Benefits of Free Enterprise Economy over Command and Control - Term Paper Example

Benefits of Free Enterprise Economy over Command and Control of the Contents Background of the Study 3 Features of Free Enterprise Economy 4 Features of Command Economy 5 Comparative Evaluation 5 References 9 Background of the Study Economic system of a country is defined as the structure of provision of resources in a society along with manufacturing and exchange of commodities and services. According to Brogaard & Detzel (2015) an economy is influenced by the social framework of the society, political structure of the nation and the level of the economic growth, normally an economy may be classified either on the basis of: Ownership of resources, Its nature and Level of economic growth. On the basis of ownership of resources an economy can be classified as: Capitalist economy, Socialist economy and Mixed economy. An economic configuration of a society is comprised of consumers and combination of different institutions, entities and agencies. The study of economic system consists of the relations between institutions and agencies, the flow of information between them and the existence of social relations within an economy (Howard & King, 2014). There are mainly three types of economic system that exists, namely, Market economy, the Mixed Economy and the Planned Economy (Woods Jr, 2015). Market economy is associated with limited interference of government. Planned economy on the other hand is completely opposite to market economy. In planned economy, all the important decisions connected with the production, distribution and prices are taken by the state. A mixed economy is an amalgamation of fundamentals of both market economy and planned economy. This implies that certain attributes from both the economies are taken to form a mixed economy. In this type of economy, the economic decision making is undertaken by both the private sector entities and the government. The system showing mixed economic features have flexibility in some sectors and government control in others. To balance broad range of economic and political views, mixed economy involves both socialist and capitalist economic guidelines (Kaynak, 2014). Features of Free Enterprise Economy Other name of free enterprise economy is market economy or laissez faire economy or capitalist economy. Before discussing the features of the free enterprise, it is essential to have a clear idea regarding the definition of market. Lewis, (2013) defined market as a structure where buyers and sellers are engaged in the process of exchange of goods, information and services. It is a place where demand and supply of a commodity is created. When the supply of a good is equal to its demand, then this leads to equilibrium. At this point, equilibrium quantity and equilibrium prices are determined which implies that the allocation of goods has reached its optimal point. It has been examined by Kaynak, (2014) that concepts of supply and demand help in structuring the pricing system. When availability of goods is larger than its demand, then lower price is charged for that good and vice versa when supply exceeds its demand. This is a vital consideration because the market automatically sets prices of goods and services (Richter, 2015). The main defining feature of a market economy is that the allocation decision of commodities and investment decisions are primarily made through functioning of markets. However, in reality, pure market economy cease to exist since state always interferes when market fails to optimally allocate resources. The capitalist economy or free market economy is characterized by ownership of resources of the economy by the people privately and their unrestricted freedom of choice in manufacturing and consumption. This type of economy can include different types of cooperatives, autonomous or collective state agencies that trade and acquire capital goods in capital markets exploiting a free price system to distribute capital goods and labor. Some free market countries are Hong Kong, Australia, the United States, etc. (Kaynak, 2014). The salient features of Capitalist Economy are mentioned below: Freedom of enterprise and choice, Competition, Consumer’s sovereignty, Private ownership of property, Role of self interest, Limited role of government. Features of Command Economy If in an economy, economic institutions engaged in production and distribution are owned and controlled by the state and are put to use under a centralized plan, then that will be known as socialist economy or public sector or controlled economy or command economy (Bremmer, 2010). Salient features of socialist economy are: It is a planned economy, The means of production are owned by the state, In such an economy the government is the most decision maker, Economic welfare and social welfare motive. The main feature of this type of economy is that government tries to keep prices under control so that everybody in the economy can equally afford the goods and services. The main motive of the state here is to eliminate inequality of wealth. There is less scope of duplication since the allocation of commodities and services are centrally planned. Low level of unemployment exists as government’s objective is to create full employment situation in the economy. All the plans are centrally formulated. The suppliers and buyers are given limited freedom. Some countries which fall under planned economy category are North Korea, Myanmar, Laos, Libya, Iran, etc (Gregory, 2014). Comparative Evaluation Woods Jr. (2015) explains that every economy regardless of its type faces three fundamental economic problems. The central problems of the economy are: What goods are to be produced and in what quantity? How are these to be produced? To whom are these goods to be produced? The first question emphasizes on the full utilization of the resources. The second question focuses on the efficient usage of the goods. The third question deals with the productive capacity of the economy overtime. These questions arise because there is unlimited human wants and scarcity of resources (Richter, 2015). In capitalist economy, these economic problems are solved through price mechanism. In this economy, price acts as the indicator of the direction of