The un-utopian issue

2. The second approach to planned economies would be to raise prices, but they must do so in a way so that even the poorest of their workers are able to buy that particular product. This approach might lower the demand of the good and bring people to find alternatives, however the problem is generally there are no alternatives. So this approach tends to not go well as well.

3. A planned economy would have the option of subsidizing the firms of that particular scarce product, to encourage it to grow and produce more. This can be effective, but it may lack in resources if the firm expands such as workers. So to counter-effect this, the firms would bring in machinery, which could end up leaving a lot of workers laid-off. The machinery would indeed increase production, and if the government finds a way to re-allocate the unemployed workers this policy could work and reduce scarcity.

4. Sometimes planned economies resort to rationing, especially if the country is at war. The most commonly used system is the rationing coupons. By doing this, the government can easily estimate the amount needed and the amount that each person gets. In some ways, this virtually eliminates scarcity for that product since everyone gets the same shares of it. Therefore they can’t demand for more. This system was widely used especially in the Second World War countries, at that era, and it proved to be an effective scarcity removal. 

5. Another really used policy is propaganda. The planners would run add campaigns to try and make people conscious of the seriousness of a problem and hopefully make them consume less. A common example is gas, people are encouraged to share cars, turn to diesel or even use a non-gas transport system. This is also really widely used today in many countries, for example some areas of Indonesia are inaccessible unless your car is carrying more than 3 people.

                                                           

6. And possibly the last suitable solution to scarcity on a planned economy would be to switch to either a mix, free or open trade. This would allow for better efficiency, more resources, and better allocation of resources, thus resulting in a substantial increase of that particular scarce good, since many companies will seize to opportunity and produce the good which is highly demanded. The major issue is that once this happens, the economy can no longer be centrally planned. Therefore it is a major step, and probably the last of resorts that any centrally economy would decide to make. We’ll review transition problems in the second question with more detail.

        1.c) Free Market Economy: Now let us slip to the exact opposite of centrally planned economies; the free market. Basically the free market aims at letting the economy run by itself with as little government intervention or participation as possible. This can generally result to good outcomes, as competition helps production efficiency and cost reduction. However, if totally unregulated, companies may turn into monopolies, oligopolies or cartels, leading to scarcity and to affect the economy much the same. A free market will try and improve their output of the scarce products in quite a number of ways, being increasingly the choice of developed ones the use of technology. Among other choices, here are a few ways free markets solve scarcity…

1. Free markets are aware that innovation in better technology can greatly improve output of scarce resources. This leads governments to subsidize firms in order to promote their research and development, therefore new technology can be obtained and used. This directly connects to free market’s belief in specialization, where a more specialized company would obtain higher production rates; this in turn produce more output and promotes innovation with new machineries and technologies, making a system more efficient.

2. Another common measure to reduce scarcity is to simply import the volumes missing in the economy; however, this does not take into account potential deficits and inconveniences, but it does solve scarcity.

3. Free markets base their economies in heavy competition. This in some ways is a very effective scarcity solver. Since companies furiously compete for supremacy, the most efficient and productive one will generally end up in the high line. Competition really helps over-come scarcity since the firms will gradually concentrate in the quality and quantity of the product at a lower price, with as few resources available. However, the competition must not go to the extremes, such as monopolies or too few firms that leave a huge amount of unused resources to become wasted. Therefore, complete disappearance of the State and regulations seems practically unviable even in a free market.

4. A free market can in some ways concentrate in its most productive areas, even though it might not be the scarcity area. If, say, country “A” is best at producing rice, but its scarce on fish, what it can do is concentrate all it’s available resources on rice. Therefore, once they earn profits from the surplus rice, they may obtain the fish through other means such as trade. This can greatly help reduce scarcity, and produce profits (or reduce deficit levels) for the economy.

