Free Market Economy and Planned Economy

Free Market Economy – Throughout history, as a result of the development of each country, in parallel with the formation of social and political structures, and especially depending on the prevailing political system in a given country, different models of economic systems have been developed. Let’s see the difference between a free-market economy and a planned economy, two economic systems that stand out for everything they represent worldwide and propose opposing basic solutions in the financial strategies of the countries that adopt them.

It is important to know the characteristics that define them before understanding the differences between a free-market and planned economies. The free market economy allows an exchange between buyers and sellers, who are the ones who determine the prices of goods and services. It is based only on supply and demand, and there is little or no government regulation. A planned economy establishes its behaviour on the decisions made by the State. It regulates both economic variables and prices and plans the volume of production.

What is the modification between Free Market Economy and Planned Economy?

The modification between Free Market Economy and Planned Economy is well defined. It can say that they are opposite poles. In a free-market economy, the prices, volume, and production structure determine buyers and sellers by those involved. These also assess consumption, the form of production and the treatment of goods—these decisions are based on supply and demand for both goods and services.

Different is the way decisions in a command economy. In this economic system, state interventionism is total. It is a method of coordination in the economy in which the State decides to a certain extent on supply, demand or transaction conditions. The State sets a minimum price, production limits, concessions and can even directly order what and how to produce and to whom the delivered goods. Another noticeable difference between both systems is how the needs of consumers. While a planned economy does not consider the needs and deficiencies of consumers,  a free market economy always works based on it. Although both the planned economy and the market economy have the objective of achieving greater productivity, their differences in attaining this goal are by the characteristics of each of these systems.

What are the Consequences of Applying One and the Other?

It cannot remain said that a market economy is based only on the market and a planned economy only on a plan. Both systems have market planning and coordination. However, applying the typical strategies of one or another system has different consequences. A free-market economy ensures the security of private property, supports fair competition for business and commercial activities, contributes to economic growth, and promotes and increases consumption.

In contrast, the largest owner of all large production companies and large farms in the State are consequences of a planned economy. The economy does not adapt to the needs of consumers but to the standards of the central power, which often leads to scarcity and speculation. Both result in the competition. But in the market economy, there is competition between companies to obtain higher profits. In the planned economy, a round takes place at the political level to receive more support from the party and state leaders.

Free Market and Planned Economy – Which has more Advantages?

Both systems have advantages and disadvantages. However, the benefits of a free-market economy are greater. This system has free competition, free price, free trade, and free consumption. And it is through free competition new products and services can constantly develop and sell. In a free-market economy, the State has little intervention. It is only supposed to ensure the protection and property of citizens, provide a suitable means of payment, and maintain the legal system.

On the other hand, the planned economy is an economic system that the State quite controls. That means much less to decide for entrepreneurs since the State determines production type, quantity, and quality. In addition, as we already mentioned, the number of goods used and the prices of the products. And the training, work, hours, and labour requirements also determine the workforce’s income. Therefore, a free-market economy is more advantageous

So is the Free Market Economy better than the planned one?

Both the market economy and the planned economy have had their drawbacks. Many countries have tried to have a planned economy, which has proven less efficient. But the market economy has also created problems, like the financial crisis of 1929 or the financial crisis of 2008. At that time, the market economy led to a great depression. The command economy was when the free market economy fueled society’s financial, economic, and social tensions.

Still,  in a free market economy, there are greater possibilities for economic growth and more efficient distribution of resources. There is no government intervention in the free market economy in economic activities. But their appropriate intervention is required to protect consumers from market forces. And manage the social impact on the free market. Therefore, a mixed economy can be the most effective for personal and social well-being.

Examples where you can see the difference between the two

After World War II, the European economy was in ruins. By 1947, the situation had worsened because there was no money to provide food for the population. The Marshall Plan, known officially as the European Reconstruction Program, created to strengthen Europe, an example of a free-market economy in Western Europe. Through the Marshall Plan, industrial modernization was achieved and contributed to countries’ economic growth, supporting private property.

In contrast to the market economy promoted by the Marshall Plan, in Eastern Europe, countries followed the planned economy model. The State became the owner of all large production companies and farms in these countries. The development of the economy in these states adapted to the consumer’s needs, but central standards. Therefore, the needs of the people to the background.