Economy Markets

UNIVERSITI BRUNEI DARUSSALAM

BE 2403 ECONOMICS FOR NON ECONOMISTS

Free Market and Command Market

Introduction
Globally, there are at least 4 well known economy systems that are used by countries around the world. They include the traditional market, free market, command market and mixed market. Certainly, the way government policies work and their influence on the economic growth of their country vary depending on which economic system is used. It is also important to note that these different systems of economy management have their own distinct advantages and disadvantages as well. The purpose of this essay is to examine how two of these economic systems work and discuss the pros and cons of each one. The two systems selected for this particular essay are the free market and the command market.
Free Market (The United States of America)
A free market is an economic system in which prices are determined by unrestricted competition between privately owned businesses. These businesses use the supply and demand curve to determine the prices of their products and services. The role of a government governing a free market is basically to propose bills, vote on it and if a majority of the members agree, it is signed by the President himself to be put into force. The United States is a good example of this. In that particular country, the discussions and decision making largely happens in the Congress.
Every year in Congress, a new fiscal policy is discussed. When this happens, budget allocation for the different government agencies are put into place. The money that is used for these government budgets mainly comes from income taxes imposed on citizens and companies. Income taxes from citizens contribute 46.3%, social security, medicare and other payroll taxes contribute 33% while corporate taxes contribute 12% to the yearly budget. The other remaining 8.2% are from excise taxes, custom duties and other revenues. The main purpose of the fiscal policy is to stimulate and guide the economy, promoting economic growth.
The drafts of these budgets are drafted by the executive office of management and budget, who prepares it for the President before the president himself presents it to the Congress. This task is completed by the President all before the first Monday of February each year. After that, the Congressional Budget Office provides information to the Congress to facilitate its review of the budget. Then the Congress using the President’s budget as a simple guideline, develops their own budget proposals. The proposals of Congress members are then discussed and many give reasons to justify why their proposals need to be accepted. The Congress then develops the bills which are passed through to the Senate to be inspected before they send it to the President. The President’s task now is to either to approve, disapprove or allow them to go forward without his approval.
By October (the beginning of the Fiscal Year), the Congress and the President must work out and finalize on a budget so that government agencies can continue to spend and function smoothly. In February 2009, a stimulus package was approved to jumpstart the US economy. The main purpose of this was to instill confidence needed to restore economic growth and soften the economic recession. However, the monetary policy of the country is controlled by the federal reserves. Their primary objective is to control inflation and their secondary objective is to stimulate economic growth. The Federal Reserve is also responsible for the monitoring of banking systems in the country.
A free market economy is also open to trade with other countries. Trade with other countries are facilitated and regulated through agreements. With these agreements, both countries seek to earn a profit so that more capital will be available for their budget in the following year. However, in certain cases, trade deficits can occur. This happens when the total costs of goods and services imported is greater if compared to the amount of profit gained from exporting goods and providing services. The United States experienced a trade deficit in 2012 when it was reported that $313 billion of oil related products was imported, an increase from $252 billion in 2010, further weakening the economy of the country.
Here lies the risk of pursuing a free market economy. Prices of goods and services are not regulated and this can consequently lead to overspending and poor financial management. This is evident when one starts to invest in stock markets like Wall Street or any other stock market around the world. The simple concept of “buy low, sell high” can be considered misleading as a result. Indeed, companies offer the public ownership in their companies through the selling of stocks and the money they earned from selling these stocks are used to finance the operating costs of the company itself. Although profits can be earned if a person makes a good investment, one can also lose large amounts of money when engaging in such activities, especially if the companies concerned are not making a healthy profit. Add to the fact that the stock market is usually controlled by assumption and the “gut feeling”, a free market might not be for the best interests of the public.
However, the bright side of following the free market philosophy is the simplicity of starting new companies and encouraging foreign investment. This is because other than approving the yearly budget of government agencies, there is very little government intervention when it comes to trade activities, especially those controlled by private companies. Companies will only need to pay a yearly tax and follow the laws of the country to be given a license which allows them to commence trading activities.
Command Market (North Korea)
A command market is an economic system in which the state directs the economy and decision making is centralized. In a command economy, the government controls the factors of production and makes all decisions about their use and about the consumption of output. In this essay, we have chosen North Korea as an example of a country that practice the Command Market.
