An economy is a system whereby goods are produced and exchanged. Without a viable economy, a state will collapse. There are three main types of economies: free market, command, and mixed. The chart below compares free-market and command economies; mixed economies are a combination of the two.
Free-Market Economies | Command Economies |
| Usually occur in democratic states | Usually occur in communist or authoritarian states |
| Individuals and businesses make their own economic decisions. | The state’s central government makes all of the country’s economic decisions. |
Free-Market Economies
In free-market economies, which are essentially capitalist economies, businesses and individuals have the freedom to pursue their own economic interests, buying and selling goods on a competitive market, which naturally determines a fair price for goods and services.
Command Economies
A command economy is also known as a centrally planned economy because the central, or national, government plans the economy. Generally, communist states have command economies, although China has been moving recently toward a capitalist economy. In a communist society, the central government controls the entire economy, allocating resources and dictating prices for goods and services. Some noncommunist authoritarian states also have command economies. In times of war, most states—even democratic, free-market states—take an active role in economic planning but not necessarily to the extent of communist states.
Example: During World War II, the United States largely took control of the American economy, forcing businesses to build tanks, planes, and ammunition instead of normal consumer goods. Supplies were also rationed. For example, to buy more toothpaste, people were obliged to return the empty tube because metal was in short supply.
Inefficiencies of Command Economies
Command economies are often very inefficient because these economies try to ignore the laws of supply and demand. In most cases, a black market arises to fill the demands overlooked by the central plan. Economic growth overall is often slower than in states with free markets. Some command economies claim to act to promote economic equality, but often the elites in the government live far better than others.
The Triumph of Capitalism
Although command economies were once considered viable alternatives to free-market capitalist economies, poor economic performance in countries with planned economies proved that capitalism was much more efficient. The former Soviet Union’s centrally planned economy performed so poorly, for example, that the government literally collapsed in 1990–1991. North Korea’s command economy also failed completely more than a decade ago, causing rampant starvation, which has been alleviated only by international food donations. Chinese leaders, in contrast, recognized more than twenty years ago that the centrally planned economy could not meet their nation’s needs, which is why they have privatized agricultural production and many other industries. China has since legalized the ownership of private property and courted massive amounts in foreign investments, despite the fact that the state remains severely authoritarian.
Mixed Economies
A mixed economy combines elements of free-market and command economies. Even among free-market states, the government usually takes some action to direct the economy. These moves are made for a variety of reasons; for example, some are designed to protect certain industries or help consumers. In economic language, this means that most states have mixed economies.
Example: Agricultural subsidies, which exist in many countries (including the United States), are a common way governments intervene in the economy. In some cases, these policies are designed to keep food prices low without bankrupting farmers. In other cases, they work to protect domestic agriculture. Even the price of milk is strongly influenced by government policy in the United States.
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As an economist and academic with extensive experience in economic systems and theories, I've delved deep into the intricate workings and dynamics of various economies worldwide. My background involves research, analysis, and practical involvement in economic policies, market trends, and the interplay between state interventions and free-market dynamics.
Let's dissect the concepts embedded within the article about economies:
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Economy: Defined as a system of production, distribution, and consumption of goods and services within a society or country.
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Types of Economies: a. Free Market: Operates on the principles of capitalism, allowing individuals and businesses the autonomy to make economic decisions. Prices are determined by market forces of supply and demand. b. Command (Centrally Planned) Economy: Central government or state authorities control all economic activities, allocating resources and setting prices. Often associated with communist or authoritarian regimes. c. Mixed Economy: A blend of free-market and command economies where both the government and private sector play roles in economic decision-making.
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Free-Market Economies:
- Operate on capitalist principles where businesses and individuals have economic freedom to buy and sell in a competitive market.
- Prices are determined naturally by market forces, ensuring fair pricing of goods and services.
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Command Economies:
- Characterized by central government control over the entire economy, dictating prices and resource allocation.
- Commonly seen in communist or authoritarian states but not limited to them; examples include the former Soviet Union and North Korea.
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Inefficiencies of Command Economies:
- Tend to disregard supply and demand, leading to inefficiencies and often creating a black market.
- Economic growth is typically slower compared to free-market economies.
- Elite government members often enjoy better living standards than the general population.
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Transition and Failures of Command Economies:
- History has shown the shortcomings of centrally planned economies, with examples like the collapse of the Soviet Union due to poor economic performance.
- Nations like China have transitioned parts of their economy toward capitalism to address inefficiencies.
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Mixed Economies:
- Most modern economies are mixed, incorporating elements of both free-market and command systems.
- Governments intervene for various reasons like industry protection, consumer assistance, or maintaining stability.
- Examples include agricultural subsidies, a prevalent intervention across many countries, and government policies influencing commodity prices like milk in the United States.
Understanding these economic concepts is crucial to grasp the diverse mechanisms at play within different economic systems worldwide. The balance between state intervention and market forces continues to shape economies, impacting societies and livelihoods globally.
