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Requirement
1. Free market economies stimulate greater economic growth, whereas state-directed economies stifle growth. Discuss.
Solution
State-run economies are directed and controlled by government and free economies run on their using demand and supply forces. Private individuals and organizations can own property and additional assets in the market economy. They are given the right of ownership which gives them a strong incentive to do hard work. They can introduce new products; better advertising campaigns can be developed, and the invention of new things can happen. This is done with the hope that additional personal wealth and capital will be accumulated. In the process of accumulating wealth by always searching for the ways to do that, the entire economy gets enriched and fosters economic growth. On the other hand, in state-directed economies or command economies, it is not allowed to the people and companies to own private properties and additional assets. The main purpose behind this is that everyone should work for the betterment of society. The idea behind this may be good, but if the individuals are not given the opportunity to develop, invent and become wealthy, the economy will not grow. Innovation is not generated in state-run economies and hence they are less efficient than market economies.
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When markets are free, the resources can be allocated more efficiently than command economies. The presence of profit/loss price mechanism is there in the open market and not in the state-run market. The command economy faces the problem of economic calculation because it does not know how to allocate the resources in most efficient way. The only way to do this is with the help of price mechanism where arbitrary guess does not work, but profit/loss system is used. Also, in free markets, private property rights are allowed which removes the issue of ‘tragedy of the commons.' In the free market, the growth is more than command economy because the organizations make money by keeping up with the competition in the market. Hence, more goods and services are bought and sold which fosters economic growth. When the market is free, right product is produced at the right price and right quantity. But in state-run economies, the top authority tells that what is to be produced, at what price. The needs of people are not regarded much.
Individuals own all the productive activities in a market economy. Demand and supply drive production and not planned by anyone else. For e.g. if the demand of consumer for a product is more than production by the supplier, the price rises. On the other hand, if production is more than demand, the price falls. Hence, there is faster stimulation of economic growth in the free market as demand and supply drive it. In state-run economies, all the income and resources are channeled to a central agency in government which stifles the growth. The finances are allocated into the important programs by the government. There is no competition among companies, the level of productivity falls, efficiency declines; profits are less and growth is stifled.
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Fryer, D. (1958). World Income and Types of Economies: The Pattern of World Economic Development. Economic Geography, 34(4), 283. http://dx.doi.org/10.2307/142347
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Erhard, L. (1958). The Free Market Economy Works. Challenge, 6(8), 40-45. http://dx.doi.org/10.1080/05775132.1958.11468698
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