SANKIT SUCHAK
Every country has a type of economy, be it market, mixed or command, and each one of these economies has a different level of government involvement.
In a free market economy there is little to no government involvement; the economic fluctuations are primarily based on supply and demand. One benefit to a market economy is that there is a lot of competition so prices are continually dropping as firms compete to find ways to improve their technology and efficiency, and to increase incentives for consumers to buy their products. In a purely economic system, consumers care about two things: prices and quality. This means that in a free market companies lower their prices and try to make the best quality products available at the lowest possible prices to satisfy consumers' needs. Market economy is based on the idea that people make their own choice about what products or services to buy, so in theory there should be no waste as producers are producing the goods that consumers want. The producers minimise waste by being as efficient as possible to maximise their profit.
However, since in a free market economy firms only care about maximising profit there no incentive to consider things like environmental pollution or the safety of the workforce. There is also little to no government intervention so there are no regulations or laws to prevent such "negative externalities" (costs of a transaction to anyone not involved in the transaction). Also, since firms want to maximise profit they may not be interested in the safety of the workers so people who are miners or loggers might not be safely furnished with the right equipment. Moreover, in a market economy companies will supply what people want, not what people need, and so the market structure will lead to important professions such as teachers and doctors paying less, with entertainment jobs such as TV presenters or music stars becoming more lucrative. This causes a lack of critical services for the people.
The second type of economy is a command economy. This is the opposite of a market economy as the government has a significant role to play in a command economy and there are no private enterprises (firms). In a command economy the government employs all of the workforce and determines everyone's wages. In theory, because of this unemployment rates are low as the government can set higher wages to encourage people to get jobs. This is something which cannot be done in the market economy. Also, in a command economy there is less inequality as the government pays everyone their respective wages and so this causes people who work low skilled jobs to still have a sufficient and substantial income. Wages become less judgemental in terms of the "quality" of your work. In contrast, the free market economy already discussed pays people with low skill jobs considerably less than those in high skill jobs as they don’t bring as much growth to the economy.
However, a command economy still has some drawbacks as there is little competition in the economy so prices are kept high for consumers, and the lack of competition means there is no incentive to revolutionise the technology used. Hence, many recent advancements in technology and healthcare have originated in China, which opts (mostly) for a free market economy. This is often cited as one of the significant factors leading to China's relative success over other developing countries. A further disadvantage to the command economy is that low competition makes it inefficient because there is no reason for the government to change production rates to minimise waste, as there is no competition.
Of course, whenever a dichotomy exists in science and nature a compromise can be found. The combination of free market and command economies is known as a mixed economy. A mixed economy has firms operating but it also has government involvement to help improve social welfare. Most of the production is left to the private sector (firms), while the government aims to subsidise public goods, tax demerit goods (e.g. cigarettes, petrol) and improve societal well-being as a whole. A mixed economy reduces inequality, even though products are provided by the private sector, as if merit goods are priced too highly or demerit goods are priced too cheaply, the government can intervene and introduce policies to make prices fair, and also to encourage consumption of the right (merit) goods. This also reduces market failure; the mixed economy can be more stable because, for example, when a recession occurs the government can provide grants and introduce programmes such as the recent furlough scheme to protect the humans behind the jobs that they do, and to prop up the economy itself.
Nevertheless, there are some disadvantages to a mixed economy. If there are too many market forces there will be inequality and market failure (misallocation of resources) or if there is too much government control products will not be of the best possible quality for consumers. The government provides public sector services such as education and healthcare so they need revenue to afford them, and this usually comes from higher taxes. We observe examples of this in Denmark and France which are both mixed economies with a high income tax.
Overall, scholars generally conclude that, despite a few minor disadvantages, the best type of economy would be the mixed economy due to its balanced role of the state and businesses, which permits the government to intervene where necessary to ensure both the stability of the economy and the welfare of the people.
Sankit wrote this article for the WBGS Fuller Research Prize 2021. If you are inspired by their work, why not participate in the next Fuller Research Prize, which is soon to be announced? Or if you can't wait that long, you can just write and send an article on any topic which interests you. Details here.