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Nov 8, 2017 in Economics
Free Market Economy and Planned Market Economy
Free market economy refers to the type of the economy where various means of production, such as land and capital among others are either privately owned or under the ownership of the people. Such form of the economy is commonly referred to as either capitalist economy or Laissez faire economy. It is believed that societies practicing the free market economy are guided by the need for efficiency, growth, freedom and varied production (Forbes and Ames, 2011). Through the history, free market economy has been identified by various features which includes “individual are in possession of production, freedom of operation, businesses are profit oriented, properties are inherited and owned by individuals, prices are determined by demand and supply, and limited interference from the government” (Martinez, 2009).
Advantages of Free Market Economy
In a free market, entrepreneurs have an opportunity to utilize their mind in production issues. A free market encourages individuals to exercise their ability (Martinez, 2009). For instance, the fact that new products are valued, promotes continuity and the need for individuals to get involved in new production. This stride is only possible because of the fact that the government does not hinder the free market production and allocation of resources.
On the other hand, the inability of the government to interfere in the free market economy often offers producers and consumers an opportunity to adapt to the changing market waves (Martinez, 2009). For instance, free markets usually find it easy to adapt to varied changes that are common among consumers and producers. Such state is only possible in a free market because of the fact that it is never interfered with by production, trade, and resource allocation interventions initiated by the government.
Free market economy encourages competition within the market, thereby causing producers to focus on quality products. According to Martinez (2009), competition is believed to be an indispensable tool that can be utilized for the development of cooperation and division of labour. In other words, a free market economy is perceived to be more productive because of the division of labour.
Disadvantages of Free Market Economy
Since in the free market economy, individuals only enter into trade and production because of the perceived benefit that each party is to acquire, it would be impossible for individuals to engage in trade or production for the benefit of others (Forbes and Ames, 2011). In other words, free market economy is driven by profit making; such drive can easily ignore the essence of production at a fair cost for the entire community at the expense of a few individuals who are able to afford costly products.
Secondly, the freedom allowed by free market economy can sometimes be misused to infringe and oppress the minority (Martinez, 2009). That is, according to every individual in society the right to do what he/she likes, tantamount to denying consumers the right of choice and freedom of expression regarding their interest and the quality of products obtained from consumers.
On the other hand, planned market economy is an economic system where all aspects of production are under control of the government (Weber, 2012). That is, it is the government which decides on how resources meant for production are being allocated; what, when, to who, and how much to produce at any given time. Therefore, in a planned market economy, the government is in full control of all aspects of the production. Some characteristics that can be used to identify a planned market economy include, the ownership of production factors are controlled and managed by the State, consumers and producers do not have authority of production, prices values are determined by the government and not the demand and supply, and production is not intended for the profit (Weber, 2012).
Advantages of a Planned Market Economy
Generally, a planned market economy propagates industrialization and the structural change. These industrial and structural changes are based on the fact that the government plans for and executes various projects aimed at promoting industrialization for a better production of goods and services (Wolf, 2001). Planned market economies are also prone to low income, inequality in wealth distribution. Such conditions have continuously promoted higher literacy levels. In addition Weber (2012) cites that industrialization that comes with planned economies have constantly offered citizens better life styles by according all citizens basic healthcare, increasing life expectancy and reducing the infant mortality rate.
Moreover, planned economies allow individuals to earn income based on their work, thereby giving room for individuals to acquire different income, especially when the work done is unequal. On the other hand, the fact that planned economies are under the control of the government offers much stability to a country’s economy. According to Weber (2012), the planned market economy is more controlled and guided by certain rules of operation that ensure the conformity and collective focus of individual efforts from all perspectives. This is totally different from the free market economy where every individual is directed by the personal interest.
In addition, various governments operating from the planned market economy perspective find it quite easy to achieve various social and economic goals (Weber, 2012). This is firstly owed to the fact the system operates on a collective effort, thereby allowing the entire nation to focus their energy on the government’s designed mission and objective. In Wolf’s (2001) view, most societies that have embraced planned market economy to always ensure that there is fair distribution of goods and services, as well as a wealth. This is particularly owed to the fact that that the production process is in hands of the state.
Besides the equal and even distribution of goods and services, planned market economies ensure that the production is not directed by the people; but the government that understands the economic status and needs of the country. For instance, in a planned market economy, the government takes it upon itself to price goods and services, thereby making them affordable to every person’s need. The aim of this strategy is to ensure that wealth is evenly distributed among all societal classes. It also eliminates instances’ stratification within the society; a fact that is common because of unequal wealth distribution.
