Magoosh GRE

Critically evaluate the advantages and disadvantages of England being a mixed economy rather than a pure command or completely free-market.

| February 8, 2017

Abstract:

Different economies of the world choose one of the three economic systems: command economy, free market economy, and mixed economy to suit their needs and aims most appropriately. While each of these economic systems have their own advantages and disadvantages, most of the economies of the world are currently mixed economies. The command economy system has become substantially outdated as most economies, such as China and the Soviet Union, are transitioning into mixed economic systems.
This paper discusses the advantages and disadvantages of each of the economic systems and particularly focuses upon the advantages and disadvantages that England has of being a mixed economy rather than a free market economy or a command economy. The paper sheds light upon issues such as unemployment, medical care, transport, and the increasing rate of immigrants that the country currently has to face.

Introduction:

Countries around the globe adopt various economic systems which suit their own circumstances or which their governments feel would be most appropriate to promote prosperity in the country. The economic systems of countries also evolve over time and may change from one particular system to another when the government, economic advisors of the country, and the public deem appropriate. There are three main types of economic systems which include the free market economy, the command economy, and the mixed economy (Ostrom, 2010). While most of the countries in the world are mixed economies, there are examples of countries which are closer to being free market economies or command economies. As with other economic concepts, each of the economic systems mentioned have their own respective advantages and disadvantages (Ostrom, 2010).
Accordingly, governments and economic advisors devise economic policies which classify the economy into the categories of one of the three types of economic systems. However, governments may change these policies and may also change the economic systems adopted in a country when they feel it is required, although this process may take a long period of time (Ostrom, 2010). This paper will aim to explain the three types of economic systems and their advantages and disadvantages and then commence with a critical evaluation of the advantages and disadvantages of England being a mixed economy rather than a complete free market economy or a pure command economy. The paper will begin with an explanation of the free market economy and the advantages and disadvantages of the free market economy, followed by the command economy and the advantages and disadvantages of the command economy. The paper will continue with an explanation of the mixed economy and the advantages and disadvantages of the mixed economy and the application of these concepts to the economy of England. The paper will then critically evaluate the advantages and disadvantages of England being a mixed economy and conclude with a summary of the main points mentioned and recommendations for improvements in economic policy for the country.

Free Market Economy:

The free market economy is an economic system which is purely driven by the market forces of demand and supply and the price mechanism. Thus, in the free market economy, those goods and services which are in high demand are produced and supplied and those that consumers are not willing to pay a high price for are not produced or supplied. The free market economy promotes the privatization of all industries as all resources are owned by private individuals in a free market economy and there is little or no government intervention (Polak, 2013). The government does not nationalize any industries and does not interfere in the production of goods or services. The free market economy is also known as the “laissez’faire” economy and producers operate upon the profit motive as the economy is in a state of pure competition (Baylis, Smith, & Owens, 2013).
The advantages of a free market economy include that consumers are provided with a variety of products at potentially low prices as there are many producers competing for market share. Consumers are also likely to benefit from high quality products as producers would be competing with one another on the basis of factors such as quality and price. Consumers would also benefit from additional advantages such as convenience, variety, and availability of choice. Also, consumers would easily be able to find the products which they are demanding as the market would be operating according to the price mechanism (Polak, 2013). There would be higher investment in research and development and more chances of larger technological breakthroughs as firms would be competing to gain a competitive advantage in the design of their products /services and/or gaining a cost advantage in their production processes. The free market economy may also mean higher productivity levels, higher wages, and more work opportunities for individuals. This is because the economy would be in a state of rigorous competition, making room for more workers to gain higher incomes as businesses would also be competing to recruit the most talented and skilled workers. An economy may prosper and increase its GDP when operating upon a free market economy system, yet it is often considered that the disadvantages of a free market economy system outnumber its advantages (Bremmer, 2010).
The disadvantages of a free market economy system include the fact that there is likely to be a high level of inequality in the distribution of income as the rich would be likely to get richer and the poor would be likely to get poorer. Additionally, as there would be no or little government intervention, the public would not be provided with benefits such as welfare schemes, pension schemes, and may not even be provided with fair pay according to the cost of living. Problems such as inflation and the occurrence of monopolies would also not be prevented by the government as the government would have no major role in the economy. There may be wastage of resources as the economy would be in a state of pure competition and expenditure would be incurred on activities such as advertising, marketing, and continuous innovation of products/services (Coates, 2014). Essential services would not be provided to the public such as free medical care, police and army services, and education (Robertson, 2013). De-merit goods such as drugs, alcohol, cigarettes, and other products would be produced without interference or control from public authorities. Public goods which are not produced for a profit but are produced because they are necessary such as street lighting, water, roads, and other such products/services are either priced very high or not produced at all. Accordingly, a free market economy may be beneficial for the rich but may be highly detrimental for the poor. There is no example of a complete free market economy in the world but the USA comes closest to the definition of a free market or capitalist economy. This is because the USA has approximately 30% government spending in its GD, one of the lowest figures in the world, with 70% expenditure incurred by the private sector (Coates, 2014).
A pure command economy is the opposite of a free market economy and will be explained in the next section of this paper.

