1.1.6 Free, mixed and command economies

What is the problem of choice?

• infinite wants vs scarce resources (factors of production)

• opportunity cost

What is the economic system?

It is used to help solve (lessen) the economic problem of scarcity.

• economic systems emerge or are created by different economic agents within the economy.

• these agents include consumers, producers, the government and specialist interest groups (e.g environmental or trade unions)

• The economic system aims to allocate the scarce factors of production

What are the three basic questions regarding the problem of choice, which economic systems need to decide?

• What to make?

• How to make it?

• Who to make it for?

What is a free market economy?

An economy that has no government intervention in the allocation of resources or distribution of goods/ services.

What is a command/ planned economy?

an economy in which all the resources are owned by state and the government controls the distribution of good/ services

What is a mixed economy?

A blend of the free market and the planned market as individuals, forms and the government own factors of production and distribute goods/ services

What was Adam Smiths view on how an economy’s market should be structured?

• He believed in a Free market economy with low levels of government intervention

• He recognised that there was a role for governments to ensure efficiency in the allocation of resources and proved public and merit goods

• However, he believed economies function best when private individuals work in their own self-interest

• Famous quote by him: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest”

What was Friedrich Hayek’s view on how an economy’s market should be structured?

• he believed in free- market economies 

• he thought command economies were flawed

• he identified information gaps between what the economies actually required and what the central planners in command economies were saying they required.

• These gaps lead to shortages or surplus of goods/ services in command economies

• He left that the threat to efficiency and economic growth is overly heavy government intervention

What was John Maynard Keynes view on how an economy’s market should be structured?

He believed in a mixed economy

What was Karl Max’ view how how an economy’s market should be structured?

• He believed in a PLANNED ECONOMY

• He believed that free markets lead to capitalism, in which the owners of the factors of production exploited the workers

• This creates inequality, which will lead to a break down between the classes

• The role of the State is therefore to share the means of production and ownership with all of the worker in society.

• This required the abolition of private property.

• This required the State to become the central planner deciding how each of the three economic questions would be answered

What are the advantages of a free market?

• profit incentive motivated people to work or develop entrepreneurial ideas → more innovation

• Greater variety of goods/ services

• more competition

• Competition encourages innovation and product development 

• Profit, income and wealth are unlimited resulting in better standards of living

• Allows for specialisation

• Hard workers are well rewarded

• Freedom → people are happier → resulting in them working harder → high output

• Invisible hand of the market

What are the disadvantages of a free market?

• Wealth is concentrated in the hands of the few as they are able to keep buying up the scarce factors of production

• this increases inequality so the gap between the rich and poor continues to grow 

• Sometimes product quality falls as forms lower quality standards in order to increase profits

• Resource depletion and environmental degradation are ignored

• Monopolies develop as firms increase market power through merges and acquisitions → they can charge any price because they are the only ones who make it → monopolies the market

• Can be chaotic 

• Unfair distribution of resource

• Inequality can occur → survival of the fittest

What are some advantages of the command/ planned economy?

• Organised

• sense of authority → allows for regulation 

• everyone has a job so resources are fully used 

• meant to promote equality

• ‘government’ can protect the environment → so natural resources are used well

• less unemployment

What are some disadvantages of command/ planned economies

• Receiving the same wages creates disincentives for people to acquire difficult skills

• A lack of competition means that there is less motivation and innovation and product development

• Personal freedom is restricted

• Black markets multiple as the population seeks to address shortages

• There is a lack of efficiency as central planning always results in surplus or shortages of goods/ services 

What is the role of the state in a mixed economy?

• Some mixed economies have a higher level of government interventions than other

• Government interventions occur mainly through taxation (to raise revenue) and then spending the revenue to redistribute income and provide essential goods/ services