FALL 2009 | Mitronatsiou Anastasia

Every economy, in order to produce and consume, needs to address basic issues such as the following: what goods and services should be produced and in what quantities; how scarce resources such as labor and capital should be allocated to produce goods and services; how the available supplies of goods and services should be distributed across the population; and what price should be charged for a good or service. Individuals, the state or both can make and implement decisions on these issues. In a capitalist economy, most of these decisions are made by the citizens acting individually. In capitalism, individuals are driven by self-interest, and market forces direct and co-ordinate the decisions they make. As a result, a capitalist economy is often referred to as a ‘market’ economy. In a socialist economy, on the other hand, most of these decisions are made by citizens acting through the state, which coordinates and implements these decisions through central planning and command. In fact, a socialist economy is often referred to as a ‘planned’ or ‘command’ economy. Nowadays, most economies are known as ‘mixed’ economies because, in reality, both market and state play a substantial role in them. The mixed economy has become established in North America as well as in the countries of the European Community, while in the socialist countries there has been a move towards various forms of decentralization and of a market economy. The U.S. economic system is based more on capitalism, whereas the Chinese system is based more on socialism. Most other countries, including Canada, rely on both market and state and so are considered to have mixed economies. Within the mixed economies, the role of state in the former socialist economies is still significantly higher than in the other economies.

The problem of socialism versus capitalism has a long history. The period of modern controversy begins with the publication of E.Barone’s famous articles “The Ministry of production in the collectivist State”. Examining the question of whether centralized decision-making can replace the free-market, Barone concludes that such a solution would encounter practical difficulties because of the gigantic task of collecting data and the continual change of technological coefficient. During the last fifty years, the countries of Central and Eastern Europe have experienced two profound changes in the dominant political ideology; a transition to a socialist command style of economy during the early 1950’s,followed by a transition back to a market economy in the years following 1989. The socialist years had a significant impact on the socioeconomic and legal framework. Two main success indicators which can be achieved under conditions postulated in various economic systems are the static and dynamic efficiency. Static efficiency may be defined as production conforming to the preferences of the community when there is no possibility of increasing the production of one commodity without reducing the production of another. It has been pointed out in the last section that static efficiency can be achieved in an economic system organized according to the rules of competition. Consequently, with regard to static efficiency, the real difference is not between a free enterprise and a socialist system but between, on the one hand, free enterprise and a socialist market solution, and on the other centralized physical planning. From the analytical point of view the workings of a purely competitive and of the market solution for socialism, and the results they lead to, are essentially the same. Nevertheless, some analytical differences have already been noted; in addition, two more factors should be considered. With regard to static efficiency pure competition appears to be superior planning on the physical level.

Nevertheless, there are two types of “market failures” which impair the efficiency of a competitive system: those existing in a static world with perfect information and foresight, and those connected with imperfect information and uncertain expectations. The first type contains the following factors: a)Under conditions of increasing returns competition will break down, partly because monopolies will be formed, partly because an optimum position may be reached only if enterprises producing under increasing returns minimize rather than maximize profit. b)Direct interaction between producers, between consumers or between producers and consumers which is unaccounted for in market valuations, also impairs the efficiency of the system. c)Market valuation is no better guide in the case of collective goods either. The second type of market failure comprises uncertainty and inconsistency of expectations, inertia and resistance to change, and imperfect information. These phenomena have dynamic implications, hence they will be dealt with in connection with dynamic efficiency, below. Dynamic efficiency is concerned with static efficiency in the allocation of resources at a given time ; an economic system may exhibit static efficiency even if production is uncharged from year to year. The distinction between static and dynamic efficiency has been forcefully expressed in Schumpeter’s classical words: “A system –any system, economic or other-that at every point of time fully utilizes its possibilities to the best advantage may yet in the long run be latter’s failure to do so may be a condition for the level or speed of long-run performance.” There is much disagreement on the question whether a free enterprise or a socialist economy is superior with regard to efficiency. According to Hayek, a higher growth rate could be secured in a free enterprise system “if we assumed that the same restriction of consumption, which has actually taken place [in Russia], had been

caused by taxation, the proceeds of which had been lent to competitive industry for investment purposes.” The contrary conclusion id reached by, for example, Dodd and Sweezy. Bergson also inclines towards the latter view: “One may imagine that in a highly dynamic economy a Centralist allocation of investment might lead to fewer and smaller errors than a Competitive allocation.” Although his remarks were addressed to the competitive (market) solution in a socialist economy , they may apply to free enterprise as well. It is , I believe, recognized by everybody and in particular by all orthodox socialists that the transition from the capitalist to the socialist order will always raise problems sui genesis whatever the conditions under which may take place. But the nature and extent of the difficulties to be expected differ so greatly according to the stage of the capitalist evolution at which the transition is to be made and according to the methods which the socializing group is able and willing to use that it will convenient to construct two different cases in order to typify two different sets of circumstances. Bibliography: F.A. Hayek, Collectivist Economic Planning(London, Routledge, 1935) Joseph A.Schumpeter, Capitalism,Socialism and Democracy Socialism,New York,McGraw-Hill, 1949 Jean-Charles-Léonard Simonde Sismondi, Political Economy

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