Economic Systems

The world’s economic systems fall into one of four main categories:

Traditional economy
Capitalism economy
Socialism economy
Mixed economy

However, there are unlimited variations of each type. An economic system must define what to produce, how to produce it and for whom to produce it. Depending on the products produced and the environment, certain economic strategies will be more successful than others.

Traditional

A traditional economic system is one in which each new generation retains the economic position of its parents and grandparents.

Traditional economies rely on the historic success of social customs. South America, Asia and Africa support some traditional economies of thriving agricultural villages. Tradition decides what an individual does for his living, so industry, clothing and shelter are the same as in previous generations One of the few advantages existing in a traditional economy is that the roles of individuals are clearly defined. Every member of the society knows exactly what they are to do and most don’t have any complaints about it.

There are also many disadvantages to this type of society.

These societies are often very slow to change and when new technologies are introduced, these ideas and techniques are discouraged.

Capitalism

Market economies are based on consumers and their buying decisions rather than government control. Market trends and product popularity generate what businesses produce. The producers choose how to make products based on the most economically sound decision: that might mean machine labor to save costs or human labor for specific skills. The buyers decide who gets which products by what they are willing to pay for what they want.

Complete market economies do not utilize price controls or subsidies and prefer less regulation of industry and production. Market decisions rely on supply and demand for pricing.

Government’s role is to create a stable economy for the market to operate properly. The market system relies on many factors to ensure its success. The profit motive or incentive for a financial reward for enterprise stimulates production. Information regarding available products and services needs to be available to producers and consumers. Producers use the information to set accurate prices and procure supplies at the lowest cost. Price relates directly to the costs and benefits of product creation and use and required profit. In recent years, market economies have been coming more and more popular. Three major examples of market economies are The United States, Japan, and France. There are many advantages to a market economy: One major advantage is that market economies can adjust to change easily. If there is a demand for one thing, companies have the ability to change what they produce instead of having to go through too much government protocol first. Rational self interest in market economies are also encouraged. People have the ability to make as much money as they can and do what is in their best interest. Another positive to market economies is that the government tries to stay out of the way of businesses.

Although the government sets certain standards businesses must follow, for the most part businesses can do as they please, allowing them to produce what they want, how they want. A fourth advantage to the market economy is that there is a great variety of goods and services for consumers. If there is a demand for a good or service, the demand will almost always be met in a market econom Although there are a lot of positives to market economies, there are also many negatives that go along with it too. One major problem with this type of economy is that it doesn’t always provide the basic needs to everyone in the society. The weak, sick, disabled, and old sometimes have trouble providing for themselves and often slip into poverty.

Another problem is that it becomes hard for a government with so many private businesses to provide adequate defense, education, and health care to its people. A third disadvantage to this type of economy is that there is uncertainty in the business world. One company could easily be forced out of business causing all of its employees to become unemployed and lose their means of income. The final major disadvantage is that occasionally there are market failures. This can cause some companies to become way to powerful and become a monopoly. If the government doesn’t step in, the monopoly can take advantage of the consumers and charge ridiculously high prices

Socialism

In a command economy, the government controls all economic activity. One example of a command economy is communism. In a government-directed economy, the market plays little to no role in production decisions. Command economies are less flexible than market economies and react slower to changes in consumer purchasing patterns and fluctuations in supply and demand Command economies have many advantages: One advantage is that equality is focused on. The government tries to eliminate all private property and distribute its good equally. If done correctly no one is in poverty and no one is wealthier than another. Social services are also emphasized in this type of economy. The government will provide equal health care, education opportunities, and make sure all people are fed. A third advantage to this type of economy is that it is capable of rapid change for major problems. The government owns the companies, so if production needs need to be shifted into a different area, the government is capable of doing it rather quickly. A final major advantage of command economies is that they are very stable. Command economies will never have sudden depressions.

Although command economies may seem like a utopian form of economics, they also have many disadvantages. In command economies there is very little freedom. The individual usually doesn’t have the opportunity to decide what they want to do for a career, and they have no control over the goods they receive. Another major problem is that there is little reason for innovations, hard work, or quality of the work. Since no one makes more money than everyone else, the people feel like there is no reason to work hard. A third disadvantage is that there is little focus on consumer wants. Finally, when it comes to minor day-to-day changes, the government has a hard time cooping with them.

Mixed Economy

A mixed economy combines qualities of market, command, and/or traditional systems into one. In many countries where neither the government nor the business entities can maintain the economy alone, both sectors are integral to economic success. Certain resources are allocated through the market and others through the state. Theoretically, this system should be able to combine the best policies of both systems, but in practice the proportion government controls and response to market forces varies.