Economic System Essay Sample
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- Category: economics
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Economic System Essay Sample
Discuss the desirability of the worldwide movement towards the market economy and away from the planned economy.
Globally, compared with command economy, market economy has proved more successful in raising living standard, economic growth and economic efficiency. Here comes the question that to what extent shall we move from planned economy to market economy.
Market economy is an economic system, which resolves the basic economic problem mainly through the market mechanism and limit government role. It relies on the profit motive and consumer sovereignty. In contrast, in a command economy, resources are allocated by the government through a planning process, with large-scale government intervention.
One advantage claimed of a market economy is that there is dynamism. In comparison to planned economy, free market economies have grown at a considerably faster rate than planned economies.
By moving to the market economy, consumers will benefit from more choices of goods and services. There are strong incentives built into the market system to innovate and produce high quality goods. Companies failed to do both are likely to be driven out of the business by more efficient firms. This cannot be achieved in planned economy, which lacks variety of products.
Moreover, the profit motive and competition promote economic efficiency in a market economy. Firms, who produce what consumers want at the lowest possible prices, are rewarded with high profits. But the one’s which do not change their output quickly to reflect what is demand and have high costs (this in turn lead to high prices) are likely to go bankrupt. This provides the producers with the incentive and ability to innovate and expand.
In labour market, workers will increase their chance of earning high wages by developing those skills which are highly demanded, working hard, accepting more responsibility. Those who are not prepared to work, lack the appropriate skills may receive no or low incomes. While, in planned economy, under a big-pot distribution system, people lack incentive to work hard.
However, in addition to the above possible benefits might be brought, the movement from planned economy to market economy brought problems as well.
Competition between firms should ensure efficiency but, in practice, there may be little competition. A market may be dominated by one or a few firms. These firms have considerable market power leading to limited or no choice for consumers. Then they can raise the prices and produce poor quality products. Another problem with market system is that there are many groups in society who are likely to have little or no income through no fault of their own. The handicapped, orphaned or abandoned children and the old are examples. This uneven distribution of income can lead to social instability and crime.
Market failure can arise when private firms fail to take into account the costs and benefits of their decisions on others. For example, some people may smoke even if it annoys and endangers the health of those around them. To keep their costs and prices down, firm may dump waste material in local rivers rather than process it.
Firms will not make products free of charge, i.e., public goods. For example, national defence, which most people want but no one would like to pay for it as people can act as free riders. People can enjoy the product even if they do not pay for it. Therefore, when it is not possible to exclude non-payers, private firms have no financial incentive to produce the product.
Relatively high unemployment rate compared with planned economy might be another possible problem. Due to the changeable demand, there might be a shortage of appropriate skills in the labour market, which makes people more likely to lose their jobs.
The move to market economies brought beneficiaries and causalities. Russia transformed itself to a market economy in 1990 after the Soviet Union was dissolved, this increase the number of millionaires while unemployment and poverty grew as well. Again, considering the case of China, since the reform and development in the late 1980s, China do have achieved high economic growth rate (annual rate around 10%), the inequitable distribution of wealth has also emerged and unemployed rate (especially among the university graduates). This may challenge the social stability and the possibility of increasing crime rate.
It can be seen that both systems have their own benefits and problems. It cannot say a country should stay in a pure planned or free market economy. It would be better to keep an appropriate balance between planned and market economy.