Saturday, January 4, 2014

Learning economics through pictures: free markets vs. communism/socialism

Here's a picture of North Korea vs. South Korea at night: 
Source: Anthony Watts

We see virtually no lights  in North Korea, while South Korea is well-lit.  North Korea is a centrally planned economy, whole South Korea is more market-based.  You could call North Korea communist or socialist, and either term is probably OK.  This picture shows the devastating consequences of a centrally planned economy.

A centrally planned economy relies on central (government) planners to determine prices (and incomes).  The market system is removed, and central planners decide on what should be produced.

To help understand the difficulty of this task,  I tell my students to imagine they are central planners of a town of about 5,000.  Then imagine purchasing pants for everybody in the town.  Here are the questions you'd have to ask:

* How many pants should you purchase?
* What sizes would you purchase?
* What type of variety (jeans, khakis, etc.)?
* And more

Even for a small town, this would be incredibly difficult, and we've only focused on one item.  Imagine that you're on this committee and you have to deal with the coordination of every product in the economy.  It is an impossible task to do perfectly, and incredibly difficult to do well.

Even if you're not corrupt (and we know some politicians are corrupt), you won't be able to do as well as the market system at setting prices.

Nothing has done more to encourage economic growth than free markets.  Part of the reason is it can handle all these production and allocation decisions seamlessly.  It also encourages entrepreneurship, which further affects growth.

Over a number of years, the differences become noticeable, even by satellite pictures.

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