Free market and mixed economy
An economic system is made up of the organizations and the techniques that are used to determine the commodities to be produced, the approach of producing them, and the intended consumer of these commodities. These decisions are important because resources are scarce. There are several types of economic systems. In this paper, the free market and mixed economy will be discussed. The two economic systems have different characteristics.
In the case of a free-market economy, resources are allocated by the forces of demand and supply. Thus, either an individual or a group of central players cannot allocate resources. In a free-market economy, the price mechanism ensures that all aspects of the economy are in balance (Douma & Hein 2013).
Prices start at $12
Prices start at $11
Prices start at $10
For instance, growth in demand pushes the price upwards. This stimulates manufacturers to increase production. Further, the amount of consumption depends on the income of individuals. Therefore, in a free-market economy, a government will concentrate on safeguarding property rights (Tucker 2010). A free-market economy is hypothetical and does not exist in the real world.
In the case of a mixed economy, resources are owned by both the public and the private sector. A mixed economy can also be viewed as a market economy with significant government involvement. In most cases, a government intercedes to rectify market failures and to provide public and merit commodities. Most economies in the world are mixed (Ruth & Hannon, 2012).
A change in quantity supplied and change in supply
There is a difference between a change in supply and a change in quantity supplied. The differences are explained below.
A change in quantity supplied
A change in quantity supplied can be explained as the movement long a stationary supply curve while holding other factors constant. This movement is drawn from the law of supply, which states that there is a positive relationship between price and supply while holding other factors constant (Perloff 2012).
Thus, if the price moves up along the y-axis, the quantity supplied will move to the right along the x-axis. A change in quantity supplied is caused by price movements. This relationship is shown in the graph below.
An increase in price from P1 to P2 will cause an upward movement on the supply curve, as shown by the arrow. This will cause the quantity supplied to increase from Q1 to Q2 (Adil 2006).
Change in supply
Change in supply is caused by non-price factors that influence the quantity supplied. These factors can make the supply curve to shift to the right (an increase) or to the left (a decrease). Some of the non-price factors are increases in the number of suppliers, change in technology, subsidies, and a decline in the price of raw materials, among others. A change in supply can be illustrated using a graph, as shown below (Parkin 2007).
In the graph above, favorable non-price determinants will cause the supply curve to shift from SS1 to SS2. This makes the quantity supplied to increase from Q1 to Q2. It can be noted that the price does not change. An opposite movement occurs if unfavorable non-price determinants are experienced (Bade & Parkin 2013).
Cross price elasticity of demand
This type of elasticity measures the degree by which a change in the price of one commodity affects the change in demand for another commodity. In arithmetic terms, it is the percentage change in quantity demanded of one commodity, Y, divided by the percentage change in the price of one commodity, X. The resulting coefficient of elasticity shows how sensitive the demand for one commodity is to the changes in the price of another commodity. Examples of two substitutes are butter and margarine (McEachem 2008).
These two cannot be consumed at the same time. Therefore, if the price of butter rises, by the law of demand, the quantity demanded will fall. Further, consumers will prefer to consume more of the substitute, which is margarine. In the case of substitutes, when the price of one commodity increases, then the quantity demanded of the best alternative, that is, the substitute increases. In this case, the value of the cross-price elasticity is positive. Complementary goods are consumed together (Moon, 2013).
Examples of two complementary goods are rice and chicken. If the price of chicken goes up, then by the law of demand, its quantity demanded will drop. Since rice complements chicken, then its quantity demanded rice will also drop. Based on the analysis above, if the cross-price elasticity is zero, then it implies that the two commodities being analyzed are not related (Barber 2010).
Further, if the value of elasticity for the commodities is less than one (negative), then it indicates that the two products are complementaries. Finally, if the elasticity is greater than zero (positive), then it shows that the two commodities being analyzed are substitutes. In the United States, the cross elasticity between cantaloupe and watermelon is 0.6. This shows that they are substitutes. Further, the cross-price elasticity between chicken and rice is -0.1309. This implies that they are complementaries (Jain, 2006). Thus, the study of cross-price elasticity helps in monitoring market trends.
Income effect and substitution effect
Based on the law of demand, a change in price can be described in terms of income and substitution effect. The diagram presented below will be used to explain these effects.
