CIA 4U
Economic Systems
1. The Three Basic Economic Questions
What to Produce?
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What goods/services should our society produce & how much?
What is worth producing and what is not?
What must we give up to produce the chosen goods/services?
How to Produce?
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Who will produce, with what resources and method?
How can we be most efficient?
Technology vs. Manual labour?
For Whom to Produce?
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How will output be shared among the members of our society?
Who will get what?
How will we decide on the “Division of the Economic Pie” ?
How a society answers the above questions will dictate the type of Economic System that will operate.
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An economic system is a set of laws, institutions and common practices that help a nation define how to use
its scarce resources to satisfy as many of its people’s needs and wants as possible.
A. The Traditional Economy
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The practices of the past determine the answers to the three economic questions.
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All goods/services produced today are the same as was produced in the past.
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They are produced in the same manner and skills, etc. are passed on through family for generations.
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This type of economic system is typical for less advanced societies where just meeting the basic needs of survival
is the most important task of the day.
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Currencies are rarely used here and barter is common.
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Example include: Bedouin/Bushmen/Mongols/Lapps/Masai/Waura/Mbuti/Senoi
B. The Command Economy (China, North Korea, Cuba)
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All production decisions are made by a small group of political leaders who in effect
control the country in question. i.e. Central Planning
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These leaders are usually high ranking members of the military.
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The central planning group answers all economic questions based on what is in the
“best interest” of the state.
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All productive resources are owned by the state and “efficiently” allocated by the
central planners.
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The only obligation an individual has in this type of society is to serve and be loyal
to the state.
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In return, central planners take care of individual needs like food, shelter, medicine, education, etc.
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More loyalty to the state is rewarded and lack of loyalty is punished.
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Central planners determine who will work where, what equipment will be used, and how much each worker will be
paid.
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Workers only really need to buy food, clothing and shelter as everything else is provided free of charge by the
state.
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This means there is more emphasis on producing capital goods rather than consumer goods.
C. The Market Economy (USA)
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Economic questions are decided upon based on the interaction between buyers and sellers in free markets where
resources are privately owned. i.e. free or private enterprise
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What will be produced is determined by demand for the particular product or service in question.
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Businesses will only produce what is in demand, otherwise they will be forced to close.
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How goods are produced is dictated by the producers quest for profits.
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Producers will try to be as efficient as possible to cut costs. This will, in turn, increase profits.
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A benefit of this action is the competition that will result in lower prices for the consumer.
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For whom to produce depends solely on consumer incomes. People with higher incomes will be able to afford the
most and those with low incomes the least.
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The basic elements of a market economy are private property, freedom of enterprise, profit maximization and
competition.
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The government’s only involvement with the economy is to provide law and order and to assist with economic
development.
D. The Mixed Market Economy (Canada, Sweden, UK)
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Since very few pure economic systems exist today, the rest combine some aspects from each of the pure
systems.
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The economy will have both private enterprise and state-run enterprise.
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Basically a mixed system allows for more government involvement in the economy, usually to provide some form
of social welfare for its citizens.
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Some of the more positive government run and/or controlled items are:
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Crown Land
Universal Health Care
Employment Insurance
Social Security for seniors
Welfare
Media and Arts (CBC)
Education
There are also “negative” aspects of more government:
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High Taxes
Underground Economy
Abuse of the System
E. Kleptocracy
These are designed to make those in power, and their friends, rich such as the Philippines under Ferdinand Marcos,
Iraq under Saddam Hussein, etc.
Saddam Hussien
Iraq
Ferdinand Marcos
Philippines
Idi Amin
Uganda
Nicolae Ceaucescu
Romania
3. Understanding Political Economies
A democracy is a political system whereby a freely elected government represents (for a set term) the majority of
citizens. There are usually many parties with a variety of political views.
A dictatorship is a political system whereby a single person or party has absolute control over an entire nation (usually
via the military). There are no free elections allowed.
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Communism (China, Cuba, North Korea, Vietnam)
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 A political model based on the theories of
Karl Marx, Friedrich Engels, and Vladimir Lenin
(Soviet Union).
The government owns all means of production
and wealth.
There is no private property or free enterprise.
Individuals produce according to their ability and
consume according to their needs.
Central government planning is used.
The theory was that everyone would share and the society would prosper with no class system emerging.
The reality was a corrupt centrally controlled economy where the military ruled and communist party members
were treated favourably.
Socialism (Norway, Denmark, Sweden, Finland)
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Based on public ownership/control of the factors of production.
Democratic and peaceful methods are used to accomplish this.
Try to promote a fair and equal distribution of available goods/services via democratic decision-making process.
Co-operation and worker solidarity are encouraged.
Capitalism (Hong Kong, USA, Singapore)
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Based on the theories of Adam Smith (1723-1790)
Requires a democratically elected government to maintain order and free/fair competition.
Private ownership is encouraged.
Producers are motivated to maximize profit (minimize loss) by becoming more effective and efficient than the
competition.
Most modern industrial countries use elements of this system mixed with elements of socialism to produce
“welfare capitalism”
Fascism (Nazi Germany)
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Occupies the far right of the political spectrum.
Usually combines a free-market economy with a strict form of government.
Force is used as a means of political/economic control.
Citizens are free to own property and make profits as long as they do not oppose the party in power.
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