Comparative Economic Systems
Adapted (somewhat) from “What are the three basic economic systems?” by Dr. Donald
Schunk @ http://www.sces.org/lmi/data/trends/economist/quest2.asp
Economics is the social science that studies the production, distribution, and
consumption of goods and services. An economy is all of the human activities related to
producing and distributing all of the goods and services of a country or other area for use
or consumption. A “good” is an economic term for anything that can be produced which
you can touch, like food or a toy – it is a material thing. A “service” is an economic term
for non-material things that are produced, like what a lawyer, doctor or teacher does. A
consumer is like you or me – the people that buy goods and services and the producers
are the people or businesses that make or sell goods or services. Consumers demand
goods and services and producers supply goods and services.
The three major types of economies are usually referred to as: command economies,
market economies and those that are somewhere in between, called mixed economies.
These types of economies answer the basic questions of supply and demand and price.
Who decides what consumers demand, what producers supply and what price the goods
and services will be sold.
In any economic system, there must be a way for resources to be put to use to produce
goods and services. A resource is something of limited availability that can be used to
produce a good or service – it can be a (1) natural resource like land, water or trees, a
(2) human resource like someone’s labor or a (3) human made resource like machinery
or buildings or even investment money, also called capital. How a country decides to use
their resources and make whatever products and services they make, tells you their
particular economic system. In a command economy, these decisions are made by the
government. In a command economy, the government makes all of the economic
decisions and this is called central planning. For example, the government would decide
how many peaches should be grown, how many vacuum cleaners should be made, and
would also decide how much of the various resources would be allocated towards each
good. The theory behind command economies is to make everyone equal and to distribute
resources equally so that there are no rich or poor and everyone’s basic needs are met. A
major problem with this type of system is that there is no way for a government to know
exactly what everyone wants or needs. That is just too much information. It becomes
impossible for the government to make the all of the right decisions. In a command
economy, the government also decides where people will work and what they will do
with their lives because the government decides what jobs are needed. Many people
don’t like to have their lives controlled. Command economies are therefore very
inefficient and very controlling, without much individual freedom to make choices.
Command economies were found mainly in communist countries and in some
dictatorships. There are few left.
A pure market economy (also called Free Enterprise or free enterprise capitalism) is
the exact opposite of communism and its command economy. All decisions are made by
the buyers and sellers in individual markets. Sellers want to make profits, which is the
extra money they receive after all of the costs to make the goods or buy the goods for
resale. Buyers want goods as low a price as possible. Depending on how many people
would buy the good and for what price, sellers would decide how many workers to hire,
how much land to use, and how much to produce.
Sellers in market economies often organize themselves into a company, a businesses with
a name. Some business may be organized as a corporation, which is a business
organized under special laws which give some protection from lawsuits and bankruptcy
(total business failure) to individuals who work for the company. Market economies are
very efficient and tend to meet most people’s needs better than a command economy. A
major problem of a pure market system is that these individual decisions will not account
for what economists call externalities – unintended bad outcomes. For example, a pure
market economy may result in too much production of a good that generates a great deal
of pollution. Another example is if the production of a good that wastes too much of a
natural resource so that there would be none left. Also, the wealth of the economy tends
to end up in the hands of a very few – the people who control most of the resources, and
the needs of the poor may be forgotten. A country with too many desperately poor people
can be politically unstable and lead to violence or even a revolution. For reasons like
these, most economies are mixed economies, usually tending towards market economies.
In a mixed economy, many of the necessary decisions are made in the market place.
Decisions are made by consumers and producers (“market place’ is a figure of speech),
but there is also some degree of government intervention in the economy. The
government may set rules or laws that businesses (sellers) have to follow to make
products and commodities safe and prices fair and control pollution. The U.S. is a mixed
economy though it is closer to a market economy. Though markets are a key piece of our
economic system, we also have Federal, State, and Local governments that enact various
forms of regulation to improve the outcome of a pure market economy. A mixed
economy like in the U.S. is typically considered to be the best of both worlds. A mixed
economy that tends a little more toward a command economy in which the government
controls important industries, healthcare and education but still retains a market economy
for most decisions is called a Social Welfare Economy. Canada and many countries in
Europe are like this.
In many less wealthy countries of the world, many people make their money to survive
by making crafts or selling small amounts of goods and services which are not taxed by
the government because these people make barely enough money to survive. This is
called the informal economy and is characteristic of countries like Mexico and many
Latin American countries and the countries in Africa, Asia and the Middle East (except
Israel). Many people grow just enough food to feed their own families and make little or
no money. Small plots of land are inherited and worked by families using traditional
methods with very little modern machinery or tools. This sort of simple farming is called
subsistence farming and as a whole, this type of economy is called a traditional
economy. Traditional economies are also characteristic of poor countries or poor areas
within countries.