thoughts on tradition, market, and command
Though we like to talk about the differences between a free enterprise economy and traditional and command economies, we should keep one point in mind. There are no pure free enterprise economies, pure traditional economies, nor pure command economies. Every nation has an economy that represents a mixture of these three basic types. In some countries, more elements of free enterprise are evident. Others are characterized by a large number of traditional or command features. Each society must decide for itself which mix is best for it.
The ability to mix these pure forms has created a wide variety of economic systems in the world today. In spite of these differences, they all have one thing in common — they are made up of people. Even though great diversity exists within the human race, we can make a general observation about human nature. Each of us, regardless of our nationality, wants to improve our own well-being, the quality of our life. This is sometimes called “self-interest” or “selfishness.” But it simply means that, given a choice of different courses of action, we will choose the one we believe will benefit us the most. This is neither bad nor good. It is just the way we are. Every economic system, no matter what form it takes, must somehow take this into account.
In order to understand the advantages and disadvantages of various mixes, we must first understand the basic characteristics of pure economic systems. For example, the United States frequently is cited as a country with a free enterprise economy. To understand how our American economy actually does operate and to learn the extent to which it really is a market economy, we need to become better acquainted with the basic features of a pure free enterprise economy.