A free market economic system is employed by Governments, in which people and firms privately own all resources. Hence, all goods and services within the economy are produced by the private sector, with the aim of maximising profit. However, in order to boost profit, the firms must produce in whichever markets are expanding according to consumer demand, highlighting the consumer sovereignty that exists within a free market economy.
Within this economic system, in order to purchase a good or service, one has to be in effective demand, i. . both able and willing to purchase the commodity, meaning some goods will be unattainable for those on a low income. Therefore, if a price is too high, then demand will fall and producers will decrease supply and if the price is low, demand will increase and supply will follow. This is known as the price mechanism of supply and demand, which exists and shows how market forces within a free market solve the problems of what to produce, how to produce it and for whom, in effect determining the allocation of scarce resources.
In this way, the free market can rapidly respond to changes in people's wants and produces wide variety of goods and services to meet these varied demands, which are manufactured using techniques, which develop as technology changes, due to the entrepreneurial managers of firms within the free market. It is impossible for any country in the World to have a perfectly free market system, as this would imply no regulation or taxes, with the privatisation of all industries, including national defence and policing.
Therefore, in the UK, there is a balance set in between the characteristics of a free market economy and those of a planned economy, although opinions differ over the extent to which the UK sways towards either the free market end of the spectrum or the planned end. To a certain degree, the UK is based on the main principles of a free market: minimal State intervention, a focus on private enterprise and consumer sovereignty determining price.
It is true to say that most industries are run by the private sector, though some are nationalised, like some elements of television broadcasting (BBC), the National Health Service (NHS), fire brigade and many other merit goods, provided by the Government due to their positive externalities and social rate of return, as well as lack of provision if run in a purely free market system. Therefore, the UK shows characteristics of a mixed economy, which combines Government planning with most elements of the free market, giving an amalgamation of profit-run industries and those with the aim of their positive externalities.
This system incurs less unemployment than found in the theoretical pure free market economy, whilst regulating and taxing many other goods and services, in order to subsidise Government expenditure. It would be impossible for the UK to have a perfectly free market economic system, for a number of reasons, notably that many merit goods, like defence and law and order, which the Government wish to be provided due to their positive externalities, although have little profit-making capability because of the free rider problem, i. . there would be no way a private company, which runs on a profit-making basis, could charge a consumer for their use of national defence or street lighting and if they tried to, some 'free riders' would derive benefit without paying. Also, many industries like health, education and national defence have huge sunken costs, meaning that no private company would have the resources necessary to pay the initial costs for such an industry.
Within a free market economy many of these merit goods would not be provided, and also there would be no regulation of demerit goods, those with negative externalities and a negative social rate of return, like drugs, alcohol, cigarettes and goods which damage the environment, which the Government can control within a planned or mixed economy, like that of the UK. Despite this, there is debate over the extent to which the UK is mixed economy, and whether it sways towards the free market or planned economic system.
One way of considering this question is to compare the UK with both a close to a planned system, and also one nearer to a free market system, like that in the USA. The main difference between the economic systems of UK and USA lies in the political foundation of the two countries, notably Britain's in a constitutional monarchy, and the USA's in a republic based upon a Constitution, which, in its 5th Amendment, protects private property and outlines the free market system that the country to this date still follows.
In America, the economy is run in a similar fashion to that of the UK, although the federal state system gives each state the right to determine certain taxes and duties. However, the USA has a much larger proportion of its industries in the private sector than Britain, such as health and part of the education system, with 5% less of total spending coming from the public sector.
Despite this, the USA has nationalised defence, law and order and parts of the transport system, mainly due to the free rider problem that would arise were they privatised. The reasons for the UK's economy lying to the left of that in the USA lie deeper than the political founding of the legislature, but in the country's feudal heritage, in which the monarch relied on taxes from each layer of the hierarchal tree, therefore heavily regulating many goods, in order to maximise State revenue.
Also, the sheer age of many of the UK's industries led to their ownership by the Government, who often had to take control in times of war, unlike America, independent only in 1776 and so the establishment of the new Government in an already productive country meant that rivalry in consumption allowed the free market to expand due to vast competition. Neither country has remained static in its economic structure, mainly due to historic circumstances like war, but also due to changes in Government.
