So far we have been focusing on microeconomics, or the part of economics concerned with individuals
and their decisions.
For the next significant portion of the series, we will be looking at macroeconomics, or the
study of the economy as a whole.
We will find that it’s still about choices and economic behavior, but instead of looking
at how economics affects individual decisions, we will be looking at how economies affect
entire countries.
Any study of macroeconomics often begins by looking at economic systems.
An economic system is a way that resources get around in a society.
Economic systems regulate the factors of production that we’ve been discussing, or land, labor,
physical capital, and human capital.
There are three questions that can serve as a guide for which economic system to choose
when a society decides to produce things.
These are generally as follows.
First, what should we produce?
Second, how should we produce it?
And third, for whom should we produce it?
To answer the first question, we know that all people need food and shelter, so that
has to be produced.
However, things get more complicated when we attempt to figure out how many resources
we should devote to national defense, education, or health care.
To answer question two, there are so many ways to produce goods and services, and all
require land, labor, and capital, so this requires many trade-offs.
For question three, we know that all people get food and shelter, but how much income
should people get for supplying the factors of production, and who owns the factors of
production?
The answers a society lands on for these questions regarding what should get produced, how it
should get produced, and for whom it should be produced tell us a great deal about that
society’s values.
In order to figure out what these values are, and help societies determine the best economic
system for them, it helps to know the four different types of goods and services.
Generally they are presented in a table like this.
Let’s define some terms.
Rival goods are those for which one individual’s consumption of the good prevents simultaneous
consumption of the exact same good by other consumers.
Food is an obvious example.
If you buy some food and eat it, nobody else can eat that food.
Non-rival goods are just the opposite.
Consumption does not limit the ability of others to consume it.
Think of Netflix.
When you get a Netflix subscription, it in no way interferes with the ability of others
to get a Netflix subscription, and watching movies on Netflix does not deplete the amount
of movies available on Netflix to watch.
Non-excludable goods are those which can’t exclude any individuals or groups from using
them.
Think of public roads, absolutely anyone can drive on them.
Excludable goods, on the other hand, are those that some are restricted from using, often
due to affordability, like an expensive theme park.
Now let’s combine these concepts.
Private goods are those that are both excludable and rival.
They have to be bought before they can be consumed.
Therefore, anyone who can’t afford them is excluded from consuming them.
And once purchased, the ability of others to acquire the good becomes more limited.
Examples include food, clothing, cars, and personal electronics.
Public goods are those that are non-excludable and non-rival.
That means no one can be prevented from consuming them, and anyone who consumes them can do
so without reducing their availability to others.
Examples include air, national defense, and knowledge.
Common goods are products or resources that are non-excludable but rival.
This means pretty much anyone can use them, but if one consumes them, their availability
to others is reduced.
Examples include fish, timber, and coal.
And finally, club goods are those that are excludable but non-rival.
We can be prevented from using them, but their consumption does not reduce their availability
to others.
Club goods are sometimes referred to as artificially scarce resources, and examples include country
club memberships, satellite TV, toll roads, or even a YouTube Premium subscription.
Now, politicians and government officials often like to use words like capitalism, socialism,
and communism when discussing economic systems and how to best help the economy, but those
three words have different definitions to different people.
In particular, communism is also a social and political theory, so it makes the word
even more confusing when definitions are mixed up.
In addition, because the words “capitalism”, “socialism”, and “communism” are often
weaponized and used to attack and marginalize others, even economists can be guilty of misusing
them.
For example, people often seamlessly interchange communism and totalitarianism, or capitalism
and fascism, as if they mean the exact same thing.
For this reason, in this series, we will not be using the terms capitalism, socialism,
or communism to characterize economic systems.
These will instead be discussed in the upcoming series on political science.
Instead for our purposes, when looking at factors of production, there are four distinct
economic systems.
And remember, all of them have to answer the three economic questions that we mentioned
earlier.
The oldest economic system in history is a traditional economy.
It relies on habit, custom, or ritual to guide the factors of production.
It’s informal, revolves around the family unit or tribe, and there’s usually no currency.
There is little room for innovation or change.
Traditional economies are usually found in communities that tend to stay relatively small,
close, and isolated from the rest of the world.
The second oldest economic system in history is a market economy.
In a market economy, consumers guide the factors of production.
It’s bottom-up.
In a market economy, individuals and privately owned businesses make their own decisions
about what to buy and sell.
Market economies are also often called capitalist economies because the capital that entrepreneurs
invest in businesses is an important part of the system.
Command economies, also known as centrally planned economies, are top-down.
A central authority, usually the government, guides the factors of production, and there
is usually little input from the people.
Command economies operate in direct contrast to market economies, by going against private
property, free market pricing, competition, and consumer choice.
Finally, a mixed economy is a combination of the other three economies.
Sometimes the government steps in to try to guide the factors of production.
Sometimes it’s individuals and businesses.
Sometimes it’s even based on traditional values.
Generally, however, it’s any economic system that has some market-based elements and some
level of government involvement.
It’s also the most common type of economy around the world.
And this makes sense, since no economic system is perfect, which we will learn as we move
through the series.
In conclusion, every society has different values, and those values ultimately determine
how much influence governments should have in an economy, which is a major factor in
determining social dynamics.