Comparative Economic Systems

Basic economic concepts, such as opportunity cost, diminishing marginal returns, comparative advantage, and the law of demand apply to socialist and capitalist economies alike. Different forms of economic organization can change the incentives faced by decision-makers (for example, managers and workers), but basic economic principles do not differ from one type of economy to another.

Capitalist economies are characterized by private ownership of productive assets and the use of markets to allocate goods and resources. The distinguishing characteristics of socialist economies are government ownership of physical capital and resource allocation by central planning.

Central planning is the dominant characteristic of the Soviet economy. The Gosplan, a central planning agency, presents state enterprises with an allocation of inputs and target levels for output. Key commodities and raw materials are centrally rationed in physical terms. The rewards of managers and workers are affected by their success at meeting the targets of the central planning authority. Pecuniary as well as non pecuniary incentives are used to motivate managers and workers to carry out the directives of the central planners.

Central planning in the Soviet Union has stressed heavy industries and capital investment. The share of GNP allocated to investment in the Soviet Union is substantially higher than that in the United States.

The supply of each consumer good is determined by the priorities of the central planners. Just as for market economies, however, the quantity demanded by Soviet consumers is inversely related to price. Soviet planners generally use prices to allocate the centrally determined sup ply among consumers. However, shortages and surpluses often occur when the planners set the prices of various goods either below or above the market-clearing price.

Even though small, private plots constitute slightly more than 1 percent of the land under cultivation in the Soviet Union, they have accounted for approximately one fourth of the total value of Soviet agricultural production in recent years.

The distribution of income in the Soviet Union is probably less unequal than for the United -States. The distribution of income shares in -Japan, the United Kingdom, and Sweden, however, appears to be quite similar to that of the Soviet Union. Comparisons of income inequality of market-directed economies with the Soviet Union may be misleading. The prices of many items purchased intensively by the poor, including  medical service, basic food products, and housing, are low in the Soviet Union. This, of course, is beneficial to low-income families. On the other hand, the state provides privileges-such as the use of automobiles and the right to shop at stores where high-quality goods are sold at low prices-only to government officials and other members of the Soviet elite. Such benefits are an important source of economic inequality in the Soviet Union.

The per capita GNP of the Soviet Union is substantially less than that of Japan, the United States, and the countries of the European Economic Community. Nevertheless, the economic growth record of the Soviet economy has been impressive, particularly during the 1950s and 1960s. During the last decade, the growth of real GNP in the Soviet Union has converged with the rate of growth of the major Western industrial nations. Many observers believe that the future growth of the Soviet Union is vitally dependent on the development of an incentive system capable of stimulating experimentation and innovation.

The Yugoslavian economy combines socialist and capitalist economic organization. Central planning directs the economy and channels capital investment into designated areas. However, business firms have a great deal of discretionary decision-making authority. Employees of each firm elect a workers council, which manages the firm. The firm is usually free to decide what products it will produce, the production techniques to be used, the employment level, and even product prices. As in market economies, business firms in Yugoslavia pursue profits that are then distributed to employees according to their wishes. Despite high rates of unemployment, the growth record of the Yugoslav economy has been impressive.

The growth record of Japan has been the most impressive of the major industrial nations during the postwar period. The following factors have contributed to this rapid growth: (a) institutional arrangements that have encouraged harmonious labor-management relations, (b) very high rates of saving and capital formation, and (c) low tax rates.

Economics does not tell us which form of economic organization is best. However, economic analysis can reveal a great deal about how alternative systems will operate in reality.