Demand vs. Command Economy

July 1, 2015

Written by Sandy Stuart

It has been a long while between articles from this author. I had just completed (or nearly so) an article concerning the futility of socialist economic systems as they attempt to compete with free market capitalistic economic systems. Then the Pope issued his most recent encyclical in which he expressed his displeasure with global markets. The implication is that the rich are riding the backs of the poor to excessive profits and destroying the environment as they do so. He holds that mankind is largely responsible for global climate change.

I am not going to take on the Pope about the issue of global climate change. It used to be “global warming” but after some very cold winters the issue was relabeled “climate change”. I acknowledge that the climate is changing. However, I will color myself as undecided on how much mankind is at fault and how much is caused by natural rhythms. I acknowledge that we produce carbon dioxide. It’s called breathing. Don’t know what to do about that. Should we cancel the Olympics? Make everyone walk to reduce heavy breathing? Cutting back on combustion for energy generation is obviously desirable. Unfortunately, wind and solar energy sources are not very efficient yet.

I am troubled by the Pontiff’s concern about global markets. What is a “market”? A market exists whenever something is bought, sold or traded. Wherever there is a market, there are market forces (think supply and demand) with which the traders must deal. Those who deal successfully with those forces profit. To object to global markets is to object to global trade. I don’t think that idea is going to fly.

There are fundamentally two types of economic systems to deal with those market forces. I call them the afore-mentioned “free market capitalism” (FMC), resulting in a “demand” economy, and socialism, resulting in a “command” economy. Socialism has a noble objective which can be stated: “from each according to his ability; to each according to his need.” Unfortunately, socialism does not work very well. One reason is that if you ask me how much I can produce, I will tend to low ball my answer so my quota will be easily achievable. And if you ask me how much I need, I will likely pad it a bit to make sure I won’t run out. With socialism, the government owns and/or controls both the means of production and the distribution of goods.

Socialism has undeniable political appeal, especially to the poor masses who keep the politicians in power. Robin Hood, who takes from the rich to give to the poor, can be quite popular, for a while. That is, until the wheels come off the economy and the whole country becomes poor. Industry after industry fails. Bread lines lengthen. Price controls fail and shortages become rampant. Governments will usually blame free market capitalists for their failures. Of course.

On the other hand, free market capitalism (FMC) is brutally efficient. Really, all the government need or should do is ensure the markets remain free, usually with solid anti-trust legislation. There is also the matter of ensuring interstate trade is conducted fairly. The federal government has to have this role, but it is easily and often abused. Bankruptcy and “safety net” legislation should be effective but kept to the minimum.

In reality, I can think of no country that is purely FMC or Socialistic. Most countries have mixes of socialism and FMC. But I have observed that the closer a government is aligned with FMC, the more successful it will be economically. Conversely, the more socialistic a country is, the worse off its people are economically (think Cuba and North Korea). By the way, both FMC and socialism can be rife with corruption. Law and order effective law enforcement and a just court system are still required.

In my opinion, a society that closely adheres to FMC and encourages the economically successful people to help those who did not do as well as they, is about as close to heaven on earth as we can hope for.

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