Explore BrainMass

Global Business Strategies and Economy

Free market economies stimulate greater economic growth, whereas state-directed economies stifle growth. Do you agree or disagree? Explain why.

Solution Preview

1. Free market economies stimulate greater economic growth, whereas state-directed economies stifle growth. Do you agree or disagree? Explain why.

A good place to start is to look at what is meant by a free market economy.
For example, (2006) claims that a market economy (aka free market economy and free enterprise economy) is an economic system in which the production and distribution of goods and services takes place through the mechanism of free markets guided by a free price system rather than by the state in a planned economy.[1] [2] Market economy is also used as a synonym for capitalism. In fact, a market economy has no central coordinator guiding its operation, yet theoretically self-organization emerges amidst the complex interplay of supply and demand and price regarding a multitude of goods and services. Supporters of a market economy generally hold that the pursuit of self-interest is actually in the best interest of society. Adam Smith says:
"By pursuing his own interest [an individual] frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the [common] good." (Wealth of Nations) (2006) says something similar and says it this way: In simple terms, a free market is a summary term for an array of exchanges that take place in society. Each exchange is a voluntary agreement between two parties who trade in the form of goods and services. In reality, this is the extent to which a free market exists since there will always be government intervention in the form of taxes, price controls and restrictions that prevent new competitors from entering a market. Just like supply-side economics, free market is a term used to describe a political or ideological viewpoint on policy and is not a field within economics.
Those who agree with capitalism argue that it stimulates economic growth; and this is true, but at what expense, the opponents argue. For example, the economic rewards (from the reported economic growth) is unevenly distributed with most going to about the top 10% of society (e.g., the rich get richer and the poor get poorer). But there are also some other serious consequences (e.g., exploiting the poor, exploiting the environment, through pollution, etc.).
Let’s take a closer look.
Critics of Free Market Economies:
There are a variety of critics of market as an organizing principle of an economy. These critics range from those who reject markets entirely, in favor of a planned economy, such as that advocated by socialism, to those who merely wish to see them regulated to various degrees, and they range from those who believe that greed is inherently immoral to those who raise practical objections. One prominent practical objection is the claim that markets wreak havoc through their externalities (things that the market price does not take into account), for example through environmental pollution. Another is the claim that through the creation of monopolies, markets sow the seeds of their own destruction.

Proponents of Free Market Economies:
Some proponents of market economies believe that governments should not diminish market freedom because they disagree on what is a market externality and what are government created externalities, and disagree over what the appropriate level of intervention is necessary to solve market created externalities. Others believe that government should intervene to prevent market failure while preserving the general character of a market economy. In the model of a social market economy the state intervenes where the market does not fulfill the needs of the market participants. John Rawls is a prominent proponent of this idea.
The economists' model of a free market is one in which there is no governmental intervention or other coercion. The theoretical model of a large-scale free market economy ...

Solution Summary

This solution debates the statement: Free market economies stimulate greater economic growth, whereas state-directed economies stifle growth.