The four main economic systems are traditional, market, command, and mixed. Economics involves the distribution of goods and services. Who gets to make the decisions about what goods to make and how they are distributed is the fundamental difference in the various systems. In modern times, economies involving a mixture of types are the most common. For example, today the United States is a mixed economy.
Economics: The Basics
Xenophon was a Greek military hero and a student of the great philosopher Socrates.
Xenophon also wrote a lot. One book discusses proper household management and agriculture, which was an important concern for living a good life. The title of the book is where we get the word “economics,” which there translates as “household management.”
The “economy” over time became a term applied to the financial management of the whole country. The economy involves the distribution of goods and services, both by private actors (individuals and businesses) and the government. “Economists” study the economy.
A “good” is a fancy term for something you buy, like food and rent you use to pay for an apartment. A “service” is something done for someone, like a teacher educating students (aren’t teachers great?). The study of goods and services in this context is known as “economics.”
A system is a group of things that form a whole.
As with the different types of governments, we can see patterns that help us classify different economic systems. The basic economic systems are traditional, market, command, and mixed.
We now will look at each economic system. While reading about them, consider the roles of the people and government. Keep an eye on how goods and services are created and distributed. Consider how stable the economy is and how much change is possible. Note the examples.
A traditional economy relies on beliefs, customs, and time-honored practices.
Tradition is the basis of the economy. Traditional economies are the oldest type. And, things basically stay the same. Children tend to do the same thing as their parents did.
They rely on farming (agriculture), bartering (“if you fix my plow, I’ll give you some food”), and a limited amount of trading (trading uses money). A family is a basic unit of the economy.
Traditional economies are usually rural and produce fewer goods and services than others types of economic systems. They often only produce what is needed for the community.
A market economy involves the free trade of goods and services with limited government involvement. It is based on supply and demand. Another term sometimes used is “capitalism.”
The British Empire when the U.S. declared independence relied on mercantilism, which involved the government closely regulating the economy. The Brits didn’t want their colonialists trading with the French. The economic theorist Adam Smith (The Wealth of Nations) promoted a new approach: less government power over the economy and support of free trade.
Adam Smith supported a more pure form of market economics. The economy would be a free market, where children need not follow in the footsteps of their parents. The lack of limits encourages more goods and services to be provided to more and more people.
A market economy brings with it various problems. There can be a big divide between rich and poor, leading to inequalities. Businesses can have poor working conditions and pollute the environment. And, the economy can be unstable, leading to unemployment and market collapses.
A pure market economy is more of a concept than an exact idea since societies will usually have some governmental control of the market. The term “market economy” is a matter of degree. The United States in its early years probably rightly is termed a market economy.
Countries moving on from traditional and command economies sometimes go through a period with limited government control. Russia in the 1990s, for instance, could be labeled a market economy. Certain countries in Latin America in the 20th Century also went through such periods. These periods often are messy with a lot of stress during the transition.
A command economy is centrally controlled by those in power. It is sometimes known as a “planned” or “centrally planned” system. The most famous would form would be communism.
The government owns many or all of the businesses. The government carefully regulates the economy, including determining what will be produced, and how the goods will be distributed. Central planning determines who gets the profits and how much individual people will receive.
Command economies had their heyday during the Cold War when the Soviet Union and its Eastern European allies were all centrally planned economies. Today, China, Cuba, and North Korea would be examples of command economies.
A centrally planned economy in theory can promote equality and serve the needs of the people. In practice, they often are inefficient, promote corruption, and limit freedom in various ways.
A mixed economy is a combination of a market and a command economy. It is also known as a “dual” economy. The United States today would be an example of a mixed economy.
A mixed economy involves the government regulating the market. The government might own and/or strongly regulates certain industries as public utilities (such as electricity). The government provides various services (such as education) that can also be privately provided.
Socialism is based on the idea that common or public ownership of resources and means of production leads to a more equal society. Socialism is not the same as communism.
Socialism tends to be a more gradual, limited, approach while communism is more revolutionary and absolute. Socialism is a mixed economy, while communism is a command economy. Socialism is practiced in places like Scandinavia, countries in Latin America, and yes, the United States.
A mixed economy, like a mutt, can be the best approach. A mixture of things (I am a bit biased, being a “mutt” myself) can bring together the good of both without the problems of the pure form of each. Nonetheless, this depends on how the mix is applied. And there’s the rub.