Coming to Terms

It happened one summer
It happened one time
It happened forever
For a short time
--The Motels

While our planet is well endowed, most resources are not in readily consumable form. Natural conditions of abundance are an illusion. Axiomatically, from the standpoint of human existance, the state of nature is one of scarcity.

Reducing conditions of scarcity requires production. Production is the transformation of resources into consumable goods and services. Some combination of labor and capital (i.e., equipment) is necessary to execute the production process. Axiomatically, production is required in order to advance standard of living.

Although it is reduced by production, scarcity is not eliminated. Many factors constrain the abundance obtainable from production. Certain raw materials may be hard to find, thus limiting manufacture of certain outputs. Capital is limited by technological state-of-the-art and by available savings that can be used for investment. Labor is limited by the hours in a day, by methodological state-of-the-art, and by human tendencies to favor leisure over work. Moreover, humans have ever increasing needs and desires which exert constant pressure on production for more. Axiomatically, resources must be rationed, or 'economized,' in order to satisfy needs under scarcity constraints.

So how should such economizing proceed? How to decide what resources to use, who makes what and how, and who gets what and how?

There are two general approaches for economizing. One is a market economy (a.k.a. capitalism, unhampered economy, laissez faire, free market). In a market economy, economic decisions are made by market participants--buyers and sellers engaged in cooperative exchange. Ownership of the means of production, and control of commercial decisions and methods, is in private hands. Government's role in a market economy is limited to the protection of property rights of all individuals.

The other approach is a planned economy (a.k.a. socialism, command economy, central planning). In a planned economy, economic decisions are made by the state--planning bureaus engaged in allocating resources. Ownership of the means of production, and control of all commercial decisions and methods, is in the hands of planning boards. Government's role in a planned economy is all encompassing, although emphasis on protecting individual property rights is muted since a large amount of property is in public rather than private hands.

The two categorical approaches to economizing define extremes of sorts, meaning that it is likely that many if not most economic systems operate somewhere 'in between' the poles. The in-between condition is called a mixed economy (a.k.a. managed capitalism, hampered economy, interventionism). A mixed economy is characterized by some degree of state intervention in production and distribution processes. Government may own some, but not all, of the productive capital. Government may make or regulate some, but not all, of the commercial decisions. The greater the government involvement, the closer the system is to the planned economy extreme.

Where does the U.S. economy stand vis a vis this framework? We'll consider in future posts.