1.1.6 Free, Command, and Mixed Economies

Any economy seeks to solve the Basic Economic Problem (BEP) of scarce resources and unlimited wants.

If an economy were to ask questions:

• What is to be produced?
• How?
• And for whom?

Economic agents are interdependent, meaning that an action taken by one group has an effect on others.

Free Market Economy

A free market attempts to solve the BEP with as little intervention from the government as possible.

Adam Smith is seen as the "father of capitalism" who advocated for the division of labour, the "invisible hand" of economics. He also wrote the "an enquiry into the wealth of nations" book which explains how developed countries from his time used division of labour (specialisation) to speed up production and make nations wealthy.

Command Economy

A command economy is one where the state and its central planners make most of the decisions regarding resource allocation.

Proposed by Karl Marx in "The Communist Manifesto" and "Das Kapital", Marx said that in pure capitalism, the ruling class owns all the means of production and this does not go well with the "working class" who sell their labour to them.

i.e., those who own, do not go well with those who do not.

Karl Marx also stated that the tensions created by capitalism will lead to its inevitable fall (self-destruction) and its replacement by a form of socialism.

Mixed Economy

A mixed economy, as the name suggests, is a mix between the two types, where resource allocation is determined by both the state and the market forces of supply and demand.

Example: Economic Spectrum

If you know a bit about the history of the USSR (e.g., think GCSE History Cold War) and especially its economic policies, in addition to the economic policies of modern day Russia, then this spectrum will actually be interesting for you.

A stylised 0-10 line placing selected countries and historical periods between a tightly planned command economy and a liberal free-market economy.

Hover over any point to see the reasoning.