Market Economy and Planned Economy

Introduction From1760s to 1830s, UK originally completed the industrial revolution and achieved the large-scale production of the machines. And then other European countries followed the UK and finished the industrial revolution. All these greatly promoted the development of the market economy in Europe. From the ending of the 19th century, the major capitalist countries in Europe and the United States had successively entered the stage of monopoly capitalism from the unrestricted competition of the capitalist stage.

In order to get more resources, some capitalist countries started twice world wars. After the world war two, United Stated became the most powerful country in the world. And the market economy began to be developed in the all world. At the same time, the planned economy, a completely opposite economic system, had been developed in some socialist countries such as Soviet Union, Cuba and China. Over a period of time, the planned economy showed its persuasive power in these after-war countries and made significant contributions to the economic development of these countries.

But after the disintegration of the Soviet Union, the planned economy began to disappear in the world, and there are only two countries in the world who implement the planned economy. In the capitalist world, many countries began to realize that the market economy was not a panacea after the Great Depression of America in 1930s. In today’s world, there are no countries that use the pure market economy as its monetary system, and the mixed economy is more popular.

In this task, we have to discuss the advantages and disadvantages of the market economy and explore one question: is the market mechanism better than the planned economy as a means of allocating scarce resources? What is the market economy? According to Chris and Demand (2010), a market economy, as known as capitalism or a free enterprise system, is an economic mechanism in where goods and services are traded freely on an open market. In a market economy, individuals and businesses owners make the supply, product, purchase, and sell decisions by themselves.

According to above, we can find the first characteristic of the market economy that is less government intervention. The government in a market economy country does not direct the monetary policies, influence goods’ price and plan the social production. The things that the government needs to do are to keep the its main market stability and make law and policies promote the development of its market. Secondly, without much government intervention, the prices of goods and service are determined by the supply and demand in free markets.

Because of the private ownership of capital and freedom of choice, individuals and businesses can organize their consumption or production by their own decisions. So when demand for goods in the market is greater than supply, the goods’ prices will rise, on the contrary, the prices will fall. Thirdly, legitimate competition is encouraged in a market economy. There are so many individuals and businesses activating in the open market, and they provide goods and services for the customer in their own ways. So whatever your business is, you have to face competition.

If you want to win the competition, you must improve the quality of your products and services. Fourthly, the high profit motivates individuals and business owners to highly participate in the competition in free market. If individuals and firms except to get high monetary rewards continually, they have to constantly innovate and explore new products and processes. Thus, in a market economy, an entire economic goal of individuals and businesses is to attract customers to buy their products or services at a price that let them get the highest rewards. The advantages of the market economy.

Most countries in today’s world use the market economy as their economic system because they get back many benefits from this system. And US economy, Japan’s economy and Germany’s economy are the most successful economy in the world. All these three countries are the market economy country. According to the IMF, in 2011, the GDPs of US, Japan and Germany are 15,076, 4,444 and 3,114 billion respectively. And the ranks of these countries are first, third and fifth. The advantages of the market economy are following: Firstly, a market economy has automatic incentives.

In the market economy, individuals and firms have the right to earn and retain property and profit that motivate individuals and businesses to participate in the high degree competition. In the competition, the participants continuously improve the quality of products and services to get more benefits from the price mechanism. In 1970s, before the economic reform, Chinese farmers had no right to retain the grain from the farmland, and the land belonged to the government. In rural areas, the farmers worked together in groups and the acquisitions from the farmland belonged to groups.

After harvest season, the committee of every group allocated the grain equally on the basis of the number of crews in the group. In this situation, some farmer did not work hard, but they could also be allocated the grain as much as some industrious farmers. Then more and more farmers lost their enthusiasm in daily work. After that, the farmland was short of care and the productions of the grain were low. At last all farmers had no enough food. And this phenomenon also was funded in other economic areas.

In the market economy, farmers work in their own land and try their best to improve the production to get more profit. Secondly, in a market economy, individuals and businesses manufacture production according to the needs of customers and product varieties goods to maximize the needs and satisfaction of customers. Because of the competition, high profit rewards and the private ownership, individuals and firms provide products with varieties of shape, color, design and packaging to win the competition and get more profit. In the period of the planned economy in China, the government indicated social productions.

At the beginning of every year, the government would plan how much the products should be produced in this year and ignore the demand of the consumption. In 1970s, there were big demands of camera, bicycle and television in big cities of China. But these products were produced by the government’s plan, and the quantities were limited. Most people could not buy these products from shops even if they had money. The policies of the planned economy not only could not satisfy the needs of people, but also restricted the development of the social productions. Even some factories’ production for a few days could be able to meet their annual sales.

