Compare Free Market Economy Planned Economy Economics Essay

Compare and contrast a planned economic system with a free market economic system. Discuss why in world most economic systems are assorted economic systems.


The background of this economic system is private ownership and single economic freedom, i.e. the market of this economic system operates merely on the demand and offer footing, when purchasers and Sellerss by themselves decide what and how to fabricate ( Corsi, C. et al. , 1997 ) . This the chief point of this system. Therefore this system is referred to as the system of the market-driven economic system.

Harmonizing to Schotter, A. ( 1990 ) , In the states of free market economic system, 1000s of markets are available, these markets are interconnected by 1000000s of interfaces. Under the conditions of such a complex economic system, procedures are suitably controlled and regulated by monetary values. Changes in market conditions are reflected by alterations in monetary values as the monetary values inform and promote the market participants to alter their behaviour ( Cobin, M. , 2009 ) . In this manner, they introduce an order in a pandemonium.

One should non bury that, besides relationship between Sellerss and purchasers and the monetary value arising as the consequence of this relationship, there are several other market-driven economic system elements. One of these elements is private ownership. Harmonizing to Gianari, N. ( 1995 ) , Private ownership is the ownership which is disposed by single personalities and private companies ; this is the premier right of the free concern system which procures entities with freedom to have and utilize the merchandises which have a value and to dispose them.

Here we have in head the right of people and concern projects to be the proprietors of agencies of production. Though market elements are available both in usage and bid economic system, in these economic systems, fixed production assets ( companies, projects, agricultural projects, mines, and etc. ) are owned by communities, which means that they are considered as all people ‘s ownership ( Greaves, B. 2005 ) . The proprietors of these assets are the groups of people or authoritiess. In the market-driven economic system, means of production are owned by private entities – ownership is private, whereas resources are distributed by the market in conformity with the Torahs of demand and offer.

Under the conditions of this economic system, each person may be engaged in any activity he desires provided that he has assets and that demand is available. However, persons may be forced to end their activities if they are short of money. There is a batch of viing with each other entities in the community of capitalist economy ; these entities compete to have net income, whereas the monetary value degree should procure sufficient net income ( Przeworski, A. , 2001 ) . Private ownership encourages people to utilize their ownership so that it would convey net income.

Net income having aspiration encourages business communities to industry merchandises which are on demand and to sell them at the monetary value acceptable to purchasers. The net income motivation encourages business communities to fabricate merchandises under cost-efficient conditions so that business communities would be able ( Kearns, P. , 2007 ) :

To increase net income, which means to increase the difference between production costs and the sale monetary value ;

To sell merchandises at a monetary value lower than the monetary value of rivals.

Rao, P. ( 1998 ) noticed, that taking specific merchandises or services in the market, the consumers makes the makers to make up one’s mind which merchandises are to be manufactured in larger measures and which – in smaller measures, which merchandises will be on demand and which merchandises will non be on demand. Industries which right interpret the picks of purchasers and which supply merchandises necessary to purchasers may hold net income. Those makers who do take into histories these factors manufacture excessively big measures or excessively little measures or put excessively high or excessively low monetary value and hence do non hold net income. The latter frequently have losingss. In the market-driven economic system, the ballots of consumers may find the being or bankruptcy of concern.


Under the conditions of the planned economic system, all determinations refering what to fabricate, how to fabricate and to whom to industry are approved by the exclusive Centre or group ( Smith, A. , 1983 ) . This economic system is based on corporate ownership. Fixed production assets are owned by the authorities, and resources, production and the measures of future merchandises are distributed harmonizing to a program. The type of the system of the bid economic system was predominating in the USSR, Cuba, and North Korea. Harmonizing to Jozef M. new wave Brabant ( 1991 ) , the programs of the system of the centralised economic system are drawn up and implemented by the governments and governmental political leaders after confer withing with extremely ranked professionals: applied scientists, economic experts, industrialists, and other experts. These contrivers decide which merchandises to industry and which services to render. Their ballot is decisive in determinations whether new projects are to be constructed, how many employees are to be employed at projects, whether modern equipment and advanced engineering is to be applied at projects. The same contrivers, on the petition of the political governments of the state, make up one’s mind who will devour the merchandises manufactured and services, set up the sum of wage for everybody every bit good as the net income and involvement rates.

