Economic Systems: Command, Market, and Mixed Show
The way in which a society answers the three fundamental economic questions is called an economic system. More formally, an economics system is a process or mechanism for answering the three fundamental questions. We can classify any type of economic system by two characteristics: who owns the resources? And who answers the fundamental questions? There are three main types of economic systems: command, market, and mixed. We will briefly describe each of these three types. Command Economy In a command economy, what goods and services are produced, how they are produced, and for whom they are produced are all questions answered by government planning. The government makes economic decisions for the good of society. In a pure command economy, all resources are owned by the government, so the government can direct them to produce what is best for society as a whole, rather than what might be in the interests of private individuals. So government owned the land, government owned the businesses, and government even told people what their occupations would be. Historically, command economies were associated with a political system known as communism, where the goals of society as a whole were given priority over individual goals. The Soviet Union until its breakup in the late 1980s was an excellent example of a command economy. Cuba and North Korea are good examples in today�s world of command economies. One of the biggest changes in the world in the last 15-20 years has been the fall of communism and command economies. The number of command economies in the world has fallen dramatically in the last decade. While the theoretical objective of a command economy is to use economic resources for the good of the whole society, as a practical matter command economies didn�t do that very well. In a command economy, government-owned producers are not allowed to go out of business, so they had little incentive to produce quality products at low cost. Since private individuals could not own means of production, they had no incentive to search for better ways of serving consumers� wants and desires. Rather than growing and prospering, command economies typically were stagnant. Market Economy In a market economy, resources are owned by private individuals. The goods and services that are produced are not determined by the government. Rather, production is determined by businesses responding to the wants and desires of consumers. (This process occurs through the interaction of demand and supply, about which we will have much more to say starting next week.) Consumers determine what will be produced. (You might have heard the expression �consumer sovereignty,� which suggests that in a market economy, consumers are king.) Adam Smith is often regarded as the first economist. In his famous book published in 1776, An Inquiry into the Nature and Causes of the Wealth of Nations (often referred to simply as The Wealth of Nations), Smith described the advantages of a market economy. Smith said that a market economy is controlled as if by an invisible hand � producers produce the things that consumers want without government telling them what to do. The invisible hand expression suggests that if the economy allows people to pursue their own individual interests, the result will be the best for society as a whole. Producers who want to make as much profit as they can will have to produce the things that consumers want. Profit thus is an incentive for producers to satisfy consumers wants and desires. Critics of a market economy argue that while it might do a good job of answering the first two fundamental questions (What to produce, How to produce), it does not do so well answering the third question (For whom to produce). Critics argues that producers satisfy the wants and desires of consumers who have the money to express those wants and desires, while those people without money are not served. In a market economy, critics say, there may be a wide gap between rich and poor. Mixed Economy A mixed economy is a blend of market and command economies. In a mixed economy some parts or sectors of the economy are left to private ownership (market) while in other sectors there is substantial government ownership or government-directed production (command). In a mixed economy, government intervenes in those sectors where private ownership is believed to be not in the best interests of society as a whole. For example, in a mixed economy the government might control the production and distribution of health care (as in Great Britain and Sweden). Mixed economies are relatively common in Western Europe, in countries such as France, Sweden, and Italy. What Is a Free Market Economy?Governments highly control some economies. In the most extreme planned, or command economies, the government controls all of the means of production and the distribution of wealth, dictating the prices of goods and services and the wages workers receive. In a purely free market economy, on the other hand, the law of supply and demand, rather than a central planner, regulates production and labor. Companies sell goods and services at the highest price consumers are willing to pay while workers earn the highest wages companies are willing to pay for their services. A capitalist economy is a type of free market economy; the profit motive drives all commerce and forces businesses to operate as efficiently as possible to avoid losing market share to competitors. In capitalism, businesses are owned by private individuals, and these business owners (i.e., the capitalists) hire workers in return for wages or salary. In such an economy, the government serves no role in regulating or supporting markets or firms. In reality, no country is purely capitalist and no country has a purely free market -- there is some sort of combination of markets and regulation, with different countries falling at different places on the spectrum. Below, we list some of those countries that rank highest toward the free market end. Key Takeaways:
What are Free Market Economies?Understanding Free Market EconomiesPurely free market economies and command economies exist more as theoretical concepts than as tangible realities; almost all of the world's economies feature some elements of both systems and are classified as mixed economies. For example, although the United States allows companies to set prices and workers to negotiate wages, the government establishes parameters such as minimum wages and antitrust laws that must be followed. The U.S. government furthermore has several regulatory bodies such as the FDA, EPA, FCC, and SEC that can intervene in firms or markets. Most countries, too, have some type of taxation and impose trade controls such as quotas and tariffs. The countries with the greatest economic freedom tend to be those that encourage entrepreneurialism and protect private property. These policies encourage laissez-faire economics, another term for a free market structure. At the same time, however, these countries often see the largest disparities in income and wealth inequality. Capitalism vs. Markets"Capitalism" and "free markets" are often terms that go together, but the two are not the same thing.
