Difference Between Free Market Economy and Command Economy

Main Difference – Free Market Economy vs Command Economy

Economics can primarily be classified into four types as traditional economy, market economy, command economy and mixed economy. The market economy, capitalist, laissez-faire are the terms that use to describe the free market economy whereas command economy is similar to a socialist economy. The free market economy is controlled by private owners whereas command economy is controlled by the government. This disparity in control can be termed as the main difference between free market economy and command economy.

This article explains,

1. What is Free Market Economy?
     – Definition, Characteristics and Features

2. What is Command Economy?
     – Definition, Characteristics and Features

3. What is the difference between Free Market Economy and Command Economy?

Difference Between Free Market Economy and Command Economy - Comparison Summary

What is Free Market Economy

A free market is a system in which the prices of goods and services are determined by the buyers and sellers. It is solely based on demand and supply; in the free market system, there is minor or no government regulation. The buyers and sellers do their transactions freely according to the agreements which they have made freely on the price and quantity of a good or a service. Hence, no intervention comes from the government to the economic system, primarily to the demand and supply, in terms of laws or any other regulations. Both buyers and sellers agree with the equilibrium price without a single intervention of government.

Main Difference - Free Market Economy vs Command Economy

Countries by 2008 economic freedom index

What is Command Economy

If the whole financial management of country is controlled by the government, that economy is identified as a command economy. The government has the power to control the pricing of goods and services, quantity of output, distribution of goods, labors, etc. This is also known as a centralized economy. Depending on the criticality of the level of intervention, the government may even assign people to respective jobs. The command economy has state-owned entities as well as privately-owned entities, but both have a significant amount of control over government rules and regulations. People in power, such as politicians, give orders to buyers, sellers, and investors and the equilibrium will be determined by the government itself. The command economy is a key feature of any communist society. Cuba, North Korea, and the former Soviet Union are examples of countries that have command economies.

Difference Between Free Market Economy and Command Economy

Similarities Between Free Market Economy and Command Economy

Both economies perform with general economic players such as producers and consumers, goods and services, and money and labor; the aim of both is to produce goods and services that are demanded by the citizens using the least amount of resources.

Difference Between Free Market Economy and Command Economy

Decision Making 

Free market Economy: Decision making is done by several individuals such as buyers, sellers, intermediaries, etc.

Command Economy: The decision making is centralized and done by the authorized government entities

Role of Government

Free market Economy: The government has little influence over the economic activities.

Command Economy: The government has its full control over all the economic activities.

Division of Labor

Free market Economy: The market is based on the division of labors.

Command Economy: No division of labor is involved.

Prices 

Free market Economy: Price of goods and services is set by the supply and demand.

Command Economy: Prices are determined by the government decision makers.

Choice 

Free market Economy: Choice of goods available to customers is higher.

Command Economy: Customers have less choice in command economy as what to produce is purely a government decision.

Ownership

Free market Economy: Ownership of land and resources are with individuals or firms.

Command Economy: Land and other resources are owned by the government.

Quantity of Output 

Free market Economy: Demand decides the quantity of output.

Command Economy: The government decides the quantity of output.

Distribution of Goods and Services

Free market Economy: Distribution of goods and services is decided by firms themselves; so income distribution is not similar.

Command Economy: Distribution of goods and services is decided by the government; so equal or fair enough income distribution practices.

Free Market Economy vs Command Economy – Conclusion

Market economy and command economy are completely mutual economic types. In free market there’s no government intervention on economic activities; thus equilibrium is automatically determined according to the intentions of the market players. In contrast, command economy involves full government control over the entire economy. However, 100% government intervention tends to discourage the private businesses; as a result, investors are also discouraged to invest in the country. But a fair intervention is required to protect consumers from market forces and to manage the societal impact on the free market. Therefore, a mixed economy can be identified as the most effective type of economy for both personal and societal wellbeing.

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“1676138” (Public Domain) via Pixbay

“GM – Countries by Economic Freedom Index” By The original uploader was Aaaarg at English Wikipedia – Transferred from en.wikipedia to Commons. (CC BY-SA 2.5) via Commons Wikimedia 

About the Author: G.Perera