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Nov 8, 2017 in Economics
Are Free Markets Better than Planned Economies
Free markets refers to an economic system where the decision to save, invest and earn profits is solely left to individuals in an economic system (Kotler, 1999). It is also referred to as a free-enterprise system. A control economy is the direct opposite of a free-market system. In this economy, decisions regarding production, division of labour, consumption, savings, profit share, and investment is entirely made by the government. Planned economy deals with the macroeconomic interests while free markets economy is autonomous. This paper endeavours through explanations to show, which kind of economy should be accepted for adoption.
A planned economy ensures universal survey of consumer needs before formulating a plan. This means that, thorough research is conducted on what the population wants, way before producing the goods commences. The information obtained from this research aids in formulating the end product through meetings such that the out-come receives appreciation from the consumers. This kind of economy targets a greater number of consumers. The government, acts by controlling major decisions on research, as explained with the view of improving the citizens of a country.
A controlled economy has benefits that enhance the development of a particular society. One major hindrance for this development is inflation. Inflation can be felt through the rise in product prices. Inflation can be defined as the sudden increase in goods and service prices corresponding to the economy. This makes more basic commodities harder for the poor and middle class family to acquire. Medical services become too expensive to afford, and it may seem as a luxury to get medical care whereas it is a fundamental service to an individual. Rise in commodities prices due to inflation result to rise to increase in crime in any given economy. The salary which one had always received becomes not enough hence one is compelled to turn to crime for a greater pay day. Controlled economy suppresses inflation resulting to lesser crime. A controlled economy, therefore, helps citizens of a country to fight inflation.
Monopoly is defined, as exclusive control of commodities or service in a particular market. Larger corporation usually have monopoly in business where only their products whether in terms service or commodities. Small businesses have it tough as the competition becomes too stiff for them to keep up. In the long run, the business individuals either experience great losses or end up bankrupt due to the competition presented by the business giants. The government steps in to control the situation. The controlled economy gives the small business a chance for survival among the well established business giants.
Wealth is distributed evenly in the country. They have access to capital at their disposal, so after an extensive research has been conducted they decide on when to start up a production site. It has a general focus on the well being of the citizen of the particular country is spheres of education, health and poverty eradication. This implies that all efforts of this economy are for the citizens of the country. The idea of trying to distribute wealth equitably reduces the poverty by increasing job opportunities where wealth is created.
The wages and salaries of the workers in a planned economy are set by the government, minimizing strikes in the process. The workers fear that the government is the highest payer. A private organization run by entrepreneurs will not offer the same work conditions, as the one in a state owned organization. There is also the fear of being censored from working with any other state organization. A medical practitioner, for instance, who causes strike in a government institution, could lose his license. All the efforts will then be shattered in that, the only option will be to take a risk of working with the private sector, where his output will determine the salary he gets, not the kind or level of education he acquired.
Government employees’ get paid even for the days they are not at work. Their salaries are controlled with the government, which rarely performs supervision on the quality of service that they offer. The lack of supervision means that employees’ efforts are not recognized leading to lack of motivation. When they are not motivated due to the failure of the government to provide incentives, they perform mediocre work. This kind of sector is not new in rude employees’ and poor service. An example is where one gets to a hotel owned by the state only to get poor service after an hour, with an unapologetic waiter (Theobald, 1963).
A state owned organization lacks ground to qualified personnel. The managers in these organizations are often demoralised from a lack of incentive from the government. This leads to a lack of effectiveness in their organizations often manifested in the great number of waste through excessive supplies, and shortages. This happens when there is excess produce in the market leading to a decline in prize. In the event that there is a shortage in the market, the prices of the commodities will increase leading to consumer disloyalty to the product. This distressing trend often accompanies the state owned and controlled organizations.
Planned economy works with no intention of making a profit. This only leads to inefficiencies from research, till the final produce. A look at the characteristics of business organizations clearly shows the main aim as to make profit in order to stay in business. When an organization is set to provide a service or produce a good at a loss then, it fails to work in accordance to the basic rules of business. Taking an, entire look at the whole scenario, shows that the government will dig deeper to the citizens to sustain a plant that continually makes a loss. This does not aid development but, prevents it. State owned premises and organizations are known for corruption. Corruption is manifested in the appointments of senior employees who form a basis on the decisions that are made in the organizations.
A planned economy produces only one type of product. This kind of product may not be favourable to the consumers, leading to excessive supply and wastage. The fact that the government targets only the citizens of her country means that export is not factored in. In the event that they opt to sell their produce abroad, and it fails to appeal the buyers, a huge amount of loss could be incurred. Consumers are diverse, their needs also differ, so the idea of a government producing massive products to serve the greater majority, which is diverse leads to a loss on the part of the government.
A planned or controlled type of economy hampers the development of entrepreneurs due to the regulations that it imposes upon them. An entrepreneur in the case of a planned economy has to adhere to rules of such, as those of licensing and acquiring certificates. It also delays the time in which these documents are produced which accounts for the loss of motivated entrepreneurs. The restrictions on what an individual’s enterprise should not do plus the high taxes make it impossible for entrepreneurship to strive. The entrepreneur faced with this situation figures out the possibility of increasing the prize of the product in order to meet the cost of production while the business.
Free Market Economy
Free economy may be ineffective in terms of pricing because of lack of government controls. Sellers may decide to exploit the buyer when the demand is more than the supply. The companies could create a deliberate acute so, as to make supernormal profits from the buyers. In the service sectors, for instance, the health, and education institutions, monopoly could be exercised (Root, 1994). The idea of high prices could jeopardize the lives of those who cannot access the service that is provided at very high prices. Suppliers may also deliberately give false information to producers on the market, and given that they are vital for the prosperity of this kind of market lead to its failure (Root, 1994).
