THE MODERN, MIXED ECONOMY

THE MODERN, MIXED ECONOMY

We live in a world of constant change. What consumers demand
today they discard tomorrow as tastes and preferences move on;
what producers find technically impossible this year is revolutionised
next year with the latest breakthrough. In such
circumstances, achieving the twin goals of efficiency and equity in
any economic system is a never-ending challenge.
Only the most flexible and fleet-footed economic organisations
will survive to meet this challenge, as is evident by the demise of
inefficient centrally planned Eastern European economies that
could not match the growing wealth of their western neighbours. It
is also evident in the economic stagnation of nations with
inequitable regimes in sub-Saharan Africa and elsewhere which
confine riches to a few and thus fail to harness the productive
capacity of most of their peoples.
Getting the perfect mix of market systems, government controls
and national traditions just right in any one country is frustratingly
difficult since there are an infinite variety of combinations and the
global economy is moving all the time. But, of course, it is just this
endless diversity that makes the world what it is and the study of
economics so fascinating.
There is a continual debate, in particular, over the extent to
which governments should intervene in markets. It must be emphasised
at the outset of this text that markets need government and
could not survive without them – the art is in knowing just how far
to exert the guiding (corrupting?) influence of central authority and
examples will be given throughout the following pages to illustrate
this point.
That markets cannot develop without government protection is
easily demonstrated. Contrast the experience of a consumer trying
to purchase something as basic as a shirt in different cultures. In a
modern city store, the buyer would choose the selected item from a
range of alternatives on display – all carrying designated price tags
on cards which additionally provide information about the shirt
size, quality of cloth and design type employed. The customer next
takes the shirt across to the sales assistant and quite possibly hands
over a plastic card to effect a transfer of money from the
consumer’s bank account to that of the store. The buyer signs the
© 2004 Tony Cleaver
till receipt, picks up the packaged item and leaves the store. Sale
concluded.
In another culture the process may be very different. The
consumer enters the bazaar and is confronted with a wealth of
colourful alternatives, none of which appear standard. After a period
of indecision, one particular shirt perhaps seems attractive. An eager
stallholder – if not already present – soon arrives now and, recognising
a potential sale, engages in conversation with the customer
pointing out how wonderful this particular product is and how
astute his client is in picking out this item so soon. When it comes to
price, there is quite a debate. One party starts high; the other much
lower. In the process of HAGGLING, the eventual equilibrium price
emerges according to the bargaining strength and verbal acuity of
the participants. Payment is accompanied by minute examination of
the means of exchange proffered. If all goes well, the stallholder
accepts the cash and the customer moves away with his purchase,
wondering if what he has bought is as good as he hopes it to be and
whether the price will subsequently turn out to be exorbitant . . .
The physical characteristics of the shirt in both examples might
be exactly the same, though a case can be made for saying that in
the latter market place the customer has paid for the social interaction
as well as the product.
The economic reason for the differences described here relate to
the nature of institutional support for the markets in question. In the
second case, much time and effort is devoted to CLIENTISATION: the
process by which the two parties become known to one another and
their credibility established. Without the back up of a reliable
system of contracts and law enforcement, one party can always
cheat on a deal and get away with it. To overcome this, personal
credibility has to be established with a certain extravagant interaction
(hidden agenda: is the other worthy of entering into business
with?) otherwise the ‘price’ agreed upon will be all the higher to
compensate for the increased risk involved.
If the buyer distrusts the seller then the latter will have to pay
the ‘price’ of no deal or gaining less cash than he bargained for.
If the seller distrusts the buyer or his currency then he will charge
all the more. Better for both parties if they deal with each other
frequently and have already established a respectful relationship or,
failing that, one comes with the personal recommendation of a third
© 2004 Tony Cleaver
party who is known and respected by both. (Hence the importance
of extended family, or a patron, in such societies.)
Without the support of contract law, reliable currency and trust
that each is indeed the rightful owner of the property that is to be
exchanged, the market society in the second example – however
colourful and attractive to the tourist – cannot extend very far. The
TRANSACTION COSTS and INFORMATION COSTS involved limit its scope
to personal trade only between recognised dealers. It is too costly,
too risky to engage in transactions with total strangers. This simple
market economy will never grow, therefore. It is, indeed, characteristic
of what goes on in villages and towns that are found
throughout the poorer countries of the world.
How much easier it is to buy products in a modern (albeit
impersonal) market economy. Both parties are assured that if they
are cheated they have recompense in law. With central authorities
providing the essential institutions to protect property and facilitate
trade, risk is reduced and market dealers can get on with their
business.
Today people can purchase goods and services on the internet
which minimises transaction costs and allows greater expansion of
commerce. Dealing with strangers is quite normal; one-off trades
where you are unlikely ever to see the other party again do not
mean you are going to be exploited. Revealing details of your bank
account over the phone or on-line is so safe that it has become
common practice. It might be impersonal, but it works.
In fact, because it works, it has become more impersonal. Where
trust can be taken for granted, the market economy grows. And as it
grows it facilitates greater and greater economic specialisation,
interdependency and thereby wealth. You can book a foreign
holiday, buy the flight tickets, reserve hotel rooms, hire a car and
pay for it all without leaving your computer – safe in the knowledge
that the tickets will arrive in the post, the car will be waiting at
the foreign airport and the hotel room will be ready for you whenever
you say. A range of specialised contracts have all been fulfilled
across different frontiers, not one party having personal knowledge
of the ultimate customer: you. Yet insofar as these trades are
successfully concluded, all dealers profit from the arrangement and
are encouraged to expand their businesses, offer more services,
employ more resources and spread the benefits ever wider.
© 2004 Tony Cleaver
FURTHER READING
North, D. (1994) ‘Economic Performance Through Time’, American
Economic Review, Vol. 84, June pp. 359–68. This is a very accessible
article by a recent Nobel Prize winner of how institutions underpin
trade and how this accounts for the economic progress of North
America in contrast to the stagnation of South America.
Schultz, T. (1964) Transforming Traditional Agriculture, Yale
University Press. A classic text on its subject.
Wilbur, C. K. and Jameson, K. P. (1996) The Political Economy of
Development and Underdevelopment, McGraw-Hill. Not positive
economics but a provocative set of readings that emphasise the
exploitation of poorer by richer nations. Note the chapter on El
Salvador.
There is a powerful clue here to explain why some communities
grow rich and others do not. Where society has evolved institutions
to underpin markets and facilitate trade, wealth can be created.
Where such institutions are missing, markets do not develop and
wealth cannot grow. This is an important conclusion in basic
economics and one to which we will return.
Summary
• Economics analyses how societies choose what, how and for whom
goods and services are produced.
• Tradition, central planning or free markets can be employed as
mechanisms to organise production and distribution.
• The choices made and end results achieved by different economies
can be judged according to the efficiency and equity of the processes
involved.
• The real or opportunity cost of achieving any goal is measured in
terms of what has been sacrificed in achieving it.
• Wealth is created and economies develop insofar as market trade is
facilitated and enhanced by institutions that protect property, enforce
contracts and minimise risk.
© 2004 Tony Cleaver
World Wide Fund for Nature, www.panda.org. Again, not positive
economics but a source of selective information on environmental
matters.
World Bank, World Development Report 2002: Building
Institutions for Markets. The World Bank publishes an authoritative
report each year on a topic of economic importance, reflecting
the trends in current academic interest. This issue is recommended
if you want to read a more balanced reference on how markets
develop.
© 2004 Tony Cleaver