The
economic problem we face is because humans have a limitless number of wants but
there are a limited number of resources, what should be produced, how should it
be produced, and for whom should it be produced? The economies created are set
up to address this issue with two main solutions: the free market economy and
the planned economy. The name free market economy essentially explains itself;
businesses are privately owned without intervention from the government. The
economic problem is addressed by the forces of supply and demand. This means
that, based on the consumer’s choices, producers will choose how much to
supply. In a planned economy, the government says what to produce, how much, and
for whom in order to please the masses. Everything in this type of economy is
owned by the state. Although some countries may lean more towards one type than
the other, most of the economies in the world are mixed.
Neither
a planned economy nor that of free market is perfect. A free market economy is
more successful at motivating competition to occur. Since it is basically every
man for himself, every man does in fact work to create a good quality of life. One
big advantage is that resources are distributed in a better way using prices,
allowing the economy to work more efficiently. However, surpluses and shortages
can occur when the demand of one product changes to another. This means that
the price of the product in surplus must go down so it is more widely
available. Thus, the price of the product in shortage will go up until the
other product is bought. Then the production can be switched to that of the
product higher in demand. Because this economy is driven by the profit motive,
a purely free market economy can be a terrible thing. The big companies will become
corrupt and prey on other industries leading to an extreme amount of pollution,
high prices, and excessive control. To fix this, like in the United States,
government involvement has been integrated into the economy. Those who are
negatively affected by the unfair system of profits and losses are supported
with taxes while the wealthy are the ones being taxed.
Whereas
competition is at the heart of a free market economy, there is no real
motivation for those in a planned economy. The government simply decides what
will be produced leading choice for consumers to be very limited. For this type
of economy to be one hundred percent successful, an enormous amount of
information has to be collected in order to predict what consumers may want and
how much businesses are able to produce. This information is very difficult to
obtain and so the economy does not always operate smoothly. The government is
also very prone to becoming corrupt because they have so much control. However,
some of the control they do have can work as an advantage. Although it does not
leave much choice for the consumers, the government can stop the production of
undesirable goods. They can also change the distribution of income so as to
make it more equal.
Nearly
all countries have a combination of both a free market and a planned economy;
free markets are used to promote efficiency in resource distribution and when
the markets fail, government planning is used to help redistribute the income.
The fact that many countries that once had planned economies have changed to a
free market shows that the latter has a more positive effect. Yes, Russia and
China have showed that a planned economy can work when a country is developing
economically, but they have failed to stay stable. Of course a purely free
market economy can be dangerous as well, but it has been more prosperous over
time.
