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April 9, 2013
The Dismal Science
Economic Systems
by Adam Smith

Every country has a distinct economic system. What does that mean?

There are two extreme types of modern economic systems – unrestrained capitalism and total dictatorship. Back when I was growing up, America and the Soviet Union/China were held up as the best examples of these two extremes. I was taught that America was moving towards more government control of the economy and the Soviet Union was moving towards a more capitalistic society and that eventually the two would meet in some sort of harmonic, euphoric, economic bliss.

I actually believed this rubbish. Of course I was a product of public education.

I am going to talk about three basic systems that are prevalent today. The first is the totalitarian economy. This is defined as an economy that is in all material aspects controlled by the government. Even companies that are private, owned by individual people, are controlled by the government. The government controls the prices of goods and allocates the available capital to different industries and projects.

This economic system is always headed for economic collapse and disaster. Always. That does not suggest that the country and government may not continue for many years. The economic system in these countries exists to enrich the ruling class. As long as the military leaders get their share of the economic pie then the government can go on and on. There is almost no middle class in these countries and the poverty in these countries is heartbreaking.

There is little possibility for people to work hard and get ahead. You are born poor, live poor and die poor.

Examples of countries that fall into this system are Cuba, many African countries, and Myanmar.

The next system is the one where there is some economic freedom but there are still large sections of the economy controlled by the government. These economic systems allow for some personal property rights and people can improve their station in life. Many of the former communist countries that would have been in the previous group now fall into this group.

By releasing a small amount of control and allowing individuals or companies to earn a profit, China has soared. Russia has settled into this system with very spotty success due to the level of corruption in the government. In this system, the government still wields almost total power and allocates capital to great inefficiencies. But at least there is some hope.

I would suggest that there are many European countries that are getting very close to falling into this economic system. Restraints on business in countries like France and Spain are increasingly causing economic stagnation.

There is a key point to be made here. Generally, whenever a government imposes mandates on businesses there are inefficiencies created. This is true even when the mandates are for the good of the workers.

Consider France, the government is very active in the business community mandating maximum hours worked, ability to fire employees, etc. Even though intervention into the economic system by the government is done for the workers and at their request, it is still a drag on the economy as a whole. These mandates help those with a job, but create an economic system that just does not create very many new jobs. France’s long-term unemployment rate is horrific.

These economic systems also are not long-term sustainable. China will have to choose between economic vitality and control over the population. Russia is an energy glut (a real possibility with the right US administration) away from economic chaos. France and Spain are getting close to the end of the government give away scheme.

That leaves the last group or the free economies of the world. This group allows the markets to allocate resources using pricing mechanisms such as cost per unit or interest rates. This group has the long-term ability to be stable because they are constantly reinventing their economies. Because of the economic freedom allowed, the workers in the country know they can move up the socio-economic ladder with hard work and some creative new ideas.

These countries create the new industries that drive growth in the world economy.

The US is the best example. Other countries may copy our technology but who invented the technology industry. Silicon Valley rules technological innovation. Everyone thought energy was a mature predictable industry until some innovative engineers in America created new ways to get oil and natural gas and now America is looking like an energy goliath for the foreseeable future. (Again, with an administration that does not hate fossil fuels.) This happens again and again in an economically free society.

Countries in this system are the US, Canada, Germany, Poland and the Czech Republic.

Of course there are so many gradations between these three groups. Each country has its own system based on its history. It is not an overstatement to say that the world needs a strong US economy. The more the US moves to greater government intervention into the economic system the more likely it is to become stagnant like some of the European countries or even Japan. The world cannot afford for the US to become like France.


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