In a market economy, the products and services will not be stop before satisfying the needs of customers. Thirdly, the most important advantage of the market economy is utilizing resources efficiently. In order to obtain more profit, businesses owners and individuals should strive as much as possible to improve efficiency in production, enhance the quality of goods and reduce the cost to defeat other competitors in an open market. And firms will stop production once some goods are not needed. All these behaviors enhance the efficiency of consuming resources and reduce opportunities of wasting sources.

Also in the period of the Great Leap Forward in China, the central government put forward the objective that the output of main industrial products of China should beyond United States and UK in 15 years. In order to achieve this objective, the central government mobilized people of nationwide to make steel. In the result, not only factories but also farmers and general citizens took part in the activity of steelmaking. They built steelmaking furnaces by themselves in rural and urban areas and used iron farm implements and kitchenware as raw materials of steel.

Even some people put Chinese herbal medicine into the furnaces during the process of making steel. As the result, most steel products were rejects and could be used. During this period, many resources were wasted, and many other production activities were delayed. The disadvantages of the market economy In reality, there is no longer a free market because the market economy is not all-purpose and it has disadvantages too. Some crisis like the Great Depression and the Subprime mortgage crisis were the negative results of the high degree development of the market economy.

Recognizing the shortcomings, many market economy countries enhance government intervention in their economic system. But the government interventions just limit the influence of the disadvantages and not eliminate the disadvantages. The disadvantages of the market economy are following: Firstly, the big problem in the market economy is inequality of distribution of wealth and income. In many capitalist countries, the rich get richer and the poor get poorer. Because of the private ownership, rich can use their abundant resources like capital and real estate to obtain more wealth.

On the contrary, the poor can only work for the rich and get general salary for the heavy bill. And without the government intervention, some poor who lack of social welfare and social security live a life of crime and make undesirable social effect. Michael and Dan (2010) reported that the gap between the richest Americans and the poorest was larger than at any time since the 1920s. And according to a reported in 2010 by Edward Wolff of New York University, the top 20 percent of rich people controlled about 85 percent of the wealth. On the contrary, lowest part 40 percent owned almost 0 percent wealth.

These people have negative net wealth. Secondly, the problems of inflation and high unemployment rate always perplex the governments of capitalist countries. According to the data statistics (Table 1) by Bureau of Labor Statistics of United Stated, unemployment rate in America has been continuously above 4. 5 percent. And especially after the Subprime mortgage crisis, the rate increased sharply from about 4. 5 percent in 2007 to almost 10 percent in 2009. It was because the business fluctuations during the Subprime mortgage crisis caused the reducing of opportunities for employment.

In high unemployment rate, social labor resources are wasted and people have no income to consume. The reducing of consumption leads to decrease the production. And more people begin to lose their jobs. This is a vicious circle. The unemployment rate of United States: 2002 to 2012 Data extracted on: October 27, 2012 (8:20:14 AM) Source: http://data. bls. gov/timeseries/LNS14000000 Bureau of Labor Statistics Table 1 Thirdly, businesses owners’ blindfold ambition of profit brings the results of unnecessary variety and wasteful competition and misappropriation of resources.

In order to attract more customers, firms cost much in products’ color, design, package and advertisement, and these lead to unnecessary high costs of production. To maximize profit, firms like to produce the high-profit goods for the rich and ignore the production of low-profit goods for the poor. Gallo (1999) reported that there was a about $7 billion advertising expenditure spent by America’s food manufacturers in 1997. And most of this advertising focused on highly processed and highly packaged foods. In other words, these high-quality foods were produced for the rich.

According to Table 2, the advertising expenditure of foods was continuously increasing. Advertising by food industry, 1995-1997, United States Source: Compiled from BAR/LAN Multi-Media Service data USDA/ERS Table 2 The planned economy According to Alec (1987) and Myant et al (2010), in a planned economic system, a central authority, usually a central government agency, formulates a plan which embodies the decisions regarding production and investment. In this kind of economic system, not only most property resources but also most of business firms are owned by the central government, and the individuals and business firms produce according to government directives planned by the central government.

The powerful central government fixes the prices of goods and divides outputs of production and customer goods. The government also allocates the capital goods among industries on basis of the central planning board’s long-term priorities. In a ward, economic activities rely exclusively on the central plan in the planned economy. The most important advantage of a planned economy is the equal distribution of income and wealth.

