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Market and command economies market economies and their history.

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Introduction

Raja Bobbili Thursday, September 26, 2002 Market and Command Economies Market Economies and Their History A market economy, also a capitalist economy, is an economic system where there is freedom of ownership on the means of production. Emphasis is on individual liberties, with the government playing a very minimum role in the control of market mechanism. The idea of the market economies was stated in Adam Smith's book Wealth of Nations, written in 1776. This is where it is stated that efficiency is achieved by having the invisible hand of the market operating in the form of demand and supple forces. This is demonstrated by a demand and supply diagram, example of which is given in figure 1.1. Fig 1.1 Prices of goods are freely determined in the bargaining process through forces of demand and supply. The monetarists and classical economists believed in the free market forces or supply side economies, where government allows private enterprises to flourish. Among them were people like Alfred Marshall, A C Pigou, V Fisher and Milton Freedman . These believed that state owned enterprises are a waste of resources, as they are politicized or influenced by political decisions. They, therefore, called for privatization...and there began the real free-market mechanism. ...read more.

Middle

This goes to show that, due to high competition and the motivation for profits, producers tend to make their prices as low as possible - this leads into a lot of demand. Free-market economies often experience high demand. The implication of high demand are: a. High employment - Producers sell more goods, make more money and employ more people to produce more and more goods. b. Higher profits - Higher demand results into higher money inflow and higher long-term profits. c. Economic Growth - When there is more demanded, more has to be spent, hence more has to be borrowed (from outside the country) - this encourages money pump-in. When this happens, the country heads towards a trade surplus and eventually into a budget surplus. This caused economic growth. d. Higher Standard of Living e. More FDI, Foreign Direct Investment. 2. The free market system helps to allocate resources uniformly so that there is a shift from less efficient use to more efficient use. This is caused by competition - and this 'competition' is only found in market economies. e.g. When a farm owner, who is currently renting out his plot to a maize farmer for $200 is approached by a rice farmer wanting the same plot for a rent of $600, the far owner will be forced to give his farm to the rice grower. ...read more.

Conclusion

Disadvantages of Free-market Economies 1. Some merit goods, such as education and health, may not be sufficiently provided - this is a punishment to the poor. 2. Excess competition can collapse the weaker firms and can cause unemployment to the employed people. 3. Social costs such as pollution, noise, congestion will be high and difficult to control. This will, in a way, lead to lower standards of living, poor health condition and may eventually result into a higher death rate. 4. Wide income gaps will exist between the poor and the rich - the poor will get richer and the poor poorer. This is one of the bad implications of the kind of tax structure found in free market economies. 5. Harmful goods such as illegal drugs, ammunition etc. will be produced because of the cut-throat competition and the strong urge for money that these economies create. This excess desire for money, could indeed, lead to violence, higher crime rate and more deaths. 6. Social support is unseen - government benefits are low. People are on their own. While in command economies, governments are there to support the person, whenever and wherever. 7. Public goods like roads, traffic lights etc are nonexcludable. Some, who evade tax, still enjoy the benefits. In command economies, however, this is not the case because everyone has to work and feed the nation. The dependency ratio, in free market economies, is therefore very high. ...read more.

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