When seeking to treat all information which is necessary to organize the activities of a big figure of entities in the exclusive Centre, insolvable jobs arise in the system of the bid economic system. Therefore, in the former USSR and in the closely related Warsaw Treaty states: Eastern Germany, Bulgaria, Czechoslovakia, Poland, Rumania and Hungary, a big figure of market elements was available along with the bid direction ( Bosworth, B. ( 1995 ) . Quite big differences between socialistic states depended on the part of assets owned by authoritiess and the rigidness of planning of use of resources.

If the figure of merchandises which are on demand amongst people who want to purchase them does non co-occur with the figure of the merchandises offered, the job of mechanisms which would be capable of organizing the equilibrium arises ( McEachern, W. , 2008 ) . In the state of the market-driven economic system, an single maker who wants to have optimum net income on a regular basis by itself attempts to modify the measure, quality and monetary value of the merchandises manufactured. It turned out that the system of the planned economic system was barely capable of being flexible and susceptible to alterations. Virtually, it is impossible to alter official monetary values. In add-on to this, it turned out that it is really hard to alter the offer planned between the undertakings themselves every bit good as between companies and consumers. At long last, the desire to obtain acceptable quality at an acceptable monetary value was rarely satisfied.

Therefore, here, the market inducement is replaced by the bids of governments. Therefore, here, it is hard to alter the monetary value of merchandises, to fulfill the demands of consumers – to develop the growing of the economic system at a fast gait. Harmonizing to McEachern, W. ( 2008 ) , this was caused non merely by the jobs arisen in the cause of efforts to treat such a big sum of information necessary to equilibrate all the subdivisions of economic system in the centralised manner but besides for the ground that the shortage of merchandises frequently satisfied the economic involvements of a big figure of “ distributors ” better than trade in the balanced market.


One barely may happen the “ pure ” system or the system of the free market market-driven economic system in the modern universe. Though it is declared that the major economic determinations in the state are dictated by the market, the function of the authorities in the process of following these determinations is increasing ( Ikeda, S. , 1996 ) . For illustration, 50 old ages ago the USA authorities acquired 15 per cent of the entire figure of merchandises manufactured and the services rendered in America, whereas for the being clip this figure already amounts to 20 per cent.

Due to this combination of market forces and engagement of the authorities, the economic system of America and a big figure of other democratic states is referred to as the assorted economic system. The economic system of states which were included in the composing of the former USSR and which were under the influence of the former USSR now besides is referred to as assorted one ( Ikeda, S. , 1996 ) ..

The economic system of states of the modern universe constitutes the combination of market-driven and governmental economic systems. Baumol, W. and Blinder, A. ( 2008 ) think that, in such states as USA, the UK, France, Germany, Japan, and many other states, the assorted capitalistic system is applicable. Therefore, in the assorted economic system, economic freedom prevails. However, some determinations are adopted by groups, really frequently – by authoritiess.



Harmonizing to Baumol, W. and Blinder, A. ( 2008 ) , difference between the free market ( capitalistic ) system and the bid economic system is largely manifested by the function of the authorities and the theoretical account of ownership to the agencies of production. In the market-driven economic system, production exists for the benefit of an person, whereas, in the planned economic system, an single exists for the benefit of production. As we know, under the conditions of the bid economic system, companies, agribusiness, stores, and other production resources were owned by the authorities and major economic jobs were solved by the governmental planning governments. Therefore, in the states of centralised planning, the cardinal function is performed by the authorities. The state of affairs is radically different under the market-driven conditions: these jobs are solved by purchasers and Sellerss and the fixed production assets are owned by the right of ownership. In this economic theoretical account, the authorities performs a conditionally little function.

The combination of the market-driven ( capitalistic ) economic system and the bid economic system is the assorted economic system ( Baumol, W. and Blinder, A. , ( 2008 ) . Both the theory of economic sciences and universe experience proved that the most effectual is such a assorted economic system in which market relationship elements instead than command relationship elements prevail as both the USSR and other states of the bid economic system on a regular basis experienced the shortage of some or another merchandises and did non get by with excessively slow addition in the efficiency of agribusiness and other concern activities. Though the assorted economic system is more efficient if market relationship elements prevail, the latter elements besides have some drawbacks.