Economics is a system of rationing
goods and services; however this is a very vague statement. Economics itself is
an exceptionally complex subject which is why people dedicate to study it for a
living. The basic economic problem is what determines what type of allocation
system a state has. The two main theoretical allocation systems are planned
economies and free market economies. How do governments decide which allocation
system is best for their people? To what degree should the government arbitrate
in the economy? Which system is better? This is an extensive debate for the
reason that both economies have their upsides and disadvantages.
The basic economic problem consists
of three prominent questions. A government settles on what is produced and in what
quantities, how things should be produced, and who things are produced for? Each
allocation system handles each of these questions differently. Seems fairly
simple up to now and that is because theoretically these systems seem almost
perfect. As soon as free market or planned economies come to life is when tribulations
arise. Most economies are not solely free market or planned but a mix between
the two, better known as a mixed economy.
The IB Economics Course Companion
textbook states that in a planned economy, decisions in the basic economic
problem “are made by a central body, the government”. In other words, the government controls the
economy through central planning and does not take decisions from their people.
They decide what is best for their people and command production, prices and
wages. All resources are collectively owned by the state which means distribution
is handled by them. At present, there are only 3 countries that strictly have
planned economies (North Korea, Cuba and Laos). A Centrally Planned economy
provides advantages such as a definite lifestyle as long as you work and do
what you are asked to do. In a planned economy, you receive benefits such as
free education, health care and much more. It seems like a perfect system since
everyone receives resources equally; there should be no unemployment or poverty.
While some disadvantages include dominance from the government due to their
full control; which leads to individual liberties being taken away. Also, an
individual could be a hard worker and not benefit at all because everyone collects
equal resources. This could lead to many people slacking off and their quality
of work would definitely degrade.
Free Market economies are the other
system of allocation. It is also known as Private Enterprise or Capitalism. In
this type of economy, the state does not interfere in the economy which means
the economy is in private hands. The economic problem is decided through
private industries allowing for variation. In this type of economy, the idea of
‘demand and supply’ is used to settle on production, prices and wages.
Individuals are able to choose an adequate way to allocate resources according
to demand and subsequently, profit rises to their benefit. If it was not obvious
already, resources are privately owned. The upsides of a Free Market economy is
that with economic freedom comes personal freedom. The two conjoin to create individual
liberties. Another advantage, dissimilar to planned economies, is that
individuals are compensated for their hard work which means someone who is lazy
earns what they deserve. You are
rewarded economically for your triumphs and this reflects on the way someone
works. Disadvantages of this type of economy include social inequality. You are
not guaranteed anything by the government therefore an indolent person would
not benefit because the government would not provide health care, education and
other necessities. A further nuisance is that demerit goods (terrible goods and
services) could be over provided and merit goods (excellent goods and services)
will be under provided.
Both economies have many advantages
and disadvantages though listing them all would just be endless. Personally, I
believe that both economies would not be great for any society. People deserve
to have liberty nevertheless they also need guidance from the government. Too
much of anything is a bad thing which is why there should be a mix between both
allocation systems. I am only now learning economics and could not give an
opinion on how they should be mixed. Hopefully, soon enough I could state how
an economy should be formed. Capitalist economies give me the freedom I deserve
and reward me with how hard I work. Whereas centrally planned economies allow
me to live a standard life providing me with my necessities. Therefore, I lean
more on the capitalist side (I have to say that because I am American) but I
see aspects from planned economies that are essential to strive for the finest economy
for the people.
By: Matthew Bocanumenth
Information collected from:
- IB Economics Course Companion (Jocelyn Blink & Ian Dorton)
- Notes from Mr. Caple's class
