An economy is a system whereby goods are produced and exchanged. Without a viable economy, a state will collapse. There are three types of economies would be discussed here: socialist economy, free market economy, and mixed.
Economic systems are defined by the method that a nation uses to allocate its goods and services. These systems have varying degrees of government control, and range from free market economies to those that have total control of ownership, taxation and resources. Small business owners must have an awareness of the type of economy in which they operate. This is important, because the firm must adapt to changes in the economic system.
Firstly, a mixed economy is a system that combines characteristics of market, the command and traditional economies. It benefits from the advantages of all three while suffering from few of the disadvantages. A mixed economy consists of three of the following characteristics of a market economy. First, it protects private property. Second, it allows the free market and the laws of supply and demand to determine the prices. Third, it is driven by the motivation of the self-interest of individuals. A mixed economy has some characteristics of a command economy in some strategic areas. It allows the federal government to safeguard its people and its market. The government has a large control in the military, international trade and national transportation.
The government’s role in other areas depends upon the priorities of the citizens. In some, the government creates a central plan that guides the economy. Other mixed economies allow the government to own key industries. These include the aerospace, energy production, and even banking. The government may also manage health care, welfare, and the retirement programs.
A mixed economy has all the advantages of a market economy. First, it distributes goods and services to where they are most needed. It allows prices to measure supply and demand. Second, it rewards the most efficient producers with the highest profit. That means customers get the best value for their dollar. Third, it encourages innovation to meet customer needs more creatively, cheaply or efficiently. Fourth, it automatically allocates capital to the most innovative and efficient producers. They, in turn, can invest the capital in more businesses like them.
The expanded government role also makes sure less competitive members receive care. That overcomes one of the disadvantages of a free market economy. That only rewards those who are most competitive or innovative. Those who can’t compete remain at risk.
A mixed economy can also take on all the disadvantages of the other types of economies. It just depends on which characteristics the mixed economy emphasizes. For example, if the market has too much freedom, it can leave the less competitive members of society without any government support. But central planning of government industries also creates problems. The defence industry could become a government-subsidized monopoly or oligarchy system. That could put the country into debt, slowing down economic growth in the long run.
Socialist economy refers to the government ownership of the means of production, planning by the government and income distribution. Socialist means the system under which economic system is controlled and regulated by the government so as to ensure welfare and equal opportunity to the people in a society. The idea of socialism is first introduced by Karl Marx and Fredric Engles.
The word socialism means ‘all things to all men’. Socialism refers to the government ownership of the means of production, planning by the government and income distribution”.
The main characteristics of socialist economy are collective ownership. In socialism, all means of production are owned by the community. No individual can hold private property beyond certain limit. Therefore, it is government who utilises these resources in the interest of social welfare. Next, under socialism, there is almost equality between rich and poor. There is no problem of class struggle. Under socialism, the government fixes certain objectives. In order to achieve these objectives, government does economic planning. All types of decisions regarding the central problems of an economy are taken according in the economic plans.
Unlike capitalistic economy, there is no cut throat competition. It means lack of competition as state is the sole entrepreneur. In socialism, government plays significant role in decision making. Thus, government has complete control over economic activities like distribution, exchange, consumption, investment and foreign trade etc. In socialistic economy, work is according to ability and wage according to need.
The sole objective of socialism is the maximum social welfare of the society. It means that there is no scope of exploitation of labour class. Government keeps a close eye on the needs of the poor masses while formulating plans.
Free Market Economy
In a free market economy, the firms and households act in self-interest to determine how resources are allocated, what goods get produced and who buys the goods. A free market economy is different and opposite to how a command economy works, where the central government gets to keep the profits.
The first advantage of the free market economy is consumer sovereignty. In a free market, producers produce what consumers want at a reasonable price. It gives the consumer more choice for their purchases. Also, there’s an absence of bureaucracy. Free markets reduce cost, lead to more innovation and research ; development through the absence of red tape. Entrepreneurs don’t have to wait for the government to tell them what to make. They study demand, research trends and meet the customer’s needs through innovation. This also encourages competition amongst firms to improve their product and service.
Guided by the invisible hand, entrepreneurs are taking risk to fulfil consumers’ demand. Those entrepreneurs who succeed are largely rewarded with profits. The invisible hand is an economic concept where market demand act as signals for producers, i.e., because consumers want and are willing to pay for bread, a baker has the incentive to produce bread.
In a free market economy, resources in the market are better distributed and allocated. Since consumers are willing to pay for a certain quantity of a product, as well as producers are willing to pay to acquire the inputs and raw materials. Otherwise, producers produce too much of a good that has no demand. It also encourages firms to be more efficient as they seek to produce at the lowest price possible to maximize their profit.
However, there are also few noticeable disadvantages of free market. Since profit maximization is the biggest motivation for firms, they may try to reduce their costs unethically by polluting the environment or by exploiting workers, which leads to a bad quality. Next, goods and services that are not profitable are likely not to be produced. Rural communities will suffer as a result, regarding transport and post. For example, hospitals in the rural area may not be profitable to run but are necessary.
The next disadvantage is some firms are having dominant power. Large firms can still dominate certain markets, even where there is competition, and they do exploit suppliers by squeezing their prices down and consumers by charging higher selling prices to maximize profits. For example, Amazon did this in the book industry by dictating unfair terms to publishers.
Unemployment problems do arise to in a free market economy. Certain level members of society will not be able to work with the elderly because their skills aren’t marketable. They will be left and fall into poverty, and when there is no government, they are unlikely to get assistance.
In contrast, each economy has its strengths and weaknesses.