To what extend do you agree with free market economy being more effective than a mixed economy - Essay Example

Effectiveness of Free Market Economy over Mixed Economy Among the extreme economic systems of the world, there are free market economies and command economies. The economic system of free markets, prevalent after the popularity of capitalism, is characterized by private ownership of the modes of production, perfectly competitive markets, no barriers to entry, free enterprise, motives driven by self interest, and economic resources allocated by the price mechanism. In a free market economy, therefore, the role of government is limited and is focused at policy making in order to maximize overall well being of the economy and state.

Unlike command markets, which are controlled by governments, free markets refer to the daily exchanges that occur in a particular society in a way that maximize well being (Rothbard 2008, n.pag.). In a free market economy characterized by free trade, the agreements for exchange that occur between both parties are driven by willingness and eagerness thereby improving maximal benefit and well being. On the other hand, command economy is characterized by public ownership of the factors of production, no free enterprise, no competitive markets, therefore, the prices and levels of output were decided by the governments.

While free markets grant greater control to the consumers, command economies grant greater control to the governments. While command economies became quite prevalent, the major flaw in the system was its centralized decision making and allocation of resources that decided its own prices and quantities of outputs. Today most markets exist as free markets although there are some skepticism about its ability, in its entirety, to effectively perform as compared to mixed economies, which are a mixture of free market economies and command economies.

Since a greater control is given to the consumer, they are faced with a wide range of choices and decisions to make (Alain 2008, p. 32). And making choices involves a trade off where one choice includes the giving up of another. A certain cost, called the opportunity cost, is associated with the giving up of one thing in order to obtain another (Mankiw 2008, p. 5). So consumers are constantly involved with opportunity costs as they make decisions and face trade-offs. As Alain evaluates the structure of free market economies, he points out that choice is not available to all with a greater choice available to those with higher incomes than those with lower incomes.

In a free market economy, provides an incentive to producers to innovate and bring new technologies in order to maximize their profits (Alain 2008, p. 32). However, this notion of innovation assumers perfect consumer sovereignty in their choices, which has been found to be greater among higher income groups. Because free market economies are also symbolized by dynamism, their rate of growth is fast although some may grow faster than others. However, many mixed economies have also shown considerable growth at comparable rates (Alain 2008, p. 33). While many individuals in free market economies take steps to insure themselves from risks such as unemployment, disease, health risks, and so on, many lower income households are unable to do so.

Although the extreme economic systems of free market economy and command economy exits in theory, in practice most economics are a mixture of the two kinds of economic systems. In mixed economies, a balance exists between resource allocation by the market mechanism and the planning process. The four main types of players in a mixed economy include consumers, governments, factory owners and producers. Like a free market economy, the players are said to be driven by motives of self interest which is why they innovate their production processes for maximal benefits.

The private sector for the market is run on a free market system whereas the public sector is run on a planned economy. Among the few but important role of such an economy is that of policy making, regulation of private sector economic activities and maintain the natural monopolies that exist in the public sector industries. One debate that has stayed is that regarding the degree to which the mixed economy is ‘mixed’. The question of mixing in mixed economies is important in addressing issues such as that pertaining to social disparity, citizen sovereignty in the way they spend their money, the degree of impact that incentives have on growth rates, the extent to which the government is an efficient provider of goods and services, etc (Alain 2008, p. 34). Thus, purely free economic markets do not exist today and most economies consist of a mixture of free market economies and command economies.

Although free market economies are quite effective in terms of giving more control to the consumers, many purely free market economies have failed to perform well. And many mixed economies have outperformed purely free market economies. Freidman in his book explains several times in history when the mixed economies performed well in terms of growth as compared to their free market counterparts (2003, p. 3). Moderate government intervention has proved to be beneficial for a particular economy by improving the overall well being of the society as compared to free market economies where only those with greater buying power benefit.

While full governmental control over the prices, output levels and other decisions are detrimental for societal and economic progress, moderate governmental control through policy making helps reduce social disparity and inequality, and improves overall well being. Thus, free market economies are effective in their decentralized distribution of resources however it is too consumer centered in a way that grants greater choice to higher income groups as compared to others. At such instances, mixed economies work well as they allow government control of public sector industries so as to provide the citizens with services including education, health, welfare, and so on.

Purely free market economic system does not necessarily imply high growth where other economic systems have also performed well. Though, it is pleasing that a free economic system is more effective in driving innovations in technologies so as to enhance production processes and other systemic procedures for greater efficiency and performance. Therefore, free market economies are effective as long as they maintain overall societal well being. Bibliography Anderton, A. G. 2008. Economics A Level Student Book.

Harlow: Pearson Education. Friedman, K. S. 2003. Myths of the Free Market. New York: Algora Pub. Mankiw, N. G. 2008. Principles of Microeconomics. Mason, OH: Cengage Learning. Rothbard, M. N. 2008. Free Market: The Concise Encyclopedia of Economics. [online] Available at: http://www.econlib.org/library/Enc/FreeMarket.html [Accessed: 28 Feb 2014].