Market Society or a Centralized Economy - Assignment Example

Would you rather live in a ‘market society’ or a ‘centralised economy’? In the world today, countries, corporations and societal communities are heavily reliant on the different systems of economy they utilise. Essentially, an economic system is a socially-based mechanism that primarily manages the way goods and services are produced, distributed and eventually consumed by society. Economic systems are composed of communities of people, the infrastructure that allows trading of goods, and the nature of interrelationships among the resources they use such as the convention with which land is utlised. Economic systems also manage existing economic relationships such as the proper allocation and scarcity of socio-economic resources throughout society. As the world’s economies become increasingly interrelated with each other, several problems of economics need to be addressed. As was mentioned above, problems from scarcity lead to rudimentary economic issues such as what particular good or service needs to be produced, how this kind of product or service is produced, and the target market this kind of product or service is being produced for. These economic issues can be addressed by an efffective and customised economic system. Each economic system addresses these economic issues in a different manner. In most cases, ideologies, political systems and economic systems have strong interrelationships. Today there economic systems in existence that correspond to the different needs of society and how that particular society intends to manage their economy. Some of the most common economic systems are the market economy (2002), mixed market and planned economy, planned or central economy, traditional economy and participatory economy. This paper aims to provide a comprehensive description of the market economy and the centralised or planned central economy. The nature of these economic systems, their prerequisites to the community or country that wishes to utilise them, characteristics, positive and negative effects when applied to a market, are also presented in providing a comprehensive description. Apart from these, this paper also presents a concise comparative analysis between the two highlighted economic systems. What would be the more applicable and more preferred kind of economic system given the current scenario? What would it mean to live in a market economy as compared to a centralised economy? These are just some of the questions that would be addressed in this paper. The first part presents a description of the market economy. The market economy, also identified by other extant studies as the free market economy (Rothbard, 2002) and in other studies a free enterprise economy, is an economic system that manages how goods and services are produced and distributed guided by a mechanism of unrestrained market structure and is directed by un-constricted pricing system. Enterprises are given the responsibility and accountability to decide what they will produce and consumers are given the same kind of empowerment on what they will consume and purchase (Command and Market Economies, n.d.). However, when compared to a planned economy, the government, that is the central economic planner, determines what kind of good and service will be produced and at the same time at what quantities. An ideal or purely free market does not exist in our world. With this, almost all current economies in the world are running essentially on a mixed economy that integrates various aspects of free market and planned central economies. Take for instance the United States’ economic structure; it enjoy more traits of a free market economy as compared to other Western European countries. Realistically, an ideal free market cannot occur without legal repercussions; however, the most approximate semblance of a free market can be observed in an underground economy. The most fundamental premise of a true free market In order for an economy to be considered a true free market economic system, is that in which labor, goods, services, and capital factors are unrestricted and controlled from any kind of government policy or management. This will entail that economic systems become free to move across any kind of economic border. Let us look back again on the United States and consider the kind of restrictions they impose on the market. The US employs restrictions to certain organisations when they reach an almost if not totally monopolistic state. On the other hand, the US government grants monopolistic status to certain organisations for certain reasons or situations. On the other hand, the market is less restricted as compared to the US. Some of these areas are Hong Kong and Singapore, according to the Economic Freedom’s Index of countries. This speaks about the level of freedom the economy is enjoying (Index of Economic Freedom, n.d.). More often than not, the concept of a free market is conflated with anarchy as it is believed by most people that an uncontrolled market often involves an absence of government. However, only a select few scholars advocate the removal of the government and the rest still believe that the government always has a role to play. Even in the ranks of anarcho-capitalists, the rule of law as applied to the free market is defended (Rothbard, 1977). In most cases, economists believe that in a free market, governments should exist to at least operate court systems in order to settle disputes between bargaining bodies, maintain a stable currency as a base of transactions within their economy, protect the market from unbridled market competition and consumers, and protect the country and its citizens from oppressors through national defense (Rothbard, 1977). Although it can be stated that there has never been a country that has an economy where all markets are free, the term when used to describe an economy of a certain nation is not used in its absolute sense. Renowned economists stated that it is necessary to achieve economic freedom in order to create and sustain indefinitely civil and political freedoms that can be enjoyed by the people being governed. It is seriously believed that that this kind of economic freedom can only be attained when a market economy is based on a free market economy. On the other hand, sufficient economic freedom can also be attained by means of functioning markets through prices and private property rights. It is believed that as more and more economic freedom is given to the people and to the market, more civil and political freedom is given back. In describing a free market economy, It is often stated that economic freedom is one of the fundamental foundations for a country or group to attain political freedom. In other words, by letting people behave accordingly and empowering them to cooperate with one another without any kind of direction or forced action from a central body or institution, this reduces the amount of area where political power is exercised. This entails a kind of