5. Another method used by free markets is to broaden consumer’s choice with alternative supply or products. The main issue with scarcity is that consumers choose a particular product because they cannot find another that meets or exceeds their demands. Theoretically, if there are substitute products or second choice products, it is possible that demand will become balanced amongst the several products, taking off the pressure of the scarce one, thus leading to diminish scarcity for that particular good or services. A good example is computers. Before, when Microsoft was the supreme company (and it still is now) only they owned the computers fit for consumption of both general public and professionals. Therefore computers became scarce and highly demanded. Yet,  the free market allowed Apple to develop an alternative line and rise as the supreme-of-choice for designs. This greatly reduced computer scarcity and made good competition so that the two companies fought to improve efficiency, output and quality at a lower cost, using as less resources as able.

Windows Macintosh 

        

Free markets tend to have easier access to different solutions, but they still hold a few problematic issues which we’ll review in the second part of this essay.

        

        1.d) Mixed Economy: Lastly, we will review the mixed economy, increasingly becoming the system of choice to be found in developing or heavily populated countries. Mixed economies are a difficult system to categorize, for there is an ample range of mixed economies which use as many different methods to prevent scarcity. Trying to balance efficiency with social and labor issues, these economies tend to bring in a merge of methods derived from both free market and planned economies. Nevertheless, whether they’re more to one side or the other can change the different solutions. However, in the mixed economy, the system tries to cope with scarcity with a regulated amount of government intervention and/or participation in the production of some goods or services.

        It is very difficult to exactly predict what measures a government/market will take, for they tend to adopt the seemingly best appropriate method from either the free or planned economies at a particular moment. In doing so they are becoming each time more flexible and more able to correct any of the mistakes that they make. However, the most general method used by a mixed market is government subsidies. Since the government has still considerable power (unlike in the free market) areas which are crucial to prevent scarcity are well looked after; hence, the government only needs to sometimes give the so much needed boost to these other firms, so that they can innovate in technology and create a capital for research.  

        An interesting mixed economy method used to help reduce (but not eliminate) possibilities of scarcity is by setting a minimum-maximum price barrier. This should be backed-up by legislation from the government and usually states that the price of a particular good or service MUST not go beyond or below the two given prices. Hence, scarcity is prevented as retailers don’t sell below the minimum price limit; therefore, there is no excess consuming of the product which would tend to leave it in the scarce list.     Another variation linked to this, is that the government can slightly raise the minimum price if there is simply TOO much consumption of that particular good. However, for this to work, it needs the intervention of the government in also another possible aspect. The government must be prepared to help pay for the producers’ cost by either buying their products or other means. This would prevent desperate producers from illegally selling a good below its given minimum price limit, which leads to much feared black markets.

        Finally, a quite popular measure used by governments for the last 2 decades is to sell all the unneeded State companies or factories and allow them to privatize, this helping deregulate an area which can greatly aid with the diminishing of scarcity. The reason for this is that when an area deregulates, it produces more competition, which in turn improves allocation of resources and efficiency, leading to a larger output of the scarce resource.

Part 2

What problems do governments face finding the best solution for their country?

        Not all things can be easily solved as spoken. True as it may be that solutions do indeed exist for scarcity, yet sometimes the government might be unable to execute their plan since it may cause more harm than good. This second part of the essay will concentrate on how the supposedly best ‘solutions’ are sometimes counter-effected with even worst problems.

        Let us return to Traditional Economies. As stated, these usually small economies are concentrated on barter; therefore monetary power is virtually zero. However, upon solving scarcity, by some of their methods one way or the other, a traditional economy might end up devaluating their products. Let’s give an example…

A traditional economy (Eco-A) is suffering from a serious shortage of wheat, but it is abundant in firewood. To cope with this imbalance and solve wheat scarcity, the community decides to start commerce with another economy (Eco-B) which has abundant grain. At the beginning of the exchange, one sack of wheat was traded for two sacks of firewood. However, as trade progresses, Eco-B realizes that it is both stockpiling more than sufficient firewood while in parallel notes it is losing a substantial amount of fish for no particular reason. Therefore, instead of closing the trade route, Eco-B simply decides to raise the barter value for wheat in order to have excess to barter for fish somewhere else. Due to the lack of monetary power they would just demand five sacks of firewood for one sack of wheat. This would greatly affect Eco-A since it will only be able to import less wheat, even though its work would increased five-fold.  Hence, the main beneficiary of this exchange would be Eco-B, as it will be less likely to receive firewood (even though they demand more, and are near their stockpiling limits) since Eco-A simply can’t cope with the change. This is a clear example of how goods can be devaluated.

