Socialist Market Economy Vs Free Market Economy

In theory, free market believed to be the most efficient economy possible. It regulated itself by demand and supply mechanism through “creative destruction”(Joseph Schumpeter ,1947). However, the reality is that the economies contain the seed of distortion and it is inefficient and may cause harm. Some believe that the matter that disrupting the free market are not possible for the government to remove them.  Kelvin Lancester and Richard Lipsey argued that any attempt to modify or relocate the distortion will make things worse because the problem is actually linked with each other. If government wanted to do it, it must be done with caution. They believed that policies to correct market can make things worse.In Malay proverbs saying“  like mouse fixing the pumpkins” . For you all know “Pumpkins” that touches by the mouse are inedible.

However, we know that by not letting the government interfere with economy, and hope it repair itself is impossible. The debate is becoming crucial in the aftermath of World War II after all of the facility, human capital, the system had been destroyed. Like in the West Germany, the government had to build the economy and the political system from scratch.  We know that the free market also will result to monopoly and cause inequality. We also know that interference of state in the economic system might make the stagnant of the economy. Therefore, what the state should do is find a “middle way”. In this Muler Armack said it is social market economy. In the system, the industry remained in private ownership, free to compete, but government must provide a range of public goods and services, including a social security system with universal health care, pensions, unemployment benefit and measure to outlaw monopolies (and cartel!) .

This theory suggests that it would allow economic growth of free markets, but at the same time produces low inflation, low unemployment, and more equitable distribution of wealth. The history proves that mixture of free market and socialism worked dramatically well. Germany experienced a Wirtschaftswunder (“economic miracle”) in the 1950’s that transformed it from a country that destroyed because of war to major developed nation. 

Even thought the social market economy proved to harvest “miracle pumpkins” The proponents s of free market still there, led by Margaret Thatcher. But some other follow Germany steps such as China when its premier Deng Xiaoping adopted element of free market economics to operate within the centralized economy.  Malaysia is also on the path of becoming social market economy even though it is still far from European models. The method and policy are similar to mixed economic evidence by heavy interference of government, it provides facilities and inviting capital.