Different Economic Systems Essay Examples

Free market economic system

The free market means that economic decisions are taken by private individuals and firms. Everything is owned and operated by private individuals. In a pure free market there would be no government intervention in the economy. However, in practise governments usually involve themselves in the implementation of certain laws and certain public services, even if only national defence and the protection of private property.. We often speak about America having a free market economy because most businesses are left to private enterprise. But, even in America the government spends about 35% of GDP.

Theoretical support for a free market was strongly supported by Adam Smith in his book, 'The Wealth of Nations'. The wealth of nations tried to explain that; when people try to maximise their individual utility it actually leads to the best outcome for the rest of society.

However, Adam Smith was aware of some limitations of the free market. For example, he was aware of how monopoly power could be abused. But, basically his theories crystallised the theoretical underpinnings of a free market approach. Many of his arguments remain relevant today.

Benefits of a free market

  • Firms have incentives to be efficient and provide goods and services demanded by consumers
  • It avoids the bureaucracy often involved in government intervention.
  • The profit motive provides an incentive to cut costs and make efficient use of scarce resources
  • Economic freedom is important for personal freedom.

Problems of a Free Market
"Capitalism is the astounding belief that the most wickedest of men, will do the most wickedest of things for the greatest good of everyone."
- John Maynard Keynes, as quoted in Moving Forward: Programme for a Participatory Economy (2000)
A free market has various problems. This is a silly mnemonic to help you remember them. PIMM FACED.

P - Public Goods are not provided in a free market. A public good is a good with the characteristics of non rivalry and non excludability. Examples include street lighting and national defence.

I - Inequality. A free market provides no social security net for those who are unemployed or on low income. Furthermore the nature of a free market is that the benefits tend to accrue to a small number of people who have the advantage of property and monopoly power

M - Monopoly. In an unchecked free market, monopolies can easily develop. This means the owners are in a position to set high prices and exploit both consumers and workers.

M - Merit Good - Education and health care. Under-provided because people underestimate the benefits of going to school e.t.c.

F - Factor immobility. Geographical unemployment. Occupational unemployment through lack of skills

A - Agriculture. - Agriculture is prone to market failure e.g. weather can harm crops

C - Cyclical Instability - economic recessions and the corresponding unemployment

E - Externalities - Over-consumption of goods like tobacco with negative externalities

D - De merit goods - Overconsumption of goods like alcohol, where people overestimate the personal benefits, underestimate the costs of getting drunk.

Related pages


The collapse of the Feudalism in the late 16th century ushered about a world crossroads. The economic microcosm characterized by the family farm was expanding beyond known borders and rapidly crossing into unknown economic territory.  The methods in which individuals acquired and sold goods shifted to mercantilism, which in turn formed the root basis of the capitalist model successfully utilized by many countries today (Wood, 1999). Capitalism is the paramount economic system because it provides limitless opportunity, encourages innovation, and has not been proven inferior to alternative economic systems.

First and foremost, capitalist economic systems provide limitless opportunity for each individual. Capitalism is the only economic system which allows every individual an equal chance of success, regardless of inherited social class. Motivation for success hinges on the guarantee that there are no limitations on the acquisition of wealth. The guaranteed chance of success provided by capitalism inspires hard work, perseverance, and hope.

Moreover, capitalism results in the overall increase of innovation and economic growth. In a capitalist driven economic system, consumers make decisions, or votes, on preferences for products and services. The providers of goods and services are therefore motivated to create the best product to win the consumer. Constant competition results directly in pressure for the producer to continually increase the quality of product while maintaining price. In this way, the power that capitalism inherently bestows to the consumer drives a force for innovation. Without capitalism, innovation is not a priority. In addition to expanding markets, innovation also further increases efficiency, reinforcing and adding to the feedback loop. In recent years, innovation within capitalist economies has increased so rapidly that it has spurred the emergence of an entirely new economic doctrine. This doctrine, dubbed “innovation economics,” centers all economic models around innovation and entrepreneurship, as opposed to traditional models, which are based on public policy. Proponents of the innovation economy predict that exponential growth of capitalist economies is not only feasible, but probable (Baller, Bernd, Blanchard, Buckley, Collins, Eskew, Hodges & Menzer, 2008).

Winston Churchill, a British politician, was famously recorded stating that, “democracy is the worst form of government, except all those others that have been tried.” (Raymond, 1992) Similarly, capitalism is considered by many to be the best economic system by default due simply to the absence of a more successful model.  Modern countries attempting variations of the communist economic system struggle to reach the standard of living which most capitalist countries have achieved (Malik, 2013). These countries are often plagued by governmental corruption and lack of motivation among workers. For example, the Chinese Communist Party was recently ranked 78th of 178 countries in the Transparency International’s Corruption Perception index. This ranking is the worst among comparable developable countries (Transparency International, 2013). The communist USSR under Stalin’s rule suffered heavily due to shortages in basic consumer goods such as food and hygiene products. These shortages were attributed to a lack of motivation among workers to reach outrageous governmental production quotas (Fitzpatrick, 1999). In the last ten years, communist countries are tending towards legislation which increases privatization, causing a gradual governmental shift towards the capitalist model (Moscoso Boedo, 2006).

Free people and free markets are the driving force behind the success of the capitalist model. No other economic model inherently bestows limitless opportunity and power to each individual. The temptation of success and power drives the economy forever forward, creating exponential growth, unprecedented among any other economic systems attempted to date.

Works Cited

Baller, S., Bernd, D., Blanchard, J., Buckley, G., Collins, A., Eskew, M., Hodges, L., & Menzer, J. (2008).Innovation measurement, tracking the state of innovation in the american economy. Retrieved from website: http://www.esa.doc.gov/sites/default/files/reports/documents/innovation_measurement_01-08.pdf
Fitzpatrick, S. (1999).  Everyday Stalinism: Ordinary Life in Extraordinary times : Soviet Russia in the 1930s. (pp. 56). New York, NY :Oxford University Press.
Malik, K. (2013). Human development report 2013. (pp. 2-19). New York, NY: The United Nations Development Programme. Retrieved from http://hdr.undp.org/en/media/HDR2013_EN_Summary.pdf
Moscoso Boedo, H. J. (2006). Former communist countries and their transition to capitalism. Informally published manuscript, University of Wisconsin – Madison, Madison, Retrieved from http://people.virginia.edu/~hjm5p/pdfs/communistweb.pdf
Raymond, W. J. (1992). The dictionary of politics. (7th ed., p. 124). Lawrenceville, VA: Brunswick Publishing Corporation.
Transparency International. (2013). Corruption Perceptions Index 2013Transparency International.
Wood, E. (1999). The origin of capitalism a longer view. (pp. 95-124). New York, NY: Verso Books.

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