Disadvantages of a Planned Market Economy
First and foremost, a planned market economy is under the government’s control, irrespectively of whether the ownership of production forces is government owned or privately owned. Such economic system can easily infringe on the functioning of an individual or private investors (Wolf, 2001). However, in a free market economy, factors of production are under control of either individuals or the privately owned, thereby limiting the government’s move to interfere in the production process.
The other disadvantage of planned market economy is the presence of competing interests which hinders the decision-making. The essence of a planned market economy is to propagate democracy in the production and allocation of resources based on societal needs. However, such objective cannot be met easily, because of competing interests that arise in every economy (Wolf, 2001). Such fact has, therefore, made it hard for planned economies to exist in democratic societies; instead, planned market economy have naturally existed in nations that are governed by either dictatorial or oligarchy leadership. Examples where planned economy has worked in the past include the former Soviet Union, India before the 1991 and the Chinese State before 1978 (Weber, 2012).
In addition, as much as governments advocate for the planned market economy, it is always impossible for the State or any other body in-charge to plan everything. This implies that in an event of failure, the whole system will be perceived as malfunctioning, even if the wrong could simply be resolved. According to Weber (2012), history shows that most planned economies are not efficient, because they do not take into account breakdown related issues.
Differences between Free Market Economy and Planned Market economy
Owing to the fact that various means of production in a free market are not under the government’s control, individuals in such a market take such opportunity to engage in innovation and hard work for the success of every venture they are making. According to Martinez (2009), free market serves as an avenue where people, especially the minorities, are allowed to take part in the market. According to Wolf (2001), this is not like in planned market entries, where the main part controls the process of innovation and intellect; with minority underscoring a continued innovation process.
In a free market, individuals are in control of all aspects of the economy, thereby eliminating the issue of physical coercion. In other words, people voluntarily strive to attain the economic power. Individuals collectively decide to come together and engage in trade and production with an aim of creating wealth for themselves. It is a system that encourages mutual trade in goods and services for the benefit of the owner of the products being traded.
On the other hand, prices and wages in a free market are determined by the law of supply and demand as opposed to the planned market economy where market prices and wages are typically being determined by some arbitrary personalities within the society. Forbes and Ames (2011) cite that whereas the determination of prices in a free market economy might seem to benefit those participating in trade, it is a system where an individual cannot grow rich easily, unless he/she is capable of producing high quality products. However, this is not the case with a planned market economy where the government determines the price at which a commodity or a product should be sold (Martinez, 2009); a state that offers every individual an opportunity to be wealthy as long as his/her products are trade and production value.
Nonetheless, as much as it is cited that the state does not interfere with the operation of the free market economy, it would be hard for such ground to be maintained. This is particularly owed to the fact that the free market economy requires the State for the purpose of maintaining law and order (Martinez, 2009). Ideally, various States automatically interfere with the market economy through its various statutory measures that are designed to maintain law and order. For instance, in a bid to maintain law and order, the State might decide to implement rules and regulations restricting the flow of certain goods and services either within or outside a particular country (Martinez, 2009). In such a case, States will have interfered in the functioning of the free market economy. However, in case of the planned market economy, it is always obvious for the State to interfere with the functioning of the market economy. For instance, the State not only maintains law and order in a planned market economy, but also has the mandate to enforce contracts, thereby the right to influence and alter the nature of production.
In conclusion, a planned market economy tends to be better than a free market economy. The first reason for this assertion is based on the fact that a free market economy seems to be a theoretical system, especially if all means of production are left in hands of the people. In such situation, crisis is bound to occur. That is, almost every person will strive to trade only in products that have a high market demanded, thereby leading to depletion of resources with a high demand. Naturally, it is vital for resources meant for production to be controlled; a state that is highly encouraged by a planned market economy. Based on the fact that all producers are required to be socially responsible during the production process, it is only plausible for the government to control the production process. This would ensure that resources are used appropriately, while focusing on practices that are not hazardous to the environment and humanity at large.
At the same time, the planned market economy offers consumers the ability to determine various trade aspects, such as the value and prices. Such a situation does not exist in a free market economy because of the belief that issues of market, value and prices are under the jurisdiction of producers and not consumers. This implies that in a free market, consumers can easily be manipulated by producers. The other strength that makes planned market economy better than a free market economy is the fact that the government does not only regulate or control production resources, but also monitors the production process to ensure that they adhered to the stipulated quality standards for the well-being of the entire society.
At the same time the level of competition being experienced in planned market economy is healthier than in the perceived free market competition. For instance, foreign manufactured products are usually more competitive than locally manufactured products. Such conditions can sometimes discourage local production and skills, if traders and/or producers are left to freely compete in the market. Under such circumstances, planned market economy is recommended, because of its control measures that not only ensure faire ad healthy completion, but also imposes import restrictions for the quality of local manufactures.
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