World Economic Systems
Throughout history people have struggled with the problem of limited resources. Economic
systems have evolved to deal with this basic economic problem known as scarcity. An
economic system allows a group of people to decide the basic economic questions of: What to produce?;
For whom to produce?; and How to produce? The way in which a group of people decides these questions
is an indication of the economic system under which they are working. Many different economic systems
and theories have existed throughout history and across the globe, however 3 basic systems and theories can
be identified; they include: Command, Market, and Traditional. The three major economic theories are
Communism, Socialism and Capitalism.
Traditional economic systems are perhaps the oldest and are based on a particular group’s customs and
traditions. These systems are often found in tribal communities, and remnants of a traditional economy can
be seen in the other two types of systems. Resources are owned by the tribe/tribal leaders and are allocated
(given out) based on the customs and needs of the group. Custom dictates the economic opportunities within
the community – for example if your father was a bricklayer then the male sons would be bricklayers. Life is
simpler in this system since decisions are made for you; no worrying about your career path or education that
has been predetermined by custom. Often these traditional systems can hold back economic growth.
Customs can sometimes come in the way of allowing better economic decisions to be made; technology is
often shunned in this economic system. Often these societies tend to be based on agrarian economic
activities.
A market economy allows buyers and sellers or “the Market” to determine the answers
to the basic economic questions. By purchasing goods and services buyers signal to
sellers that more of these items should be produced. When buyers choose not to
purchase an item this signals to sellers that they should reduce production.
Characteristics of this system include private ownership, individual initiative/ entrepreneurial
spirit, free enterprise, competition, freedom of choice and profit/loss. Capitalism is the theory that
advocates this economic system. Under this philosophy productive resources are privately owned and
operated. Capital for production comes from private investors who want to make a profit in return.
Government may promote competition and provide some public goods under this philosophy, but for the
most part stays out of the economy. As capitalism evolved workers were often exploited due to lack of
government regulation. Basic necessities were not provided because people were expected to work and
provide these items for themselves. Gradually governments began to take a more active role in the market
economy, making mixed-market economies – where the government provides some basic necessities and
regulates the market (keeping it from depressions and high unemployment, providing protections for workers
and consumers), while the consumers still keep their freedom of choice and private property.
In command economic systems a central authority, usually the government, makes all decisions. State
planners determine the needs of the community and allocate resources to fulfill these needs. There is little to
no competition within this system and little to no private property ownership. Profit also does not exist
within this system, and there is no entrepreneurial spirit. This system provides the basic needs for all the
people (education, health care, jobs), but rarely more than that. This system has little to no economic
growth and due to a lack of competition the quality of goods is often poor. Communism is a philosophy
based on a command economic system, and was a reaction to the negative effects of the Capitalist
system. In the Communist philosophy, all resources (used for production) are owned by the government.
Resources are allocated by centralized planning, allowing the government to make all major economic
decisions. Socialism is a philosophy that advocates a partial command system (it is the trade off between
Communism and Capitalism). In the Socialist philosophy basic productive resources are government
owned and operated, the rest are privately owned and operated. For example all transportation and
communication systems are owned by the government, but the local car dealership is privately owned. The
government plans ways to allocate resources in key industries including energy, agriculture and
transportation. Like Communism, Socialism provides many social services including education, healthcare
and jobs; however, under Socialism, there is still some choice on the part of the people as to what type of
education, healthcare and employment they want.
1
ECONOMIC SYSTEMS
Directions: Use the previous reading to complete the chart below. Then review each example and write the matching system in the space
provided.
Type of
Economy
Characteristics
Advantages
Disadvantages
TRADITIONAL
ECONOMY
COMMAND
ECONOMY
MIXED (Market)
ECONOMY
FREE MARKET
ECONOMY
2
Applying Economic Systems
Directions: Read each item below and decide which economic system (Market,
Mixed-Market, Command or Traditional) is being identified; write the correct
system in the space provided.
1. __________________________ The government provides retirement pay and
healthcare for all workers.
2. __________________________ The government sets national production goals and prices of
goods.
3. __________________________ Supply and demand set the price of goods.
4. __________________________ The basic economic questions are answered by the market.
5. __________________________ Technological advancements encourage economic growth.
6. __________________________ There is a strong emphasis on hunting and farming.