The two items that will be analyzed are commodity Y and X. According to the law of demand, a drop in the price of commodity Y will lead to an increase in quantity demand. The increase will cause the budget line to pivot from BC1 to BC2. Also, the indifference curve will shift from I1 to I2. This represents a movement to a higher indifference curve. The equilibrium position is the point of tangency between the budget line and the indifference curve (Tucker 2012).
When the price of commodity Y falls, a consumer will be indifferent between consumption at point A and B because they lie on the same indifference curve. However, at point B, the consumer shall not have exploited the budget. A fall in price increases the quantity of commodity Y that can be consumed as represented by budget line BC2. This shows that real income has grown as a result of a drop in price. Thus, the consumer can increase consumption to point C on a higher indifference curve I2 from point B on a lower indifference curve (Baumol & Blinder 2011). At this point, an individual will consume Y3 and X3 of commodity Y and X, respectively.
Thus, the movement from Y2 to Y3 is due to the income effect. The change from point A to B is known as the substitution effect. This can be attributed to the fact that the individual will reduce consumption of X, from X1 to X2, and increase the use of commodity Y, from Y1 to Y2. It can be observed that this occurs on the same indifference curve I1 (McEachern 2011). It implies that the consumer is substituting Y with X. The total effect is the sum of income and substitution effect, that is, the sum of the movement from Y1 to Y2 (substitution effect) and change from Y2 to Y3 (income effect).
Perfect competition and monopoly
Perfect competition and monopoly are considered to be the extreme forms of market structures. These two have distinctive features. Some of the features are discussed below.
Number of firms
There are several firms that operate in a perfectly competitive industry is made up of a large number of small firms. These firms are price takers. Besides, no single firm can have market control. Under monopoly, there is only a single firm that has market control. Moreover, it determines the price in the market (Mankiw 2012).
Availability of substitutes
Under perfect completion, the commodities are homogenous, and there is an infinite number of products. In the case of a monopoly, there is only one commodity with no close substitute (Arnold 2008).
Entry and exit
Under perfect competition, there is free entry and exit of firms. Barriers do not exist. In the case of a monopoly, there is a barrier to entry.
In the case of perfect competition, information concerning the production methods and prices is readily available and known by all players. This information is not readily available in the case of a monopoly (Anderton 2008).
These unique characteristics create differences in the shape of the revenue and cost curves (Baldwin & Scott 2013). The graphs presented below show the equilibrium position of the two market structures.
Economics is the social science that studies the production, distribution, exchange, and consumption of goods and services. The study of economics focuses on how individuals, corporations, and societies choose to use the scarce resources provided by nature and previous generations.
Scarce resources provided by nature that societies choose to use include oil, land, water, and time. These elements are important to the economy because oil, land, and water provide money for the market. The more they are used, the more scarce they become, the higher the demand for them, the higher the prices go. Time plays an important role in this cycle because there is not a lot of time before resources run out. Time is important because people need to use it in the best way that they can.
For example, if a machine makes one thousand products in one day, and there is an order for one thousand and two hundred, what does the owner of the company do? He can either stay late to make the extra two hundred, but he would have to pay the workers overtime which is time and a half and that would cost him money.
His other option would be to wait until the next day, but then he might lose business because the order was for one thousand and two hundred for that day. Scarce resources provided by previous generations that societies choose to use our people, labor, banking, machines, roads, bridges, and transportation. These resources are important to the economy because they are what keeps the market economy going at a steady pace. The roads, bridges, and transportation provide a way for the people to get to their destination, while banking and labor keep the people going to their jobs.
Economists study the ways people earn a living and provide for their material needs. They study how people behave as a result of a change in price, income, or other variables. Many are employed in business and industry but there are many different areas of economics that economists specialize in. Industrial economists study many different forms of business organization. They study the production costs, markets, and investment problems. Agricultural economists study farm management and crop production. Labor economists study wages and hours of labor, labor unions, and government labor policies.
Other fields of economics include taxes, banking, international trade, economic theory, and comparative economic systems. Some economists specialize in inflation, depression, employment, unemployment, and tariff policies. Others specialize in investments, the utilization of manpower, business cycles, and the development of natural resources. Societies are interested in economist’s conclusions because they keep us up to date with how the market economy is holding itself up. They give us information on how our wages will be affected, how prices on goods will alter, and how demand for products will go up because of certain decisions we make.
