This post builds on what I discussed in The Basics of Economics, part 1, so there'd be little point in reading this, without first reading that. That said, let's get into it.
Free Market economics, vs Command and Control Economics.
Ultimately, all economies fall in a sliding scale somewhere along here. The ultimate extension of either, is pretty much unsustainable, as total Free Market requires no government, IE Anarchy, which is the shortest lived social structure known, and total Command and Control requires an all-pervasive government in control of absolutely every economic interaction there is, which you pretty much just can't do, because it's too resource intensive to be that omnipresent, or enforce control that comprehensively.
To give an example, try to imagine a class of 1st graders with no teacher. There's no authority structure to start with, but if there continues to be no outside authority structure enforced, sooner or later some child is going to make themself the leader, via charisma, threat of force, or both. On the other end of the spectrum, imagine a class of first graders, where the school administration is trying to dictate their every action all the time, every day. When they come to school, how they walk, how they breathe, what they eat, when they eat it, who they talk to, when they talk to them, what school supplies they use, how they use them, and on and on and on. They would literally need one teacher per student, constantly standing over the child to enforce the rules if they wished for total compliance, and that's assuming they can get enough teachers who would be up to maintaining that level of enforcement themselves.
Illustration given, I think it becomes fairly apparent just why the extremes of neither system work. Now, this brings us into how economics is inextricably interlinked to modes of government, social contract, and civil law.
Something that many people don't realize, is that the form a government takes, does not neccessarily indicate how free a society will be. Certain forms of government tend more strongly towards freedom of tyranny (often very strongly), but only tend towards. Specifications and examples below.
(Notably, the following forms and definitions are describing where the functional authority and power in a nation actually resides. You could call the UK a Constitutional Monarchy, and it would technically be true, but all the actual authority rests with the elected members of the government. Similarly, North Korea is 'The Democratic People's Republic of Korea,' but I don't think anyone outside of North Korea, and maybe China, is under the illusion that NK is anything but a dictatorship.)
Democracy: I cannot think of a single nation that is actually a Democracy. A pure-form Democracy has everyone voting on every government issue, not elected representatives. Obviously, due to the size of modern nations, this is pretty much a completely impractical system. If one did exist though, it'd either be unduly influenced or pretty much be owned by those wealthy enough to be able to spend all their time voting on issues, while employees managed their wealth, and less wealthy people were busy making a living.
Democratic Republic: This is the form of government that most 'modern' and 'free' nations employ. The basic dynamic is pretty simple, general elections amongst the citizenry elect representatives to the government, who then run the government, usually hiring clerks, accountants, law enforcement professionals, etc to do most of the work on ground level, while the elected officials determine what work is to be done, and how. This form of government can become a tyranny through a majority (or a majority of the people who actually vote) electing people who then pass laws that favor them, and restrict others, gradually establishing legally-defined class distinctions that grow progressively more and more restrictive for those not of the 'ruling' classes. This process would be entirely legal, if incredibly unethical, under the basic dynamics of the system. Generally speaking, this system tends to be the most resistant to tyranny, but is by no means immune.
Divine Monarchy: This system has receded to near extinction in the last two centuries, but was, up through the 1700's, the most common form of government in the world. Essentially, the government was intertwined with the predominant national religion, and it was believed that the Monarch (be they Duke, King, or Emperor), ruled because of the Mandate of Heaven. Generally, this vested near-absolute legal authority in the Monarch, and existed in a functional form of Feudalism with the Nobility sworn to the Monarch's service, resulting in a balance of power between the Monarch, the Nobles, and the common masses. The degree of social freedom found pretty much universally depended upon the nature of the religion the state was attached to, and the particular form it took, and could also vary wildly from monarch to monarch, and from noble estate to noble estate. As the Nobles and Monarch had pretty much unlimited authority though, social freedoms tended to be rather sparse. I honestly can't think of any modern nations that still use this form of government, except maybe for Saudi Arabia, which isn't terribly modernized anyways.
Military Dictatorship: Someone holds power, and they do it by force of arms. They control the military, the military can kill you, so you'd better do what this person says, or they'll kill you. This system can actually be incredibly socially free, but it can just as easily (and far more frequently) be incredibly oppressive, as it is entirely dependent upon the whims of the dictators. Notably, this form of government includes any government that exists only because of its effective monopoly on force, such as North Korea, Communist China, and Cuba.
As stated, there are far more technical terms for the specific systems of government employed, or different terms that mean more or less the same thing, like Despotism, Police State, Theocracy, etc, etc, but my purpose with the above descriptions and definitions is to lay out the actual mechanics by which modern (or partially modern) nations function.
Something I would like to point out here, is that elective government, is very much the extension of Free Market into Government. If you do not like those who run your government, you pick someone else. Within the USA this is particularly significant, with the State system, as if you don't like the way that your State is run, you simply pick another state to move to. Finding employment in a different state may be difficult, but it is an option, and in a healthy economy, finding employment is not too difficult.
All of this said, we now come to the issue of government run, controlled, and influence economic enterprises, and social freedoms. I'll try to address them by each economic sector of the economy the affect.