freedom that most people enjoy, assuming that these people utilise this freedom accordingly. Extant research shows that there is a standing relationship between economic freedom and political, civil freedoms. Countries that restrict economic freedom in the end often entails constricting civil and political freedoms usually given to people. As have provided a description of how the market economy works, the suceeding paragraphs present the functionalities of a centralised economy. A centralised economy, also known in order studies as a command and planned economy (Democracy and Economic Planning: The Political Economy of a Self-Governing Society, 1988) is another kind of economic system whereas a central command or institution controls how goods and services are produced, how it is produced and how much of this goods and services are produced. The government is usually the central command where all economic directions come from. In contrast, planned economies produce goods and services, distribute and price them according to a overaching macroeconomic plan as compared to private owners who based solely upon their own interests. In a planned economy, the government may either own an enterprise often called state- owned enterprises, direct private enterprises or a combination of both. Although a planned economy is often synonymous to a command economy, some provide a distinct characteristic that under a command economy, the means of production are publicly owned. This is accounted for by the principle that as the government controls the means of production, and the people are the government, then it would follow that they control the means of production (Myers, 2004). Further, a planned economy is a system that gives controls and regulatory powers of production, distribution and prices to the government. However, on a command economy, while being able to maintain this kind of regulation, necessarily entails a substantial public ownership of industries controlled by the government. It can be deduced that command economies are therefore planned economies, but not necessarily the reverse . Take for instance during Nazi Germanys private ownership. During the time of Nazi Germany, they utilised the Four Year Plan that might give them the impression that they are a planned economy; however they are not necessarily a command economy. On the other hand, the USSR implementing its plan of public ownership would direct them to be a command economy. Significant examples of planned economies that had been implemented in the past are composed of the USSR (Murza, 2004). During the time of the USSR, they had become the second-largest economic system under the command economy, second to the US. However on the onset of 1980s, several governments utilising the planned economic structure began deregulation and had progressed towards a more free market economic structure (Gregory, 2001). This was induced by the influx of private sector to make the pricing, production, and distribution decisions. As most countries today utilise the free market economic structure or utilise a mixed market economic structure, there are still some planned economies such as Cuba and North Korea (von Brabant, 1991). A centralised economic structure often ensures the production of necessary goods. Ideally one that is not based on any vagary of one person but rather of a collective of leaders that look into the welfare of the general public (Eucken , 1951). The central government can use its power in order to utlise land, labor, and capital to serve the economic objectives of the state. The objectives of the state can then in turn be decided democratically by the people. With a centralised economic system, the demands of the consumer can be temporarily restrained in order to focus the economic machinery for capital investment to attain and further economic development based on a general directive or plan. For example, a centralised government can immediately initiate building and improving its heavy industries at once although in an underdeveloped state while not wasting the years waiting for capital to accumulate through the expansion of light industry, and most especially without having to rely on external financing (Eucken , 1951).. One other advantage of this kind of economic system is that the public – that is, the consumers – need not have monetary means in order to express their economic demands. On the other hand, they may participate in a consultative and a democratic process of decision-making in order to air out their concerns and cast their votes that would affect the direction of the economy. A planned economy also has the capacity to maximize and continually utilise all available resources in order to progress economic developmen. A planned economy is not hindered by a business cycle. Also, under a planned economy, unemployment and production facilities not used should not exist beyond acceptable levels and the economy should have the capacity to stabilise after the effects of inflation or recession (Eucken , 1951). One of the benefits of a centralised economy is that it can also manage social goals rather than individual goals. With a centralised economy in place, rewards and/or wages are to be distributed based on the social value of what this person has performed for the state. As compared to a free market economy that maximises wealth by means of evolution, a planned economy on the other hand more favors design. While evolution tends to lead to a local maximum in aggregate wealth, theoretically design is more capable of achieving a maximum efficiency. A city can be designed in order to be more efficient in terms of transportation while cities that are poorly planned - organically grown tends to suffer from severe traffic congestion. One can imagine that it would be better for some cases for the government to manage the state and the economy in times of extreme and near-anarchaic situations in order to return past glory (Eucken , 1951). In addition, a centralised economic structure aims to replace a group of firms in a market with a single overly macroeconomic firm to serve the state and the public. The stability of a planned economy therefore is affected by the theory of the firm. In essence, most corporations are also centrally planned economies. In other words, corporations are essentially miniature centrally planned economies and seem to do just fine in a free market. The existence of firms in free markets shows that firms need to exist within free markets and economists opposed to planned economies argue that there is simply no need for a single “global” firm for the entire economy (Lewin, 1994). One clear example of a centralised economy is that of the former USSR. The USSR was based on state ownership and central administrative economic planning. The USSR initiated the worlds first modern centralised economic system (Lewin, 1994). From the early 1900’s to the 1990’s, the economic engine was directed by a series of Five-Year Plans. With this kind of planning, the USSR was ranked 3rd among the