profitable investment. Those commodities, whose demand prices are high and are profitable to produce, will be produced. For this purpose, only those techniques or factors of production will be employed which cost less as indicated by the prices of the factors. Moreover, goods are only produced for high income people who can afford to buy such goods. Hence, in a free economy, it is the price mechanism which solves the central problem of the economy. Weber (2009) suggests that price mechanism establishes an equilibrium price both in the commodity market and in the factor market. This price is determined through the forces of demand and supply in the various markets. The self-adjustment feature also is an advantage. In this economy, everybody has the freedom of looking after itself. The unique feature of market economy is that it promotes competition. Competition itself leads to innovation and efficiency in the market. It not only reduces price significantly but also raises the quality of the products. In other words, it enhances the economic output. In addition, the presence of competitors in the market results in creation of more job opportunities (Bremmer, 2010). The framework of free market does not completely depend on the false notion that existence of only one entity is good at knowing everything. The free market allows millions of actors to set price and engage in selling and buying activities which leads to better decision making rather than one big hand making big decisions. The free market does not necessarily indicate total nonexistence of government. Howard & King (2014) argued that state interference is required in order to fairly evaluate both negative and positive externalities. Sometimes to eliminate natural monopolies and to ensure competitive and fair practices government has to interfere in market functioning. Also, government applies regulations in order to remove asymmetric information between customers and producers. The role of the government in such an economy is to form a gentle environment for the free market so that it can continue to perform efficiently (Bremmer, 2010). In socialist market, the economic problems are solved in another way. In this system, neither people can produce or consume any commodity that they require nor can they accept any employment that they like. There exist many stringent rules and regulations. A planned economy forms a very powerful government which restricts individual rights to follow economic objectives. The implication of the price system cannot function in a socialist economy because the price system essentially means the determination of the market price through the equilibrium of demand and supply (Richter, 2015). Demand is of no importance if the consumers are not free to consume the goods that they require. Similarly, if producers cannot produce a commodity of their choice, supply doesn’t carry much importance. In this kind of economy, there are not many innovations. Innovation is the result of competition which ceases to exist in command economy. There is absence of profit motive which leads to inefficient production and poor quality of goods and services. There is also lack of proper information regarding what commodities to produce and by what technique. The command economy fails to react to consumer preferences. It is regarded as a risk to liberty and democracy. One of the disadvantages of centrally planned economy is the trouble faced by them in manufacturing suitable exports at prices in international markets. Too much government intrusion also prevents the flow of Foreign Direct Investments (FDI) in the country. This badly affects economy since FDIs are one of the sources of growth. Command economy is also illustrated by the presence of bureaucracy, corruption, red-tapism, etc. which slows down the level of growth in the economy (Friedgut, 2014). One of the historical evidence is the collapse of Soviet Union. The presence of strong government policies failed to optimally allocate resources and set their prices creating economic disturbance in the country. Unlike market economy, it became impossible for the state to minutely take decisions that was required to keep the nation running smoothly. Problems started cropping in the supply chain which resulted in the production of poor quality of commodities. Strict and harsh government regulations caused the technological lag in the country. Calculators, computers and other electronic gadgets could not compete with those produced in the west. On top of that, the economy was corrupted along with poor planning, bad policies, rigid and isolated system (Gregory, 2014). Looking on the other side, countries like USA and Australia which follow free market policies have succeeded in attaining high level of economic growth. Their GDP growth rates are highest and the markets are stable. They have allowed the market to take the decisions related to prediction and pricing (Richter, 2015). Hence, these evidences are enough to prove that free market economy is better than planned economy for a sustained growth and development of a nation. References Bremmer, I. (2010). The End of the Free Market: Who Wins the War between States and Corporations? European View, 9(2), 249-252. Brogaard, J., & Detzel, A. (2015). The Asset-Pricing Implications of Government Economic Policy Uncertainty. Management Science, 61(1), 3-18. Friedgut, T. H. (2014). Political Participation in the USSR. New Jersey: Princeton University Press. Gregory, P. R. (2014). Before Command: An Economic History of Russia from Emancipation to the First Five-Year. New Jersey: Princeton University Press. Howard, M. C., & King, J. E. (2014). A History of Marxian Economics, Volume II: 1929-1990 (Vol. 2). New Jersey: Princeton University Press. Kaynak, E. (2014). Marketing in Central and Eastern Europe. London: Routledge. Lewis, W. A. (2013). Theory of Economic Growth. London: Routledge. Richter, R. (2015). New Economic Sociology and New Institutional Economics. In Essays on New Institutional Economics . New York: Springer International Publishing. Weber, M. (2009). The Theory of Social and Economic Organization. New York: Simon and Schuster. Woods Jr, T. E. (2015). The Church and the Market: A Catholic Defence of the free economy. Maryland: Lexington Books. Read More