Social Security, Welfare, Unemployment benefits, Retirement programs, Entitlement programs: Charity.
This is probably the most commonly existing form of government interference with the economy in modern nations. To simplify things, consider this anywhere that the government has decided to pay you for not working. Within the USA, this takes the form of the government paying people to not work because they've lost their job (unemployment 'benefits'), paying people not to work because they've hit their retirement age (part of what Social Security does), paying single mothers because they're single mothers (an entitlement program), or giving people food because they're poor (Food Stamps).
What are the upsides of this? It provides support for people who are unemployed, single mothers, old and retired, and helps people who just don't have much money be sufficiently well-fed.
What are the downsides to this? There are a lot of them.
First of all, all of the above activities, private charities or retirement firms are entirely capable of doing, and doing more efficiently (as described in the last post). Remove the costs of law creation, tax collection, and tax distribution from the system, and it will be done with less overhead.
Second of all, you are encouraging, or at the least removing some discouragement, from certain behaviors. If you monetarily reward people for not working, it will encourage people to not work. There are limits on how long unemployment benefits will last, but I have personally encountered the explicit attitude of 'I don't care much if I get fired, because then I can have unemployment and not work for X period before trying to find a job again.' This happens. In addition, when you provide support for girls who go and get themselves pregnant in high school, and provide it for the rest of their lives if they don't rise above a certain income bracket, girls will be less likely to be careful about such behavior. Once you include the additional support given for multiple children, I have read first-hand accounts of women who have gotten themselves pregnant multiple times, and had multiple children, solely so that they can get enough support to live off of indefinitely. So, by subsidizing this behavior, you are encouraging it.
Third of all, you are taxing the economy to do these things. In other words, you are making the nation, as a whole, poorer, to do this. This ties directly into the first issue with this, as the ineffeciency is the lost wealth. This is particularly important, because in order to combat poverty, and the effects of poverty, you are creating more poverty.
Fourth, and probably the most important, you are giving up your social freedom. You have given the government the power to take away your property (money specifically) and give it to someone else who is not an elected representative, engaged in law enforcement, national defense, or the funding thereof. You have given the government the power to redistribute wealth. Once you've crossed this line, and reached the point where ideologically this is acceptable, you will sooner or later have to justify why you should keep your property, rather than others having to justify why it should be taken away.
So, in summation, what is the cost/gain analysis of government charity and retirement programs?
Gained: People in economic hardship in retirement, have money.
Cost: More people are in economic hardship, you are encouraging economically destructive behavior (deliberately milking unemployment/child support subsidies), and you have given up key freedoms to implement this.
Ultimately, as people give to Charity without the government taking that role on itself, this is a program that ultimately only changes who is giving money to poor people. Some people may think that such government programs are still worth it, but I have never talked with someone who supported such programs, and also understood the costs they were paying for them.
As a final thought on this issue, I will share some of my personal experience with this. I am not a wealthy person and I never have been. Both of my parents are College graduates, my mother earning a Nursing degree with Honors, and my Father both a Bachelor's Degree in Mechanical Engineering, and later a Masters of Business Administration. For a time, he taught at a Technical college, and rose to the rank of department head; at the most, my family could have been considered upper middle class in wealth, but we were living overseas at that time.
I know what it is like to live in the middle class. I also know what it is like to be poor. I have been kicked out of my father's house (during winter), lived off the gratuity of my friends, been homeless (though only briefly), been employed well enough to be financially independent, been under-employed, and been unemployed. I know what economic hardship is like.
The most I ever earned in a year, was under ten thousand dollars, and in that year I gave hundreds of dollars to not-for-profit/charitable organizations, and sometimes paid for friends to go out for a social dinner, or a movie, when they were broke at the time.
When I was completely broke, in the Summer of 2010, after I had lost my last job, spent months unable to find new employment, and sold my car, I broke down and applied for social security/unemployment benefits. I did not want to, as I do not like the system, think it should be removed, and did not want to be part of the burden on it, but my tax dollars had gone into the system, and I was pretty much completely out of options.
I was denied unemployment benefits. Why? Because it had been too long since I had earned enough money for me to qualify. Looking into the logistics of it though (and the extension Obama pushed for how long unemployment benefits could last), if I had gone on unemployment immediately after losing the job I had into early 2009, I could have still been unemployment benefits then, and I know that other people, who had not tried to avoid burdening the system as much as they could, were still gaining benefits. Fortunately for me, my friends cared enough about my plight to keep me from going homeless and hungry (again), and I'm still alive and functional.
My point in sharing this part of my personal story, is that, even when I was below what would often be considered the poverty line, I was still giving to charitable organizations. I have been homeless, unemployed, and completely flat broke. I have also tried to use the government system that's supposed to provide for such circumstances, and it failed. I am not some rich fat-cat, wealthy business, or heir to family wealth (my parents have been broke due to un and underemployment issues the last few years themselves), that is saying that social entitlement programs are a bad idea.
I am a dirt-poor young man of 25, who wants all the crap cut out of the government, so that the economy, both in my home nation and in the world at large, can live again, allowing me to find gainful employment.
I think this is a good stopping point for now.