A free market enhances the growth of an economy because the government regulations do not limit the production. Producers produce according to the market demand. The primary drivers of economic growth in the free economy are the supply and demand factors of the market. So, if the market demand for a particular commodity is high, the producers will produce more to meet the demand. Additionally, with the high demands, the business competition deems fair and conducive making the businesses to compete in production for the purpose of meeting the market demand- an indicator of a fast growing enconomy.
According to a research on the 'wealth of nations,' the growth of the economy is one of the major concern in the economy (Smith, 1963). The research findings argue that the growth of the economy is stimulated by free markets, minimal government policies and regulations as well as protection of property rights (Smith, 1963). The case for the economic growth through free markets was reversed by a group of economists who accepted that steady and non-retrogressive growth can be realized by the actions of government control, and therefore they advocated for the central planning. However, during the final years of the 20th centuries, economists are reversing to the original idea of Adam Smith which, for a long time, has been a controversial topic involving the evaluation of the laissez-faire economic policies which stimulate the growth of an economy (Isham, Woolcock, et al., 2005).
The research (Smith and Colleagues), argues the case that growth is promoted through the free market which led him to introduce the notion that the self-interest motives drive individuals. The research results label this free market situation as the 'invisible hand.' Therefore, to promote prosperity, you have first to promote the competitive market economy which is possible by allowing the free market economy. He suggests in the study that, to promote equitable resource allocation in a free market; the state should expend little government spending, low tariffs, private property protection and tax the citizens little. It is reasonable to argue that low government involvement in business and trade is likely to promote the growth of an economy because of free international trade. Free international trade ensures a circular flow of money and goods and services between nationals. Therefore, by legitimizing trade and easing up the international trade, the government opens up the country for more opportunities like; new investments, improved market due to increased trading commodities, excellent circular flow of money in and out of the country, increased skills and knowledge among other benefits accrued by opening up the market for international exploitation. Furthermore, David Ricardo also suggests the idea of free marketing as the best strategy to stimulate economic growth and the prosperity of the citizens which is the most fundamental thing in states nations. However, the same ideas of liberating the market are the same ones that could not prevent the global depression in 1930's. State of depression can only be countered by the government participation in the economy, through spending and reduction of taxes (Smith, 1963). Therefore, to a lesser degree, free market is not usually the best bets for the steady growth of an economy hence it sometimes calls for government intervention (Baumol, Litan, et al., 2007).
In contrast, state-directed economies stifle the economic growth. Bolstering the theory further is the idea that the government does not allow the market to perform to its full potential. By imposing regulations, market controls, and taxation, the government can achieve the objectives of the policies such as redistribution and reallocation of resources. However, state-directed economies stifle the growth of the economy by causing the market inefficiencies as well as causing the deadweight loss in production. For instance, state limits the circulation of resources and human capital when it imposes trade tariffs and other regulatory controls which prevent efficient international trading. The primary reason for economic stagnation in state-controlled economies is that states concentrate the resources on few hands, therefore, limiting the full circulation of the resources in the economy (Midgley, 2009). Government control of production means that the market demand is not entirely met and the initiative to produce therefore declines. Additionally, the communism state, government dictates what is produced and what is to be sold. In this kind of economy, people lack the motivation to produce and invent new things. Also, with state-controlled economies, a lot of resources go to waste and procedures like government intermediaries bring bureaucracies which, for most of the part, brings market inefficiencies. It is also important to note that with price controls, the government easily squeezes the profit margins from the producer consequently killing the morale of production and causing a deadweight loss due to inefficient resource allocation. The saddening end result is a stagnated economy which equates to low living standards of the citizens (Baumol, 2007).
In conclusion, in laissez-faire economy which has minimal government intervention, there is a faster rate of growth as compared to the state-directed economy. This is because, in a free market, people can own property and produce what is demanded in the market. They are motivated to gain the monetary value of their products, and therefore more innovations and investment will ensue. That means that there is enough capital and human resources flow which stimulate the economic growth (Johnson, 2013). To enhance steady growth and avoid recession, a little government control is recommended. In state-directed economy, there are many market inefficiencies which lead to stifling of the economy. To spark the growth, the state is recommended to give up some control and allow markets operate according to the demand and supply principles.
Asheghian, P. (2004). Determinants of economic growth in the United States: The role of foreign direct investment. The international trade journal, 18(1), 63-83.
Baumol, W. J., Litan, R. E., & Schramm, C. J. (2007). Good capitalism, bad capitalism, and the economics of growth and prosperity. Yale University Press.
Isham, J., Woolcock, M., Pritchett, L., & Busby, G. (2005). The varieties of resource experience: natural resource export structures and the political economy of economic growth. The World Bank Economic Review, 19(2), 141-174.
Johnson, H. G. (2013). International trade and economic growth (collected works of Harry Johnson): Studies in pure theory. Routledge.
Midgley, J. (2009). Growth, redistribution, and welfare: Toward social investment. Social Service Review, 73(1), 3-21.
Smith, A. (1963). Wealth of nations (pp. 109-160). John Wiley & Sons, Inc..
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