Another important feature of the free-market economy is private property. This means that individuals in the economy have the right to own their own property such as capital which are man made aids to production such as land, machinery and buildings. The entrepreneurs in a free-market economy are allowed to use this capital to make an income by producing goods and services with this capital for the consumers.
A command economy is the complete opposite of a free-market economy when it comes to private property, as there is no private property. All property and capital are owned by the state and any profits or costs produced from this capital go to the state. The reasons for this is because it is believed that private ownership of property leads to inequalities in wealth and therefore only the rich can support themselves and use services and goods which are provided and that the poor who have no wealth can not afford these services and goods that they need.
Another feature of a free-market economy is the feature of self-interest where everyone in the economy is encouraged to do his or hers’ best. This can be seen in all aspects of the free-market economy such as the consumers will spend their income to gain the maximum satisfaction; entrepreneurs who will employ their capital to obtain the maximum profits they can make; and workers will tend to go for jobs where they can gain the highest wage possible.
A mixed economy is a mixture of a command economy and a market economy and has features from both economic systems. The mixed economy is the only economic system in use in the world today. A mixed economy has both a private and a public sector, the private sector being run by entrepreneurs and the public sector being run by the state.
- Discuss the weaknesses of each system. (10)
There are many weaknesses to both economic systems. One problem the free-market economy encounters is poverty. Many people in laissez-faire economies can find it difficult to work for various reasons such as being ill, to old or being unskilled. Therefore they can become poor as they can’t work or can’t find a job that will give them an income that is enough to survive and therefore have little or no influence on what is produced, as the consumers with the highest purchasing power will have the majority of the influence on what is produced and therefore the goods the poor want or more likely need will be under produced. However in a command economy it is possible that the state will provide benefits for people who can’t work and keep the unemployed out of poverty.
Also a free-market economy can encourage unemployment, which is another factor, which can cause poverty. This is due to entrepreneurs looking to reduce costs to maximise profits, to do this they may introduce technology into the workplace, which could replace workers or limit there working hours. In a command economy, the state doesn’t care as much at keeping costs low, as it doesn’t work in its self-intrest and so could keep workers employed.
Another weakness again is to do with reducing costs is that many entrepreneurs may damage the environment by doing this whereas in a command economy there would be laws and government guidelines to prevent this. An example of this could be in a factory in a free-market economy, which emits toxic fumes and does nothing about the damage. In a command economy the state may make that factory make those toxic fumes safe in a costly process that the factory wouldn’t do if it weren’t law due to the large costs.
Safety again can be another weakness for the public in a free-market economy, when desirable demerit goods, such as alcohol and cigarettes, can be more attractive due to their low cost. These goods can be harmful to consumer whereas merit goods such as education and health services, will help the consumer and have a smaller demand therefore they can be too expensive for many people to afford. Whereas in a command economy the state will tax demerit goods making them less attractive and subsides merit goods making them more affordable or in some cases free. Also in a free-market economy there are no laws on the selling of extremely harmful drugs or other goods such as heroin. These however in a command economy are often illegal and can only be purchased illegally with extreme difficulty on the black market.
Also in a free-market economy it can be hard to make consumers pay for services such as defence that they don’t directly use and therefore they are not produced. However in a command economy these services are funded through taxing the public.
Another weakness of the free-market economy is how the role of the producer and the role of consumer can sometimes switch round in the price mechanism if a monopoly is present. One feature of the free-market economy is for companies to increase in size and power; and to drive out competition. To do this companies have two choices, drive out the competition by putting prices so low that rival firms can’t afford these prices and either go bust or leave the market; or to take over the companies that form the competition in that market. If all competition is removed then a monopoly is created and the monopolist can set the price or quantity of their product at the price or quantity they want and so they can exploit the consumer as the much as they like as the consumer only has the choice buying the product or going without it. In a command economy this doesn’t occur as the state has no self-interest only the publics’ and therefore will set a reasonable price.
There are also many weaknesses to the command economy. One of the biggest weaknesses in a command economy is that entrepreneurs and consumers have no choice. Entrepreneurs have no choice in what they produce as the state decides on what is produced and work for the state and not in there own interest and therefore there is little incentive in working, this also true with the rest of the workforce as they are assigned jobs by the state and have little or no choice in the matter. This is the complete opposite of the free-market economy where the state will not intervene and decide individual’s jobs. There is also little choice in what consumers buy there is only one choice of each good if that good is made available by the state. Therefore if that good is made of poor quality, which is more than likely as workers have little incentive to make high quality goods, there alternative to chose from so the public must have that poor quality good. This can also lead to shortages as if not enough of a product is produced then there is no alternative for consumer to turn from. In a free-market economy incentive and self-interest means that there are enough goods produced and goods of better quality produced, which is better than the command economy.
Another weakness is the lack of incentive in the workers this is due to a number of reasons such as the whole population is living with a minimum standard of living; the lack of achievement; not much job satisfaction; and little, if any, advances or promotions in their career. All of these reasons hurt a command economy considerable as productivity becomes low as workers become lazier. This is the complete opposite in a free-market economy as everyone is working in their own self-interest and therefore is more likely to want to work and so this system promotes incentive.
Another big weakness is the corruption that can occur in a command economy. In the past it has been seen that the leader of a command economy, such as Stalin, has abused their position of leader and given himself and his followers a better standard of living. This shows a large flaw in the whole model of a command economy, as they are not selfless and disinterested individuals like the command economy should have.
Another big weakness is that in history it has been seen that economic growth in a command economy is considerable less than economic growth in a free-market economy. The main reason for this is too much bureaucracy for a command economy. In a free-market economy the economy is made up of small firms and therefore the bureaucracy is spread around a lot of people, whereas in a command economy the whole bureaucracy is left up to the state. Also again incentive weakens the economic growth, as there is little incentive for entrepreneurs to enterprise in a state economy, as that individual will not receive the benefits of that enterprise whereas in a free-market economy they would.
Another big weakness of the command economy is on the environment. Although command economies do not base their productions decisions on making costs as low as possible as much as free-market economies, it is known that most command economies over the last fifty years have treated the environment a lot worse than free-market economies. The reason for this is because entrepreneurs in a command economy have been far more interested in increasing productivity than in reducing damage to the environment.
- What kind of system does the UK have today? Do you think the balance is right? (5)
The UK has a mixed economic system. This means that it has some features of a free-market economy and some features of a command economy.
One of the features that the UK has that is of a free-market nature is the feature of free enterprise. This means that the British government allows any workers in the UK to work for anyone they want and people are allowed to set up their own companies and produce whatever they want. Another feature of the free-market economy that is present in the UK is that everyone is given the right to private property and within or using that property earn an income.
In my opinion the balance isn’t right. I believe that the UK should lean more to the command side of its mixed economy. I believe more money should be spent by the state on subsidising merit goods, such as education, health and police to improve them. To do the government should tax more on demerit goods such as alcohol and cigarettes, but especially on goods that damage the environment such as petrol. I also believe that to allow for more money to subsidise merit goods the so-called ‘rich’ in the UK should be taxed more than they already are. I also believe t
Bibliography
-Introducing Economics by GF Stanlake and SJ Grant.
-Economics by Alan Anderton