Mix and Match Economies

You'll hear a lot of different words tossed around to describe different economies. Communist, socialist, and free markets are just a few of them. A lot of ideology has been built around these different terms. And these different ideologies have served to confuse things and get people very emotional about issues that are much better dealt with rationally.

The basic question seems very simple: Which economic system best serves society's needs? But with all of the ideological baggage this simple question becomes the fuse for an explosive and emotional debate. This is not a question that will be answered quickly, but we can get a start on it. So let's set aside that ideology and try to look at the different economic systems as clearly and objectively as we can.

One fact that stands out to me is that despite the many and varied terms for different economic systems there are really only two different types of economies in the modern world. Command economies, and market economies. A command economy is where a central authority sets the prices and decides what goods are produced and how and where they're distributed. In a market economy market forces decide these things.

Now, it might not be immediately obvious what is meant by market forces. Or exactly what the "market" itself is. The market is in a sense a useful fiction. There's no actual place where it concretely exists. Rather it is the sum total of all of the economic interactions of a society. Still not very clear is it? Try this, imagine an auction.

Say the auctioneer is selling a car. He announces a price, and various people bid. The price goes up. But then a second auction is set up next to the first. This auctioneer is also selling a car, but is starting the bidding at a lower price. Some people go over there, including the highest bidder for the first auction. So the first auctioneer lowers his price. Some people come back. But then a third auction opens. This auctioneer starts at a higher price, but his car is nicer with more features and some people are willing to pay more for these luxuries. Some people start playing one auctioneer off of another, when a fourth auction starts up. And so on. Now multiply this by hundreds of millions of people and billions of products and god only knows how many interactions a day and you start to have an idea of what a market economy is.

Though treating them as if they were completely separate isn't exactly accurate. To the best of my knowledge there is no such thing as either a pure market economy or a pure command economy in the modern world. So far as I know every country has some kind of admixture, even if it isn't always legal. Some call this the Third Way, though that's a little dishonest in my opinion because it implies that it was planned or intentional when it was something that grew organically and was only considered a separate option later.

An example of command economy in what's conventionally considered a market economy would be the minimum wage in the United States. That is a central authority (federal or state government) setting the price of labor. With certain exceptions (like restaurant server) you are not allowed to hire someone for less than the mandated wage. At least you can't legally. For an illegal example of the mix you can go to Cuba. Prostitution is illegal, but widespread. Prostitution might not be what most people are thinking of when market forces are discussed, but it qualifies. Something is offered for sale and people decide whether or not they're willing to pay the price. And like anything else in a market economy, the price fluctuates based upon supply and demand.

http://www.investorwords.com/951/command_economy.html

http://www.investopedia.com/terms/m/marketeconomy.asp

http://www.ppionline.org/ppi_ka.cfm?knlgAreaID=128

http://havanajournal.com/culture/entry/cuba_sex_tourism_and_cuban_prostitutes/