hi i'm adrian hill and i'm mr clifford
and welcome to crash course economics
today we're going to focus on macro
economics and talk about economic
systems and the nations that really like
them wink wink economic systems in the
nations really like them wink wink what
does that even mean i'm trying to come
up with a spicy title for today's show
okay try this one on how about economic
systems and the nations that are
attracted to them
or when economic systems and nations
hook up i don't know what to say stan
roll the intro
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so to pick up where we left off we all
have wants food cell phones a good
education the 10 000 gold apple watch
but like the rolling stones tell us you
can't always get what you want we don't
have an infinite amount of resources
like raw materials workers and time so
we have to make choices speaking of
who likes this i'm going to go change
shirts and make another choice so this
shirt it's way better right anyway we as
a social order have to figure out three
things number one what to produce number
two how to produce it and number three
who gets it answer these three questions
and you've got an economic system
there's a ton of backstory here about
the history and evolution of economic
thought we'll get to that in a future
video in today's video we're going to
chat about the world today let's take a
look at two different economic systems
market economies and planned economies
it all comes down to who owns and
controls the factors of production these
are the major inputs required to produce
stuff and karl marx classified them as
land labor and capital he even wrote a
book about it das kapital in a planned
economy the government controls the
facts of production and it's easy to
assume that's the same thing as
communism or socialism but that's not
quite right according to karl marx the
theory of communism may be summed up in
the single sentence abolition of private
property so true communism is a
classless society when i say classless
i'm talking about a social order where
everyone owns the facts of production
and output is distributed equally kind
of like china and cuba and the former
soviet union except not at all in
practice no country has ever truly been
communist there's a lot of countries
that are socialist often socialism has
both private property and some public
ownership and control of industry the
goal is to meet specific collective
objectives and provide free and equal
access to things like education and
health care in both communism and
socialism there is economic planning and
the government using the form of some
bureaucratic agency helps decide what to
produce how to produce it and who gets
it now if an economy is completely
controlled by the government down to the
number of shoes that should be produced
that's called a command economy on the
other side of the spectrum we have free
market economies in free market or
capitalist economies individuals own the
factors of production and the government
keeps its nose out of the stuffs and
adopts a laissez-faire or hands-off
approach to production commerce and
trade in free market economies
businesses make things like cars not to
do good for mankind but because they
want to make a profit since consumers
that's me and you get to choose which
car we want car producers need to make a
car with the right features at the right
price economists call this the invisible
hand
if consumers prefer one company's car
that business will make more profit and
have an incentive to produce more cars
car companies that don't offer the cars
people want will disappear maybe you've
heard of the delorean it was a cool
looking car but not a car that many
people wanted to buy apparently it was
expensive underpowered and poorly made
and it didn't actually travel through
time anyway this concept applies to all
other markets like cell phones or shoes
scarce resources will go to the most
desired use and they'll be used
efficiently more or less after all if a
business is wasteful and inefficient or
makes something that no one wants to buy
then some other business will make a
similar product that's either better or
cheaper or both if there's no consumer
demand for a product resources won't be
wasted producing it we often take
markets for granted but look at the
alternative assume instead that a
government agency was in charge of
deciding exactly which types of cars and
cell phones and shoes to make do you
think they could quickly respond to
changes in tastes and preferences if
there was only one government monopoly
producing cars do you think they'd be
produced efficiently so the invisible
hand of the free market is the idea that
individuals and businesses meet
society's needs when they seek their own
self-interest competitive markets with
profit-seeking businesses will have an
incentive to produce quality products as
efficiently as possible in the words of
adam smith it's not from the benevolence
of the butcher the brewer or the baker
that we expect our dinner but from their
regard to their own interest now it
looks like the free market's perfect we
don't even need a government but that's
not quite right right there's a bunch of
things the government must do because
free markets won't first is maintain the
rule of law we need laws and police and
contracts and courts to keep everything
orderly second we need public goods and
services like roads and bridges and
education and defense because goods
can't get to consumers if bridges are
falling down and consumers can't make
good choices if they're not educated and
no one really cares about buying the new
iphone if there's a bomb dropping on
your head third the government sometimes
needs to step in when markets get things
wrong but what does that even mean well
let's go back to producing cars the free
market produces what we consumers want
to buy and when we buy we're thinking
about what a car looks like if it's the
color we want maybe if it's safe what it
costs most of us aren't worried about
air pollution we don't think much about
who made our car what they were paid
what the conditions at the factory were
