Part 1 General Economics
Free-enterprise or market economy
There are two forms of economic organisation, the free-enterprise, or market economy, and the centrally planned economy. The main principles of free- enterprise economy were formulated in the 18th century by British economist Adam Smith. According to Smith, people acting in their own economic interests will maximize the economic situation of society as a whole. A free-enterprise economy consists of households and firms that conduct their business. There is private property of consumer goods as well as producers’ goods. Firms sell consumer goods to households, and producers’ goods to other firms. Households sell their services — labour for example — to firms. Buying and selling constitute markets, and prices are formed in such markets according to demand and supply.
The role of the government is providing defense, law and order, education, protection of private property and regulating some economic activities. Governments generally regulate “natural monopolies”, such as utilities or rail service. These industries require such large investments that it would not be profitable to have more than one provider. Regulation is used in place of competition to prevent these monopolies from making too big profits.
Governments may also restrict economic freedom for the sake of individual rights. Examples include laws that restrict child labour, take care of environment and sale of safe goods.
Many people believe that free market gives individual responsibility to make decisions and economic freedom. But free-market economy is also criticized. It does not solve the problem of poverty, and many people become too rich. They can become so powerful, that it can be dangerous for society. Market forces are indifferent to social values and can be manipulated by a few owners of wealth. Market economy can’t guarantee full employment, and use all the resources of the state.
Experience of many countries shows that market economy can’t regulate itself in the periods of hard depressions. This task should be solved by the state. In the 20th century the role of the state in economy greatly increased. The share of the state in gross domestic product increased four times and reached more than 40% in European countries. Nowadays only the fourth part of the world economy is functioning in the conditions of free market.
(1994)
The centrally planned economy
The centrally planned economy operates in such a way that the government makes decisions regarding production and distribution. All means of production are owned by people. State planners allocate materials, workers and other factors of production to factories.
Planned economy was criticised for deficit andlack of competition, for slow reaction to the needs of and changes in economic situation, for example, crop failureor changes in the world prices of raw materials.
Economic planning was first used in the Soviet Union in the 1920s in order to achieve rapid industrialisation of the country. About the same time, planning was used in non-Communist countries as a way of responding to the economic difficulties of the period between two world wars. Later, during World War II, most governments were forced to introduce control of their economies, and by the 60s the idea that government should take a significant role in planning and influencing economic activities was widely accepted.
Today most countries have some form of planning activity. The volume of planning and government control is different in different countries, but practically all of them have capitalist framework and private sector. Most Western governments control one or two publicly owned sectors and influence their economies by regulating such broad economic factors as the money supply, interest rates, etc.
Theory of state stimulation of demand of the British economist G. Keynes was successfully used in the USA after Great Depression of 1929—1933 and in many other countries. To improve the economic situation of the country after the Great Depression American President Franklin Roosevelt introduced the “New Deal”. It combined state regulation of economy and reforms in social sphere. Since that time state regulation has been used in this country in this or that form.
Nowadays economy of Japan is developing according to five-year plans. The European Union constantly develops and implements major economic projects. Experience of countries of Central and Eastern Europe, the CIS, and China shows that new efficient market institutions can be created only by a strong state which can manage its property and fulfill its responsibilities.
(1908)
Globalization
Globalization is the buzz word of our time. In the last two decades, the amount of money and goods moving between the countries has been rising steadily. At the same time, trade barriers across the world have been lowered.
It is becoming clear now that power in the world shifted from individual governments to the markets. In theory, governments are free to set their own economic policies, in practice they must conform to a global economic model. The crises of “tigers” in the Far East some years ago showed that financial markets control national economies.
The trend towards globalization began in the early 70s, when the system of fixed exchange rates, set up after World War II, stopped functioning. This meant that the value of currencies would now be determined by the markets instead of individual governments. By 1990, nearly all world’s major economies had got rid of restrictions on how much money could be moved in and out of their countries.
Other factors contributing to the rise of globalization are new communications technologies, and better transportation systems. These let companies grow into multinationals — producing goods on one side of the planet and selling them on the other.
But adjusting to this new “economic order” is rather difficult. In the developed world, and in particular the European Union, globalization is facing widespread resistance. Critics complain that, without the protection of trade barriers, workers in poor countries are low-paid and exploited, and wages of workers in rich countries are falling, especially in labour-intensive industries.
But how close are we to a truly global economy? For the losers, probably too close. But in terms of real economic integration, there is a long way to go. A global economy would mean complete freedom of movement of goods and services, capital and labour. Yet, even ignoring the tariffs and other restrictions, cross-border trade is very small compared to the volume of goods and services traded within countries. Foreign investment is also extremely small, a little more than five per cent of the developed world’s domestic investments. But what is really holding globalization back is the lack of labour mobility. Labour markets remain mostly national, even in the European Union, where people can live and work in any country of the European Union.
(1977)
