Economic Systems

Economic Systems

It is imperative in economics, that issues be contextualized before attempting to address them in any way. Identifying the type of economic system that exists in a region should be one of the first strides in contextualizing. There are four types of economic systems: Traditional, Command/Planned, Free/Capitalist and Mixed Economies. The major differences between the economic systems are who owns the factors of production and the role of the government and the private sector in each.

Traditional economies are those which are centred on subsistence farming and the exchange of goods through bartering. These economies exist in some of the most rural villages on earth, and are in most cases unaware of happenings in neighbouring villages, and have their own means of ‘government’.

Advantages of Traditional Economies

– Each family is aware of their respective role in sustaining the economy.

– Leaders are impartial in the distribution of food, shelter and health care.

Disadvantage of Traditional Economies

– Not usually receptive to the introduction of new technology.

Command/Planned economies are those in which the government not only intervenes in the market, but it also owns and allocates (most, if not all of) the resources. It allocates the resources by firstly deciding whether to focus on current consumption or on investment (to spur growth rate, consume less and invest more). The government would then be able to plan according to these targets, the resources each industry and firm would need to meet the output targets. The government then prices the items produced so as to influence consumption, with consumers being awarded rations and or an income for their labour.

Advantages of a Command/Planned Economy

– Equality is focused on as the government seeks to distribute all resources impartially, whether it is properties, jobs, incomes, social services such as, health care and education, resulting in everybody belonging to the same social class (no one is wealthier than another or more privileged).

– The ability to direct a nation’s resources in line with national goals.

– Economy is usually stable, with the economy not subjected to high unemployment and inflation rates.

– Sectors in the economy are easily regulated.

Disadvantages of a Command/Planned Economy

– The enforcement of policies despite how unpopular they are with the masses.

– There is little freedom, as people are not allowed to choose where to seek employment, negotiate pay rates or to purchase goods of choice.

– Quality is normally compromised to meet quantity requirements.

– Not able to respond to day to day changes in the economy.

Free Market economies are those in which land and capital are privately owned and firms and individuals are not subjected to government intervention.  Due to this freedom, firms and industries are not expected to streamline production methods and quantity to the governments’ agenda, but instead gear them towards maximising profits. Likewise, consumers and labourers are free to choose what products to purchase and   where to work, and also seek things that are in their best interest, that is, getting the best value for money and the best wages/salaries respectively. Firms in this economy price their goods and services based on the demand for them. When the demand for a good/service increases, it results in a shortage and ultimately causes an increase in the price of the good/service and an increase in the amount produced. A decrease in demand leads to an excess in goods/services being offered, which results in a reduction in the price(s) and a decrease in production.

Advantages of Free Market Economies

– It functions freely, and firms and sectors of the economy are not obligated to coordinating plans in line with government economic decisions.

– Companies are able to easily respond to day to day changes in demand and supply without having to adhere to too much government protocol.

– Inhabitants have total responsibility over their own well-being, and are expected to find their own jobs, negotiate salaries, purchase goods of their choice etc.

– Competition between firms keeps prices down and acts as an incentive for firms to be efficient.

Disadvantages of Free Market Economies

– The basic needs of the populous are not always provided, such as food, shelter and health care, resulting in the development of a class structure and poverty.

– Economy tends to be unstable with periods of unemployment, inflation and even recessions.

– Lack of job security, due to uncertainty in the business world and companies not producing efficiently, thus not meeting projected profit targets.

– Industries are not regulated as easily.

Mixed economies are those which embody features of the free market and the command economy.  The government in these economies either controls a sector or intervenes in each via taxes, subsidies, legislations, interest rates or the money supply. For example, the government may intervene in the pricing of goods by levying consumption taxes or by granting subsidies; over salaries/wages by charging income tax(es) (the % charged may be fixed or dependent on salary brackets); over production, by issuing legislation(s) barring certain methods of production, disposal of waste(s) and even on the goods that may be produced. The inevitable problems of unemployment, inflation, growth rates, et al (and others), are influenced by government expenditure, bank lending and interest rates, and the money supply, so as to control foreign exchange rates.

Advantages of Mixed Economies

– The public and private sector in most cases work in tandem to ultimately increase the production of the country/region.

– Government intervention is vital in curbing instability in the market through maintaining control of important sectors of the economy and establishing state agencies responsible for monitoring sectors of private control such as, the Financial Services Commission (FSC) in Jamaica, the body responsible for monitoring the Financial sector, and The Bureau of Standards Jamaica, which ensures that goods entering/made in the country meet the minimum acceptable standard.

– Social, political, business ownership and profit earning freedoms are maintained.

– Higher quality products and services are offered due to competition among firms/companies and strict regulatory standards.

Disadvantages of Mixed Economies

– The government is in some cases very influential in the economy, engineering policies which alter interest rates, taxes and (the) money supply in an effort to achieve its targets.

– In some countries the economy is driven by the private sector, with them being responsible for the overall growth of the economy, the at times instability, and due to changes in their respective markets, unemployment, inflation and recession.

– Some sectors in the economy operate as a monopoly, whether they are run privately or by the government. These monopolies stand a greater risk of being inefficient, which can lead to higher prices for the consumer.


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