Market Forces Solving Economic Problems
Different Types of Economies
There are different types of economies that operate in a state or a country. The economies include a free market economy, a planned economy, and a mixed economy. Countries choose different kinds of economies depending on the approach that suits them. A free market economy is a system where market forces, i.e. supply and demand, control the market. In such a system, there is no government control over market activities or intervention in the market process. The prices can rise and fall; and supply changes are independent of any influence from the government. However, in a planned economy, the government controls all forces in the market influencing the growth of an economy. In such an economy, the government is in charge of prices and interest rates in the market. Finally, a mixed economy means that both government influence and market forces control the direction of the economy. This is where free market is practiced but with government influence and intervention (Adamek 1983; Klitgaard 2005; Morgan 2005; Rao 1998; Reische 1975).
Over the years, many developed countries such as the United Kingdom have practiced the market economy, i.e. an economy where the government had no influence on the marketing activities. The government let the market forces to control the market. As a result, it has bred monopolists with a power of setting exorbitant prices on their goods. The monopolists have controlled production in such a way that they manufactured a few products. Many monopolists have made some small businesses to stop producing goods. Many of them became dependent to different financial institutions for supporting their economic situation. However, the government had no control over financial institutions, which could do as they wished. This has backfired on them as they have found their economies deteriorating. The example is the UK, which relied solely on its financial institutions for its growth (Kolb 1996; Mishkin & Eakins 2009).
The solution of such a problem is a mixed economic system. This system means that government can control some market activities such as pricing and others. On the other hand, market is also free to some extent to decide on what to produce and in what quantities. This has a positive impact on a country’s economy, and it stimulates its growth. This provides reducing the impacts of the turbulence in the financial markets, as the government has influence on the financial institutions’ operations (Schinasi 2006).