1.1.6 - Free market economies, mixed economy and command economy Flashcards
What is a free market economy ?
An economy that has no government intervention in the allocation of resources or the distribution of goods/services.
What is a command economy ?
An economy in which all of the resources are owned by the state and the government controls the distribution of goods/service.
What is a mixed economy ?
An economy where both the free market mechanism and the government planning
process allocate a significant amount of the total resources in the country . Each country will have a different amount of control by the government, but it is usually between
40-60%
Pros & Cons of a Free market economy.
Pros & Cons of a Command economy.
What is the Role of the State in a Mixed economy.
Blurt everything you know about Free market economies.
● Adam Smith (1723-1790) advocated for free markets with low levels of government intervention.
● He explained how there was an ‘invisible hand’ in the market which allocated resources to everyone’s advantage, allowing the greatest good for the greatest number of people.
● 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
Blurt everything you know about Mixed economies.
●Friedrich Hayek (1899-1992) argued that state control of the economy leads to the loss of
freedom. He believed 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.
● Hayek believed that, although individuals don’t make supply and
demand decisions based on perfect information, they best know what they need in their own
situation i.e. a consumer knows how much bread they need and a manager knows how
many raw materials they need.
● He believed that the poor in free market (or freer market) countries were better off than those in command economies because at least they had personal freedom.
● He said that central planning by governments led to what a small minority wanted being forced on the whole of society.
Blurt everything you know about Command economies.
● **Karl Marx (1818-1883) 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.
● Marx believed that capitalist’s profit came from exploiting labour as they underpaid workers for the
value that they actually created.
