Types of economy

Types of economy 

There are three types of economy: free market, mixed and command. 

A free market economy allocates most resources, goods and services through the market mechanism, with little intervention by the government. The private sector is often significantly involved in healthcare, education, transport, etc. 
 e.g. USA, Australia 

A mixed economy is an economy where both the free market and the government allocate significant proportions of total resources. The government/free market typically have 40-60% control of resource allocation. The welfare state is larger than in free market economies and healthcare, education, etc are often provided by the state. 
e.g. UK, France, Denmark

A command economy is where the state allocates most resources and the market plays a limited role. 
e.g. North Korea, Cuba

Adam Smith - Advocated for a laissez-faire government approach, but recognised that the state had an important role in providing a framework in which free markets can operate to prevent market distortion, etc. He also recognised that the government would have to provide services and goods that the free market would otherwise not provide (e.g legal system, infrastructure) 

Friedrich Hayek - Argued that greater government control leads to totalitarianism and loss of freedom by the individual. 

Karl Marx - Wanted to reduce the inequality between property owners and workers. Believed that the 'proletariat' would rise up and seize control of the means of production. Wished for a new democratic society where there would be equality and property would be owned collectively. 

Generally, free market economies provide individuals with greater choice of goods and greater quality goods because there is incentive for producers to do so in order to make profit. In command economies, there is less incentive to provide choice and it may be harder for the state to do so as there isn't perfect information about what people want. However, there is an inequality in the amount of choice those in a free market economy have - those with lower incomes have less. 

Free market economies typically are more efficient as individuals have incentive to be - if they aren't they may lose their job/go out of business. The price mechanism also allocates resources as efficiently as possible. Yet there are often monopolies/oligopolies in the market economy which may lead to inefficiencies/poorer quality goods. Due to the inefficiencies in command economies, there is often slower growth here as government control dampens innovation. 

There are higher levels of inequality in a market economy as there are disparities between top and bottom earners. In command economies resources are divided by the government so everyone gets an equal share. Yet even in command economies inequalities still exist - often a privileged few hold all the wealth while everyone else is at a baseline level of equality. In market economies there may be inequalities, but overall everyone is better off. 

Market economies are often riskier for the individual as there is less help available for those less able (e.g sick, old, homeless, etc), whereas in a command economy services are often provided for these people. There is also less risk of losing your job/housing. However, the risk associated with market economies may be on the whole beneficial as it is what incentivises growth.