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Economic Systems: The Fundamental Questions

Summary:
Next month, my homeschoolers are taking the Advanced Placement Microeconomics test.  Here's a thought-provoking question from a practice exam:Which of the following constitute the fundamental questions every economic system must answer?I. What goods and services will be produced?II. How will they be produced?III. When will they be produced?IV. For whom will they be produced?V. Where will they be produced?(A) I, III, and V only(B) I, II, and IV only(C) I, II, and V only(D) II, IV, and V only(E) II, III, and IV onlyThe textbook answer is of course B: "What will be produced, how, and for whom?"  But does the textbook answer make sense?  Anyone with a good knowledge of comparative economic systems will see some compelling doubts.  Starting with:1. At least officially, one of the main divisions between Western and Communist regimes was on "When will they be produced?"  The Western answer was basically, "Whenever interest rates make it profitable," while the Communist answer was, "Heavy industry for you, consumer goods for your grandkids."2. Another less-publicized Western/Communist gap appears on "Where will they be produced?"  The Western answer was basically, "Wherever the wage/rent/locational desirability package is enough to attract a workforce," while the Communist answer was, "Wherever the government orders.

Topics:
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Next month, my homeschoolers are taking the Advanced Placement Microeconomics test.  Here's a thought-provoking question from a practice exam:
Which of the following constitute the fundamental questions every economic system must answer?

I. What goods and services will be produced?
II. How will they be produced?
III. When will they be produced?
IV. For whom will they be produced?
V. Where will they be produced?

(A) I, III, and V only
(B) I, II, and IV only
(C) I, II, and V only
(D) II, IV, and V only
(E) II, III, and IV only

The textbook answer is of course B: "What will be produced, how, and for whom?"  But does the textbook answer make sense?  Anyone with a good knowledge of comparative economic systems will see some compelling doubts.  Starting with:

1. At least officially, one of the main divisions between Western and Communist regimes was on "When will they be produced?"  The Western answer was basically, "Whenever interest rates make it profitable," while the Communist answer was, "Heavy industry for you, consumer goods for your grandkids."

2. Another less-publicized Western/Communist gap appears on "Where will they be produced?"  The Western answer was basically, "Wherever the wage/rent/locational desirability package is enough to attract a workforce," while the Communist answer was, "Wherever the government orders."  This was clearest in the Soviet Union, where internal passports trapped many farmers in wretched rurality and many resource extractors in hellish locations like Siberia.  But the same held in Maoist China, and other Communist regimes to a lesser extent.

3. As readers of this blog are well-aware, immigration restrictions probably reshape the global economy more than all other regulations combined.  On reflection, this is another huge "where" question that economic systems answer.  The current answer is basically, "In whatever country the workers are born."

4. The same goes for building regulations, which make major cities much smaller (in area and population) than they'd be under laissez-faire in countries as diverse as the U.S. and India.

Bottom line: Questions of "where" and "when" are very important features of any economic system.  Important enough to call "fundamental"?  It's hard to see why not.

Bryan Caplan
Bryan Caplan is Professor of Economics at George Mason University and Senior Scholar at the Mercatus Center. He has published in the New York Times, the Washington Post, the Wall Street Journal, the American Economic Review, the Economic Journal, the Journal of Law and Economics, and Intelligence, and has appeared on 20/20, FoxNews, and C-SPAN. Bryan Caplan blogs on EconLog.

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