Macroeconomics deals with the big picture-with the macroaggregates of income, employment, and price levels. Although microeconomics still deals with important details because the big picture is made up of its parts. Billions of dollars would be meaningless if they did not correspond to the thousand and one useful goods and services that people really need and want.
Microeconomics is the study of the economic behavior of individual decision-makers who are making choices about what to buy and what to sell, how much to work and how much to play, how much to borrow and how much to save. Microeconomics focuses on what factors affect individual economic choices and how changes in these factors alter these individual economic choices.
Macroeconomics is the sum of microeconomics. Macroeconomics is the study of the economy’s performance as a whole. Macroeconomics considers the combined effect of individual choices on the overall performance of the economy as reflected by such measures as the nation’s price level, total production, and level of employment. (1) Macroeconomics puts all the little pieces of the economy together and focuses on the big picture.
Macroeconomics is the study of the sum total of economic activity that focuses on the issues of the economy such as inflation, growth, and unemployment. Macroeconomics is the branch of economics that deals with a country’s overall economy including the country’s input and output. It also includes the GNP (Gross National Product) which is the total value of goods and services produced in an economy in a certain period of time, usually a year.
Economics is a social science that predicts actions based on certain changes. A positive economic statement is purely based on facts and makes no value judgment. The statement does not have to be true, but it must have references available for verification. Positive economics can be referred to as “What is, what was, and what will probably be” economics. Positive economics is based on sound economic theory, probability, and statistical methods as it studies and determines the probable outcomes from an increase or decrease in taxes. It provides only the probable outcomes of alternative decisions.
It is assumed that an educated society will make the most rational choices for themselves, and exercise those choices in the marketplace. Positive economics attempts to understand behavior and the operation of economic systems without making judgments about whether the outcomes are good or bad. It strives to describe what exists and how it works. Positive economics is an approach to economics that seeks to understand behavior and the operation of systems without making judgments. It describes what exists and how it works.
In contrast, normative economics looks at the outcomes of economic behavior and asks if they are good or bad and whether they can be made better. Normative economics involves judgments and prescriptions for courses of action. Normative economics is a method of economics that states “what should be” instead of what is. Normative economics is subjective and values judgment and opinions that cannot be tested or proven. Normative decisions are stated during political events.
The candidate for a particular party may make a speech stating, “We ought to get the homeless put into shelters”, “People should make an effort to stop the violence”, and “We should lower taxes”. Normative economics focuses on the total outcomes of economic activity and asks if they need improvement and it requires the judgments and prescriptions for courses of action. A normative economic statement represents someone’s opinion, which can not be proven or disproven because there are no facts. Positive statements are concerned with what is, while normative statements are concerned with what, in someone’s opinion, should be. (2)
Positive economics is often divided into descriptive economics and economic theory. Descriptive economics is simply the compilation of data that describe phenomena and facts. Where does all of this data come from? The Census Bureau produces an enormous amount of raw data every year, as does the Bureau of Labor Statistics, the Bureau of Economic Analysis, and non-government agencies such as the University of Michigan Survey Research Center. One important study now published annually is the Survey of Consumer Expenditure, which asks individual households to keep careful records of all their expenditures over a long period of time.
The economic theory attempts to generalize about data and interpret them. Economic theory is a statement or set of related statements about cause and effect, action, and reaction. An example of this is a theory that Alfred Marshall stated in 1890 about the law of demand: When the price of a product rises, people tend to buy less of it; when the price of a product falls, they tend to buy more.
In economics and politics, Laissez-faire is a doctrine holding that an economic system functions best when there is no interference by the government. The capital follows its most lucrative course. It is based on the belief that the natural economic order tends, when undisturbed by artificial stimulus or regulation, to secure the maximum well being for the individual and therefore the community. The principles of laissez-faire were formulated by the French physiocrats in the 18th century in opposition to mercantilism.
In time, laissez-faire came to be perceived as promoting monopoly rather than competition and as contributing to boom-and-bust economic cycles, and by the mid-non-interference in economic affairs had generally been discarded. Nevertheless, laissez-faire, with its emphasis shifted from the value of competition to that of profit and individual initiative remains a protector of conservative political thought, influential in the 1980s in such government administrations as that of Ronald Reagan in the U.S. and Margaret Thatcher in Britain.
