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Free Market System - Essay Example

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Free market system is considered to be the only economic system which encourages efficient allocation of resources. In the case of Laissez-faire or the absolute capitalist economy, the resources are privately owned and households have the liberty to invest anywhere they can…
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Free Market System
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Download file to see previous pages This is more of a hypothetical situation as no economy in the world is in a total Laissez-faire state. As opposed to planned economy, the free-market economy allows households and private firms and businesses to own land and other resources and use them to invest in any part or sector of the economy which seems lucrative and profitable to them (Rao, 1998). In order to understand the benefits of free-market economy, one needs to understand how the planned economy works. In a planned economy, also known as command economy, all the resources are state owned. Its’ allocation is decided by the government in order to maximize the society’s welfare regardless of the profit motive. This means that even if the venture does not earn profit for the government and if the venture is good for the society’s welfare, the state would continue to allocate its resources to the latter. For example, if a government sets up a state-funded hospital in a remote are with state-of-the-art facilities, it cannot expect a fair return of revenue from its investment. However, this venture would increase the life expectancy of the people in the area and improve their standard of living. The government, operating in a command economy will not withdraw the investment. Likewise, operating a state-owned Postal Service in a remote area would incur losses as there would hardly be enough posts to break-even. Despite a venture’s disability to earn profit, a planned economy would continue to invest if a venture is maximizing the society’s welfare. Examples include building roads, infrastructure, merit and public goods etc. As there is no profit motive, the government will not invest as per market forces and the demand of the consumers. For example, if there is a high demand of luxury goods in the metropolitan city of an economy, the government would rather invest in those areas which would satisfy basic necessities of people in different parts of the country. Likewise, the government would not be interested to produce variants of any category. For example, there would be a limited range of cars produced in the economy. Some critiques argue that this economic system maximizes the society’s welfare and there is more even distribution of income in the economy as opposed to free market system. This is true to some extent however, like the case of Laissez-faire, there is no economy in the world which is entirely command economy. There is some level of international trade or some or some level of production in an economy which is driven by profit motive. However just for the sake of argument, planned economies fail to meet the consumers’ demand in an economy. Besides this, as there is no profit motive, the workers get de-motivated and as they are not allowed to own assets or factors of production, the economy’s GDP would be restricted to what a free-economy could otherwise have achieved. Besides this, the resources tend to be misallocated as they will not be yielding a fair return which it otherwise would have if the respective end product had a demand. The government would just be injecting more resources with no return as reimbursement at the expense of other people who would deserve a fair return for their taxes in the form of a diverse range of commodities to choose from (Rao, 1998). In a free-market economy, the resources are not just state-owned. Individuals and firms have the liberty to invest in whatever which is in demand. The market-forces would move in to stabilize the prices automatically and bridge the gap between demand and supply. Market forces will only come into play when the resources have some mobility and the consumers are free to choose from a range of products. Besides this, in the free market economy, there is a ...Download file to see next pagesRead More
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