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Free market versus state directed economy

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Published: Mon, 5 Dec 2016

Introduction:

According to Smith (1770) point out the “It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy . If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.”

Nowadays, a free market is an economic system that is no economic intervention and regulation by the government. In addition, in free market, the system of prices is the emergent result of a vast number of voluntary transactions, rather than of political decree in a controlled market introduction of supply and demand. Such as Dubai. The UAE has an open or free economy with a high per capita income and a significant annual trade (imports and exports) surplus. 10 years ago, however, the state directed economic or controlled market is regulated by government. Furthermore, a variety of forms of regulation exist in a controlled market such as, over sight, anti discrimination, environmental protection, taxation and labor laws. This report looks at some of advantages and disadvantages of free market economic and state directed economic.

Advantages of free market

There are several advantages of free market economics. The main advantage of free market is stimulating goods greater growth because countries with free market economics top the list with the highest Gross national income per capital (GNI) and Purchasing Power Parity (PPP). In addition, GNI Gross national income is a common activity of a country and PPP is a common measure of the differences in the cost of living. Free market economics stimulate great economic growth, because they rely on people to buy and sell things or service. It was known that Dubai having a free market economy because most businesses are left to private enterprise.

Disadvantages of free market

There are a few disadvantages of free market. The most notable disadvantage of free market is, no provision of public goods (bus stop, garden, street lighting, army, police, fire services) important requirements for public goods not provided since it is not profitable to produce as consumers are not directly willing to pay for them. Another disadvantage is social cost ignored e.g. private firms ignore negative external factors (air, water and noise pollution, road conditions etc.) It could fail to provide certain goods and services.

Alternatives

The following alternatives for free market are proposed:

1-balanced trade, 2-fair trade, 3-protectionism 4- Tobin tax.

State directed Economy

The State-Directed economy also known as Command or Planned economy is an economic system in which economic decisions related to the allocation of resources, production, investment, and pricing are under the control of the government or some other authoritative body. In the 20th century, it was popularly believed that a centrally planned economy would do a better job than an unplanned economy of addressing the needs of the people without suborning those needs to the uncertainties and business cycles of a free market economy. A planned economy is characterized by government control of the means of production, even if actual ownership is private. By contrast, in a command economy, a more coercive type of a planned economy, the means of production are almost exclusively owned by the state. The decisions necessary in economic planning are difficult to reach in a democratic state due to the many competing interests. Most planned economies, therefore, have generally existed only where the form of government is an oligarchy or a dictatorship, such as the former Soviet Union, and in India prior to 1991. China, another large dictatorship, had a command economy until 1978, when it began to permit private ownership of small businesses with some level of autonomy in decision-making.

Advantages of state directed economy

There are many advantages of state directed economy. First of all, the most main advantage is that the system is totally and directly under the control of the central authorities, it’s safe and stable for investors. The investors have to follow all the standards that the government has established, this helps to the government to have more control. The second point is all the individual work is focused in a one particular goal, which means that all the energy is used in achieving social and economic goal of the society or government. A third point is that the system has stability, long term financial and infrastructure projects can be made without the fear of market downturn, which may lead to abandonment.

Disadvantages of state directed economy

On the other hand, the major disadvantage of sate directed is the state-directed economy planners are not always aware of consumer preferences, need, and wants and normally they could not manage production accordingly. The main disadvantage is economy requires plenty of planners and administration to make the system works this produce a slow decision making, corruption and in some cases less progressing. Furthermore, there is many labor and materials there are waste of labor and resources that could have been used in other ways to fulfill other needs or wants for society. As the result, the system allows very little freedom; there is not much space for technology and innovation. If the state allocates employment, then people don’t have many options to choose from.

While planned economies are impervious, at least in theory, to business cycles and the pressures of the free market, they haven’t been very successful in terms of promoting long-term economic growth and consumer satisfaction. The large nations that employed economic planning in the 20th century have evolved to economies that permit a significantly greater level of involvement in economic decision-making by components of the economy other than the government. Those nations that still employ economic planning are generally small and struggling.

Although planned economies have not been very successful, no major nation has a completely free market. Instead, they employ a system of government influence of the economy, sometimes called a indicative planning or a mixed economy system. These systems are characterized by the use of government influence, tax policy, grants, and subsidies to affect economic decisions, but generally not coercion. In addition, all governments employ a more or less comprehensive system of regulations to govern the behavior of the different components of the market, even if they don’t control the allocation of resources. That is, a government might not dictate auto production or prices, but it will dictate safety standards.

CONCLUSION

To sum up, the free market economic allows persons to decide to consume the goods and services that will best meet their particular needs. Producers in a free market will compete with one another to earn consumers’ business. As the result, they want to efficiently match cost, features and quality of products; else they will not stay in business for long. In short, in a free economy, more needs are better met with fewer resources. However, in the state directed economy, production is determined by central planners with regard to more generic needs with less or no focus on the particular needs of individuals. Producers make what they are told to make, and since they are owned by the state they are guaranteed enough money to stay in business, no matter how badly they produce their products and serve consumers. In general, in a state-directed economy fewer needs are more-poorly met with more resources being used. Most of the countries in last 30 years trended to be more free market since that system have many advantages for the economic growth and the gross domestic production as my colleagues said. Such as, united Arab Emirate as an example in this report, The UAE has an open or free economy with a high per capita income and a significant annual trade (imports and exports) surplus. 10 years ago, the government of UAE decided to move towards the free economic systems and that was effect positively in the economy. The indicator for that could be shown by the GDP measure. In 2000 the Gross Domestic production was 70.221 billion US dollar. This was increase gradually to 239.65 billion in 2010; this increased because of the using of the free economic system which attracts the foreign investors to invest there while the tax is zero. Although the free economic system takes off the control of the market from the government, this system seemed to be more efficient and useful for the macro-economy. However, there are some disadvantages that could threaten the stability of the economy that should be taken into account.


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