Laissez-faire is a doctrine that the economic affairs of society are best guided by the free and autonomous decisions of individuals in the marketplace, to the near exclusion of government interference in economic matters. That is, the doctrine that the government should almost always leave people alone and let them do as they please, as long as they respect the personal and property rights of others; the absence of regulation and interference by a government in trade, business, industry, etc.
A command economy is one in which the people, through the government, own and operate all business and factors of production. Central government planning determines what goods and services satisfy citizen’s needs, how the goods and services are produced, and how they are distributed. This kind of economy mostly practices in communist countries.
In command economies, government committees of economic planners, production experts, and political officials establish production levels for goods and designate which factories will produce them. The central planning committees also establish the prices for shirts and blouses, as well as the wages for the workers who make them. It is this set of central decisions that determines the quantity, variety, and prices of clothing and other products.
As the number of people living in the command economies increases, along with the number and sophistication of new products, it becomes harder and harder for central planners to avoid or eliminate shortages of the many things consumers want or surpluses of the products they don’t. With more products, more people, and rapidly changing production technologies, the central planners face an explosion in the number of decisions they have to make, and in the number of places and ways where something could go wrong in their overall plan for the national economy.
There are strengths and weaknesses to a command economy. The command economy prevents abuses of the market and supposedly distributes equality. On the other hand, this kind of economy does not allow for individual initiative and does not respond to market forces. The reason for this is because the government has so much control over the market that there can be no demand or profits because the government chooses what is to be produced and what people want to buy.
A mixed economy is an economic system in which characteristics of both capitalism and socialism can be found. In a mixed economic system, both public and private institutions exercise a degree of economic control. In most free world industrial economies, a mixture of governmental industries and private industries exist in varying degrees. Even in the U.S., where free enterprise dominates the economic system, many forms of government enterprise and direct control can be found. The Post Office and the Tennessee Valley Authority are both operated by the federal government, and public transportation facilities are owned and operated by state and local governments.
Federal, state, and local regulatory agencies exercise direct control over the operation of much of private enterprise, substantially restricting its freedom of action. A mixed economy is defined as the economic system that operates partly under free-market principles, in which business ownership is in private hands and prices are set by supply and demand, and partly under government ownership or control. A mixed economy combines elements of free and command economies.
I believe that the mixed economy is best suited for today’s societies because it is a compromise between the Laissez-faire economy and the command economy. It is better for societies to have partial government control and partial private control than to have either one extreme or the other.
Markets are the means by which buyers and sellers carry out the exchange at mutually agreeable terms. Markets may be physical places, such as the supermarket, department store, and shopping mall, or markets may consist of the arrangements by which buyers and sellers communicate their intentions, such as letters, phone calls, classified ads, and radio and television ads. These market mechanisms provide information about the quantity, quality, and price of products offered for sale.
A market exists whenever and wherever there is a mechanism for buyers and sellers to meet and do business. It is in the marketplace that individuals and corporations, acting in their own best interests, will determine what to produce, how much to produce, and for whom to produce. When consumers decide to buy a particular product, they are “voting” for that product in dollars. When the dollars are counted, producers will know what consumers want and that is what they will produce.
The laws of supply and demand also apply to the market economy. People demand goods and services, businesses supply goods and services, and the balance of supply and demand determines the prices of goods and services. The law of supply states that businesses will provide more products when they can sell them at higher prices and fewer products when they must sell them at lower prices. The law of demand states that buyers will demand more products when they can buy them at lower prices and fewer prices when they must buy them at higher prices.
Market economics are flexible and are responsive to change. A shift in consumer preference will result in a shift in the products produced. Change is gradual and not coerced, nor is it discouraged. Freedom of choice is available to all and it is the market that determines the choices available. Other than assuring that abuses are minimal, there is a lack of significant government interference in the market economy. The decision-making process is decentralized. Literally countless economic choices are made every day and it is the aggregate of these decisions that determine the allocation of resources. Everyone is a participant, in a sense, in how the economy is run. There is a very large variety of goods and services available. If there is a demand for a product somebody will produce it and bring it to the market. It is possible for almost everyone to satisfy his or her wishes and tastes.
The strength of an economy is based on spending. An economy of any nation revolves around spending, how much money people have, how many have it, and how willing they are to spend it. The higher the demand is, the more spending is going on, and vice versa. Either way, the economy is expanding. When the demand level is high, businesses must work to meet the demand by increasing the supply of goods, services, and production. This will often result in the necessity of more labor. When people are hired to produce more goods, they now have money to spend which increases the level of spending to an even higher level.
