Back in Unit 2, I made the point that it’s the economic problem that gives rise to society’s need to have an organized economic system:
In very broad terms, we (both as individuals and as a society), have to make four types of decisions over and over and over all the time. These four decisions are what economists call the “four fundamental questions”. They are:
What goods should we produce with our limited resources?
How much of those goods should we produce (quantity)?
How do we produce them? What technology or method? Who does the work?
Who gets to consume the goods we produce and get the benefits?
So what are these “goods” that society (people, actually) produce, distribute, and consume? The typical economics discussion – certainly the way we introduce these ideas in principles of economics classes – focuses on ordinary, desirable, and often tangible goods. Things we want more of simply because consuming more of them makes better off – the goods have increasing utility as the technical term would put it. Think of things like food, shelter, clothing, cars, toys (kids’ and grownups’), merchandise – all the stuff we think of at stores. We also typically imagine scenarios where people have resources right now that they can use to produce or trade for these goods.For these kinds of goods and for these kinds of assumptions (people have resources now, etc), the track record both in theory and in practice is pretty clear. Markets are amazingly powerful and efficient systems for optimizing the economy in society. In the 2oth century, centrally-planned and communal ownership systems such as the Soviet Union and China (before liberalization in the late 1980’s) proved totally unable to match the output and success of capitalistic, market-oriented systems.
Again, back in Unit 2, I observed that:
Each society or country creates rules, laws, and institutional arrangements to help decide these questions. Economists refer to these institutional and legal arrangements as an economic system. There are many economic systems. Strictly speaking, every country and society develops their own economic system as part of their culture and development. But there are, of course, some general patterns to economic systems…There are actually many different varieties of capitalism and of socialism, for instance.
The how a society organizes itself – the economic system it creates – tells us a lot about the society and the values of the society. But the best place to compare the variety and values of economic systems isn’t with the ordinary, normal consumer goods. We can a lot by comparing how societies handle the following situations where markets don’t work as well:
Asymmetrical and/or incomplete information goods – goods where the buyer/consumer/user may not know what they need, or the consumer may not really “want” it but has to have it to live, or the buyer/consumer/user doesn’t know and can’t know whether the good or service will in fact be what they want. In most of these cases, the buyer/consumer/user is at a disadvantage. They have to rely on an expert of some type to tell them what to consume. But the expert often has a conflict of interest, especially if they stand to make a profit from “selling” or recommending more consumption. This is the case with medical and dental care.We are dependent on doctors and experts. And while nearly everybody wants “good health”, we can’t directly buy “health” – we have to buy and consume doctor and hospital visits, prescriptions, medical devices, etc.
Extreme externalities – Markets work best when only the exact parties to the transaction, the buyer and seller, pay all the costs of production and also receive all the benefits of consumption. But some goods involve externalities – situations where third parties that have no say in the transaction either benefit or pay a cost. Here are some examples of both positive and negative externalities. A particular problem arises when the positive externality is very large and benefits the society as a whole. This is the situation with education, regardless of whether it’s K-12 or higher education. Education definitely benefits the student – the person that most resembles the “consumer” in this case. But having educated people benefits all of society through faster economic growth, more and better technology, low crime rates, culture, etc.
The vulnerable and those without resources face particular problems in markets. Markets can be efficient in distributing resources right now but they depend on all participants having some resources or income right now to trade. What happens when someone is too sick or too poor to trade for the goods they need to live? This is not just an issue of charity and how does society car for the less fortunate. It’s a time problem. We are all vulnerable, resource-less, and dependent on the kindness of strangers at some points in our life. In particular, all of us when we are very young and when we’re very old are in the position where we cannot work to produce our own income. We cannot support ourselves with our current work. In the case of children, they are totally dependent upon adults. In the case of the elderly, they are often also dependent on others. How a society organizes to handle these situations – how it supports children and the elderly – is the intergenerational transfer problem.
So in Units 5 and 6, we are going to take a closer look and comparison at how an economic system handles healthcare. education, and intergenerational transfers. I’ll be explaining a bit about how the US handles these situations since it is particularly timely this year. In healthcare, we are now into the fifth year of the Affordable Care Act (PPACA), the so-called “Obamacare” system. The PPACA has been the subject of much controversy and a significant amount of disinformation. I’ll hope to clear a bit of that since I’ve done some public presentations on the topic recently.
Another topic I’ve spoken on publicly is the future of Social Security and Medicare in the U.S. These two programs constitute two of the largest intergenerational transfer programs for supporting the seniors. Public education and the family are the primary institutions for supporting children through intergenerational transfers. Like the PPACA, Social Security and Medicare have become political targets and the subject of substantial disinformation (propaganda?. For example, many young people believe that Social Security “won’t be there for them when they get old” because the system is “broke”. That’s absolutely not true. I hope to set the record straight.
I also urge you to search and explore on your own. In particular, compare how the US handles these issues with how other countries handle them.