like that's when government steps in to
regulate production in a free market
economy like the united states you might
think that the government doesn't tell
car producers what types of cars to
produce and how to produce them except
that it does cars need to meet strict
emissions and safety standards and there
are laws dictating how much
manufacturers can pollute and how
workers should be treated
and here's the big takeaway modern
economies are neither completely free
market nor planned there's a spectrum of
government involvement for example on
one end we have north korea they have a
command economy where production is
entirely controlled by the government on
the other end we have countries like new
zealand they have private property few
taxes and few regulations in the middle
we have the rest of the world so most
modern economies are actually mixed
economies with both free markets and
government intervention and a great way
to explain a mixed economy is by looking
at something called the circular flow
model let's go to the thought bubble a
modern economy is made up of households
which are individuals like you and me
and businesses businesses sell goods and
services to households in the product
market that's anywhere goods and
services are bought and sold the
households need to pay for those goods
and services but where do they get the
money the households earn the money by
selling the resources like labor to
businesses now this is done in the
resource market the businesses use the
money they earn from selling products in
the product market to pay for resources
in the resource market and households
use the money they earned in the
resource market to buy products in the
product market but there's another key
player in the economy the government the
government also buys products and
resources for example they'll buy cars
from businesses and hire government
employees like policemen to drive them
the government pays for public goods
like roads and bridges and public
services like firefighters and teachers
they also provide transfer payments to
individuals in poverty and subsidies to
businesses to produce things like
fuel-efficient cars but where does the
government get the money well get some
of it from taxing households and
businesses and it gets some of it from
borrowing but we'll talk about that
later so basically that's it that's the
circular flow of products resources and
money and the interactions between
businesses individuals and the
government now it gets more complex when
you add an international trade in the
financial sector but for now the
simplified circular flow shows how the
modern economy works thanks
thoughtbubble we've established that
economies differ based on the amount of
government involvement but it's
important to keep in mind that economies
can change over time denmark and canada
have adopted more elements of a planned
economy like universal health care china
on the other hand has added more free
market elements to its economy and now
has less government ownership and
control of production so communist china
actually has a socialist market economy
but which type of economy is better and
how much should the government get
involved it's hard to find support for
command economies outside north korea
and maybe some nostalgic cubans and
russians those who support socialism
would point out denmark's high standards
of living and low income inequality but
free market enthusiasts might point out
china's massive economic growth and
growing middle class after backing away
from central planning ultimately the
optimal amount of government involvement
depends on your personal values for
example what if anything do you think
the government should do to help people
in poverty do you think it's up to each
individual to provide for themselves
come what may or do you think the
government should step in as a safety
net and help pay for food and health
care what if the person made choices
that got them in financial trouble like
gambling or made them sick like smoking
should society help then well economists
aren't really good at answering these
types of questions sorry it's not that
they're heartless it's just they don't
operate in the realm of feelings in the
words of economist thomas soule there
are no solutions only trade-offs sure it
would be great if we could end poverty
or provide health care for everyone but
we're gonna have to give something up in
order to do it forcing car producers to
meet emissions and safety regulations
will increase production costs and
likely increase the price of cars but it
also reduces pollution and fossil fuel
consumption which will hopefully improve
public health and save money in the long
run there is always an opportunity cost
and deciding if it's worth it well
that's up to you and your elected
officials and a bunch of lobbyists deng
xiaoping transformed china from a
country with debilitating poverty and
famine to the economic powerhouse it is
today regarding this debate he said it
doesn't matter whether a cat is black or
white if it catches mice it's a good cat
which makes me think about that green
shirt that was a good shirt i'll be
right back so let's wrap this thing up
in practice almost all countries are
somewhere between the extremes of a
command economy and a completely free
market economy that's because mixed
economies seem best at handling the
circular flow of goods money and
resources but the debate over free
markets and government control will
never end well actually it will end when
humanity ends because microscopic
organisms don't divide themselves into
factions based on economic theory but
anyway that's why it's vital for you to
be informed about the merits and the
limitations of economic systems and be
willing to support solutions that get
the job done as opposed to getting stuck
in one ideology economic theories and
models can seem really great in the
abstract but when they're kicked out
into the real world and actually have to
govern the affairs of billions of people
it turns out that some flexibility is a
very important thing thanks for watching
we'll see you next week
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