Economic
System
Definition
It is an organized way in which a state or
nation allocates its resources and apportions goods and services in the
national community.
It includes the combination of the various
institutions, agencies, entitles or sectors and consumers that comprises the
economic structure of a given community.
There are
multiple components to economic systems. Decision-making structures of an
economy determine the use of economic input, distribution
of output, the level of centralization in decision-making, and who makes these
decisions. Decisions might be carried out by
industrial councils, by a government agency, or by private owners.
In one view,
every economic system represents an attempt to solve three fundamental and
interdependent problems:
- What goods and services shall be produced, and in what quantities?
- How shall goods and services be produced? That is, by whom and with what resources and technologies?
- For whom shall goods and services be produced? That is, who is to enjoy the benefits of the goods and services and how is the total product to be distributed among individuals and groups in the society?
Types of System
Scarcity
It is
the fundamental challenge confronting all individuals and nations. We all face
limitations, so we all have to make choices. We can't always get what
we want. How we deal with these limitations—that is, how we prioritize and
allocate our limited income, time, and resources—is the basic economic
challenge that has confronted individuals and nations throughout history.
But not every nation has addressed
this challenge in the same way. Societies have developed different broad
economic approaches to manage their resources. Economists generally recognize
four basic types of economic systems—traditional, command, market, and
mixed—but they don’t completely agree on the question of which system best
addresses the challenge of scarcity.
Traditional Economic System
It is shaped by tradition. The work that
people do, the goods and services they provide, how they use and exchange
resource and all tend to follow long-established
patterns. These economic systems are not very dynamic—things don’t change very
much. Standards of living are static; individuals don’t enjoy much financial or
occupational mobility. But economic behaviors and relationships are
predictable. You know what you are supposed to do, who you trade with, and what
to expect from others.
In many traditional economies,
community interests take precedence over the individual. Individuals may be
expected to combine their efforts and share equally in the proceeds of their
labor. In other traditional economies, some sort of private property is
respected, but it is restrained by a strong set of obligations that individuals
owe to their community.
Today you can find traditional
economic systems at work among Australian aborigines and some isolated tribes
in the Amazon. In the past, they could be found everywhere—in the feudal
agrarian villages of medieval Europe, for example.
Command Economic System / Planned Economy
the government controls the economy.
The state decides how to use and distribute resources. The government regulates
prices and wages; it may even determine what sorts of work individuals do. Socialism is a type of
command economic system. Historically, the government has assumed varying
degrees of control over the economy in socialist countries. In some, only major
industries have been subjected to government management; in others, the
government has exercised far more extensive control over the economy.
The classic (failed) example of a
command economy was the communist Soviet Union. The collapse of the communist
bloc in the late 1980s led to the demise of many command economies around the
world; Cuba continues to hold on to its planned economy even today.
Market Economies
Economic
decisions are made by individuals. The unfettered interaction of individuals
and companies in the marketplace determines how resources are allocated and
goods are distributed. Individuals choose how to invest their personal
resources—what training to pursue, what jobs to take, what goods or services to
produce. And individuals decide what to consume. Within a pure market economy
the government is entirely absent from economic affairs.
The United States in the late
nineteenth century, at the height of the lassez-faire era, was about as close
as we've seen to a pure market economy in modern practice.
Mixed Economic System
It combines
elements of the market and command economy. Many economic decisions are made in
the market by individuals. But the government also plays a role in the
allocation and distribution of resources.
The United States today, like most
advanced nations, is a mixed economy. The eternal question for mixed economies
is just what the right mix between the public and private sectors of the
economy should be.