A free market economy allows entrepreneurs to deliberate on the salaries and wages of the employees. Entrepreneurs, in a bid to seek profit always play unfair. They are known for giving minimum wages to their workers will they utilize their labour to the extreme. The result is usually bad energy from the employees who feel exploited. After they share what they all feel they combine efforts and take to strikes and other forms of go slows. This has a great impact on an organization in terms of production plus image.
The amount of produce will instantly reduce from the go slow initiated, as a result of the poor pay. The company will in turn register wastage, due to lack of preparedness on the issue. Image is everything for all companies, and private organizations for instance, the reason there is a desk to deal with relations with the customers and the employees. In the event that a company experiences a go slow the image will be daunted. The customers will acquire negative attitude towards the company and this will be carried to the product.
A free market economy is one that purely follows the rule of demand and supply. Entrepreneurs only produce what the consumers need without interference from the government. The pricing of the products is done entirely by the producers and consumers accept the product that serves the needs they require. The transaction is usually voluntary. Murray, N. a former British economist wrote on, Concise Encyclopaedia of Economics stating that the reason the free markets strive is because both parties; buyers and sellers, perceive a sense of benefit from the practice.
The main reason why such an economy proves a success is the liberty that accompanies it. When an individual is left to work with no supervision, from external authority, for his empowerment, much is bound to be achieved. In this economy, companies and entrepreneurs have the liberty to produce a variety of goods giving consumers a wider choice. Entrepreneurs seek innovation. This means that they work towards improving their products to suit the interest of the consumers. The rule guiding innovation is efficiency in time and commodity. One commodity that worked best in certain conditions, years back might not be efficient presently, due to a number of factors that are now in place. Free markets sense of novelty increases consumer loyalty maintaining high profits.
Where there is liberty peace is guaranteed. Working in an environment where there are fixed set rules of cumbersome processes drains the economy. A considerable amount of time is spent in making decisions that would have otherwise taken a short period of time, wasting human resources in the process. A lack of autonomy only encourages the wasted procedures that encourage boredom. New methods of production take time before implementation happens for reasons that on most occasions, lack substance. The reason is the methods end up being practised but, after a considerable time with no particular reason.
Principles of Economics by Gregory Mankiw
A look at Principles of Economics, an article by Gregory Mankiw, a Harvard Economist, shows that by benefiting oneself the society also benefits. He states that, in such a system where entrepreneurs and consumers chase for their interest, an individual may be enticed to ask how free the market economy succeeds, when no party or individual are looking out for the well being of the whole society. In a book Wealth of Nations by Adam Smith a Scottish Economist he noted that, customers and producers in a free market economy, hunt for their own interest but, end up being of benefit to that society, as though they are guided by an idea he calls the invisible hand.
Ownership is guaranteed in free markets authority, this is not the case in a controlled economy. When an individual is allowed the honour to own and run an organization, effort is incurred. All entrepreneurs take calculated risks; invest a lot of time to study the market while devoting each second to achieve the best. The idea of being a boss inculcates a sense of responsibility which enables an individual charged with the duty, the honour of playing the part in a responsible, accurate manner. Trusting an individual with a means of production he is in dire need of always guarantees better management, thereby, enabling prosperity.
In a free market economy individuals are encouraged to save. Savings ultimately leads to investment. Entrepreneurs use their own resources; therefore, wastage of resources is reduced. The government hardly intervenes in this scenario so they can manage their production while ensuring that they sell at a relatively low price. The process of saving, for an entrepreneur, is tasking, one that requires a lot of discipline and denial for a target to be realised. The same hardships that one experienced while in the process of saving will ensure he uses the savings accrued, to ensure optimum investment.
A market free economy allows competition among the individual producers and companies. The sense of competition for the market share and profits, thereby leads to innovation. The two companies, for instance producing the same goods strive for better ways of producing the same commodity using a cheaper means. The end product in competition should suit the needs of the consumers in terms of effectiveness of the product. If company A, for instance is in competition with company B, then A produces a better equipment than B, B will strive to improving its commodity. In the event that B fails to find a better way of production such that in producing the quality of A it incurs a lot of production costs than before, the company will decide to invent another product.
The above trend benefits the free economy in two ways. One of the ways the consumers benefit is by having a variety of products in the market. Then secondly, the quality of products at their disposal is guaranteed. Only the company that produces superior product, A above stays in business. New inventions and innovations keep ordering the free market economy causes technological improvement. The trend ultimately leads to an improvement in the standards of living and lifestyle of people in the economy.
Free market economy is characterised by niches. This implies that such an economy looks for a produce that serves a minimum group of people and which the government cannot provide. The division of labour and specialization enables production of good that could only be used by a minute number of people, for instance, the left handed only. This trend not only ensures that profit is generated but it also instils a sense of empowerment to the minority groups. After the minority have been empowered, they realise their role in the development of the society and once this has been affected they can get involved in meaningful production. This would not be the case where there is planned economy from the above descriptions.
Clearly, a free market economy has more advantages compared to the controlled or planned economy. The pages above explore on effectiveness, competence, innovation, better management and optimum produce among other factors earlier discussed.
- Cost Control Techniques
- Political Economics
- Cons Supply-Side Economics
- Commercial Sales Division
- Employee Compensation
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