Problems Of Economy

All organized communities mix, in various proportions, market activity and government intervention. Private markets themselves differ widely in the degree of competition under which they operate, all the way from single-firm monopolies to the fierce rivalry among hundreds of retailers. Much the same point applies to government intervention, which ranges from mild and comparatively uncoercive manipulation of tax, credit, contract, and subsidy policies through mandatory controls over wages and prices to the detailed central planning of Communist countries. Even those societies most completely committed to central planning, however, grudgingly modify official ideology by some concessions to private enterprise. For example, the USSR allowed its farmers, although organized in collective enterprises, to market crops grown on their own small plots. During the Communist period in Poland, most farming was in the hands of individual owners. The former Yugoslavia experimented in worker management of factories during its Communist period. Similar variation exists among capitalist economies. In most of them, the government owns and operates railroads and airlines. Even where outright government ownership or operation is exceptional, as in Japan, the central government exerts tremendous influence over economic activity. The United States, the most devoted of major capitalist economies to free enterprise, has nevertheless rescued faltering corporations such as Lockheed and Chrysler and has, for all practical purposes, converted a number of major defense contractors into federal subsidiaries. Many American economists have come to accept the concept of a “mixed economy,” combining private initiative with some government control. The major differences between Communist and American economic organization concern ownership of factories, farms, and other enterprises, as well as contrasting principles of pricing and income distribution. In the U.S. two-thirds of the nation's gross national product (GNP) is directly generated by profit-making business enterprises, farmers, and such voluntary nongovernmental entities as private universities, hospitals, cooperatives, and foundations. Of the remaining one-third of the GNP, which is generated by the government, more than half represents transfers from taxpayers to old-age pensioners, veterans, welfare recipients, and other groups of beneficiaries. In recent years in the U.S., the federal government has begun to deregulate industries such as air transportation and thus to diminish its influence over prices and the provision of services. Indeed, the most important price controlled by public influence is the price of money—that is, the rate of interest. Although American opposition to both controls and national planning is strong, the U.S. government has repeatedly resorted to these measures in times of emergency, such as during World War II and the Korean War. In general, however, free-enterprise economies consider state ownership of productive facilities and government interference in price setting as deplorable exceptions to the rule of private ownership and price determination through the mediation of competitive markets. Central Planning Precisely the reverse attitude toward economic central planning is the case in China and certain other Communist countries. Although small private enterprises are increasingly being tolerated, and no centrally planned economy has been able to function without some reliance on private ownership of agricultural land, the dominant ideology favors state planning over competitive price setting, and public ownership of factories, farms, and large retail establishments. Strictly speaking, there is no reason why a democratic community could not freely choose to plan production, prices, and the distribution of income and wealth. In contemporary experience, however, central economic planning has generally run parallel to Communist Party control of political life. Nonetheless, important differences exist in the strictness of these constraints in different Communist countries and even within the same country at different times. It is also true that capitalism has frequently been accompanied by repressive government, as for example in Chile and Brazil.

The gravest problems of capitalism are unemployment, inflation, and economic injustice. Parallel problems in centrally planned economies include underemployment, rationing, bureaucracy, and scarcity of many consumer items. Falling somewhere between societies that emphasize either central planning or free enterprise are those that practice social democracy or liberal socialism. Examples of social democracy are the Scandinavian countries, Sweden in particular. Sweden organizes the bulk of productive activity under private ownership but regulates this activity closely, intervenes to protect the jobs of workers, and redistributes substantial portions of profits and large individual incomes to lowincome groups. On the other hand, the former Yugoslavia from the 1950s through the 1980s supplied an example of a liberal socialist society. Although the Communist Party dominated, censorship was mild, emigration was easy, religion was freely exercised, and a unique mixture of state ownership, worker management, and private enterprise combined to operate a comparatively prosperous economy. The various economic problems of recent years have stimulated serious debate about the proper role of public policy. Parties on the political left in Europe have advocated more controls and more planning. In the 1980s a different solution was offered by the Conservative Party government of Prime Minister Margaret Thatcher in the United Kingdom and by the Republican administration of President Ronald Reagan in the U.S. In both countries, attempts were made to diminish taxation and government regulation on private enterprise and thus, by enlarging the potential profits of corporations, encourage additional investment, higher productivity, and renewed economic growth. These were the central elements of supply-side economics, the guiding doctrine of the two leaders. Implicit in this government decision to provide businesses with increased incentives to invest, take risks, and work harder were the hopes that technology would reduce the costs of alternatives to oil as an energy source and that the nonenergy sectors of the economy, such as data processing and scientific agriculture, would experience rapid growth as a result of encouragements to invention and innovation. Poor nations desperately need aid from the rich nations in the form of capital and of technological and organizational expertise. They also need easy access to the markets of the industrialized nations for their manufactures and raw materials. However, the political capacity of rich nations to respond to these needs depends greatly on their own success in coping with inflation, unemployment, and lagging growth rates. In democratic communities, it is exceedingly difficult to generate public support for assistance to foreign countries when average wage earners are themselves under serious financial pressure. It is no easier politically to permit cheap foreign merchandise and materials to freely enter American and European markets when they are viewed as the cause of unemployment among domestic workers. Central Problems of an Economy How to Achieve Fuller Utilisation or Full Employment of Resources? The next central problem of an economy (discussed by Stigler and Leftwitch in the extended version) is of fuller utilisation of resources or to provide full employment. In every economy, the resources like land, labour, and capital are often not fully employed. Labour is unemployed and at the same time factories are idle. The land also remains under utilised. Since the resources are scarce, their unemployment or under utilisation is a waste. An economy has to solve the problem of unemployment and under utilisation of resources to achieve the goal of full employment. Every economy makes an earnest effort to remove involuntary unemployment. An economy is also to ensure that prices should remain stable under full employment situation.