        Without monetary power, goods can simply lose their importance and this can create major difficulties for an economy. This is one of the key problems that a small government who concentrates on barter can face. This issue nearly closes the doors of commerce for traditional economies. And, in general, any other action (such as expansionism, growth) would require more than barter and depend more heavily on currency. As a conclusion, it could be said that traditional economies are one of the most fragile systems for the exchange of good/services.

        

        Moving on, we arrive to Planned Economies. Now, these are a more complex system when both preventing and fighting problems such as scarcity. This, due to their sheer size and because all is controlled from one single entity: the State government.  When planned economies allocate resources, these are but few of their most usual problems…

1. Planning errors. In a planned economy the tiniest detail missed out can simply multiply and cause major problems. For instance, a State decides to allocate its resources to the production of books. It may send all the literature materials, papers and workers to the factory, but it may have missed to properly supply ink, making the allocation of the other resources useless and a serious waste. So even though the economy attempted an efficient production, poor planning turned into a vain effort.

2. Political problems can really bring a planned economy policy to concentrate on another –and possibly harmful- aspect.  If for instance the planned economy is prepared to create new goods, yet international security threat is great, it will most probably allocate an enormous amount of its resources to defense and further development of weapons. This is a common characteristic since the Production Possibility Curve in a planned economy tends to be at the extremes, therefore only leaving real space for a single product or service.

3. Another key issue faced by a planned economy is the lack of experience. In some cases, if a planned economy suffers from intense scarcity (like Russia in the ‘Planning becomes a nightmare for Moscow’ article) the best alternative would be to start deregulating itself and turning into either a mixed or a free market economy. Nevertheless, for this process the economy must be prepared to sell and privatize a large portion of its economy and have at hand the professionals with expertise in the open market struggles. Apart from the chaotic paperwork from bureaucratic procedures and permits, the government will have to sacrifice itself from large player to relatively a small one. This would mean a huge loss in their powerful influence and domination of practically the whole economic system. Apart from this headache, the firms that used to work in the planned economies will suffer as well. Since these companies are used to be told how much, what, and where to produce they really lack the competitive spirit which would be really needed to take a share and place of the market. These firms and their staff are indeed inexperienced at managing themselves. This would mean that other companies, possibly from the exterior (since the economy is no longer planned, trade and foreign companies are most likely to be allowed) would take over this advantage; they could do so by basically ‘ransoming’ or monopolizing the targeted country at their own will, should they manage to win a large portion of the market through, for instance, through the purchase of a dominant amount of shares in one public company or ex-State monopoly (this is an easy mistake which must be avoided). This not only would mean a huge deficit for the country, but unemployment and other negative factors may surge as well.

4. Not only do most of these companies have critical inexperience levels, but some depend heavily on tax concessions and subsidies to produce goods at a reasonable price. If these key production factors are to stop, such firms might end in bankruptcy. This means that a major transition or ‘solution’ can end up with a huge reduction in bureaucracy and dramatically increase unemployment which could possibly bring the country to a sort of recession period.

5. Another problem to planned economy ‘solutions’ to areas such as trade is it’s after-effects. When an economy recently opens up to commerce, firms inside the country may become or be more inefficient and less productive than outer firms. This again could lead to unfair competition if foreign firms have subsidies to produce or export (their prices would be artificially lower, in what is known as “dumping”). Facing this, the nation’s companies may go bankrupt, which in turn would increase unemployment levels and create large deficit levels.

6. If a planned economy tries to raise its prices, it may cause more harm than good unless salaries are also raised. In a planned economy, the government believes that everyone should be able to buy any specific products, therefore they cannot really raise a good or service to become unavailable to the labourers. Otherwise this signifies a flaw in the system.

        This short analysis shows that a planned economy has very limited options and may loose a lot when trying to find a suitable solution for scarcity. It is no wonder that most of them refuse to make the transition unless in cases where no other solution can be found.

