To what extent do you agree with the view that only a free market approach to running the economy can bring about sustainable high levels of economic growth and development?

Topics: Market economy, Economics, Mixed economy Pages: 9 (2468 words) Published: December 2, 2013
To what extent do you agree with the view that only a free market approach to running the economy can bring about sustainable high levels of economic growth and development?

The basic economic problem is that we, as consumers, have unlimited wants and scarce resources. (Anderton, 2008, p.1) Due to this, the questions of what shall be produced, how it will be produced, and who gets the product, arise. (Sandford, 1977, p.42) Therefore, economic systems exist to allocate resources and solve these problems. There are three main economic systems, which include the free market economy, command economy and mixed economy. (Grant and Vidler, 2000, p.19) This essay will explore whether or not a free market approach to running the economy, would bring out sustainable high levels of economic growth and development.

The degree of government intervention is what distinguishes the different types of economic systems from one another. For example, a free market economy contains no government intervention, yet on the other end of the spectrum, the command economy is total government control over the market. (Grant and Vidler, 2000, p.19) The discussion of whether a free market economy can bring about economic growth can be demonstrated through illustrating the advantages and disadvantages of both extremes.

In a pure free market economy, or capitalist economy, the allocation resources is determined by consumers and producers through the forces of demand and supply. (Ferguson, 2002, p.3) In 1777, prestigious economist Adam Smith likened this process to an ‘invisible hand’, which guides producers and consumers to desirable market outcomes. (Mankiw, 2011, p.11) For example, if consumers wish to purchase more of a certain commodity, the price will tend to rise due to the rationing mechanism, and this in turn will signal to firms that more of this good needs to be produced. This also provides an incentive for more factors of production (land, labour, capital, and enterprise) to be moved into creating said good, as firms will wish to meet demand and maximise their profit. (Sandford, 1977, p.45) As more firms read the signals, enter the industry, and produce the good; prices will be driven down due to competition and a higher supply. This implies consumer sovereignty, as the economy produces what the consumers want through the consumer’s spending choices. (Sandford, 1977, p.46)

Furthermore, as well as the consumer having sovereignty in that they dictate to producers on what should be produced, it is said that consumers would also benefit from high quality goods. (Simpson, 2005, p.111) For example, if a government were to produce goods for consumers, there would be little incentive for them to determine the level of safety and quality consumers want in their goods. This is due to the fact that a government is not motivated by profit. (Simpson, 2005, p.111) In a free market there is a high level of competition. To compete with their rivals, firms need to offer goods that have an edge over similar goods, since consumers are looking to maximise their utility. Any firm which does not provide this, or provides a good with quality below that offered by their rivals would put themselves at a disadvantage. The loss of profit would therefore force them to compete on price and improve quality if they do not wish to go out of business. (Simpson, 2005, p.111) This is another example of the ‘invisible hand’ in motion.

According to Anderton, (2008, p.207) firms need to either increase the quantity or quality of their inputs in the production process to increase economic growth. Ceteris paribus, a free market economy would stimulate economic growth and development through the expansion of output due to signals created by consumers. With firms in the free market economy looking for a way to expand and improve output due to high demand, they would need to invest in more capital and demand more labour. (Sandford, 1977, p.45) This in turn would...

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The Richest
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Sandford, C. (1977) Social Economics. London: Heinemann Educational Books Ltd.
Simpson, B. P. (2005) Markets Don’t Fail! Lanham: Lexington Books.
The Richest
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