High controlling of most resources and social wealth lets the central government to have abilities to provide full social security benefits and equal employment opportunities for all citizens. For example, Cuba is a unique country that has the real universal free medical care in the world. Also the government can easily control unemployment and inflation in the planned economic system. As same as the market economy, the planned economy is not perfect too. Highly equal distribution and no profit motive make individuals lack their incentives and initiative in daily work.

Because of absence of competition, the state-owned enterprises have less R&D and produce low quality products. And there are little varieties in the goods and service that can be chosen by customers. Some incorrect economic plans also can large wastes of economic resources. Discussion: Which is better as a means of allocating scarce resources? According to the principles of Economics, all resources like land, labor, capital and natural resources are limited in society while people’s wants are unlimited. People always get more and more benefits from these scarce resources.

And one big problem in economics is how to use the limited resources to create more value. China is a good example which has introduced elements of the market mechanism into its planned economic system. Before reform and opening to the outside world, China practiced pure planned economy for about 30 years after the civil war. As a post-war country, China was short of capital, talented person and technology, and its industrial level and technological level were very backward. In this situation, the central government used national resources to develop the heavy industry.

During this period, industry and technology developed fast. For example, China produced its first truck in 1956. And some high technologies like unclear weapon and satellites were developed too. Although China’s industry developed fast, but the quality of people’s life did not improve much. Most people were short of popular consumer goods and lived in poverty. And some big incorrect economic policies wasted a large number of resources and hindered the development of society. After 1978, China have began to reform its economic system and open itself to all GDP by sector: 1978 – 2002 (in 100 Mio. Yuan)

Source: China Statistical Yearbook, 2003, Table 3-1, p. 55. Note: At current prices. Table 3 the world. The government first reformed its agriculture policy, and new policy permitted farmers to rent land and manage the land by themselves. The policy’s name is the household contract responsibility system. Then the central government has repealed the policy of limiting private enterprises and advanced the development of private enterprises. But in general, the state-owned enterprises control more resources than the private enterprises. According to the data from Table 3, China’s GDP has increased sharply from 1978.

The planned economy helped Soviet Union become a winner in the world war two and turn into a superpower after the war. Remco (1996) did a research of studying the economic performance of Soviet industry. In his research, he used the method of measuring value added per hour worked to estimate Soviet Union’s economic performance. Comparing with United States, Soviet Union value added per hour worked was 26. 8 percent of US productivity in 1987. The planned economic system did not help Soviet Union improve its productivity too much from 1928 to 1990.

Provisional Summary Comparison, Industry, USSR/USA, 1929-90 Source: A Comparison of Soviet and US Industrial Performance: 1929-90 by Remco Kouwenhoven Table 4 In the 21st century, the planned economy countries almost have disappeared in the world. And North Korea, last planned economy country, is one of the most poor countries in the world. At the same time, most capitalist countries have been no longer using the pure market economy especially after the Great Depression. It seems that there is no winner between the market economy and the planned economy in allocating scarce resources.


From the discussion, we find that the market mechanism cannot manage all scary resources well and the planned economy cannot allocate all limited resources accurately too. Most resources like land, labor and capital can be utilized efficiently in the market economic system. But the government must implement strict management of some scary resources like natural resources. And the weapons and unclear, the dangerous resource, must be controlled by a powerful government. The widely used of the mixed economy illustrates that it is not the reality to use the pure market economy or planned economy to manage one country’s economy in today’s world.

Maybe in future, the planned economy will take place of the market economy when the government is extremely highly efficient and intelligent. References Joseph, C. & Media, D (2011). Features of the Market Economic System. Houston Chronicle. Retrieved 27,10,2012, from http://smallbusiness. chron. com/features-market-economic-system-3887. html World Economic Outlook Database, October 2012. International Monetary Fund. Accessed on October 10, 2012. Norton, M, I. & Ariely, D (14. 11. 2010). The gap between rich and poor in America is bigger than people think. Los Angeles Times.

2010 Alec Nove. (1987). Planned economy. The New Palgrave: A Dictionary of Economics, v. 3, pp. 879–80. Martin, M. & Drahokoupil, J. (2010). Transition Economies: Political Economy in Russia, Eastern Europe, and Central Asia. Hoboken, New Jersey: Wiley. ISBN 978-0-470-59619-7. Gallo, A, E. (1999). America’s Eating Habits: Changes and Consequences. U. S. Dept. of Agriculture, Economic Research Service (1999). Kouwenhoven, R. (1996). A Comparison of Soviet and US Industrial Performance: 1929-90. Groningen Growth and Development Centre Research Memorandum GD-29 May 1996 1997.