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Current time:0:00Total duration:9:44

Video transcript

in this video we're going to talk about different ways of structuring an economy in particular who owns what and how does an economy decide what to produce and who gets the the output of that production so on one side you have what's known as a command economy and good examples of command economies are the communist States especially during the 20th century the USSR the Soviet Union being the best example of that and a command economy the government controls what's often known as the factors of production and sometimes in an extreme case there might not even be private ownership so let's say that this right over here is the government I'll do this with some type of a building with pillars in it so this is the government and in a command economy the government will often own the factories and the farms so the factors of production so let me draw a little factory here so little smokestack and so the government will tell this factory you this year you have to produce exactly ten thousand cars no more and no less and so that factories say ok you're our boss you're the government we will produce exactly ten thousand cars similarly the government might tell some let's say that this right over here is a farm and this is my best drawing of a field really fast and so it used to say hey you need to produce I don't know 10 million apples I don't even know if that's a reasonable amount of apples to produce but you need to produce 10 million apples and so the farmers who essentially work for the government because the government would own that farm they would produce those apples and also in a command economy there's like well who gets these cars and who gets these apples well in an extreme command economy they will be directly allocated by the government the government will say all right you get a car you get a car you get a car and it might not be based and in fact it it will not likely be based on any type of who's willing to pay for the car or who could pay the most for the car similarly for the apples so they're all going to be allocated so there would have to be a lot of planning done on the pie of the government to say okay how much should we produce of one thing versus another thing and how do we decide who gets the different things now the other side of the spectrum you have what's known as a market economy and most economies in the world especially the United States are much closer to being a market economy than being a command economy rather than having the government owning the factors of production deciding who produces what and how much and who gets those things and a market economy it's all based on the factory right over here independent of the government for the most part unless you're in certain fact fields that might have strong influence from the government let's say you're a military contractor but if you're not in one of those fields if you're fairly independent of the government what they would say is well what is the market need they might say hey look the market needs 5,000 cars that look like this but then it also needs another 2,000 trucks that look like that and how are they basing it well they might have looked in the past year well how well is this car selling how well the trucks selling they might look at competitors in fact it in a market economy you'll often have more competition the command economies you might have one really ginormous factory that's owned by the government or a few while here you might have competing factories where they're always hey they may they make a pretty good car we're going to make one that's just as good and it comes in yellow so once again you have this notion of competition for people to produce things out in the market and they're also making their best judgment of what does the market actually need similarly you could have your farmers here and you say hey you know what I've been growing a lot of apples but that doesn't seem to be in demand anymore so I'm going to grow more I don't know peaches because it looks like the sale of peaches the peaches are in fashion this year and similarly who gets these is not dictated by the government it's determined by the market and so let's say this is me let's say this is you let's say this is someone else if I might not be interested in getting a truck but I really need to get a new car for my family so I can drive them or around and take vacations and things and so and let's say you want to get a car - but the market will dictate who gets it so for example the factory might set a price for this car they might say it is ten thousand dollars per car and maybe I'm willing to pay it maybe I'm not maybe I was like well I really like that blue car but I'm not willing to pay ten thousand dollars and this yellow car is available for nine thousand dollars so I am going to get that and the prices themselves won't necessarily be fixed if they're not selling enough of these cars at ten thousand dollars they might lower the price to compete with the yellow car at nine thousand dollars similarly if there's a ton of people who are willing to pay the price of this truck they might raise the price on the truck or produce more of it and the severe competition if one firm doesn't do this well on a regular basis they might go out of business so there's a strong motivation to be able to meet the needs of the market and then the prices adjust accordingly and so you might say well what are the the positives and negatives that people generally associate with command economies or market economies well the motivation that's often given for a command economy is some notion of fairness or some notion of equality that when you have an a market economy as a byproduct of this mechanism where different people are competing some people are innovating more or less some people might be working harder or less some people might just get lucky or unlucky er you naturally will have some level of inequality and some of the original ideas behind command economies like communism where hey we don't like this inequality we want to see more fairness and so we want to see everyone get exactly the same car we want to see everyone get exactly the same number of apples we don't want to see all of these competing firms we want one really big efficient factory to just turn out these cars now it turns out in reality that's a little bit utopian even at the peak of some of these communist economies there were people who had better access to certain things people who might have carried favor with the leadership had more power who had better Hartman's had better cars had more access to resources and people who didn't in a market economy yes there will be some inequality but the best thing going for it and the reason why most economies in the world even ones that are nominally communist like the Chinese economy have transitioned to a market economy because a market economy is also associated with things like innovation and strong incentives for people to innovate or work or do things think about the situation in a command economy let's say that you are a manager at this factor here the government has pretty told you to produce exactly ten thousand cars in exactly the type of model maybe you have an idea for how to make this car more efficient but no one's really going to reward you for that if you're not going to be able to get paid more so that you can buy more things you might not be as interested in doing it while in this situation you have extreme competition where as soon as this factory or this company is out selling this one everyone here is going to think wow we need to innovate we need to really work harder so that we can take more market share from the other company similarly at the individual level different people might say hey I can only afford the yellow car now but I di really wish I had the blue car so maybe I'm going to work a little bit harder or I'm going to try to innovate or I'm going to try to start a business most of the world has transitioned to something much closer to a market economy because overall even though you have this inequality it has made more productivity more innovation more goods and services available to more people now the reality is is most economies as I mentioned they're close to a market economy but they aren't a perfect market economy you still have the government very involved in certain industries in many economies the government might be in control of healthcare the government in almost every country has significant influence in things like the military the government and say the United States which is considered a fairly capitalist a fairly strong market economy the government still does offer social safety nets when the inequality gets too extreme if someone is in the Wilda feed themselves they might get food stamps if someone isn't able to get health care because of poverty they might get Medicaid and so there's actually a spectrum between a command economy and a market economy with most economies actually falling in this in-between state which is sometimes referred to as a mixed economy for example as already mentioned the United States which is considered a very capitalist country with a market economy it still does have some public ownership the government still does control certain aspects of the economy it still represents a fairly large chunk of the economy and so a pure command economy government would control everything pure market economy you would have very little that's controlled by the government but the reality in most of the world things fall in this mixed economy spectrum