worlds top heavy industries manufacturers but had severely lagged behind in the output of light industrial production and consumer durables (Kennedy, 1987). After the USSR was dissolved all but a handful of the 15 former Soviet republics have dismantled their Soviet-style economies and had shifted to other economic systems, most of which are free market to mixed economies (Goldman, 1994). After being able to provide a comprehensive description of both market and centralised economic systems, the paper proceeds to an analysis between the market and the centralised economic system (Fitzsimmons, Malof & Fiske, 1960). Currently, there are numerous critics of the free market economic system as an organizing principle of an economy. Criticisms range from rejecting free or even mixed markets entirely, in favor of a centralised form of economic system, to advocacies that merely want to see the markets regulated to certain degrees, to those who believe that greed is inherently immoral and even people who just raise some practical objections to the free market economic system. Of all these objections, there are those that present very exhuberant ones such as the claim that markets wreak havoc through their externalities or aspects that the market has not taken into account upon its implementation. One of which is environmental protection. As the market has continued to progress, its level of pollution has continued also thus ever increasing global risks such as global warming and environmental degradation. Another criticism is because of the inherent trait of free markets being able to create monopolies, free markets eventually sow the seeds for the destruction of their own market (Fitzsimmons, et al, 1960). Further, market economists believe that governments that always aim to manage the free market should not limit market freedom as they are still yet in disagreement as what is a market externality and what are government created externalities. In addition, market economists and government economists disagree over what the appropriate level of intervention is necessary in order to solve market created externalities or issues. Other economists believe that the government should intervene in order to maintain the integrity of the market while being able to maintain the general character of a market economy. Take for instance the model of the market economy where the state only intervenes upon the time where the market no longer meets the political needs of the state and the public (Ollman, 1997). As we present some criticisms on the free market economy, the paper now presents another set of criticisms on the centralised economy. Economists that argue against planned economies state that it cannot effectively detect consumer preferences, shortages of goods and services, and surpluses and therefore cannot efficiently co-ordinate production as compared to a free market economy where the free price system is the one that will solve this problem (The Price System at a Time Of Large-Scale Maladjustment, 1963). For example, during the USSR term, shortages were so common that people can wait hours just to purchase basic consumer products. These shortages were due to central planners’ decisions. For example, making tractors was determined to be more critical than making shoes which was called an economic calculation problem and was further enhanced into the shortage economy theory. Another existing problem is due to surpluses (Harrison, 2005). Experts explain that a market economy has the capacity to stop long-term surpluses because of its operation of supply and demand that induces the price to drop as the supply begins exceeding demand and signals producers to halt production (Henderson, 1922). This kind of invisible hand prevents shortages and surpluses in the long run. When constrasted to centralised economies, prices are not allowed to float freely; therefore there is no accurate mechanism for determining what is unnecessarily produced in very large quantities and what is insufficiently produced. This will reinforce producers to be more efficient and can be achieved as stated by critics of the centralised planning through a market economy where individual producers each make their own production decisions based on their own profit motive (Henderson, 1922). Another kind of criticism directed towards centralised economic system is that innovation is less likely to occur as compared to a free market economy. In a free market economy, research and development are able to acquire huge benefits by producing new technology and patenting them. The structure being used by a centrally planned economy dictates a hegemonic and top down operating culture whereas a free market economy can compete simultaneously in a manner similar to that in the wild. In addition to this, other critics that are in opposition to centralised economic planning assert that it is possible to create unprofitable but socially useful goods within the context of a market economy. It is also stated in extant research that without a market to effectively allocate goods and services in accordance to the law of supply and demand, it is nearly impossible to funnel resources relative to human preferences and goals (Machan, n.d.). Lastly, other criticisms hold that certain types of centralised economic systems sometimes require the government to intervene within peoples personal lives. For example, when goods are being allocated by the state rather than by a market economy, citizens cannot easily move from location to location without state permission because if they would, they woul not be able to acquire food or housing in the new location. This is because the necessary resources were not preplanned. On the other hand, people who advocate centralised economic systems may point out that a free market economy may not even guarantee the existence of food and housing at the new location, either. References 1. The price system at a time of large-scale maladjustment. 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Henderson, H. D. (1922). Supply and Demand. New York: Harcourt, Brace. 10. Index of Economic Freedom. Viewed April 9, 2007 11. Kennedy, P. (1987). The Rise and Fall of the Great Powers, Random House, New York 12. Lewin, M. (1994). The Making of the Soviet System. New Press 13. Machan, R.(n.d). Some Skeptical Reflections on Research and Development. Hoover Press. 14. Murza, S (2004). Soviet Civilization: From The Great Victory Till Our Time. 15. Myers, D. (2004). Construction Economics. UK: Spon Press, p. 288 16. Ollman, B. (1997). Market Socialism: The Debate Among Socialists. UK: Routledge, p. 12 17. Rothbard, M. (1977) Power and Market: Government and the Economy, 2nd ed. 18. Rothbard, M. Free Market 1999 – 2002, viewed April 9, 2007 19. von Brabant, J. M. (1991) The Planned Economies and International Economic Organizations. UK: Cambridge University Press, p. 16 20. W. E. (1951). The Foundations of Economics: History and Theory in the Analysis of Economic Reality. 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