        

        In the Free Market System, trying to solve scarcity can lead to unexpected problems. A main reason is that, theoretically,  government intervention is at such a small scale that would not be really taken into consideration. However, when scarcity does occur, and a ‘solution’ or policy is thought of, they are not always nor entirely executed. Here are some of the major problems for free markets:

1. Free markets concentrate on innovation and new technology to improve efficiency, productivity and to lower prices. However, most of these innovations tends to be machinery which reduces need for manpower (less people employed). Let’s give an example…                                                                                                                               Five workers can produce 10 units of a specific good per day, for which the company must pay five wages and social benefits, thus reducing profits. Then, with a new discovered technology a machine operated by only one worker is created, producing in three hours the same of the five workers, this is 4 times more output. Then, 4 workers lose their jobs and only 1 operator remains working.                                                As we can clearly see, innovation may be more efficient, cheaper and productive; yet it can produce high levels of unemployment and poverty in a nation. This would definitely not favour the political party in power at the time, and they are most likely to be thrown out during the next elections.

2. The ability to import in a free market is an ideal way to help control scarcity. But problems can quickly arise since importing the required products/services might create a deficit or negative trade balance (such as oil in the world). Another problem is the high risk of another country to start ‘dumping’ resources in your country and flood the market. Therefore a government must seriously consider these risks before accepting full trade imports.

3. If a free market opts to try and control the price barriers, there is a high risk that within the country illegal organizations or sales will arise. This in other terms can be classified as the Black Market and would just increase stress, crime and real prices within the economy. The rise of these two factors might create inefficiencies, some deficits and possibly problems to national security as well.

4. We explained that fair competition is ideal for a free market economy to help solve scarcity. However, competition MUST not go to the extremes in where a monopoly or the control of sectors by too few firms occur. If this happens, the economy might become imbalanced and cause serious problems, such as inefficiencies, wastage of resources or illogical reasoning for future plans.

5. Because free markets don’t count on large scale of government intervention, sometimes the actions or ‘solutions’ that a government dictates or urges others to take are not always considered. This is really problematic since the market is divided into many different areas, and generally each must be supporting the other to actually make an impact or major transition in the economy.

        As we can observe, free markets have a substantial number of flaws for solutions, all this is due to the lack of government intervention or power within the economy itself.

        And last on the list is the Mixed Economy. As we already stated, mixed economies vary tremendously depending on which side they are most related with from central planning to free markets. In mixed economies, problems tend to arise quickly, especially on the political view. A major situation that mixed economies suffer when looking for the best ‘solutions’ is that sometimes such ‘solutions’ might only be relevant to only one part of the economic system (as opposed with central planning) whereas it would be damaging for other sectors left to care for themselves as in a free market economy.

        Apart from this major flaw, which can create serious disorganization, a mixed market still has the government playing a major role. Indeed, government usually controls the Amenities such as energy, water, infrastructure, etc… The one major issue with this is that the general public obtains no direct profits from it but only receives the services. Since it is government controlled, and not put in the share market, people invest to it through taxes, yet receive no profits in return. Another main issue is that, as far as the mixed economy tries to find ‘solutions’ for their problems, they are creating new flaws by simply being a mixed system.

        The mixed economy tries to deregulate itself from closed to planned and then to open free market. This means that the mixed economy is always moving its degree level. Therefore, is commonplace that policies or ‘solutions’ adopted tend to quickly become obsolete or incomplete, and new ones have to be put in place. So, in a mixed economy, the problem with finding the best solution for the country is that a new ‘solution’ or idea must be made every time.

        Another major problem with mixed economies is that the government usually clash with the powerful firms when dealing with a solution against scarcity. Since the government is not in absolute power anymore, there is no guarantee that the chosen policy will be easily executed as it needs to. This makes mixed economies a very difficult system to deal with.

Conclusion

        Economies have played a major role in mankind, especially when trying to solve the issue of scarcity. If there was no scarcity, the world would be closer to utopia than 10,000 years ago. Scarcity is the enemy of perfection and simplicity. As long as we humans evolve and further understand the concepts of economics, new problems and solutions may arise and possibly new market theories or government systems could be invented. And, perhaps we may get closer to a world of no scarcity, were we could all be supplied to cope with our never ending demands.

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