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

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Written by: Steve Vorster

Reviewed by: Jenna Quinn

Free Market, Mixed and Command Economies

In order to solve the basic economic problem of scarcity, economic systems emerge or are created by different economic agents within the economy
- These agents include consumers, producers, the government, and special interest groups (e.g. environmental or trade unions)
- The economic system aims to allocate the scarce factors of production
Any economic system needs to decide how to answer the three fundamental economic questions
- What to produce? More weapons for the military, or more schools to educate the children?
- Who to produce for? Only those who can afford to pay for it? Or for everyone in society?
- How to produce it? Should more labour be used, or should the economy focus on using technology instead?

A free-market economy is an economy that has no government intervention in the allocation of resources or the distribution of goods/services
A command economy is an economy in which all of the resources are owned by the state and the government controls the distribution of goods/services
A mixed economy is a blend of the free market and planned economy as individuals, firms and the government own factors of production and distribute goods/services

Adam Smith, Karl Marx and Friedrich Hayek had very different ideas about how these questions should be answered

The Distinction Between Free Markets, Mixed and Command Economies

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

Pros and Cons of Free Market and Command Economies

Each economic system has numerous advantages and disadvantages. Understanding the strengths and weakness of each system helps policymakers tackle the disadvantages head on while building on its strengths

The Advantages and Disadvantages of Free Market Economies and Command Economies

Type of Economy	Advantages	Disadvantages
Free Market Economy	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
Command Economy	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

Examiner Tips and Tricks

Multiple choice questions often explore your understanding of the different characteristics of free market, mixed and planned economic systems.

When answering structured questions that ask you to discuss/explain the difference between two systems, ensure that the disadvantages of one system are not always just the opposite points to the advantages of the other system. Develop some unique points for each system.

Be prepared to apply different economic systems. For example, Sweden, as a mixed economy, has a relatively bigger public/state sector than the UK, which is also a mixed economy. Explain reasons why the relative size of the private and public sectors vary in different economies.

Role of the State in a Mixed Economy

Some mixed economies have a higher level of government intervention than others
Government intervention occurs mainly through taxation (to raise revenue) and then spending the revenue to redistribute income and provide essential goods/services
- There are many different type of tax interventions, including personal income tax, corporation tax, value added tax, tariff on imports, inheritance tax etc.
- Income is redistributed through the creation of a welfare system, which often includes unemployment benefits, healthcare, and pension provision
- Government spending is often focused on infrastructure, merit goods (e.g. schools) and public goods (e.g. national defence)

Last updated: 29 October 2024

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