1.1.6 Free Market Economies, Mixed Economy and Command Economy

Free Markets
Adam Smith

Mixed Economies
Friedrich Hayek

Command Economies
Karl Marx

• Adam Smith advocated for free markets with low levels of government intervention
• He recognised that there was a role for governments to ensure efficiency in the allocation of resources and provide public and merit goods
• However, he believed economies function best when private individuals work in their own self-interest 
• Famous quote: "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest"

• Friedrich Hayek believed that that command economies were flawed
• He identified information gaps between what the economies actually required and what the central planners in command economies were saying it required
• These gaps led to shortages or surpluses of goods/services in command economies
• He felt that the threat to efficiency and economic growth is overly heavy government intervention

• Karl Marx believed that free markets lead to capitalism, in which the owners of the factors of production (Capitalists) exploited the workers
• This creates inequality, which will lead to a breakdown between the classes
• The role of the State is therefore to share the means of production and ownership with all of the workers in society
• This required the abolition of private property
• This required the State to become the central planner, deciding how each of the three economic questions would be answered

Type of Economy

Advantages

 Disadvantages

• Profit incentive motivates people to work or develop entrepreneurial ideas
• Greater variety of goods/services
• Competition leads to better quality of goods/services
• Competition leads to lower prices of goods/services
• Competition encourages innovation and product development
• Profits, income and wealth are unlimited resulting in better standards of living
• More efficient use of scarce resources

• Wealth gets concentrated in the hands of the few as they are able to keep buying up the scarce factors of production
• This increases inequality such that the gap between the rich and the poor continues to grow
• Sometimes product quality falls as firms lower quality standards in order to increase profits
• Workers get exploited
• Resource depletion and environmental degradation are often ignored
• Monopolies develop as firms increase market power through mergers and acquisitions
• This leads to exploitation of consumers and supply chains

• Social equality is the goal of the system as opposed to profit maximisation, so there is less inequality
• All workers receive the same wage irrespective of role or career. This helps create social equality
• Less unemployment
• Resources of the nation can be directed towards urgent priorities quickly
• The government owns monopoly businesses so consumer exploitation through high prices can be avoided

• Receiving the same wage disincentives people from gaining difficult skills (e.g. doctor) as 8 years of study results in the same wage as no study
• A lack of competition means that there is less innovation and product development
• There is a continual lack of efficiency as central planning always results in surpluses or shortages of goods/services
• Black markets multiply as the population seeks to address shortages
• Access to higher standards of living is. limited for most of the population
• Personal freedoms are restricted