Economic Systems Essay Example
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An economic system is a structure of manufacturing and trade of goods and services along with the distribution of resources in any state. It contains the mixture of the numerous organizations, groups, individuals and customers that include the economic structure of a given society. An economy is usually described as the condition of a nation in standings of the manufacture and utilization of goods and services, and the money supply. The most renowned economic systems include Market Economy, Planned Economy (Command Economy) and Mixed Economy. There are various views and stances on each of the different economic system amongst the famous economist all around the world. A command economy is an economic system where economic judgments are carried out by the federal organizers. These decision makers also regulate what kinds of goods and services to manufacture, the their suitable prices, and how these should be allotted amongst the public. As the plans in such economies are applied though the usage of command that is the reason it came to be known as command economic system. Such nations are normally related with Marxist or communist economic systems. On the other hand, a free market economy is a system where the distribution for goods and services is solely effected by their supply and the demand. Each economic system is constructed on a diverse logical opinion as compared to the others. Such disparities are initiated by the dissimilar reactions that every economy takes to the delinquent of insufficiency. Though, economies don’t continuously perform on the defined theoretic systems and mostly takes some mechanisms from every system to cultivate an economic system that fulfils its individual requirements. Thus, economies are classified as being free market economies or planned economies by an instrument named as the economic spectrum in which the command economies are positioned on the left and the free market economies are positioned on the right side. This paper will scrutinize these systems in detail, highlighting the benefits and limitation of each one of them.
Free Market Economy
Initially we will define the major characteristics of the free market system, which will enhance the understanding as to why some economists prefer this economic system in order to increase the efficiency. The following are the prominent features that makes free market economy unique and different from the other economic systems
Ownership of resources: The private individuals own approximately every factor of production. These resources are later rented out to the firms for the purpose of production. They then rent them out to the firms so that they can produce the goods and services. Government has a limited role to play in the economy. However, the government with the help of legal system should safeguard property rights of these private persons.
Aim: Everybody in the free market system is driven by only self-regard. Customers maximise welfare, companies maximise profits
Free enterprise: Essentially, companies can trade whatever they desire. Producers efficiently reply to the customers, who are permitted to purchase whatever the producers sell. Workers are free to work anywhere they want.
The level of competition: There is extremely high competition in the market with numerous buyers and sellers operating in one market.
The pricing system: Price mechanism decides the prices of each and every goods and services sold in the market.
Following are the major characteristics of the planned market system.
Ownership: the government possesses approximately each of the factors of production. It even regulates the labour market to some extend.
Aims: The government aims to maximize the public welfare. Every economic entity strives to maximize the benefits for the society.
Free enterprise: Not present
The level of competition: Extremely little competition in the economy as most of the resources is owned by the government.
The pricing system: government officials decide the prices of all the goods and services being sold in the economy.
The planning system: The government has a job of planning what to produce, how to produce and for whom to produce through an extreme cautious consideration.
We will draw a comparison in order to conclude which economic system is better in terms of economic performance. Initially we will use the Poland’s example and assess it economic performance when it was a command economy to its after transition status as a market economy. Though numerous features can describes the Poland’s growth record - incorporating reliable economic policies notwithstanding recurrent variations of government - the chief economic feature has been that Poland accomplished the macro-micro policy connections fine. “At its core, this meant upholding a mixture of firm budget limitations for businesses, a competitive real exchange rate, and a post-privatization governance structure that permitted businesses, in specific small and medium size enterprises, to flourish. By decreasing fiscal deficits and introducing public debt on a steady and maintainable route, Poland attained a macroeconomic setting that was favourable to growth and that permitted a steady decrease in inflation (as can be seen from table.1)” (Milanovic). It shows that the business and the firms in Poland were increasing in efficiency due to better working opportunity after the privatization. In a free market economy there is more incentives for the private individuals to perform well as all the profits and the benefits of their performance goes to them as opposed to the command economies. The private firms in order to maximize their welfare utilize the minimum inputs to produce maximum output ensuring maximized efficiency in the economy.
“In Poland during 1990–93 almost all the increase in the poverty headcount (right-hand side axis) was due to the weakening in real income (solid area in figure.2). Though, the commencement in 1992, the rise in the Gini coefficient and the associated change in the distribution also begin to add to poverty (the shaded area). By 1994, increasing incomes began to pull poverty down while poverty due to a spreading income distribution increased” (Svejnar).
It further depicts that the income distribution has improved in Poland after the transition. This is a result of increasing income levels in the economy, which is gained from the improvement in the production efficiency. As people are more motivate to work they are actively looking for employment to maximize their own welfare and work hard ensuring their maximum productivity.
Move over, there are higher chances of corruption and obsolete technology and innovation in a command economy. People are disinterested are whatever hard work they put in goes to the government or the society’s welfare not their personal. Hence there are higher chances for them to indulge into corruption and put in little or no effort in developing new products or methods. Therefore in comparison we can conclude that free market economy offers higher efficiency in the economy.
“The mixed economy system provides an integrative conceptual framework that has required to join the state- positioned approaches in a multidimensional causal form. Figure 3 demonstrates how the mixed economic framework integrates these approaches into an integrative theory. State-centred forecasters emphasize the role of the state in postulating and monitoring the fundamental rules of competition and cooperation in a societal order. Studies of communist political orders extend the state-centered approach to show the overwhelming power of the party state in shaping the economic and social order in state socialist societies” (Nee & Yang ).
This is the most preferred economic system in today’s world as its combines the best features of both the economic system. With government interference and private ownership this ensure that there is highest efficiency in the market. Government strives to keep a balance in the economy by improving the social welfare while on the other hand the individual’s works hard to maximize their personal welfare.
Milanovic, Branko. Income, inequality, and poverty during the transition from planned to market economy. Washington, DC: World Bank, 1998.
Nee, Victor, and Yang Cao. "Path dependent societal transformation: Stratification in hybrid mixed economies." Theory and Society 28.6 (1999): 799-834.
Svejnar, Jan. "Transition economies: Performance and challenges." Journal of Economic Perspectives (2002): 3-28.
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