Economics, in one aspect, is the study of how individuals, societies,
and countries manage to deal with the problem of scarcity. Scarcity
is a problem within economics because the wants of people are
unlimited and the resources available to fulfil those wants are finite
(Sloman, 2001). The answer to scarcity is efficiency which Gowland
and Paterson (1993) described as the most benefit from a certain
amount of scarce resources. Within the economic system, there are
several types of economies, each generating a different level of
efficiency. It is said that an economic system that has allocative
efficiency, productive efficiency, and equity will be effective.
Along with the latter mentioned, the division of labour and
comparative advantage, when exploited also bring about the
effectiveness of a system.
Within an economic system there are two contrasting ideals: the market
economy and the planned economy. A free-market or laissez-faire
economy makes decisions on an individual level with minimal government
intervention. On the other hand of the spectrum lies the planned
economy where all economic decisions are made by the government
(Sloman, 2001). Both economies have their advantages and
disadvantages. In a free-market economy there is freedom of choice,
high incentives, and the belief in consumer sovereignty, yet, there
are problems such as inequality of income, macroeconomic instability,
and the chance of market failure. Likewise, though a planned economy
has advantages such as low levels of unemployment and equal
distribution of income, there is a loss of personal freedom and lack
of consumer choice. Many people feel that efficiency lies in the
free-market economy where one can easily answer the questions what
should be produced, how it should be produced, and for whom. However,
the problem with this ‘capitalist’ economy is that poverty and boom
and bust cycles reduce progress (Economic Systems: How Societies adapt
to Problems, 2003). “If you care about economic efficiency, you
should like free markets…But they would also believe the second one
should be qualified, in addition to its stabilisation and distribution
functions, governments will be needed to correct market
imperfections…” (Rhoads, 1999, p.66) Rhoads (1999) mentions how a
market economy leans towards more efficiency but needs the government
sporadically, a combination which makes the so-called mixed economy.
A mixed economy which leans towards laissez-faire, as in the case with
the U.S or the United Kingdom, is rather successful. On the contrary,
countries, such as Burma or North Korea, which slant towards a planned
economy, lack progress.
Along with allocative efficiency, how resources should be allocated,
productive efficiency, which production method should be utilised, and
equity, “specialisation and exchange are both necessary to have an
efficient economy” (Demmert, 1991 p.3). Specialisation comes in the