Country Rankings of Economic FreedomBased on the Heritage Foundation's 2022 Index of Economic Freedom, as of Jun. 2, 2022, Singapore, with its extremely low tax rates, minimal regulations on businesses, and highly capitalist system of economics, ranks first, being 84.4.% economically free. Switzerland ranks a close second at 84.2% free, followed by Ireland at 82.0%. These countries impose little or no tariffs, and there are few restrictions on investments and business creation. These also feature strong private property rights protections. New Zealand, which ranks fourth at 80.6% free, also has low tariffs and strong private property rights. The government provides businesses with lots of flexibility and does not constrict them with overly complicated regulations or licensing procedures. Luxembourg, Taiwan, Estonia, the Netherlands, Finland, and Denmark round out the 2022 top ten, as of Jun. 2, 2022. The United States, thought to be among the world's most advanced financial markets, is only 72.1% economically free, as of 2022, ranking 25th. This number had decreased steadily over the past decades. While certain U.S. industries generate more government scrutiny than others, private companies rather than the government control most sectors. The five countries with the least-free market economies in 2022 were Zimbabwe, Sudan, Cuba, Venezuela, and North Korea. Other Examples of Free Market Economies In addition to those already mentioned, there are a total
of 88 countries that score as "mostly free" to "moderately free" market economies. The following are included (alphabetically):
How Does the Heritage Foundation Define Economic Freedom?According to the Heritage Freedom, economic freedom is defined as, "the fundamental right of every human to control his or her own labor and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please. In economically free societies, governments allow labor, capital, and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself." What Is a Simple Definition of a Free Market Economy?A free market economy is one without government intervention or regulation. In a purely free market, buyers and sellers arrive at prices based only on supply and demand. As such, buyers and sellers compete with one another and among each other to pay the lowest price (for buyers) or receive the highest price (for sellers). This sort of competition and price discovery would exist in a free market economy for everything from products and services to labor markets. Is the U.S. a Free Market Economy?Broadly, yes it is. However, the United States is not among the top 10 market economies ranked by economic freedom. This is because the U.S. has a relatively high degree of government spending and regulation. Are Scandinavian Countries Like Sweden and Norway Free Market Economies?Yes. Even though these countries tend to have high taxes and a robust social welfare system provided by the government, these economies still rank very highly on economic freedom. These nations tend to feature strong property rights protections, judicial effectiveness, and government integrity along with business freedom and open international trade. Are Free Markets Good?As with many things, it depends. In a free market, nobody is forced to do anything and transactions are entered into voluntarily. Economists theorize that free markets, through the price mechanism, competition, and the forces of supply and demand, are able to most efficiently allocate goods and capital to where they are most productive. The problem with free markets, however, is that they can lead to inequalities, especially when there are information asymmetries. While economic theory assumes information is "perfect," in reality, sellers or producers tend to know far more about what they are selling than consumers or buyers. Moreover, economists assume that markets see "perfect" competition among buyers and among sellers, but we know that larger companies have more influence over their markets and that wealthier consumers can bid up the prices of necessities, especially in times of crisis. The result is that buyers can get screwed and sellers can cut corners or commit fraud more easily. The solution to these problems is to have some degree of government intervention or regulation to ensure the quality of what is being sold, to protect consumers from scams, and to ensure that competition is fair. Which economy has lack of consumer choice?A command economy is characterized by central ownership of property/resources, a centrally planned economy, and lack of consumer choice.
Which economic system allows for the most consumer choice?In a free-market (capitalist) economy, individuals own the factors of production: Businesses produce products. Consumers choose the products they prefer causing the companies that product them to make more profit.
Which type of economy allows the least amount of freedom for individuals?Milton Friedman, an American economist, noted that command economies must limit individual freedom to operate. He also believed that economic decisions in a command economy would be made based on the political self-interest of government officials and not promote economic growth.
Which economic system has the least control?Answer and Explanation: The laissez-faire market system has the least government control. Laissez-faire is also known as classical economics or market economics and limits government control to handling externalities.
|
