Types of Economies – Free, Mixed & Command

Markets allocate resources to determine what is to be produced, how it is to be produced and for whom the production is to take place. The function of each economy is to solve the basic economic problem. They predominately look at how resources are best utilised in the economy. The 3 types of economies are free market economies, mixed economies and command economies.

Free Market Economies

Free market economies allow the majority of resources to be allocated through markets, rather than through governments and planning. There are no examples of a completely free market in the world, however, countries including Hong Kong and the United States have the largest proportion of their resources allocated by the free-market mechanisms including the invisible hand. 

Mixed Economies

In mixed economies, between 40-60% of resources are allocated through government planning. The 2 key factors that distinguish between free markets and mixed economies are the welfare benefits such as child benefits, state pensions, sickness benefits and healthcare. Mixed economies also tend to have their healthcare system administered, financed and run by the state such as the UK. In a free market, healthcare would be run completely by the private sector.

Command Economies

Command economies have most of their resources allocated by the state and the market mechanism plays a miniscule part. Examples of Command Economies include North Korea, China and Cuba. In addition, citizens in command economies have a larger portion of their income spent on taxes to fund government initiatives and plans.

Evaluations

These economies can all be evaluated using the following metrics:

• Choice
• Quality & Innovation
• Efficiency
• Economic growth
• Income distribution
• Risk

Choice - When comparing economies such as the United States and North Korea, it is clear that individual citizens in the US have more choices in free markets. With excessive planning from the state in command economies, choices and variety are very limited.

Quality & Innovation - In a free market economy, there is also a strong incentive for firms and production parties to innovate and produce high-quality goods. Companies that fail to improve R&D are likely to be driven by more efficient firms.

Efficiency - The planned economies of the Soviet Union proved to be highly inefficient as workers had little to no incentive to work efficiently. With their jobs pre-determined and guaranteed, they only needed to do the bare minimum. On the other hand, with high levels of competition in free markets, workers and firms are incentivised to become as efficient as possible to make a profit and survive.

Economic Growth - Whilst analysing economic growth, we assume that markets are dynamic whilst planned economies controlled by the government dampen innovation and best practices. Looking back, we know that the planned economy of the Soviet Union fell behind in terms of growth when compared to the likes of the US and the UK. 

Income Distribution - We can also identify that free-market economies have higher levels of inequality than mixed or planned economies. This is because resources produced by the government through a planning process are distributed more equally. 

Risk – Free markets expose their citizens to far more risk. The well-off in free markets can afford to overcome their health issues, whereas the less fortunate are left to struggle. In mixed or planned economies, the healthcare system is in place to help everyone.