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Table of Contents

Principles of Managerial Economics, v. 1.0

by Donald N. Stengel

8.1 Free Market Economies Versus Collectivist Economies

The well-being and stability of any society depends on whether the members of that society are able to acquire the goods and services they need or want. In primitive societies, these issues were settled by either a recognized authority figure (e.g., a king or military leader) or use of force. In modern times, even though we still have kings and dictators, the source of authority is likely to be government laws and agencies. Societies that primarily use centralized authorities to manage the creation and distribution of goods and services are called collectivist economies. The philosophy of communism is based on the prescription that centralized authority is the best means of meeting the needs and wants of its citizens.

For millennia, even collectivist societies have included some level of commerce in the form of trade or purchases with currency. The use of the word “market” to describe the activities of buyers and sellers for goods and services derives from town gathering areas where such exchanges took place. Early markets were limited in terms of how much of the total goods and services in a society were negotiated, but in recent centuries, markets took an increasing role in the allocation of goods and services, starting in Europe. Today, most developed countries operate in a manner where exchange by markets is the rule rather than the exception. Societies that rely primarily on markets to determine the creation of goods and services are called free market economies.

Countries will lean toward being either more free market based or more collectivist, but no country is purely one or the other. In the United States, which is predominantly a free market economy, some services, like fire protection, are provided by public authorities. In China, which is a communist nation, free market activity has thrived in recent decades. As we will discuss in this chapter, even when markets are the main vehicle for allocation, there is some degree of regulation on their operation.