Some weaknesses of the market economy are that the companies do not always produce products of demand at a lower cost, companies may distribute income unevenly, and periods of unemployment and inflation can be expected to recur so often. Many people think that government involvement would lessen or stop these problems, but government decisions are made by people who, like the rest of us, act in their own self-interest.
Government intervention may also be necessary because private decision-makers can make bad decisions from society’s point of view. The market provides a reason to produce a product if, and only if, people are willing to spend more on the actual product than the cost of the resources needed to produce it. This works to society’s advantage as long as the resource costs reflect the full cost to society of producing the product. For example, if a company damages the environment in the process of producing a product, like polluting, and does not spend money to clean it up, then the buyers (society) will pay for it. This makes the product more expensive and gives the company more profitable. This works against society’s advantage. Governments involved themselves in the free market to make sure that decision-makers consider all the benefits and costs of their decision.
When we talk about economics we must first define the word. Economics is a social science that studies human behavior and how to allocate our limited (scares) resources, efficiently and effectively to meet our unlimited human wants. Now as we dive deeper into the field of economics we realized that there are two separate categories that the study of economics breaks off into. The first is macroeconomics, macroeconomics is the study of the whole picture when it comes to economics. Macroeconomics will ask questions about how respected countries’ economies will work and how and why they make certain decisions.
The other category, which this class is about, is Microeconomics. Microeconomics is the study of the individual. It is the study of individual firms and households and how they make decisions that affect themselves personally. Another pillar of Microeconomics is the study of wants. Wants and needs are to totally different things that each care a different respected weight in economics.
Wants are things that can be done without and still sustain life. Needs are those items that essential to life i.e.: water, food, and shelter. The biggest difference is that human wants are unlimited and can’t all be satisfied. Which leads us to another major point about economics, economics is about choice. In economics, we will ask questions like what to produce, what resources to use, and how much to produce.
Economic theories simplify reality to allow us to understand basic economic forces and how individuals cope with the problems of scarcity. We can observe actions and their consequences. Observation and description are not sufficient for understanding and ultimately predicting actions. The theory establishes relationships between cause and effect. We use it to interpret actions and outcomes so we can explain the process by which the actions were undertaken and the outcomes achieved.
The purpose of theory in all scientific analysis is to explain the causes of phenomena we observe. To conduct economic analysis we frequently need to engage in abstraction. This involves making assumptions about the economic environment and human motivation that simplify the real world enough to allow us to isolate forces of cause and effect. Any theory is a simplification of actual relationships.
A successful theory provides insights into the physical or social relationships it studies. Economic theories are developed to explain such important observable quantities as the production, prices and consumption of goods and services, the employment of workers, and levels of saving and investment.
Economic variables are quantities that can have more than one value. For example, the price of an item is an economic variable representing what we must give up in exchange for each unit of that item. Price is an economic variable because it can go up or down as changes occur in the economy. An economic theory of price seeks to determine the causes of changes in the price of an item.
An economic model is a simplified way of expressing how some sectors of the economy functions. An economic model contains assumptions that establish relationships among economic variables. We use logic, graphs, or mathematics to determine the consequences of the assumptions. In this way we can use the model to make predictions about how a change in economic conditions results in changes in decisions affecting economic variables. Economists often use the term “model” as a synonym for theory.
Many economic models are developed using the deductive method through which observations are used to make assumptions about economic behavior or productive and technological relations. Logic is then used to trace out the implications of the assumptions using a model. For example, a model of the supply of compact discs might assume that suppliers seek to maximize profits from selling that item. The economic variables affecting the profitability of selling CD players are isolated.
Logic can then be used to show how a change in one of the economic variables affects the profitability of selling more CD players. For example, if it can be shown that an increase in the price of CD players makes it profitable to sell more, the model would imply that whenever the price increases, the quantity supplied will also go up;
The conclusions of the model can be tested by examining factual data to see if actual relationships are consistent with those of the underlying theory. Conclusions that are consistently supported by evidence are called economic laws or economic principles.
Economic models are abstract because they don’t attempt to capture all the relevant influences on behavior. By concentrating on only one goal, even though this is not realistic, a model can more clearly unveil basic forces of cause and effect.