Command/Planned Economy:

A planned or command economy is the opposite of a free market economy and is an economic system which is completely controlled by the government. In a planned economy, most or all resources are owned by the government and the government decides what is produced in the economy and the price charged for the products/services. Consumers have little or no say in what is produced and all industries are nationalized. A planned economy also sets out the wages of workers and may also impose quotas upon the number of goods purchased by a single household. Command or planned economies are sometimes imposed by governments in order to maintain control and to attempt to make better use of resources. However, the command or planned economy has not been a highly feasible system to adopt in the current economic environment, resulting in countries, such as China and Russia, to have to evolve or change their economic systems (Hummel & Stringham, 2010).
The advantages associated with a planned economy include a reduction in the wastage of resources and a more equal distribution of income between people of that country. Moreover, the population would be provided with services such as education, roads, water, medical care, and other facilities upon the government’s budget. Governments often wish to adopt this system in order to prevent riots or unrest in the country as most of the people in the country would be at the same social level and would not feel that the system is unjust. Therefore, it allows the government to have more control on the economy and control economic problems such as inflation, deflation, unemployment, poverty, and other similar issues (Calomoris, Fisman, & Wang, 2010).
There are many disadvantages associated with a command economy which include the inefficient allocation of resources as resources are not allocated according to the price mechanism. Thus, resources may be wasted in producing things that consumers may not want. Likewise, producers and workers do not have any incentive to work hard as they are not allowed to own wealth and are simply working for the government which would stunt the prosperity and progress of that country. Consumers would also have little choice or variety and would also have lower standards of living as they would have a lack of products/services to choose from. Additionally, it is difficult for the government to provide all goods and services efficiently themselves and this may mean that the provision of some important goods/services may be prevented or may be provided inconveniently. Countries with planned economies may suffer in global trade and other such factors as they would not be able to motivate their citizens to exert their best efforts into production and trade without giving them personal incentives. Thus, this also causes a lack of foreign investment and a high tax rate for the provision of government-funded services. Also, it is difficult to determine how the government would decide what should be produced in the economy and how they can easily anticipate consumer demand (Warner, 2011).
Accordingly, the planned economic system has become outdated as previous communist or planned economies such as China, Russia, and even Sweden are now in transition towards a more mixed economic system which will be explained in the next section of this paper.

Mixed Economy:

The mixed economic system is a combination of the free market economy and the planned economy as this system has both a public sector and a private sector. As mentioned before, most of the countries of the world are mixed economies as they have a public sector and a private sector. The mixed economy allows the government to intervene to provide essential goods and services such as police, medical care, education, welfare and pension schemes, and other similar services while the private sector is free to produce goods and services as well (Castells, 2011). However, the government will intervene where needed and prevent the production of de-merit goods and prevent producers from charging unfair prices amongst other things. Consumers receive the benefit of variety and choice in goods and services and are given an incentive to work hard while they are also facilitated by the government in the form of free goods (public goods) and services (Meyer, 2011).
The mixed economy combines the advantage of the free market economy and the planned economy and also shares some of the disadvantages of both respective economies. England is a mixed economy and thus benefits from the advantages associated with not being a complete free market economy or a pure command economy, but also suffers from a few of the disadvantages of not being either of these economies (Meyer, 2011).

England’s Economic System:

