The state of the economy of any nation is determined by the decisions taken by the government. And the degree of regulation and control the government has on the economy determines whether the economy can be termed as a command economy or free-market economy. OpinionFront will explain the differences between these two types of economies along with their advantages and disadvantages.
Did You Know?
There is no country in the world which has a hundred percent free-market economy. Some degree of government intervention always exists in any economy. According to a recent survey, in 2014, Hong Kong boasts of the highest level of economic freedom of 90.1%.
The system of production, distribution, and consumption of any product or item is referred to as an ‘economy’. There are four major economic systems, and two among them are: command economy and free-market economy; each having unique characteristics.
While both have stark differences, an economy containing a mix of both is followed by most nations around the world. Though a perfectly free economy is a myth, there are some nations that have very little government interference. The degree of economic freedom in capitalistic countries is usually high (above 70%). While some countries such as Brazil, India, China, etc., have moderately low economic freedom (around 50-60%). However, we also have nations such as Zimbabwe, Cuba, etc., who have an economic freedom as low as 30-40%. Let’s take a look at the major differences between command economy and free-market economy.
|
Command Economy
|
Free-market Economy |
| Background/Meaning | |
| A command economy’s dictionary definition is: ‘An economic system based on state ownership of capital’. No private ownership is entertained, and the government decides what to produce, how to produce, and for whom to produce.
|
A free-market economy can also be referred to as ‘capitalism’. As the name suggests, the dictionary definition of a free-market economy is: An economic system where prices, wages, and trade are unregulated, and prices are determined by competition between businesses. Simply put, in a free-market economy, demand and supply control the market forces, and private individuals or entities have the freedom to utilize the resources and enter any line of production. |
| Government Interference | |
| Government control allows no scope for individuals and businesses to take autonomous decisions and develop entrepreneurial skills. This dissuades budding entrepreneurs to take up innovative activities for the development of the economy. | You’re the master of your choice in a free economy. You can enter any area of your interest and use your resources the way you want! This may seem enticing; however, other than the government, there are many socio-economic factors that govern your decisions. |
| Ownership Rights | |
| Government owns the resources and decides its allocation. The government makes centralized plans for the economy, as a whole. | In a free-market economy, you are free to own any property, acquire it or even pass it to the legal successors. |
| Objective | |
| There is higher focus on the social objectives and macroeconomic objectives. Nation’s interest is kept in mind, rather than individual profits. | Profits are the reward for the risk-bearing capacity of any entrepreneur. Would you take up any business, unless there was an element of profit in it? In any economy, the principal objective of any private individual is profit. Of course, apart from the philanthropy aspect, the profit motive is a glaring feature of a free-market economy. |
| Consumers’ Preferences | |
| Preferences of consumers are not taken into consideration, because the government decides the amount and item of production. This may lead to flourishing of black market activities. | Sovereignty of the consumers is another striking feature of a free-market economy. As per the consumer’s wishes and demands, the market forces play, and the entrepreneurs accordingly take up lines of production. However, it is possible to manipulate the consumer’s choices. (A good example can be the changing fashion trends, would you buy something that is out of fashion? Can this be said to mold consumer choices?) |
| Economic Development and Innovation | |
| Since profit is not the main motive, individuals are not motivated to innovate and work harder for higher rewards. Also, too much monopoly is not good for the health of any economy. |
A healthy competitive spirit always leads to increased efficiency, and the desire to achieve customer satisfaction to earn their brand loyalty. The profit-motive and the belief of ‘more efforts equals more rewards’, leads entrepreneurs and laborers to strive and work harder. Entrepreneurs are willing to take more risk innovate and venture into new businesses since there is complete freedom, and they are always striving to entice the consumers into buying their products/services. |
| Competition | |
| Government controls the market, thus, it can regulate the competition too, even if they allow some private enterprises in the market. If government allows no private entrants, there is no question of any competition arising. | Of course, with profit as a motive and a consumer-centric market, there is bound to be fierce competition, all vying to win the hearts of the consumers (Don’t we have multiple brands to choose from? Well, we’re spoiled for choice, sometimes!) |
| Wastage of Resources and Environmental Hazards | |
| Through government interference, environmental hazards such as pollution, depletion of resources, etc., can be prevented, as the government can prevent overuse and inappropriate allocation of resources. | In a bid to earn higher profits, it is quite possible that resources are wasted to produce variety and attract more consumers. With lesser focus on social welfare, there can be emerging industrial hazards, such as pollution, deforestation etc. |
| Gap Between the Rich and the Poor | |
| Of course, with more focus on social welfare, economic equality occurs in tandem. The government takes efforts to bridge the social gap, for example: rationing of food, or concessional schemes for the lower economic section, etc. | Too much capitalism can lead to a section/class of people earning greater profits, leading to an unhealthy economic disparity. If wealth gets accumulated in the hands of a few, it may lead to injustice to the working class, as pockets of the rich grow fatter. |
| Unemployment and Unethical Practices | |
| The government regulates the factors of production, thus, it can also control unemployment; which sometimes, is observed in free-market economies. Ample employment opportunities can be generated by the government. | Of course, man is bound to be greedy, and in the tussle to gain more, the nation’s interest or human welfare as a whole may not be top priority for some entrepreneurs. It may invite many hazards of unhealthy competition such as inequality, slavery, etc. |
Command Economy vs. Free-market Economy – Which is Better?
Today, most nations follow a mix of the two economic systems, only the degree of freedom and government interference is different. Countries with higher capitalism have shown a higher GDP (Gross Domestic Product), and in the era of globalization, most mixed economies are also turning into free-market economies. Although, taxes, social welfare, public transport (in some nations) etc., remain a forte of the government, liberalization of the market is on the rise.
The introduction of corporate social responsibility(CSR) in the finance sector is also an attempt to reduce the disadvantages of over-capitalization. However, certain economies, such as China, have a high level of government control, but have a high GDP as well. Well, it is still a point of debate between the economists over deciding which is the better one. Famous philosopher and economist, Karl Marx, in his book, Das Kapital, mentions the evil effects of over capitalization. In his opinion, it has mechanized humans. It can be seen in one of his quotes, The last capitalist we hang shall be the one who sold us the rope.
A mixture of both is good, but every nation has to take a call on this issue, considering its background―availability of resources, population, climate, political-social environment, psychology of consumers, foreign players in the market, and many other factors.