An important qualifier in constructing economic models is hypotheses that represent the untested implications of a model. A hypothesis is a statement of a relationship between two or more variables. An example of a testable hypothesis is: The number of CDs sold per year will increase if their price fells while all other influences on willingness and ability of consumers to buy are unchanged. To test this hypothesis we need a method of accounting for the effects of changes in all economic conditions on the value of the economic variables this model seeks to explain.
And these are the steps necessary to construct an economic model:
- Selection of economic variables among which cause-and-effect relationships are to be explained.
- Assumptions about technology, constraints, and human behavior.
- Analysis of the assumptions of the model for the relationship among the economic variables it seeks to explain.
- Testable hypotheses. A model whose implications are contradicted by empirical evidence is abandoned.
Example #5 – Economic Inflation In Australia
Inflation is a rise in the general level of prices of commodities. Inflation is a major economic issue in Australia and is one that requires stable management for durable and long-term improvements. Low inflation and steady economic growth; have emerged as outstanding economic achievements this decade. Along with unemployment, economic growth, and external viability; inflation acts a major economic indicator, illustrating the strength and stability of our economy. It is for this reason that inflation management has played such a great role in domestic economic policy over the last decade.
Inflation at present is the focal point of the Australian economy. Inflation is at an unprecedented low, which has acted to keep the Australian economy competitive. Economic policy in Australia has acted to keep inflation low, which has been a traditional problem for decades. At present Australia’s, underlying inflation rate is less than 1.3%, which has opened up a stronger, more competitive export market. With such a pleasing outcome for inflation, Australia can reap the rewards through lower interest rates as well as economic growth, and job increases. Low inflation does more than simply slow price increases; it acts as an expansionary booster to the economy and a stimulus for other economic objectives.
In recent times, low inflation levels have characterized the Australian economy. The underlying inflation rate was only 1.1% to June 1999, and this has meant further stability of prices and continued growth. This result has come on the back of Australia’s “Inflation Target”, set by the Reserve Bank (RBA) in 1993. This has acted as a guide to spending and domestic monetary policy, over the course of the economic cycle.
The RBA has set an underlying inflation target of 2-3% per year, and this has contributed to our steady inflation performance. In the late 1990s, Australia has operated at the lower level of this target, and this has pleased the government and the RBA through their initiative. Inflation figures of fewer than 2% annually are a testament to this. Recent trends have given Australia one of the lowest underlying inflation rates in the OECD group, which includes many highly industrialized nations.
Over this century Australia has seen both high and low inflation. In the 1950s, 1960s, and early 1970s we experienced periods like today. Yet we faced high levels in the 1970s and 1980s. These were due to the great peaks and falls in the economic cycle, brought on by recessions and boom periods. The Australian economy has developed by adapting to changes in the economic cycle, and flattening out the large “bumps”. Causes of inflation are varied in both their diversity and severity.
They include excess demand, where high aggregate demand for commodities forces prices upwards. There is also cost-push inflation, where an increase in the cost of production promotes an increase in the price of goods for consumers. Inflation can also be brought about through inflationary expectations, hence the quote “Inflation breeds inflation”, as well as currency depreciation, which also damages exports. The numerous causes of inflation give testament to the fact that it is a difficult problem to combat. Increased levels of inflation also cause many changes in the economy.
There are essentially three main negative aspects of high inflation. It acts by reallocating resources in the economy, usually by encouraging speculative investment. It also causes a redistribution of wealth from those who hold cash funds, as opposed to property or capital. Thirdly, it causes decreased levels of international competitiveness. Conversely, there are many positive aspects of low inflation.
Australia has gained through lower interest rates, high but steady economic growth, and the promise of job creation in the future. Low inflation has bred a more confident economy, one which is wiser for the adversity it has faced through recessions of the past. Low inflation creates a more externally viable economy and allows competitive export growth.
Australia’s current low level of inflation can be attributed to an array of factors. These have included the lagging effects of the recession earlier this decade, as well as the implementation of a number of recent economic policies.
Current low levels of inflation are the product, of three main policy initiatives. First and foremost, Monetary policy has helped our inflation by keeping spending in check. Through interest rates and the adoption of an inflation target, the RBA has been able to artificially control the level of economic activity in Australia. Monetary policy has been a favored government option, and it has proven a success. Secondly, microeconomic reform has played a major role in keeping inflation low. It is essentially based on efficiency and productivity in the Australian industries, where it has aimed to help firms lower costs, thereby creating a stable economy based upon strong and efficient production, healthy exports, and generally more economically sound industries.
