Centrally planned economy vs market economy

Yihan, Andrew, Shannon, Loic, Francesca, Dana

Centrally planned economy

What is it? ​

• Government controls economic decisions​
• How resources are distributed and used ​
• Determining the prices of goods and services​

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Characteristics ​

• Resources are owned and managed by government ​
• There is NO consumer or producer sovereignty ​
• Market resources are NOT allowed to set prices of goods ​
• Government decides what to produce and how much of it​

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Centrally Planned Economy

PROs

• it promotes equality among consumers

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• it allows the government to monitor all aspects of economy (prices are kept under control)

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• it does NOT hinder economic projects to be carried out immediately

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• lower wealth

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• NO competition

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CONs

• it is known to be inefficient in distributing resources (waste of time and money)

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• it would go against some people’s rights as consumers (government has total control)

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• it suppresses economic freedom

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• lower confidence​

Example from the past: the German Democratic Republic

• Businesses nationalized
• Government determines production
• 2 or 5 year plans
• Hard to predict demand
• Trends
• Subsidize products
• Cars
• Government debt
• 20-25 billion debt

Example of today: Cuba

• Planned economy run by state-run enterprises
• 76% of all enterprises are state-run
• Majority of the remaining (23%) are self-employed
• Healthcare, education, and food are all government subsidies
• NON-convertible currency, Cuban Peso
• Cab driver is paid more than a doctor

Market economy

What is it?

• Supply and demand are the key determinants of aggregate well being�

Characteristics

• NO Government intervention or protectionism
• Goods and services are primarily controlled by private individuals and businesses
• Can effectively accommodate consumer sovereignty
• Generally better on efficiency than on equity
• Forceful competitive environment

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PROs

• sufficient production of goods and services
• creation of employment opportunities
• it encourages innovation

CONs

• it causes prices of commodities to escalate.
• NO support for companies with an inherent competitive disadvantage.

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Example from the past : The Republic of Venice

• From the 11th century to the 1350’s, Venice was the financial capital of the world

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• It enormously benefited from its partnership with the Byzantine Empire

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• Venetian ships were allowed to stop by Byzantine ports without having to pay taxes and their property was protected by the Empire

Economic peak, social change, and downfall

• After decades of prosperity, social mobility had been made possible by international trade. Some wealthy families seized the opportunity to strip the Doge of most of his power, forming the Great Council.

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• To make the city even more powerful, the Council took some egalitarian measures, such as judging individuals by merit and not by social status.

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• After a few generations, descendants of these families chose to pass laws that would restrict social mobility and trade fairness. This decision led to a steady decline until Venice was NO longer the financial capital of the world.

Example of today: USA

Characteristics of a market economy can be found in the United States Constitution

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• Article 1, section 8, states the protection of innovation as a property by initiating a copyright clause

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• Article 1, section 9 & 10, defends the free enterprise and freedom of choice by forbidding States from taxing each other’s goods and services

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• Amendments 9 & 10 limit the government’s control to intervene in any rights NOT explicitly outlined in the Constitution

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The best economic system

• It is impossible to determine which is better than the other

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• Theories from different historical and cultural contexts (Feudalism, Marxism, Fascism)

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• The ideal economic system is the perfect mix between centrally planned economy and market economy

References

10 Significant Pros and Cons of the Market Economy. (n.d.). Connect US. Retrieved March 26 2017, from:http://connectusfund.org/10-significant-pros-and-cons-of-the-market-economy

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Amadeo, K. (February 9 2017). Market Economy: Characteristics, Examples, Pros, Cons. The Balance.com. Retrieved March 26 2017, from https://www.thebalance.com/market-economy-characteristics-examples-pros-cons-3305586

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Market Economy. (n.d.). Investopedia. Retrieved March 25 2017, from http://www.investopedia.com/terms/m/marketeconomy.asp

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Puga, D., & Daniel, T. (2012). International trade and institutional change. Cambridge, Massachusetts: National Bureau of Economic Research. Retrieved from

Nisen,M (2012). The economic history of Venice. Retrieved April 18 2017, from http://www.businessinsider.com/the-economic-history-of-venice-2012-8?IR=T

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