Text 2. The fundamental problem of economics
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1. Two fundamental facts provide a foundation for the field of economics and comprise the economizing problem. The first fact is that the society’s material wants are unlimited. Second: economics resources — the means of producing goods and services — are limited or scare.
2. The desires of consumers to obtain and use various goods and services are defined as «material wants». Innumerable products which we sometimes classify as necessities (food, shelter, clothing) and luxuries (perfumes, yachts, mink coats) satisfy human wants. Services satisfy our wants as much as products do. The differences between goods and services are often less than they seem to be at first.
3. Economic resources can be classified into the following categories: property resources — land or raw materials and capital; human resources — labor. Land refers to all natural resources which are usable in the productive process. Such resources are arable land, forests, mineral and oil deposits, water resources come under this general classification. Capital, or investment goods, refers to all manufactured aids to production, that is, all tools, machinery, equipment, and factory, storage, transportation and distribution facilities used in producing goods and services. It is a man-made resource. Real capital — tools, machinery, and other productive equipment — is an economic resource; money or financial capital is not. Besides, capital goods should be distinguished from consumer goods. Labor is a broad term which the economists use in referring to all of the physical and mental talents of men and women which are usable in producing goods and services.
4. We must recognize that a variety of different institutional arrangements and coordinating mechanisms are used by a society in responding to the economizing problem. The industrially advanced economies of the world differ essentially on two grounds: 1) the ownership of the means of production, and 2) the method by which economic activity is coordinated and directed.
5. Pure, or laissez faire, capitalism is characterized by the private ownership of resources and the use of a system of markets and prices to coordinate and direct economic activity. In such a system each participant is motivated by his or her own self interest; each economic unit seeks to maximize its income through individual decision making. The market system functions as a mechanism through which individual decision and preferences are communicated and coordinated. The fact that goods and services are produced and resources are supplied under competitive condition means there are many independently acting buyers and sellers of each product and resource. As a result, economic power is widely dispersed. The term laissez faire translates as «let it be», that is, keep the government from interfering with the economy. Government’s role is limited to the protection of private property and establishing an appropriate legal framework to facilitate the functioning of free markets.
6. The polar alternative to pure capitalism is the command economy, characterized by public ownership of all property resources and collective determination of economic decision through central economic planning. All major decision concerning the level of resource use, the composition and distribution of output, the organization of production are determined by a central planning board. Business firms are governmentally owned and produce according to state directives.
7. No country relies exclusively on the market mechanism to make its economic decisions. The USA and most other countries rely instead on the market for some decision and on centralized decisions making for others. The use of both market signals and nonmarket directives is the hallmark of a mixed economy. The U.S. economy is distinguished by a heavy reliance on the market mechanism. The Swedish economy is also a hybrid system. Although over 90 % of business activity is in private hands, government is deeply involved in achieving economic stability and in redistributing income. Other «mixed» economies include a heavier dose of government intervention.
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