This decade it has included moves for national competition policy, deregulation of industries as well as general moves for efficiency. Fiscal policy is the third policy option. It surrounds government spending and taxation initiatives. In recent times it has acted in a contractionary manner, including budget surpluses and the repayment of foreign debt, which have allowed for more expansionary monetary policy.
Some feel that current policies aren’t doing all they could. While drives for efficiency are a step in the right direction, it is clear that monetary policy could be eased to benefit other economic objectives. Being below the RBA target for inflation should allow Australia to lower interest rates. These could help economic growth and achieve greater job expansion. This could easily be achieved if the government would diversify its one-eyed monetary policy.
The coalition must begin to realize that low inflation is coming at the expense of other, equally important economic objectives. While the tight fiscal policy may be paying off foreign debt, we are still faced with high unemployment and unfavorable CAD terms. It is clear that while inflation is at a low level now, we must turn more attention to other pressing economic objectives.
Inflation is a major economic management issue and is one that requires great vigilance and perseverance for durable improvements. Though through the efforts of the RBA and the current government, inflation has fallen to an unprecedented low, via much agony and policy deliberation. At present inflation has been brought back to earth through monetary and micro-economic policy essentially. Yet the pressing issue is not how far we can go with inflation, but how much can it’s current level benefits our other major management issues.
Example #6 – Economic Policies Of Lenin And Stalin
“Both Lenin and Stalin adopted well-structured economic policies in order to build their country into a well-established and powerful state” – Robin Ronne
Both Lenin and Stalin had enormous power to change Russia as the leaders of the ‘Dictatorship of the Proletariat’; the question is how did they succeed in giving economic power to Russian people.
The first solid economic policy instituted in Russia after the abdication of the Tsar and the overthrow of Kerensky’s Provisional Government was Lenin’s policy of War Communism. War Communism was not a policy designed to promote economic stability in Russia. Russia was in the civil war and war communism was a policy designed to get food to the soldiers fighting the Whites (anti-Bolshevik soldiers) and then next in line for food were the workers who supplied the soldiers. One must keep in mind that Russia’s economy was in a bad state even before the institution of War Communism. In economic terms, War Communism was an abysmal failure. The state was forced to pay wages in kind to workers because money was simply worthless. With the ban on private trade, there was a break down of the currency system and rural communities reverted back to a barter economy.
The Bolshevik party forcibly seized all surplus grain from the peasants causing resistance from peasants by hiding grain and not producing more than was needed for themselves – Russia had gone back to subsistence farming. This lead to a drop in production with some historians claiming that by 1921 there was more than a 60% percent drop in agricultural productivity since pre-war Russia. The peasant reaction is justified considering that some historians estimate well over 5 million peasants were killed during the grain requisitions. In the cities factories were taken over by the state and the state commissioned managers to run the factories – the Bolsheviks felt that loyalty to the Bolshevik party and Communism was more important than competency. As a result, there were staggering drops in industrial production, especially in fossil fuels. Oil production dropped from 9.2 million tons in 1913 to 3.8 million in 1921 under war communism.
Coal production dropped a massive 67% from 29.1 million tons produced in 1913 to 9.5 million in 1921 (Statistics from Economic Systems in Action – Oxenfeldt and Holubnychy). A clear sign of economic catastrophe in Russia was the estimated depopulation of 60% of the population of the large centers of Moscow and Petrograd. The situation in Russia got so bad that 8 million children were left homeless and millions died in famine caused by inefficient peasant farming. Russia was under immense financial strain from the Civil War and the dissidence of the peasants, something had to collapse and it was the Rouble.
Once the Civil War was under control and Lenin saw citizens growing restless he decided that a new economic policy was in order and the policy was given the name New Economic Policy. The Policy was a drastic measure and I think it was just what Russia needed and it was just in time. Politically, Lenin stepped on the toes of a few hardcore Communist Party members (Bolsheviks) but economically the policy was sound. The policy was a hybrid Socialist-Capitalist economy and was called state capitalism by Lenin. Lenin said the New Economic Policy was a temporary measure and was going to slow down the transformation into communism to ensure that when the state ‘withered away’ (In Marxist theory) the withering would be as smooth as possible. I think that the New Economic Policy was Lenin putting the brakes on the communist revolution, even if only for a while.