7. __________________________ Competition and private property ownership are encouraged.
8. __________________________ Large corporations compete for business.
9. __________________________ Free trade is encouraged.
10. _________________________ Inherited occupational roles.
11. _________________________ The government requires licenses to practice certain professions
such as teachers, doctors and lawyers.
12. _________________________ The government provides job training programs and student loans
for those in financial need.
13. _________________________ The government gives tax breaks to encourage women and
minority businesses
14. _________________________ Little technology; very little to no economic growth
15. _________________________ Quality of goods is often poor due to no competition
16. _________________________ The government provides all basic needs for the people: education,
employment, healthcare.
3
Economic Theories
There are 3 basic economic theories that are used throughout the western world today: Capitalism,
Communism and Socialism. Each of these three theories came about because of the conditions that
the theorist saw in their society. The theory was meant to improve the economic conditions for all people
based on the problems that were seen at that time in history.
Capitalism is the theory of Adam Smith, a Scottish philosopher writing
during a time when the government controlled the economy using a system
known as Mercantilism. Under the mercantile system there was no
economic choice, the government made all decisions whether they were
good for the people or not. Smith did not like this system and
came up with a new system based on freedom. The basic
idea of Capitalism is that through the freedom of making
economic decisions an invisible hand would set the price of
goods based on supply and demand. Production and
distribution of goods would be dictated also by supply and demand. If consumers demanded more
goods then production and distribution would increase to meet demand, or price would increase as the
supply decreased. Goods that were not in demand would not be produced. Everyone had an equal
opportunity to participate in the system, and private property ownership, entrepreneurship (creating
your own business) were encouraged and government interference was discouraged; this concept of
governmental hands-off was referred to as laissez-faire. Smith argued that the only time the government
should interfere in the economy is in time of national crisis, to encourage competition by breaking up
monopolies. This is the theory that we use in the United States, though our government interferes in
the economy more than a government in a pure capitalist system would. To make this theory work a
more free and open political system is required.
In the mid 1800’s most of Europe’s countries were experiencing an industrial
revolution fueled by the rules of capitalism. Unfortunately, capitalism often
resulted in no protection for workers, poor working conditions and overall
exploitation of the working class. A class system of workers and bourgeoisie
(owners) arose during this time. In reaction to the horrible working
conditions, Karl Marx and Friedrich Engels wrote about a classless society where all
factors of production were cooperatively owned by all the people and every one contributed equally to
the betterment of all society. Marx advocated a revolution by the working class to overthrow the
capitalist system and replace it with this new Communist system. China, Cuba, North Korea and
Vietnam all identify themselves as Communist. In order to put this theory into action a more
authoritarian political system is needed.
Due to the radical nature of Communism and pressure from workers, governments had to make some
reforms of Capitalism. Reform laws were passed in order to protect workers from business owners who
mistreated them. Many countries embraced a compromise between Capitalism and Communism
known as Socialism. Under the Socialist theory the government would own some factors of
production – those that were essential – transportation, communication, energy and natural resources,
while private ownership of businesses and property was also permitted. The goal of the government was
to ensure that the basic needs of the people were being met: food, clothing, shelter, employment,
healthcare, and that income was distributed more equally. Countries such as Canada, Great Britain,
France and Germany embrace this socialist philosophy.
4
Applying Economic Theories
Directions: Complete the chart below, and then identify the economic theory for each of the
following characteristics. (some characteristics may fit more than one theory)
Theory
Person
Government’s Role in the Economy
Capitalism
Communism
Socialism
1.
_______________
Freedom of Choice
2.
_______________
Social Services and equal distribution of wealth are the government’s goals
3.
_______________
Private Ownership and control of property and economic resources
4.
_______________
Usually found in politically free societies
5.
_______________
Usually found in countries run by authoritarian governments
6.
_______________
Public ownership of most land, of factories and of other means of production
7.
_______________
Competition is encouraged
8.
_______________
Society controls all major decisions about production through the government
9.
_______________
Possibility of Profit
10.
_______________
All Factors of production are controlled by the government
11.
_______________
“Working men of all countries, Unite!”
12.
_______________
“profit is wages stolen from the worker”
13.
_______________
“abolition of private property”
14.
_______________
Adam Smith
15.
_______________
Karl Marx
5