England, while previously being one of the strongest economies in the world, is currently plagued with several economic problems, which have slightly weakened its economic system. Being a mixed economy, England’s government spends about 40% of its GDP upon government spending while the remaining 60% belongs to the country’s private sector. The 40% of government spending is 10% more than what is spent in the USA as a percentage of GDP (Cleaver, 2013). This is because England’s government spends a larger proportion of its tax revenue upon the provision of more comprehensive health services, unemployment, and welfare schemes for the poor, and the transport system of the United Kingdom (Castells, 2011).
The country is benefitting substantially by not being closer to a pure free market economy as the government of the country plays a vital role in stabilizing several economic aspects of the country. First of all, the unemployment rate of England is increasing rapidly, which means that it is essential for the government to provide support for the unemployed. If the government had little or no role to play in the economy, the unemployment rate may have even been higher and the number of people that were currently out of jobs may have been out on the roads without provision of basic facilities (Gillespie, 2011).Moreover, as the country is currently in a state of recession, without government intervention, the living standards of people would have decreased substantially, putting the economy in further turmoil and in a possibly irreversible situation (Gillespie, 2011).
England is also home to a large number of immigrants and students who form a large part of the GDP in the country annually. If the country had been a complete free market economy, the country was likely to be in a state of chaos as there would be no control upon the immigrants entering the country and there would be no provision of facilities for these immigrants and students which would further burden the country with increasing crime rates, further unemployment, and increasing numbers of homeless people filling the streets. Besides, with increasing numbers of immigrants and an increasing unemployment rate in the local population, the country is also benefitting from government spending upon free health services which keep the citizens and visitors of the country under high quality healthcare and helps prevent the spread of dangerous diseases from people who cannot afford expensive medical treatment. The implications of this control imposed by the government include a better and fairer distribution of income along with the provision of unemployment benefits, free education, pension and welfare schemes, and high quality healthcare for all people alike (Cleaver, 2013). Furthermore, another essential part of the government’s role in the economy includes the transport system which is subsidized for students, senior citizens, and people with lower incomes. Thus, the government is responsible for the provision of essential public goods and services which are needed to promote the welfare of the citizens of England and make them a prosperous economy (Bohstedht, 2010).
Conversely, the disadvantages associated with England being a mixed economy rather than a free market economy include the fact that some services may be provided more efficiently by the private sector including healthcare, as the National Health Service is taking up a substantial part of taxpayer’s money and the standards of the service are also slightly deteriorating resulting in long waiting lists for patients who require treatment. Moreover, if the government privatized several more industries and promoted an environment of pure competition, it may result in the creation of additional jobs and help decrease the unemployment rate. Additionally, increased consumer spending and investment may also attract further foreign direct investment into the country and help bring the country out of its current recessionary state as England’s foreign direct investment rate has decreased over the years and UK’s own companies have increased their investment in other emerging markets. The public has also been highly verbal and rebellious regarding the increasing tax rate in the country which would have been non-existent had the country been a free market economy (Cleaver, 2013).
On the other hand, while there are advantages and disadvantages associated with the country being a mixed economy rather than a free market economy, there are also advantages and disadvantages associated with the country not being a pure command economy. The advantage that England has of not being a pure command economy is that it has been able to motivate its population to work hard and become a progressive state as workers are allowed to accumulate wealth instead of limiting the growth of its citizens and nationalizing all its industries. While there is some inefficiency in the allocation of resources, the country’s private sector does operate upon the price mechanism thus allowing the efficient allocation of resources according to the market forces of demand and supply (Boaden, 2010). England has also been able to encourage high amounts of foreign direct investment and the immigration of skilled labour which would not have been possible if the country had been a pure command economy. Consumers are also provided with a variety of high quality goods and services which has increased the country’s standard of living and has also enabled it to be an active participant in global trade (Boaden, 2010).
Yet, there are certain disadvantages that the country has of not being a pure command economy and being a mixed economy which include the unequal distribution of wealth amongst its citizens which is causing increasing unrest. Moreover, there is ample wastage of resources in the economy because of increasing competition between firms and the country is suffering from several scandals in the realms of corporate social responsibility, quality, unfair pricing, and other problems in its private sector (Bohstedht, 2010).The country has also had to face immense problems because of the large number of immigrants entering the country each year and if the country had been a pure command economy, it would have not had so many potential immigrants to deal with (Boaden, 2010).

Conclusion:

England is best suited to be a mixed economy like most of the other economies of the world as this economic system enables the economy to combine the advantages of both the complete free market economy and the pure command economy. Additionally, while the country is progressing in the private sector, government intervention is essential for the provision of necessary public goods and services, without which the economy would substantially deteriorate the conditions of the poor. However, while the country has nationalized many of its essential services, the country should consider allowing privatization in the healthcare industry as the burden of taxes to pay for the NHS is increasing while the quality of the service provided by the NHS is deteriorating. Moreover, this is an essential industry which cannot be plagued with delays as is currently happening with the NHS. Thus, being a mixed economy, England should slightly further reduce its government spending to allow the private sector to benefit further while the government can exert legal control over the activities of firms in the private sector.
Furthermore, the government must encourage private industries to increase employment, incomes, and consumer spending, and thus lead to a higher GDP and a more progressive nation. The country would also easily be able to pull itself out of its current recessionary state and reduce the tax burden on its citizens.

References

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Bohstedt, J. (2010). The Politics of Provisions: Food Riots, Moral Economy, and Market Transition in England, C. 1550-1850. Ashgate Publishing, Ltd..

 

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Polak, J. J. (2013). An international economic system (Vol. 7). Routledge.

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