One of the most important economic decisions (if not the most important) a country must make in dealing with the fundamental problem of resource allocation concerns the choice of an economic system. Economic systems range from the pure market economy to pure command. The key differences between the two surround the issues of resource ownership and/or control and the mechanism through which resource allocation decisions are made.
     Within a market economy, the economy's scarce resources are owned and controlled by private parties. This is referred to as the institution of private property rights. Equally important, within a market economy, resource allocation decisions are made by private owners and then these decisions are coordinated within markets. Within free markets, the forces of demand and supply operate to ensure that equilibrium prices and quantities are established at which neither shortages nor surpluses exist. Put differently, markets operating on their own tend to ensure that production is carried to the point where social well-being is maximized, given that the equilibrium reached is one in which the desires of consumers and producers exactly coincide. Should consumers' desires change, indicating that they would prefer either more or less of a given good or service, the market reacts to bring about the desired change. Circumstances in which markets fail to maximize social well being, treated in detail in the following chapters, occur infrequently enough to be considered exceptions to the rule rather than the rule.
     A command economy is one in which resources are owned, or at least directly controlled, by the state. Further, decisions about resource allocation are made directly and with the force of law by the state. Put simply, within the command economy, resources are allocated based on the preferences of the planners rather than on the preferences of the public. Given this, social well-being is maximized only if the planners know better than the public what mix of goods and services yields maximum satisfaction.
     China's recent experience with both the command and market types of economic systems argues loudly in favor of market orientation. From the advent of the People's Republic of China in 1949 through the late 1970s, with minor exceptions, the Communist Party adopted the Soviet model of the command economy with its pervasive public ownership and/or control of most economic resources and extreme centralized planning. By the time of Chairman Mao's death in 1976, pragmatists in the Communist Party had begun to see the shortcomings of the command orientation. Later estimates suggest that this period of command cost the Chinese people in the sense that, had markets been allowed to exist during this period, per capita GDP in1992 would have been about two times as great as it turned out to be. The inefficiency of the command orientation is also made plain when you look at the explosive, world-leading economic growth that China has enjoyed since it began its return to market orientation in the late 1970s. This is not to say that transition in China, or anywhere else for that matter, has been and will continue to be easy. China has had to address serious problems of inflation and unemployment, corruption, population pressures, and the public's growing desire for democratic change. It appears that, with the exception of the desire for democratic change, the Chinese government has weathered the storm. Time will tell whether the leaders of the Communist Party in China will prove as pragmatic in dealing with the public's desire for increasing input into political issues as it has with respect to economic reform. If Communist Party is capable of this, China's future is indeed quite bright.