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 VERSUS COMMAND ECONOMIES
|
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.
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.
