1. What
is a market economy?
It
is an economic system which allocates scarce economic resources using the price
mechanism. In a layman term, there is a price tag for everything from the tuna
we eat, the fuel we pump, the clothes we wear, the condominiums we stay in, the
flight tickets for both our local and international holidays to the college
tuition fees we pay for our children. It also covers the wages for different
types of profession. Some of these prices fluctuate on a daily basis, a day up
and the other day down. Some are relatively stable and often revised upward due
to the willingness of consumers in paying them
In
a more technical way, wages and prices that we pay for are all determined via
the interactions of demand and supply. It also has other names such as the free
market, capitalist and laissez-faire. Laissez-faire is actually a French term
that translates as ‘let it be’ which means that an economy should be left
operated on its own without any disturbances (government intervention). Through
the greed for profits and own selfishness, scarce resources are said to be
allocated in the ‘most efficient way’ since they go to the most deserving firms
and individuals
2. How
does a market economy solve basic economic problems?
The
existence of scarcity in our world means any economic system must be able to
address three fundamental questions and they are WHAT SHOULD BE PRODUCED? HOW
IT SHOULD BE PRODUCED? and FOR
WHOM SHOULD IT BE PRODUCED?
Source: economicsonline
What
goods to produce and what services to provide depend heavily on the
interactions of demand and supply and hence the final equilibrium price, higher
or lower. Consider the housing market in Malaysia. Over the past few years,
prices of properties have averagely spiked up by as much as 40% due to the
buying interest of investors from overseas. A rise in demand has caused the new
equilibrium price to increase and this sends a signal to all housing
development firms to construct more houses and condominiums. The logic is,
higher prices mean more money to be made. What about subjects offered by private
learning institutions like HELP Academy and Taylor’s College? Well, they work
the same. Higher demand for pre-U studies as a ticket to go to the top
universities in the world has caused all colleges to be rushing in with the A-Levels
programme
How
those goods and services were to be produced will depend on the nature of the
industry itself and the management skills of people appointed to run the firm.
Some industries are labour intensive while others capital intensive. Whichever
it is, the most cost efficient one will be considered at the end of the day.
Similarly, is the firm willing to pay a little bit more to retain the most
talented workers? If yes, the economic benefits for the firm are tremendous.
Highly skilled and most experienced workers are not just scarce but also very
productive, helping the firm to reduce costs in every way. On the other total
revenue generated will be high due to their craftsmanship, teaching skills
which will attract more students, ability to cook wonderful dishes and others
For
whom those new luxury condominiums are built for? For whom those designer
watches, shoes and bags are targeted at? How many units an individual or firm
can get? Perhaps the best answer is none other than how much a person is
willing and able to pay for it. Firms which are motivated by high profits will
definitely sell the expensive houses, collectibles, antique cars and furniture
and A-Level study to people who are prepared to pay a hefty price for it while
at the same time gain satisfaction out of it. Remember, we as consumers always
want to maximise our utility and well being and therefore if we are able and
willing to we will always want the best for everything
3. What
is a mixed economy?
It
is an economic system where scarce economic resources are partially allocated
via the price mechanism (as discussed earlier) and also through government
interventions. Although private sectors are generally more productive,
efficient, conduct more R&Ds or more innovative and do not waste resources,
it is far from being perfect. In many circumstances, economic resources are not
even allocated efficiently leading to net welfare loss. The drive to maximise
profit and satisfaction has eventually led to series of economic problems. To
increase annual profits and please the shareholders, thousands of jobs in a
factory may need to go and where will all these unemployed people end up in?
The most cost efficient method to start up farming may not even be the best.
For instance, plantation firms in Indonesia chose to burn down trees rather
than cutting them down resulting in deterioration of air quality, increase in
respiratory illnesses, tourists shunning away from Malaysian and Singapore,
decline in GDP and others
What
about alcohol consumption? Consumers just want to maximise their own utility
and in most cases do not consider much of the wider implications of binge
drinking. The same goes for cigarettes. Do you think cigarette manufacturing
companies will think of public’s health? No, they only think of ways to fatten
their margin. What about education and healthcare? Some private schools and
colleges are extremely expensive because consumers are willing to pay for it
but what about those cannot afford? Isn’t education is universal right? The same
with access to healthcare treatment. With all these arguments, clearly free
market economy is highly preferred but there must also be measures to regulate
the behaviour of firms and consumers
4. How
does a mixed economy solve basic economic problems?
Source: economicsonline
The
discussion here will focus on government interventions. What goods and services
to be produced will all depend on what the government perceives to be in the
best interest of the general public. For instance private universities and
hospitals may be too expensive and so not everyone will be able to gain access
and this is why we have government schools and hospitals all over the world.
Equally national defence which is a form of public good that will never be
provided under the pure market system. The main reason is the existence of free
riders and hence the difficulty to maximise profits. Once again, the government
feels that national defence cannot be absent and therefore undertakes to
provide it. Also, it can be quite dangerous if national interest lies in the
hand of greedy entrepreneurs
The
government seeks to maximise welfare and hence will consider methods of
production which will benefit more people. This partly explains why all
governments are the largest employer and also more inefficient compared to the
private. To maximise welfare within the society, jobs are purposely created to
absorb those unemployed people resulting in non-necessary departments, more
paper works and layers of bureaucracy. They shouldn’t even be there in the
first place
To
address the last question, government will always try to seek equity or
fairness. Goods and services produced will always go to those that need it the
most rather than on a discrimination of who can afford to pay for it. This is
why there are affordable housing schemes, healthcare treatments and national
schools. On top of that, there are many ways in which the government can
regulate the economy. I will discuss this in another separated post
5. Is
USA a market or mixed economy?
In
textbooks, USA is always being regarded as a market economy but in reality it
would be better if one says that the States is a better proxy of capitalism
rather than being one. As a matter of fact, there is no pure capitalist or
socialist in the real world. Every economy is in fact mixed and the key issue
is the degree of mix from one country than the other. As for the USA, it is
definitely a mixed economy but rather one with larger roles from capitalism.
The credit crunch crisis and the near collapse of Ford and GM are some of the
good examples which prove that pure market system cannot survive on its own.
The greed for profits has caused the banks to ‘misbehave’ and finally they
collapse and require the government to intervene by pumping in tax payers’
money. On top of that, there are minimum wage, carbon tax, progressive income
and corporate tax, Social Security, Medicare and a lot more which are not even
possible under market economy
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