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FALL 2009 | Mitronatsiou Anastasia

Every economy, in order to produce and consume, needs to address basic issues such

as the following: what goods and services should be produced and in what quantities;

how scarce resources such as labor and capital should be allocated to produce goods

and services; how the available supplies of goods and services should be distributed

across the population; and what price should be charged for a good or service.

Individuals, the state or both can make and implement decisions on these issues. In a

capitalist economy, most of these decisions are made by the citizens acting

individually. In capitalism, individuals are driven by self-interest, and market forces

direct and co-ordinate the decisions they make. As a result, a capitalist economy is

often referred to as a ‘market’ economy. In a socialist economy, on the other hand,

most of these decisions are made by citizens acting through the state, which co-

ordinates and implements these decisions through central planning and command. In

fact, a socialist economy is often referred to as a ‘planned’ or ‘command’ economy.

Nowadays, most economies are known as ‘mixed’ economies because, in reality, both

market and state play a substantial role in them. The mixed economy has become

established in North America as well as in the countries of the European Community,

while in the socialist countries there has been a move towards various forms of

decentralization and of a market economy. The U.S. economic system is based more

on capitalism, whereas the Chinese system is based more on socialism. Most other

countries, including Canada, rely on both market and state and so are considered to

have mixed economies. Within the mixed economies, the role of state in the former

socialist economies is still significantly higher than in the other economies.

The problem of socialism versus capitalism has a long history. The period of modern

controversy begins with the publication of E.Barone’s famous articles “The Ministry

of production in the collectivist State”. Examining the question of whether centralized

decision-making can replace the free-market, Barone concludes that such a solution

would encounter practical difficulties because of the gigantic task of collecting data

and the continual change of technological coefficient. During the last fifty years, the

countries of Central and Eastern Europe have experienced two profound changes in

the dominant political ideology; a transition to a socialist command style of economy

during the early 1950’s,followed by a transition back to a market economy in the

years following 1989. The socialist years had a significant impact on the socio-

economic and legal framework.

Two main success indicators which can be achieved under conditions postulated in

various economic systems are the static and dynamic efficiency.

Static efficiency may be defined as production conforming to the preferences of the

community when there is no possibility of increasing the production of one

commodity without reducing the production of another. It has been pointed out in the

last section that static efficiency can be achieved in an economic system organized

according to the rules of competition. Consequently, with regard to static efficiency,

the real difference is not between a free enterprise and a socialist system but between,

on the one hand, free enterprise and a socialist market solution, and on the other

centralized physical planning. From the analytical point of view the workings of a

purely competitive and of the market solution for socialism, and the results they lead

to, are essentially the same. Nevertheless, some analytical differences have already

been noted; in addition, two more factors should be considered. With regard to static

efficiency pure competition appears to be superior planning on the physical level.

Nevertheless, there are two types of “market failures” which impair the efficiency of a

competitive system: those existing in a static world with perfect information and

foresight, and those connected with imperfect information and uncertain expectations.

The first type contains the following factors: a)Under conditions of increasing returns

competition will break down, partly because monopolies will be formed, partly

because an optimum position may be reached only if enterprises producing under

increasing returns minimize rather than maximize profit. b)Direct interaction between

producers, between consumers or between producers and consumers which is

unaccounted for in market valuations, also impairs the efficiency of the system.

c)Market valuation is no better guide in the case of collective goods either. The

second type of market failure comprises uncertainty and inconsistency of

expectations, inertia and resistance to change, and imperfect information. These

phenomena have dynamic implications, hence they will be dealt with in connection

with dynamic efficiency, below.

Dynamic efficiency is concerned with static efficiency in the allocation of resources at

a given time ; an economic system may exhibit static efficiency even if production is

uncharged from year to year. The distinction between static and dynamic efficiency

has been forcefully expressed in Schumpeter’s classical words: “A system –any

system, economic or other-that at every point of time fully utilizes its possibilities to

the best advantage may yet in the long run be latter’s failure to do so may be a

condition for the level or speed of long-run performance.”

There is much disagreement on the question whether a free enterprise or a socialist

economy is superior with regard to efficiency. According to Hayek, a higher growth

rate could be secured in a free enterprise system “if we assumed that the same

restriction of consumption, which has actually taken place [in Russia], had been
caused by taxation, the proceeds of which had been lent to competitive industry for

investment purposes.” The contrary conclusion id reached by, for example, Dodd and

Sweezy. Bergson also inclines towards the latter view: “One may imagine that in a

highly dynamic economy a Centralist allocation of investment might lead to fewer

and smaller errors than a Competitive allocation.” Although his remarks were

addressed to the competitive (market) solution in a socialist economy , they may

apply to free enterprise as well.

It is , I believe, recognized by everybody and in particular by all orthodox socialists

that the transition from the capitalist to the socialist order will always raise problems

sui genesis whatever the conditions under which may take place. But the nature and

extent of the difficulties to be expected differ so greatly according to the stage of the

capitalist evolution at which the transition is to be made and according to the methods

which the socializing group is able and willing to use that it will convenient to

construct two different cases in order to typify two different sets of circumstances.

F.A. Hayek, Collectivist Economic Planning(London, Routledge, 1935)
Joseph A.Schumpeter, Capitalism,Socialism and Democracy
Socialism,New York,McGraw-Hill, 1949
Jean-Charles-Léonard Simonde Sismondi, Political Economy