For example, the Great Depression of the 1930s and the election of the Democrats under Roosevelt in 1933 led to a reforming of the economic system that led to a shift towards the left, with the Government now regulating banks and the stock market, in order to prevent another crash occurring. Similarly, in Britain, new parties' coming to power has led to mainly the nationalisation/privatisation of many industries.
Ever since the rise to power of Margaret Thatcher, the British Government has moved to the privatisation of more industries, moving the economy to the right and towards a freer market, with the main aim of freeing more funds to subsidies Government activity. However, a recent report from the Organisation for Economic Co-operation & Development praised Mrs Thatcher's policy, saying that "Britain is now doing better than many other economies because of labour market flexibility," due to the privatisation, which has made British institutions more "efficient, transparent and accountable" than those abroad.
Reduced Government spending also allowed for a greater amount of resources to be focussed on merit goods and services, like the NHS and education. One can see that the UK economy is fairly similar to that of the USA, though its true position as a mixed economy can only be ratified after a comparison with a planned economy, like that of China. China is under Communist control and so bases its economy on the Government controlling all resources, and therefore deciding on the allocation of these resources, setting targets for manufacturers in five-year plans.
Although this seems to differ from the UK totally, China is not a true planned economy, in that some aspects of the way in which it is run are based on a free market. The once nationalised health service is not Government-controlled to a certain extent, but has been decentralised and some doctors are now turning to the private sector, in order to increase their revenue. This mix between nationalisation and privatisation is similar to that of the UK, although the clear difference between the two countries is in ideology and thinking, rather than practice.
China, like any other country, has scarce resources, and so with regard to education, university students who can, have to pay, like in the UK. However, at primary and secondary school level, there are no private schools, only compulsory state education, highlighting that in a planned economy there is not a wide range of goods or services available and consumers do not always get the goods and services that they want. All teaching within Chinese schools is focussed on the good of the State, showing that with economic centralisation comes political centralisation and with a lack of economic freedom comes a lack of political freedom.
However, as with many other aspects of the Chinese economy, the education system is being reformed so that there are more fee-paying students, representing the move away from a solely planned economy to a mixed economy. This has also occurred in other areas of the Chinese economy, notably the interaction with foreign markets. Planned economies are by definition self-sufficient, although now 52. 2% of China's export commodities were manufactured through foreign investment, a figure, which is expected to increase in the future.
China still has cheap labour and a vast supply of natural resources, which allowed it to become self-sufficient for over half of the twentieth century. For a country like Britain it would be impossible to sustain a planned economy, as there is not enough variety in natural resources available to become totally self-sufficient. Also, since the Industrial Revolution, Britain has been moving through a predominantly secondary industry-based economy to an economy mostly based on the tertiary sector.
Therefore, Britain relies on imports of manufactured goods from where there is cheap resources and labour, whilst creates a trade surplus by exporting services, especially financial services. In 2002 China joined the World Trade Organisation (WTO), which opened its markets to foreign trade and effectively lost the socialist-style economic system, on which the country had previously been based. Ever since 1978 Chinese GDP has risen rapidly, due to international trade and so it is unfair to compare China with Britain as a planned economy, because of its swift shift towards a free market.
Despite this, there are few planned economies left in the World, especially ones that are powerful, and China can thank its planned economy for the improvement of social conditions and living standards, brought about by the fairly even distribution of wealth, although many luxury goods are not supplied ot the consumer. To conclude, the UK employs an economic system different to any other country in the World, due to the country's unique heritage, based on feudalism and a constitutional monarchy.
Its is clear to say that the UK is not a pure free market economy, as this is only theoretical, but that the country mixes elements of the free market with those of a planned economy to form a mixed system, in which most prices are determined through the interaction of demand and supply, with private firms owning most resources, although the Government often steps in to regulate demerit goods, set taxes and provide certain goods that would not be provided in a pure free market. Therefore, the UK has a free market to as maximum an extent as possible, without the omission of certain merit goods, which the Government intervene to supply.