Free enterprise economies and command economies are two extremes in the organization of economic activities. The major dissimilarities lie in the mechanisms that regulate prices and the utilization of the factors of production (Orr 135 ). The main objective of an economic system is to maximize the utility of the available resources in the production of goods and services. The two types of economies differ in characteristics, merits, and demerits among other features.
It is also termed as a planned economy or a regulated market. In this economy, all the resources are possessed by the government, which makes all the decisions regarding the production and distribution of commodities. Consequently, the forces of demand and supply cannot play out in this economic system. Karl Marx defined the theory of a command economy which later became a distinguishing feature of the communist regimes (Orr 201). Examples of countries that have command economies are North Korea, Russia, China, and Iran. However, since 2018, command economies like China and Russia have moved toward more economic freedom, while North Korea and Cuba remain economically restrained.
The command economy has several characteristics. First, the factors of production, which include land, capital, and resources, are possessed by the government. Secondly, the government is charged with the responsibility of creating a macroeconomic plan that sets out both economic and social objectives for every region in the nation. them policies to put in force this economic plan are put in place. For example, the economic plan outlines how the nation’s resources are to be allocated. Thirdly, the government regulates the pricing of goods and services because policymaking is centralized in a command economy thus prices the market forces of demand and supply do not determine prices unlike in a market economy. Lastly, in a command economy, the government has monopoly power in the sectors that are considered to be critical in the economic progress of any nation, such as finance, transport, and automotive (Orr 271). That way, no domestic competition arises in such sectors
The command economy has several advantages. For instance, it is quick to adopt rapid industrialization and structural change. Businesses can complete mega projects without delays since all decisions are made by the government. Moreover, the level of unemployment is low because the government regulates jobs. For example, the government assigns the jobs and determines the hourly pay rate of workers (Orr 326). Another advantage is that every citizen gains access to basic services, which are made available for free or at no charge. Lastly, in this type of economy, monopoly power by the private sector is evaded. As such, bad market practices, such as extortion and deceptive advertising, do not exist.
While the command economy is convenient in some instances, it also has some disadvantages. A command economy discourages innovation due to a lack of market rivalry. The industry leaders gain rewards for adhering to government directives rather than generating new commodities and solutions. Additionally, since prices are predetermined, the command economy is unable to detect the changing consumer needs. Therefore, at times, there are over and underproduction of commodities, causing surpluses and shortages. Finally, this type of economy leads to the emergence of black markets that unlawfully avail products that are not produced by the command economy (Orr 290). Such a market emerges because the legal one does not produce commodities that are on-demand
Free Enterprise Economy
It is also referred to as a market economy or an unregulated market. In this type of economic system, all the resources are individually owned and the decisions regarding the production of commodities are made according to the price mechanism. Businesses produce commodities that yield maximum profits through the least costly methods of production. Additionally, this economic system is characterized by economic freedom and individuals can own property. Goods flow freely through the market according to demand and supply. The United States of America and Hong Kong are examples of countries with free enterprise economies.
The free enterprise economy has several features that are distinct from those of the command economy. For instance, there is the private possession of resources whereby individuals can buy, lease, or sell property through legally binding agreements. The production and distribution of goods and the supply of labor are controlled by individuals rather than by the government. Moreover, the market allows the freedom of choice to participate in trade. Business entities and individuals are free to produce and purchase goods or services at their discretion. The production is largely determined by the capital base and the price of goods and services in the market. Additionally, the forces of demand and supply determine fluctuations in prices in a market economy. This economy, therefore, relies on an efficient market to sell goods and services. Lastly, in a market economy, there are no government interventions (Orr 121). Instead, the government assumes minimal roles, such as the formulation of policies that safeguard the markets and ensuring equal entry and access to the trade of goods and services.
The enterprise economy has several strengths. This type of economic system encourages innovation. It gives room for marketing ground-breaking products and services in several ways, such as studying consumer demands and researching popular trends. Additionally, market economies encourage profits, which lead to economic growth and development of a nation when properly utilized. Lastly, it ensures that the goods and services desired by consumers are produced. This is because it entails the interplay of demand and supply in the production, distribution, and consumption of goods and services.
Likewise, the Free enterprise economy has some demerits too. Foremost, there is the danger of profit motives by businesses that may lead them to forego occupational safety and ethical conduct to achieve profits. For example, in 2010, The Deepwater Horizon oil spill became one of the biggest environmental disasters in the history of the USA (Orr 361). It was majorly triggered by the use of low-quality cement along with other cost-cutting processes at the expense of safety. Another demerit is that there are no guarantees. There is no surety for individuals in terms of them achieving financial breakthrough unless governments intervene through the formulation of policies to regulate the market (Orr 390). Finally, a free-market economy may lead to inequalities because it encompasses competition and it has no specific plan to care for those who are at an inherent competitive disadvantage such as the elderly, children, and people living with disabilities.
In conclusion, command economies and free enterprise economies are two opposing models that define how economic growth should happen within an economy. Notably, Their major differences fall in the manner in which they are regulated and their utilization of the factors of production. Free market economies allow demand and supply to set prices unlike in command economies. Command economies are controlled by a central government, unlike free-market economies which are controlled by individuals. Moreover, properties in a command economy are owned by the government unlike in free enterprise economies. It is from these and other dissimilarities that the merits and demerits of these economic systems arise and this has been crucial in the economic growth of countries that utilize them such as the USA, Hong Kong, China, and Russia.
Orr, Tamra. Understanding Economic Systems. New York: Rosen Pub, 2012. Internet resource. www.books.google.co.ke/books?hl=en&lr=&id=liV3eAK0As0C&oi=fnd&pg=PA4&dq=+McGrawHill,+Glossary+of+Terms,+”Mixed+economy”%3B+ch.+1,+(section)+Market,+Command,+and+Mixed+Economies.&ots=LbsBt8FdoC&sig=3GVS8JlnGGbpVzcpU4_CtEEN4ZA&redir_esc=y#v=onepage&q&f=false. Accessed 25th June 2020.