Systems. Economic system

Actually, the word ‘system’ is an irreplaceable part of our daily vocabulary. People use it to express different meanings: we may speak of medical systems, communication systems, economic systems, defense systems, educational systems. All of us exist within cultural and social systems. But we hardly think of the very meaning of the word ‘system’. It originates from the Greek word ‘systema’, which meant ‘a whole made of parts’. Nowadays it is a strict logical notion denoting things, made of parts which somehow interact with each other for some purpose or reason. A system is an organized or complex whole - an assemblage or combination of things or parts performing as a complex or unitary whole. Systematic approach is a universal scientific method, which can be easily applied to animate or inanimate objects, that’s why both social and natural sciences use this concept, and economics is no exception.

There are many ways to characterize systems. Mathematicians divide them into 4 groups: small systems (up to 1000 components; a group of students), complex systems (up to 10.000.000 components; a phone net in a city), ultra complex systems (up to parts, economic and social systems) and super systems (planets, galaxies etc). There are systems with parallel and sequential structure, with hard or soft connections of the elements. In fact, all these classifications are rather relative, as real-world systems combine features of the opposite theoretical models.

The definition of a system implies several important ideas. First it the concept of interdependency. If a change occurs in one part or set of parts, it affects all other parts of the system. This affect on each part may be direct on indirect. Still, there are some systems where this influence is considerably reduced. It concerns parallel manufacturing systems, in which a damage of one link is not a fatal accident.

A second implication of the definition of a system is the concept of wholism. This means that the system should be considered as a functioning whole. Changes in parts of the system and in the functioning of elements of the system should be considered from the standpoint of the system's overall performance.

A third concept implied by the definition is synergism. This refers to the interactive effect of the parts of the system working together. The actual interaction of the parts creates an effect which is greater than the effect of the parts acting separately. However, sometimes we come across systems, which weaken the individual potential of their components due to poor organization.

Economic system may not be called an independent formation. It is a multidimensional space, a crossing of two greater systems – natural and social. Economic system is a certain combination of interconnected and specifically regulated elements of economy. Societies use economic systems to allocate scarce resources and to distribute goods in the most efficient way. Economic systems vary from region to region; they depend on the legislation and historical tradition. The main distinguishing features are the dominating form of property, the mechanism, regulating economic choices and the level of governmental interference. Using these criteria we may speak of private enterprise (it means that decisions about what and how much to produce are left to the discretion of owners and managers) and controlled economies, in which such decisions are the responsibility of some governmental institution. It is quite obvious, that real economies are neither fully-free nor fully-controlled. Even the countries with highly-developed market structures accept the necessity of the public sector. There are many beneficial services and protections available from the government. Those include equal conditions and fair competition, subsidies, long-term loans and the policy of protectionism. Government is an influential player in the game of life.

However, market economy may be unambiguously named the basis of economic prosperity. But what makes this system so effective? One of the answers was suggested more than 200 years ago by Adam Smith, a founder of modern economics. He used to analyze the interaction between demand for and supply of goods, and came to a striking conclusion. Smith proved that all people, while maximizing their own satisfaction, achieve the best good for society. The philosopher compared this law with an ‘invisible hand’, driving the whole market economy. The idea became really popular among his contemporaries, who developed the concept of economic man. This notion holds that each person is motivated by economic forces. Such people try to obtain the greatest amount of satisfaction for the least amount of sacrifice. This attempt may take the form of greater profits for a businessman, higher wages for a worker and greater pleasure from goods purchased for a consumer. Economic man is able to risk, to predict opportunities and threats, to think rationally and innovatively in order to get competitive advantages. Of course, all these assumptions are not entirely correct. People may be motivated by forces other than self-interest; they may have limited access to information or personal preferences. Still, the idea of economic man is a reasonable approximation of a prevailing pattern of economic behavior in a capitalistic society.

But both capitalistic and socialistic systems perfom the same principal functions. First, a system provides some means of recourse allocation. In a private enterprise this function is basically performed by the price mechanism. This simply means that demand for and supply of goods and services interact to set their market price. Price is the source of information, telling a consumer about the costs required to manufacture this or that object. In the case of regulated utilities, there are governmental agencies such as public service commissions that determine the rates that may be charged by utility companies. These rates are set at the level that will allow a fair return on investments made by the companies. This form of regulated monopoly is considered, on balance, preferable to unchecked competition, from society’s standpoint. This is true because of efficiency reasons. Sometimes governmental monopolies are allowed to set higher prices, in this case the state usually takes indirect measures to provide help to its citizens. In taking actions in the area of employment, government is attempting to control the economy in such a fashion as to help the business community operate at the level of production that will yield full employment. Actually, full employment doesn’t mean that all the people have jobs. Full employment implies the existence of frictional and structural unemployment.

Without a system of distribution economy simply could not exist. A major part of this distribution system is credit. Economy flourishes on credit or extended methods of payment. Such a system literally affects every link in the distribution chain from the supplier of raw materials to the ultimate consumer. Without this vital financing function being performed, the economy would doubtless be forced to a lower order of production. Credit system is a complex construction. It combines private and state finance, accumulated by banks, investment funds or insurance companies. Unfortunately, this system is not very stable and sensitive to political and social events. Economic crises are usually initiated by crashes of banks or stock exchanges, what makes credit system a matter of governmental concern.

Economic goals for a nation include price stability, full employment, economic growth, equitable distribution of income, economic liberty, economic efficiency and many others. Each country has developed its set of prior objectives and carries out a specific economic policy. Besides, some of the goals are contradictive, and a society should be ready to sacrifice. Price stability contributes to the efficient allocation of credit resources and facilitates long-term planning. Full employment means that jobs are available for those seeking work, and these jobs correspond to the employees’ qualification. Higher standards of living require increased output per person (economic growth per capita). An equitable distribution of income means that the fruits of the economy are divided in a way that seems fair to the majority of the people. Unfortunately, we can observe numerous results of badly-prepared economic decisions, emanating from political ambitions and lack of knowledge. While creating a long-term policy, a government should analyze the experience of other countries and the business environment in their own state. Only carefulness and intelligence can lead a nation to well-being and prosperity.