1.1.6 Free market economies, mixed economy and command economy Flashcards
Free Market Economy
In a free market economy, economic decisions are primarily made by private individuals and firms.
Key figures: Adam Smith, who advocated for the “invisible hand” of the market to allocate resources efficiently.
Command Economy
In a command economy, the government or central authority makes all economic decisions.
Key figures: Karl Marx, who envisioned a classless society with centralized planning, and Friedrich Hayek, a critic of central planning who believed in free markets.
Mixed Economy
In a mixed economy, both the private sector and the government play significant roles in economic decision-making.
Mixed economies combine elements of free market and command economies.
Example: Most modern economies, including the United States, have mixed economic systems.
Advantages of a Free Market Economy
Efficiency: Competition incentivizes firms to produce efficiently and innovate.
Consumer Choice: Consumers have a wide range of choices in products and services.
Economic Growth: Free markets can lead to rapid economic growth and higher living standards.
Example: The United States’ free-market system has led to significant technological advancements and economic growth.
Disadvantages of a Free Market Economy
Inequality: Income and wealth disparities can be significant.
Lack of Public Goods: Some essential services may be underprovided without government intervention (e.g., public healthcare).
Boom-Bust Cycles: Free markets can be prone to economic cycles of booms and busts.
Example: The 2008 financial crisis exposed some of the shortcomings of unregulated financial markets.
Advantages of a Command Economy
Equality: Command economies aim to reduce income inequality through central planning.
Stability: Central control can provide stability during crises.
Prioritizing Social Goals: Resources can be directed toward public services and social welfare.
Example: North Korea’s command economy focuses on central planning and state control.
Disadvantages of a Command Economy
Lack of Incentives: Central planning may discourage innovation and individual initiative.
Resource Misallocation: Inefficient allocation of resources can lead to shortages or surpluses.
Bureaucracy: Command economies often involve complex bureaucracies.
Example: The collapse of the Soviet Union highlighted the challenges of central planning.