There were two things that needed to be done urgently in Russia. Firstly, the populous needed to be calmed down and made happy because not even the mighty Lenin would be able to stop the people of Russia if they had a third revolution. The policy was employed to ensure the survival of the Bolshevik Party. Secondly, the economy needed to recover to some extent if the Bolsheviks wanted to industrialize Russia, which I believe they did want to do in order to compete with the west and capitalism. The transition from a command economy to a slightly capitalist one had immediate and far-reaching benefits such as peasant farmers having their surplus grain taxed instead of requisitioned.
The taxation along with the legalization of free trade meant that farmers with excess grain could go and sell it at the market and earn money, this had a crucial spin-off – money became the medium of trade once again. The standard of living in Russia increased somewhat. The Bolsheviks gained more peasant support because of the new policy. There was a drawback that occurred as far as communism is concerned, some peasants became wealthy and were known as kulaks.
Having wealth amongst the peasants was, however, positive for the economy in exactly the same way as an increase in middle-class wealth is good for any developing economy today. Industrial sectors remained mostly under state control except for small concerns (employing fewer than 20 workers). Capitalism still crept into an industry in the form of bonuses for workers for incentive purposes. The results were astonishing, by 1928 the coal and oil production mentioned earlier had risen to above the 1913 levels with oil at 11.6 million tons and coal at 35.5 million tons. The New Economic Policy was an economic success.
By the end of Lenin’s life, he had taken Russia through three and a half years of an economically and socially crippling policy of War Communism and then into the beginning of the prosperous New Economic Policy. Lenin’s impact on the economic situation in Russia in the period leading up to 1939 cannot be overemphasized. I think the War Communism adversely effected Russia and had as much negative influence on the economic growth of Russia as the positive influence of the New Economic Policy.
The lack of cultivation of land during the period of war communism had a long-term adverse effect on Russia’s agricultural capacity. Russia is probably still feeling the effects of the millions of potentially healthy able workers killed in the Red Terror (Grain requisitions during War Communism), during the famine of 1921 and the Cholera and Scarlet fever epidemics.
Stalin contributed much to Russia’s economy and he has to be admired for taking an apparently backward (Some historians suggest Russia was not that backward) country and giving it economic power. Stalin’s decided that the New Economic Policy had run long enough and it was time to put Russia back on its path to Communism. Stalin ordered the State Planning Commission (Gosplan) to devise a series of five-year plans which would set out exactly what the country’s goals were for the next five years. The goals were broken down into smaller and smaller goals until eventually, every worker knew what he or she had to do for his or her specific shift at the factory.
The five-year plans were the ultimate example of goal setting. Although the results of the five-year plan’s implementation were astounding, the percentage increases were not as convincing as the change from War Communism to the New Economic Policy under Lenin. Oil production, for instance, was 305% of its 1921 level by 1928 whereas it was only 184% of its 1928 level by the end of the first five-year plan.
Obviously percentage increases drop as the amount of coal or steel produced increases so in order to keep the staggering increase in the rate of production as I believe Stalin did to encourage emerging communist nations and boast to the capitalists, Stalin employed more and more women. Many facilities were built for women simply because the USSR needed more workers and the number of male workers unemployed was meaningless.
Stalin’s two main economic aims were Collectivisation and Industrialisation. Collectivization was the combination of many peasants’ small farms into one large farm, which the peasants collectively ran. Collectivization made more sense for the state because it was more economically viable to buy machinery to work the land once there was a substantial piece of land and the state needed effective, optimized farming with tools such as tractors. Industrialization went hand in hand with agriculture because Stalin realised that the growing population needed to be fed and the system of each farmer working a small piece of land was inefficient and did not fit in with his plans.
Stalin’s goals were lofty; he wanted power production to go from 5 to 17 billion kilowatt-hours in the first five-year plan. When he tried to implement collectivization he found resistance from the kulaks and other peasants. After trying to sell the idea by means of propaganda and failing, Stalin used the more direct approach and simply sent the kulaks to the concentration camps. Thousands of kulaks were sent to labour camps and many burnt their crops in protest and as a result there was a famine in 1932. Agriculture was virtually totally collectivised by 1941 (Modern World History – Ben Walsh p105).
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