Economics permeates the lives of all people in all places. It determines what an employer pays his employees, it determines who gets care, in what order, in the hospital emergency room, and it decides when your car gets serviced at the dealership.
Economics is the allocation of scarce resources that have alternative uses. There are a number of methods to allocate resources, each effective to varying degrees in varying situations, but large national economies are most efficient in free market form.
There are basically two types of national economy: free market and central planning.
- Central Planning: A centrally planned economy relies on a party in power to decide what resources should be allocated to various demands as they see fit.
- Free Market: A free market economy relies on prices to determine where demand should be filled and to what extent.
In a free market, supply follows price. If turnip farmer X has a horrible crop, but all others have bumper crops, the price of turnips will be low. On the other hand, if farmer X has a bumper crop and all other farmers get their crops eaten by bugs, lucky farmer X sells his turnips at a very high price.
If the turnip farmer with the poor crop is in County A, turnip prices there will be necessarily high because of the shortage. Another turnip farmer in County B has a bumper crop, more than enough turnips to supply A's needs, this supply will flow to the higher priced market in County A. Not only that, turnips will start pouring in from anywhere that has a surplus until County A has enough turnips, causing the price to fall. The price fluctuates according to supply.
An Example of a Centrally Planned Economy
The medical concept of triage is a simple example of a planned economy. For instance, if there is a major disaster, such as a tornado, in which there are a high number of injuries in a relatively small geographical area, the local hospital emergency rooms may be inundated with people who need care. In such a centrally planned economy, it is the responsibility of the doctors and nurses to determine which patients should be cared for first, last, or virtually ignored altogether.
There will be some victims who, it would be determined, could wait for care since their injuries are minor and unlikely to cause serious, permanent harm. Then there will be those who are so badly injured, terminal in fact, that spending time and medical resources on these people would be wasted. (Discounting any pain relieving drugs they might be given to alleviate their suffering). This leaves the victims who have serious injuries, but whose lives could be saved if resources are directed to their care.
The victims who need care, and will likely live as a result of it or die without it, are treated first. Those whose injuries are minor and not life-threatening would have to wait.
In this example, a planned economy is effective because it is relatively small and manageable. Its central planners, the care givers, have both the immediate knowledge, and, presumably, the supplies needed to make crucial decisions.
In large economies, however, such as government, it is impossible for central planners, no matter how wise, to know the intricacies of the demand of various scarce resources in various geographical areas of their jurisdiction, be it city, state, or national in scope.
Recommended reading:
- Basic Economics, Thomas Sowell; Basic Publishing
- Economics in One Lesson, Henry Hazlitt; Random House
- The Wealth of Nations, Adam Smith; Prometheus Books
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