Capitalism Essay, Research Paper

The free market economy is a system devised to resolve the basic economic problem (resources having to be allocated to many competing users that have infinite wants) through the market mechanism.

The centrally planned economy is an economic system where government go through detailed planning procedures to allocate resources in society.

The Free Market Economy:

The government provides public goods and services, but in order to pay for these the government need to raise some funds this is done through taxation. The government is also responsible for the issuing of money, it?s value and keeping stable prices. The government are also responsible for ?free goods? (a good or service available in quantities larger than desired for zero price) if this is not regulated the free goods may be misused or abused. In a free market economy the government also has the right to eliminate any monopolies, so a fair competitive market can be maintained. The government can also control the activities of trade unions, this is because particular firms or trade unions may seek to gain control over individual markets. In the market economy the government should intervene as little as possible. Government regulation should be the minimum required to protect the orderly working of the market economy. The free market sees government spending confined to the spending of public goods. In a free market economy almost all factors of production (FOPs) are owned privately. The government have the responsibility to uphold the rights of the citizens to own a property; this is generally done through the legal system. Free enterprise exists in free market economies these are when the owner of FOPs and producers of goods and services have the right to buy and sell what the own or produce through market mechanisms. The government have little restrictions on what is brought and sold, and workers can work for whom the wish, no restrictions exist. Homeowners can sell their home as and when they wish and no one can say no as the choice is entirely theirs. Businessperson?s and entrepreneurs can commence firms to their discretion. Consumers can purchase whatever they wish and no one can be told to buy one brand over another. Producers can produce whatever they want although it should be noted that they must produce a product that matches the consumers specification otherwise it will not sell. Competition between producers is permitted and it is this that leads to better quality products. In a wealthy free market economy, consumers are faced with many options and ?trade offs? (sacrificing on economic good for an other), firms compete with one an other on similar goods. The consumers with high income have more choice than others in the free market economic as they can afford the more high-end goods, such as luxury cars. Society is dealt with differently in each economy, in the free market economy price, disposable income (spending money) and utility determine whether a good or service is purchased.

Centrally Planned Economy:

This is quite different from the free market economy; actually it is almost the complete opposite. The centrally planned economy has resources allocated by the government through a planning process. In this economy, consumers are issued with a limited amount of money, which they can spend on a limited assortment of goods or services. At some stage a centrally planned economy?s government could freeze prices so that goods and services are available to the consumers even though their budgets are restricted. However, this is likely to lead to everyone purchasing that product that has been priced low, and therefore demand would rise, which in turn would cause supply to fall. There are 3 types of actors in the planned economy, the planners (usually the government), consumers and workers. These actors are all working together in cooperation for the common good, not for self-righteousness. In the command economy all FOPs are owned by the state with the exception of labour (however labour services can be re-directed to the state). Also the command economy contains no private property. As resources are given to the consumer, sometimes this can lead to the state directing labour into jobs as well as telling consumers what to consume, however it is more likely that the government will go to the producers and tell them what to produce, this in turn determines the product available to the consumer. In the command economy there is little or often no competition and this causes substandard build quality of products, as consumer have to put up with what they are given. In a command economy, all prices and incomes are the similar this is where the perception of first come first served come into use. In the command economy consumers have little choice, as labourers they may be allocated to jobs in particular regions ore sectors. They will have restriction opposed on them so that they cannot switch jobs. As consumers they have very little say about what is produced. Queuing is unavoidable in command economies as supply is diminutive. There are no restrictions that the government set about the quality of a product unlike the free market economy which has many rule that have to abided too.

So what are the main differences between command and free market economies? To summarise this up I will review my findings.

In a command economy the state allocate the required resources through a planning mechanism whereas in the free market economy resources are allocated through spending lifestyle of an individual. Command economies of Eastern Europe having reduced inequality in society have had low growth in the past few decades while the free markets involve inequality and these provide an incentive for individuals to become self interested and profit minded in an attempt to prove ones self to another. Quality found in a free market economy is of a higher standard in comparison to the type of build quality found in Command economies. Command economies have been associated with communist systems whereas free market economies have been associated with capitalism.