Economic Problems Solved By Various Societies Economics Essay
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Published: Mon, 5 Dec 2016
“The recent turbulence in financial markets in most developed economies has shown that market forces are no better at solving society’s economics than any other mechanism”
This question relates to how economic problems are solved by various societies. An economics system is a country’s plan to answer the economic problems of what should be produced, how and for whom; it is an Organized way in which a state or nation allocates it resources and apportions goods and services in the society.
There are three major types of economy, a free market economy, a planned economy and a mixed economy.
A free market economy is a system for allocating goods within a society which is mainly driven by supply and demand; purchasing power within the market determines who gets what is produced, rather than the state. Examples of these economies are US, France.
In this type of economic system, speculation, assumptions, and market forces are significant in determining economic growth. The aim of a market economy is to reduce or be completely devoid of all pre-determined prices for some products, and the level of regulation is minimal. 2The role of the government in a market economy is to ensure that the market is stable enough to carry out its economic activities properly”. Free-market economics is closely associated with laissez fair economic philosophy, which limits government involvement in economic matters to regulating
This system has the biggest advantage of rewarding hard work and consumers getting what they can afford rather than giving everyone the same thing. It leads to growth through individual prosperity but monopolies arise and distort the market
The next economic system is the planned economy, in this kind of economy the major decisions such as the goods, production method, distribution and the prices of the goods, all these important decisions are made by the government. Countries such as the old USSR and North Korea have a totalitarian government with socialist economies, where the government fix prices from the procurement of raw materials to the price it’s sold to the consumer. It is usually stable; it aims to meet a collective objective rather than individual needs, under such a system, rewards, whether wages or perquisites, are to be distributed according to the value that the state ascribes to the service performance.
And finally a Mixed Economy, it is an Economic system in which resources are more equally divided between private and government ownership. This system integrates both elements of the market and planned economies in one organized system seeking to reach a balance between them. The business sector and the government play an important role in decision making as regards to the economy but a mixed economy results in neither business entities nor the government controlling the economic activities of that country. In a mixed economy, there is a lot of flexibility in certain sectors and in other sectors government control exists.
Free market economy compared to a planned economy or a mixed economy has it its various advantages and disadvantages;
A planned economy in theory appears more stable than the other two because it is not subject to various economic crises that the market economy and a mixed economy face, i.e. the business cycles such as the housing market bubble and the recession with high rate of unemployment
There is also a question of efficiency, free markets and mixed economies contrast sharply with controlled markets , in which governments directly or indirectly regulate prices or supplies, which according to free-market theory causes markets to be less efficient. ; It also lacks innovation that the other two systems possess, free market and mixed economies encourage specialization of labour, eliminate costly and complex bureaucracy.
However, a planned economy has some advantages over the free market system in regard to efficiency; a planned economy aims to use all existing resources for manufacturing public goods rather than directing some of those resources to advertising or marketing.
It appears that a free market system could lead to more inequality due to the uneven distribution of power and wealth; property owner, big business shareholders will have access or gain more power compared to the less well off.
A disadvantage of a market economic system is that, though competing firms try to be efficient to keep costs and prices low, it sometimes creates a monopoly, a few large firms may hike prices, sometimes pricing a certain part of the society out of various products.
A planned economy on the other hand , national income could be distributed more equally in accordance with needs; public goods that would be described as necessities such as health care, In a planned economy, state planners would allocate state resources toward public goods and state projects, this might not necessarily be available in a market economy, or might require precise government provision (which then makes it a mixed economy), in a mixed economy, the government would have to achieve this goal through taxation or inflation.
Mixed and free market economies are flexible, production reacts almost immediately to the movement of demand; a planned economy lacks the kind of flexibility and because of this, it reacts slower to changes in consumer needs and variable patterns of demand and supply.
A planned economy eliminates the individual profit motives as the driving force of production and places it in the hands of the state planners to determine what is the appropriate production of different sets of goods; on the other hand because a market economy is profit oriented, it leads to innovation and creativity which a planned economy lacks.
In a mixed or market economy, there is a plethora of choices, it lets the consumer choose according to their preferences which is evident through the interaction between supply and demand but a planned economy more often than not cannot detect consumer preferences.
A free market system might not be better than a planned economy or a mixed one, it all lies in the balance, and no one system can guarantee absolute success. The market economy is clearly the system of choice in today’s global marketplace but mixed economies should be encouraged which is largely what countries like France, U.K and the US practice, there is a considerable amount of government interventions to ensure stability although they could be classified as practicing a free market system because they allow market forces drive their economic activities.
What the financial meltdown of 2007-2010 showed was that a totally free market doesn’t necessarily make the best system. With some of the developed countries manufacturing less and relying more on financial services as the basis for their economic growth, for examples the UK, leaving the various financial institutions with little or no regulations has left the consumers exposed and the world economy in tatters.
In conclusion, having a system where the government step in with regulations is imperative to prevent this sort of melt down in the near future. There ought to be directives and regulatory bodies to police the activities of private business enough to protect the end user and the economy but not too much, so as not to stifle growth. Free market system has shown it is not fail proof just as much as a command economy is not. A market economy combined with some degree of regulation, and special directives to stabilize prices by the government to protect people with low income can provide idyllic circumstances for developing countries like India, Brazil, China and other South East Asian countries to attain growth and prosperity.
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