Category: Social Issues
Autor: andrey1985 13 July 2010
Words: 1504 | Pages: 7
Explain the main differences between a command economy and a free market economy.
An economy may be defined as the state of a country or region in terms of the production and consumption of goods and services, and the supply of money.
A planned economy is an economic system in which economic decisions are made by centralized planners, who determine what sorts of goods and services to produce, how they are to be priced, and allocated. Since most known planned economies rely on plans implemented by the way of command, they have become widely known as command economies. These are generally associated with socialist or communist economic systems.
A free market economy is an economy in which the allocation for resources is determined only by their supply and the demand for them.
Every economic system is based on a different philosophical stand than the others. These differences are caused by the different responses that each economy has to the problem of scarcity. However, economies dont always work as their theoretical models and take some components from each system to develop an economy that works. Thus, economies are graded as being free market economies or planned economies using a tool called the economic spectrum, where the planned economies are placed on the left and the free market economies on the right.
Below is the spectrum along with the different names that each economy may be known as.
Centrally Planned Mixed Economy Free Market
The most striking difference between a command economy and a free market economy is the degree of government intervention.
In a command economy all the economic decisions are taken by the government, whereas in a free market economy all economic decisions are taken by individuals and firms, which are assumed to act in their own self-interest.
In a command economy all land and capital is owned by the state as contrasted to private ownership in a free market economy.
In a command economy, the state plans the allocation of resources between current consumption and investment for future, the output of each industry and firm, methods of production and the resources allocated to each industry and firm. In a free market economy, the output is determined by the quantity demand, the techniques of production by the firms themselves keeping in mind efficiency and productivity.
In a command economy, the distribution of goods and services among the population is planned by the government, based on their assessment of the peoples needs; whereas in a free market economy the population may acquire the goods and services as per their specific needs at the price fixed by the seller(s).
A command economy has price controls in place, which means that the government fixes the price of all goods and services and they must be sold at that fixed price. In a free market economy the prices are fixed by the seller(s) of the goods and services, as guided by the laws of demand and supply.
Thus, the two types of economies display a difference in answering the three basic economics questions:
Therefore, the structures of a command and free market economy may be summed up as:
Pillars of a Centrally Planned Economy Pillars of a Market Economy
Evaluate the costs and benefits of moving from a command economic system to a free market system using Poland as a case study.
In 1989, Poland became the first member of the former Soviet bloc to reestablish political democracy and a market economy. The fledgling government was faced with a stagnant economy, inflationary pressure, a large external debt, and market inefficiencies. Gross domestic product (GDP) growth rate was nearly stagnant, growing by only 0.2 percent, consumer prices had risen by 250 percent, and real wages increased by a mere 9 percent. In view of the economic situation, the new government introduced radical measures that were intended to stabilize the economy and encourage the development of a free market. The countrys much publicized "shock therapy" had begun. There was massive a cut down in government spending, private enterprise was allowed and the government sat back and watched. Initially the inflation rose and the situation seemed to be worsening, when entrepreneurship and the laws of supply and demand kicked in, and the free market economy began to materialize.
In 199091, Poland experienced a deep recession throughout which GDP decreased by almost 20 percent, the demand for labor decreased, and unemployment increased. During the first 3 years of the nations transformation, both the State sector and the cooperative sector lost 4.6 million jobs, while the flourishing private sector created 2.6 million new jobs. In 1992, the number of unemployed reached 2.8 million, of whom 80 percent had been previously employed. Since 1992, Poland has experienced annual economic growth ranging from 3 percent to 7 percent; correspondingly, inflation decreased from 585 percent in 1990 to 11.8 percent in 1998. Employment has increased, unemployment has begun to decrease, and real wages have risen once more.
However, this transition from a command economy to a free market economy was not without its downsides.
The GDP growth rate witnessed a drastic rise. The Polish stock exchange registered over 2 million private companies and about 2 million private farms. But this growth was unevenly distributed. The cities, especially Warsaw, thrived with the growth of medium to large private businesses. But the rural sector was badly hit, especially from 1996 onwards when the fall in international crop prices (and the continued subsidies offered by the industrial countries to their own farmers) affected the viability of Polish farmers who were being newly exposed to free trade.
The inflation dropped drastically, but this destroyed the savings of many people, especially the rural poor. There has been a widening disparity since in the rural and urban areas, as well as society as a whole; whilst many managers, entrepreneurs, investors are growing richer by the day, there is a growing underclass and the gap keeps widening.
The new policies have also meant a significant increase in economic insecurity, as many of the basic goods and services that were previously guaranteed by the state have been privatized and have become more expensive and difficult to access. These services range from housing, health and education to electricity and water supply. Higher prices charged by privatized utilities and health providers as well as exorbitant charges for higher education have all reduced access not just for the absolutely poor but even for ordinary Polish citizens.
Alongside the thriving official economy, Poland also witnessed a flourishing grey market, accounting for almost a whopping 20% of the GDP. Crime has become rampant, with a thriving sex-industry as more and more women are forced into prostitution, both out of coercion and as recourse for lack of employment.
Unemployment has surged as large companies shed workers and smaller companies were forced to close. The unemployment rate in 2002 touched 18 per cent of the labour force with one-quarter of the population estimated to be below the official poverty line.
In 2000, the Polish economy was hit by the world economic slowdown, which affected the European Union and especially Germany, Poland's main trading partner. Meanwhile, part of Poland's comprehensive neoliberal reform measures had entailed granting "independence" to the central bank. This made the central bank free of government control and democratic accountability, but increased its subservience to financial markets, making it focus on the single aim of containing inflation regardless of the state of the real economy.
Consequently, even in the face of the economic slowdown, the Polish central bank imposed a deflationary policy, with high interest rates aimed at stabilising the value of the currency, the zloty. Obviously, this had further negative effects in terms of lower exports and greater import penetration. Since then, economic growth has slackened to the point where it was only 1 per cent last year, and the growth is expected to be even less this year.
Poland has experienced a surge in the tourism industry. It has opened up to foreign investors and found itself a place in the global economy. Poland has also opened up to Western media and publications which has increased its global awareness but also brought with it pornographic content.
Under the command economic system, Polands natural resources were fast depleting and suffering from contamination, rendering them useless. The transition to free market has lead to greater environment awareness and steps have been taken by the Polish government towards rehabilitation of the environment and protection of the natural resources.
Certainly, the free market principles have not delivered the rosy picture they painted to Poland. Poland has paid an extremely high price for a liberal economy, one it continues to pay; but the situation has improved from what it was under a command economy, and though its not a desirable condition, it is the lesser of the two evils.
Text book (sloman)
Monthly Labor Review September 1999 21
Articles from The Remaking of Poland: From Command to market economy.
Commanding Heights the documentary.