Question

Explain why nations with Socialist run governments generally have lower levels of innovation and poor-quality living environments for citizens. Your answer should include the differences between Capitalism and Socialism outlined by the 3 questions that a Government Structure must answer in establishing an economy

Answer 1

Central Problems of an economy:-

There are three main central problems of any economy these are basically questions that it has to answer before it decides the type of economy it wants to become, this is also at times determined by the Socio economic status, polotical scenario, culture, and other such variables.

1) What to Produce:-

Goods can generally be classified into two types which would be Capital goods and Consumer goods. An economy at a given point of time needs to find balance between what goods it needs to produce. Capital goods include those that would enhance the production of further goods and are final goods to the producers who in turn use them to produce more goods.

On the other hand, consumer goods are those that are finally consumed by the general public. Examples could be household good etc.

The same goods at times maybe both consumer or capital. Example a car could be used by both households, and producers for different purposes.

2) How to produce:-

This would involve in deciding the technique of production ie labor intensive technique or capital intensive technique.Most economies try to balance this depending upon the state of the economy

3) For Whom To Produce:-

This involves deciding the final consumer ie what is the section of the society are to be produced for more and in what quantity ie how much for the rich and how much for the poorer sections of the economy.

The types of economies are generally classified into the following 3 types.

• Capitalist/Market Based Economy
• Socialism/Centrally Planned Economy
• Mixed Economy

Capitalist Economy:-

As the name suggests a capital economy is run by the market forces and the government of the country plays no role in deciding what to produce,how to produce and for whom to produce.It is assumed that products in higher demand that offer higher profit margins would automatically be picked by the producers to produce and due to competition they would have to continuosly upgrade themselves to be able to survive. The biggest example of such an economy would be the United States of America.

Socialist economies:-

These are economies in which the decision of what to produce how to produce and for whom to produce are undertaken by only the government. The top priority for such an economy is social welfare of the people it employs maximum labour intensive techniques to ensure wide spread employment. Goods that might not be profitable but are required for the poorer sections will often be produced in such an economy. In the modern times such economies are hardly any since countries have realised the importance of globalisation. Previously USSR was an example currently North Korea is one such country that can be contreversially be called as a socialist economy.

Mixed Economy:-

A mixed economy is one, in which both forces play an active role. Which means that the government and the private players both decide on the central problems of what to Produce, how and for whom. In certain areas of production, the producers can freely decide this while others, decisions are taken by the government. For example in India, producers are free to produce cloth or steel to maximise the profits that they earn, but railways is kept under the ambit of the indian government only.

Reason why Socialist run governments have lower levels of innovation and poor quality living:-

The prime reason for this is that the government considers social equality more of an issue than innovation, empowerment and profit maximisation. The government is in monopoly and hence would only produce goods that would give a stable but not innovative life to the residents. They would refrain from employing technology since it would lead to loss of jobs. The quality of present jobs though would be very low.

This inturn would mean a cyclical nature wherein the producers would get lesser returns, leading to lesser wages for the factors of production meaning lesser net disposable incomes and poor living environments. Such countries also engage in import and export of only primary goods leading to lesser technological innovations.

Situation in a Capital Economy:-

The prime reason why a capitalist economy would have higher levels of innovation and a better quality of living is the fact that the ultimate goals of all those engaged in production is profit maximisation. Therefore only those goods are produced that are in demand. The best possible techniques are used to keep the cost as minimal as possible, and these are produced for those who have the paying capacity to purchase the goods. Also continuous technological advancements are done to improve output, reduce cost of production, and lead to higher profit margins. This further leads to a higher level of disposable income with factors of production, and a better lifestyle and living environment for the same.