North Korea is situated in the Eastern Asia and located at the northern half of the Korean peninsula. The government system is a communist state one-man dictatorship. By referring to Jun Bin Kwak article, this system is brought by Kim Il Sung who is the first leader of North Korea and he was supported by Soviet Union (From wisegeek website , Soviet Union was founded in 1917. It was the alliance of Russian Federation and a number of adjacent states, including the Baltic States (Latvia, Estonia, Lithuania), Ukraine, Kazakhstan, and others where they support the idea of communism).
North Korea originally adopted maxism-lenism as its ruling philosophy but later implemented a Juche Philosophy (world of information, 2006). Juche Philosophy includes “holding fast to independent position, rejecting dependence on others, using once own brains, believing in one’s own strength, displaying revolutionary spirit of self-reliance and thus solving one’s own problems for oneself on one’s own responsibility under all circumstances” explained by Kim II Sung (Grace Lee, 2003).
Following the Juche Philosophy, North Korea have adapted the “command economy” or “central planning economy” which is subsequent their self- reliance policy. In 1960’s, this central planning economy of North Korea was established. This planning system had made this country more extensive to the public finance. An example of these extensive scopes are they check the finance of the agencies, factories and Enterprise of grade II at least once in every two to three years.
Their budget system is divided in two which is central and local budget. They emphasis more on local budget rather than central budget since their economy is following the self-reliance policy. This is also done to lessen the burden of the central budget.
According to Jung-Bin Kwak, North Korea gets it revenue from the transaction proceeds, state enterprise revenues, social cooperative revenues, service fee revenues and others. The transaction proceeds is defined as the extra income of the enterprise and manufacturing cooperatives that are to be given to the government. On the other hand, the state enterprise revenue is the corporate income tax where it is payable to the government.
Unfortunately, these revenues are mostly use to a great portion of military expenditure which it is not very beneficial to the people living in North Korea. This has led to their economic failure because this entirely closed economic system had imbalance the distribution of resources and in the demand and supply of goods.
In the present day, there is no effective tax system in place. The government commands almost every part of the economy. The government sets production levels for most products, and state-owned industries account for nearly all GDP. The state directs all significant economic activity. Large military spending further drains uncommon resources. Despite the state’s attempts to crack down on them, black markets have grown.
North Korea continues to regulate the economy heavily through central planning and control. Business activity remains virtually impossible. As the main source of employment, the state determines wages. It also tightly controls the labor market and the movement of people. This central planning unit takes the inputs of the economy and directs them into outputs in a socially desirable manner. It requires a careful balancing between output goals and available resources. Resources are allocated through a planning process. At its most extreme, this means that the state will direct labor into jobs as well as directing consumers what to consume, although it is more likely that they will direct producers what to produce, thus determining the choice of goods available to consumers. What is more, price is controlled by government, they decide minimum and maximum price of goods according to their importance. For instance, one the one hand, government sets the minimum price for wheat to encourage farmers to produce more. On the other hand, government sets the maximum price on rents so everyone can easily afford that.
Moreover, the failed currency reform in late 2009 has resulted in increased inflation and confiscation of operational capital and savings earned by private traders (Scott, North Korea Currency Reform).
Formal trade in North Korea is minimal. Inter-Korean trade remains constrained by North Korea’s unwillingness to implement needed reforms. This self-reliant economy in North Korea leads to the rejection of the imports of foreign capital and technology. North Korea mostly uses their own domestic resources to produce products. There is also a limited foreign participation being allowed in the economy in which they have to go through some special economic zones where investment is approved on a case-by-case basis.
Overall, the economy structure of North Korea can be characterized by “State ownership of all production, command economy and completely closed economic system”. Therefore, this completely closed policy has made the country to more severe economic condition.
Although, this closed economic system has its disadvantages, it also gives benefits to the country and its people. The prices of goods and services are kept under control and thus everybody can afford to consume those goods and services. There is also less inequality of wealth. Moreover, there is low level of unemployment as the government aims to provide employment to everybody. This system also cuts the competition between firms.
Conclusion
There is a need to examine into detail whether a particular economic policy is worth pursuing and abiding to. There are always both sides to an argument and there will always be pros and cons to any economic policy that is implemented. Despite all this, the main priority of every country should be to pursue a sustainable economy and pursue growth to maintain unity and solidarity within the countries under their rule.

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