What Is an Economy? What are Economic Systems?
The U.S. presidential election was yesterday, and congratulations to Barack Obama for winning a second term in the White House. But just as the first polls were closing last night, analysts kept repeating that U.S. voters were largely voting based on “the economy” last night. Now, “the economy” didn’t include things like health care, unemployment, or the federal deficit. And aren’t these all factors that contribute to the well-being of any country? So what is “the economy,” anyway?
What is an economy?
Truthfully there are many different definitions of an economy; but Dictionary.com states it as being. “the management of the resources of a community, country, etc., especially with a view to its productivity.” Or in short, an economy is the wealth a country brings in, and how the country handles that wealth. But what about markets, politics, and things like supply and demand? What do these have to do with a nation’s wealth, or its economy?
These are all the economic systems, or processes, that are used to measure a country’s economy, and see where it stands in relation to the rest of the world.
An economic process or system is “an organized way in which a state or nation allocates its resources and apportions goods and services in the national community,” according to Business Dictionary, and there are many when it comes to the ones used in Canada. Some of the most common economic systems in Canada are made up of different markets (the stock market and real estate market primarily,) a C and C (or command and control) process, and a political process.
A C and C process is one in which a commander (the first “C”) controls what will be produced, how it will be produced, and who it will be distributed to after it’s produced. This is the control portion, or the second “C” in the process. In Canada, the C and C process does make up part of our economy, and the federal government is the controller. This branch of government oversees things such as our GDP, Gross Domestic Product, one of the largest indicators of how our economy is doing. However, our economy is not entirely made up of a C and C process; otherwise the Prime Minister would be able to dictate where you live, what house you buy in that area, and even who you marry.
Markets also make up a large part of the economy but typically, no one is “in charge” of the markets. There may be regulators and governors of these markets; but no one can force anyone to buy anything within a market, or arbitrarily make them sell their possessions within that market. A market is based on property rights and so, the only way goods can be exchanged within a market is either by a) someone gifting somebody else property, or b) an exchange of one good for another. If you’re in the real estate market, the down payment for your mortgage may be gifted to you by certain individuals; and after you purchase your home, you can exchange the home in return for a certain amount of money, by selling it. Markets can become extremely complex, but in their most basic terms, a market is a place where people trade goods and services, usually with an exchange of funds taking place.
Political decisions are those that are made exclusively by the government, but that affect everyone in the country. For example, if a country were to go to war, that would be a political decision that affected the economy. Word War II actually greatly benefited the States in particular, because it created jobs for soldiers and for the women who stayed at home working in factories, manufacturing things such as ammunition and military clothing. World War II was what greatly helped pull the global economy out of the Great Depression. No market within the economic system created these conditions of war, yet the economy was helped by it. It was a political system, or process.
Who’s responsible for the economy?
So, going back to the fact that last night’s election in the States was based largely on the economy, is that appropriate? Should the leader of a country be held solely responsible for that country’s economy? You would certainly think so, given all the arguments we heard even here in Canada during the campaigning. One side blaming the other for things such as bailouts, a ballooning deficit, and markets (especially that of real estate) that still aren’t back up to pre-recession levels. And whether or not you hold a president or Prime Minister responsible for the economy is largely part of your own personal outlook.
But if we’re being honest, in an economy such as Canada’s, where no one market or economic system supports or corrupts the economy, there’s enough responsibility to go around for everyone.
Yes, our government needs to help control the economy by ensuring that our GDP is always strong, and that we’re importing and exporting the right things to the right countries at the right prices. The government can even be held partially responsible for some of our markets. Most recently the federal government has stepped in to the real estate market, imposing new rules that make it more difficult to get a mortgage; thereby helping to control that particular market. And Canada’s BoC Governor, Mark Carney, has certainly taken his share of the blame for not raising interest rates – a policy implemented by the government that directly affects the economy.
But the individuals in a country, or in any given market, are also responsible for the market. For instance, in the States before the recession hit, one-third of their mortgages were in the sub-prime market. This simply shows a lack of responsible spending, and people irresponsibly taking on far more debt than they could handle. That affected the banks, and there’s no doubt that they too, were largely to blame for the irresponsible spending. But it was also the individuals, and that’s just something that can’t be denied.
The answer to “what is an economy?” certainly isn’t an easy one to answer. An economy is the production and allocation of goods, and is made up of many markets and different processes. At least, thankfully, ours here in Canada is.