The different economies and models

People often talk about the different economies in countries, but it is never really stated clearly what these economies entail. There are the free market economy, the centrally planned economy and the mixed economy. There are also different economic models. This article explains what these different economies entail.

Free market economy

The concept of economic order includes the way in which the economy is organized in a society. In a free market economy there is enterprise-based production, which means that private initiative determines what is produced. Production is guided by demand. The price mechanism in a free market economy means the process of entrepreneurs coming and going, until supply and demand are in balance. According to Adam Smith, there is an invisible hand in this economy. He believed that there was an automatic, natural order in society, which would automatically create economic equilibrium. A condition for this is that there is fair competition, and therefore no monopoly positions. To ensure this condition, cartel formation is required, which means that companies make agreements with each other to prevent competition or a company eliminates competitors using linked products (Word from Microsoft).

Benefits of the free market economy

  • Producers are forced to offer high-quality products at such a low price.
  • It stimulates innovation. The so-called ‘gap in the market’.

Disadvantages of the free market economy

  • It can lead to social inequality. Demand is defined as demand with purchasing power. So not as the real question, this also maintains social inequality.
  • The cheapest production method is sought, this can be harmful to the environment.

Centrally planned economy

One of the founders of the centrally planned economy is Lenin. In this economy, the state must have sufficient means of production. That is why capital, factories, shops and land are nationalized. In this economy, private entrepreneurship is not possible.

Advantages of the centrally planned economy

  • Social needs are central. This must be provided in a way that is affordable for everyone. Education and health care are often free.
  • Less social inequality. The means of production can often be used more efficiently.

Disadvantages of the centrally planned economy

  • There is an economic calculation problem: to set the correct prices, the government must have the correct complete information. That turns out to be impossible. As a result, companies are imposed targets that they cannot meet. This leads to loss of quality and tampering with figures.
  • The production is very uniform.
  • There can be a big difference between theory and practice. The government often controls the media, so there is little room for critical information gathering. Environmental damage occurs.

Mixed economy

John Maynard Keynes believes that the government should play a more active role by pursuing a countercyclical policy. When the economy grows, the government must spend less. If the economy stagnates, they have to spend more money to stimulate the economy. This government intervention can be by setting limits on competition: especially for essential goods and services that everyone needs. For example, the location policy for general practitioners. The government can also intervene by combating concentrations of power and by setting a minimum price. The government also monitors the quality of the products and the protection of the environment. There are also strict requirements for food.

Models of the mixed economy

Scandinavian model

In this model there is most government intervention. Economies are characterized by a high degree of flexibility in the labor market, coupled with a well-developed social security system. There is a relatively high collective tax burden here.

Western European model

In this model there is harmonious cooperation between the government and the social partners, such as trade unions and employers’ organizations. Public goods are left more to the market, which ensures that costs for the collective sector remain limited.

Anglo-Saxon model

In this model, the government prefers a good business climate. The collective tax burden is kept as low as possible, in the Anglo-Saxon model there is more of a division between society. For people at the bottom, this often means: working more and harder, fewer educational opportunities for children and poorer health care. China has a socialist market economy in which production is left to the market, but the land and means of production remain in the hands of the state.