Free Market Economies, Mixed Economy & Command Economy (Edexcel A Level Economics A)

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

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 is concentrated in the hands of the few as they are able to keep buying up the scarce factors of production

This increases inequality so 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 creates disincentives for people to acquire 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