Some notes on different kinds of economies

Economies

 Some notes on different kinds of economies...

1) Free-market economy

Individuals can make some decisions for themselves

Main points

• Few restrictions or regulations on the market-place: any person can (buy and) sell any goods and services
• Little or no protection or control of prices: Goods and services are worth only what they can be sold for in the market-place
• In order to survive, people or companies selling goods and services must sell them for more money than they cost to obtain or prepare. If this cannot be done, they must contrive to charge more, reduce costs, or go bankrupt. The state does not intervene.
• There is little or no protection of companies that “fail” (that is, cannot sell goods and services at a low enough price) - or of their employees.

Positives

• Encourages innovation, initiative and hard work
• Encourages good service and a customer-oriented culture
• Compatible with liberal democracy
• Tend to raise the overall or mean standard of living in a country
• Efficiency: prices in a market economy follow market forces and the law of supply and demand. No-one need worry about setting prices correctly
• Robustness: when a market economy enters a depression, there may be widespread unemployment, suffering and even malnutrition, but mass starvation is unlikely

Negatives

• Inherently risky to the individual
• The gap between rich and poor almost invariably widens over time
• Favours the rich, the clever, the lucky and the strong. The poor, the stupid, the unlucky and the weak will not always prosper without charity or state intervention
• Can lead to a focus on short-term greed and profit and takes little account of the needs of others or of long-term planning and strategic aims – like winning a war or tackling global warming
• Without government intervention to ensure there is competition, market economies tend to revert to  monopoly capitalism
• A totally free market may not function correctly owing to the fact that most people are stupid – in the average person, arrogance, pride, snobbishness, greed and idleness are far more powerful than self-interest.

2) Planned or “command” economy

Many decisions are made by a controlling organisation

Main points

•  The controlling organisation (usually the state, but it can be a monopoly private company) controls or regulates the market-place for political, economic or commercial reasons: Only the controlling organisation or its clients can (buy and) sell goods and services
• The controlling organisation sets prices: Goods and services are bought and sold at the prices set by the people in power
• Whether or not goods or services can be sold for more money than they cost to obtain or prepare is simply not relevant
• The controlling organisation will protect companies and prevent them from “failing”: companies and state-owned industries cannot go bankrupt.

Positives

• Protects the individual: the poor, the weak, the unlucky and the stupid – in theory, all are provided for
• Strategy: Command economies can be strategically planned to take a long term view and prosper countries over long periods, e.g. to win a war or save a country from destruction
• Examples:
• Soviet Russia went from horse-drawn carts to nuclear weapons in 25 years – but at the enormous human cost of millions dead and imprisoned
• The NHS provides free health care for all in the UK– at the cost of 16% of the UK’s GDP. The NHS is one of the biggest and most wasteful employers in the world
• Does not tend to widen the gap between rich and poor

Negatives

• Stifles initiative and innovation
• Tend to have a lower overall or mean standard of living than comparable free market economies
• Must use coercion and ultimately, naked force to survive – in a command economy, the ultimate sanction is the hangman – F.A Hayek
• Invariably tend to be totalitarian
• Inefficiency – need vast armies of non-contributory bureaucrats to survive. The NHS is the classic example of this
• Lack of robustness - when command economies go wrong or are wrong-footed by circumstances like drought or climate change, millions will starve to death – viz. Soviet Russia in the 1930’s, Ethiopia in the 1980’s, North Korea throughout the last fifty years.

How do we tell the difference? Ask these questions

• Are there restrictions placed on the selling of any particular goods or services?
• Does someone (not necessarily the state) partly or fully control the price of any goods or services?
• Are businesses allowed to go bankrupt, or are they propped up?