What is Economics all about? The most general definition of Economics is perhaps this: “Economics is the discipline studying the organization of economic activities in society.”…

What is Economics all about? The most general definition of Economics is perhaps this: “Economics is the discipline studying the organization of economic activities in society.” You may, at first, think that this is too much of an abstraction. After all, how do questions like “how much should be produced?”, or “what determines prices?”, or “how can I make money?” relate to the general problem of the social organization of economic activities? Broadly speaking, particular institutions created by society will have an effect on the answer to the questions posed in the preceding paragraph. The answers will depend, for example, on whether society wishes to have competitive institutions as opposed to, say, cooperative structures. They will also depend on whether decisions are made through a decentralized system of decision-making (which does not necessarily imply competition) or some form of hierarchy. Naturally, the system that will emerge will be a reflection of what is commonly perceived as the “economic problem”. To complicate things, similar institutions may not necessarily reflect similar perceptions of the economic problem. Likewise, similar perceptions may not always produce the same kind of institutions. For instance, Adam Smith was not the first one to point out the benefits of the division of labor. He did so because for him, broadly speaking, the “economic problem” was that of reproduction and growth. He asked how society could organize its activities in order to produce as much surplus (above what is needed for reproduction) as possible. But forms of division of labor had been recommended before, as solutions to entirely different problems. Plato, for instance, in his Republic, suggests a division of labor as a means to create the just society. However, while both of them considered the division of labor as central to the ideal form of social organization, their institutional recommendations were very different indeed. In part, this can be attributed to a fundamental difference in the way these two scholars understood the world. In a brief and unsatisfactory way one can say that the difference between Plato and Smith is that the former was a kind of “rationalist” while the latter a kind of an “empiricist”. Plato felt that the way we know about the world is by the power of our mind. Appearances may be misleading. Smith, on the other hand, wrote in the tradition which followed the principle that knowledge can only be acquired by means of the senses and experience. Consequently, while both of them considered division of labor, the latter attached it to decentralized decision making based on private ownership of property while the former created a clearly hierarchical system with communal ownership among those who make decisions about what society should do, and private ownership among those who provide society with its material wealth. Put broadly, Smith felt that the division of labor must give rise to the institutions of private property, the market and competition as a means of coordinating economic activities. While Plato felt that division of labor gives rise to communalism — which should not be confused with communism — sharing and co-operation. Evidently, the answers to questions like “how much to produce?”, “what determines prices?” and “how can I make money?” are going to be fundamentally different in the two systems. In the end, whatever it is that we are doing, the advice and the recommendations of the economist are all derivatives of the same principles which guide and direct the social organization of economic activities. Basic types of economic systems Three types of economic systems exist, each with their own drawbacks and benefits; the Market Economy, the Planned Economy and the Mixed Economy. An economic system is loosely defined as country’s plan for its services, goods produced, and the exact way in which its economic plan is carried out. In general, there are three major types of economic systems prevailing around the world. Market Economy In a market economy, national and state governments play a minor role. Instead, consumers and their buying decisions drive the economy. In this type of economic system, the assumptions of the market play a major role in deciding the right path for a country’s economic development. Market economies aim to reduce or eliminate entirely subsidies for a particular industry, the pre-determination of prices for different commodities, and the amount of regulation controlling different industrial sectors. The absence of central planning is one of the major features of this economic system. Market decisions are mainly dominated by supply and demand. The role of the government in a market economy is to simply make sure that the market is stable enough to carry out its economic activities properly. Planned Economy A planned economy is also sometimes called a command economy. The most important aspect of this type of economy is that all major decisions related to the production, distribution, commodity and service prices, are all made by the government. The planned economy is government directed, and market forces have very little say in such an economy. This type of economy lacks the kind of flexibility that is present a market economy, and because of this, the planned economy reacts slower to changes in consumer needs and fluctuating patterns of supply and demand. On the other hand, a planned economy aims at using all available resources for developing production instead of allotting the resources for advertising or marketing. Mixed Economy A mixed economy combines elements of both the planned and the market economies in one cohesive system. This means that certain features from both market and planned economic systems are taken to form this type of economy. This system prevails in many countries where neither the government nor the business entities control the economic activities of that country — both sectors play an important role in the economic decision-making of the country. In a mixed economy there is flexibility in some areas and government control in others. Mixed economies include both capitalist and socialist economic policies and often arise in societies that seek to balance a wide range of political and economic views. перевели текст