The major decisions of any society are made through an economic system, which is a framework that organizes the production, trade, and consumption of goods. Different societies throughout history have developed different economic systems, each with their own unique strengths and weaknesses. Economists have identified several main economic systems, including: traditional, command, market, and mixed economies.
WHAT IS AN ECONOMIC SYSTEM?
Economics is the study of how societies handle the distribution of money (wealth) and the production of goods and services. There are several different types of economic systems that historians and economists have identified throughout history, but the study of economics is usually centered around two main concepts, which include microeconomics and macroeconomics. Some key elements of any economic system which are important to understand are supply and demand, the boom and bust cycle, employment and government intervention.
As explained previously, economics is the study of how societies handle the distribution of money (wealth) and the production of goods and services. As such, all economic systems deal with how best to achieve prosperity for citizens and how best to operate the services in a given country. To better understand this concept, economists have identified four basic questions that all economic systems must be able to answer.
- What will be produced?
- How will goods and services be produced?
- Who will get the goods and services that are produced?
- Who will make the decisions regarding what is produced and who gets it?
WHAT ARE THE MAIN ECONOMIC SYSTEMS IN HISTORY?
The main economic systems (traditional, command economy, free market economy and mixed economy) all answer the economic questions listed above differently. The answers for each economic system help us to better understand their underlying principles and where they fit on the economic spectrum.
TRADITIONAL ECONOMY
A traditional economy is the oldest type of economic system in history. In this system, people usually produce what they need for survival, relying on farming, hunting, and bartering (trading) rather than money that is produced by a central government. A traditional economy was common through the Middle Ages of Europe and throughout many different indigenous societies across the world. While it was common in early history and was a stable form of economic trade, it was limited by its lack of innovation and slow productivity. As such, as time passed, people sought new ways of organizing trade and economic activity.
COMMAND ECONOMY
A command economy is one of the main three types of economic systems that are still common today. In a command economy, the government (or central authority) makes most, if not all, economic decisions for the people. For instance, in a command economy the state owns all property, factories, and resources. Furthermore, leaders decide what will be produced, how much, and at what price. An example of this type of economy in history was seen during the time of the Soviet Union. Today, North Korea still practices elements of a command economy, wherein the central authority makes almost all of the economic decisions for the people of the country. This system is sometimes praised for the ability of a leader to make quick and decisive decisions to improve the economy of a country. With that said, command economies lack efficiency, economic freedom and often struggle with slow innovation.
FREE MARKET ECONOMY
A free market economy is based on individual choice and economic individualism. In general, it can be viewed as the opposite of a command economy, because the economic decisions are made through the interactions of people and companies, rather than through a central authority. For instance, businesses and consumers make the economic decisions through the forces of supply and demand. As such, prices are determined by competition between buyers and sellers, and not through central planning. An example of a free market economy today would be the United States. While it is not a pure free market economy, it is one of the most free market economies in the world today. Economists argued that a free market economy ecels at encouraging innovation, efficiency and improving consumer choice. Whereas, critics of a free market economy argue that it leads to inequality in the form of wealth gaps in society.
MIXED ECONOMY
A mixed economy is an economic system that contains both elements of a command economy and a free market economy. As such, economists refer to it as a mixed economy, since it has elements of both sides. In fact, ost countries today use a mixed economy. For instance, in a mixed economy the government regulates certain industries to protect consumers, workers, and the environment. At the same time, individuals and businesses are free to own property and operate in the free market. As stated above, most modern countries are considered to be mixed economies, including: Canada, Australia, Britain, Germany and the United States. Economists argue that a mixed economy is positive because it tries to balance efficiency of the market economy with the protections of a command economy. However, economists disagree on the level of government intervention. Some argue for more government intervention, whereas other argue for limited government intervention in the economy.
