Economic Systems

The Four Economic Systems

The Four Economic Systems

There are four types of economic systems: the traditional economy, the market economy, the centrally controlled economy, and the mixed economy. The people of a society choose or follow one of these economic systems based on their goals.

System 1: Traditional Economy

• In a traditional economy, people answer the three economic questions in ways they have long used and that worked for them in the past.

• This is the oldest economic system.

• Economic activities based on traditional practices can still be found in some rural areas, especially in poorer countries.

• Traditional economies are high in security, stability, and efficiency. However, people have limited economic freedom.

• Traditional economies do not promote growth because the society produces the same things in the same ways over a long time.

• A traditional economy may be high in equality if goods and services are given out fairly. However, leaders or others with power may take more of what is produced than others.

System 2: Capitalism/Free Market

• In a free market economy, the three economic decisions are answered by the way individuals and businesses that make things interact in the market with the people who buy things.

• A market is any setting where people or businesses exchange goods or services for money. It could be a physical place, like a store, or an electronic setting, like a website.

• The free market system is also called capitalism.

• This market is also considered a laissez-faire system due to less government regulation and interference.

Capitalism/Free Market - Part 2

• For most of United States’ businesses, a capitalist system is used to maximize profits of businesses. This economic systems allows the people in the United States to own their own businesses rather than the government, unlike a communist or command system, in which the government controls all industries and profits for distribution.

Advantages of Capitalism Part 1.

• A free market system has some advantages. It gives great freedom to entrepreneurs. Entrepreneurs are people who have an idea for a product or service that people will want and are willing to make it, even at the risk of failing.

• Entrepreneurs take that risk because they hope to earn a profit. A profit is the money left over after a business owner pays all expenses. Buyers also have a great degree of freedom in a market economy. They decide which goods and services they buy—as long as they have the money to meet the seller’s price.

Advantages of Capitalism Part 2.

• The free market economy is also very efficient. The individuals and companies that produce and sell goods constantly look for better ways of making things and marketing them. Finding these better methods can drive down the price of goods or increase their profits.

• The free market economy is very good at generating economic growth. As the people and companies that sell goods find better ways to make their products, they produce more. Higher production generally means lower prices, and lower prices usually lead to people buying more goods and services. Business owners then hire more workers, creating jobs. Those workers use their new wages to buy more goods. The result is a growing economy.

Disadvantages of Capitalism

• A free market economy does not necessarily lead to equality. Some people can make large amounts of money, while others struggle at low-wage jobs. With little income, they can find it difficult to buy the necessities of food, clothing, and shelter.

• A free market economy is also low in security. Business owners may reduce costs by buying machines to do the work of people. When they do so, they might let workers go. Stability can be a problem as well.

• While free markets can lead to great economic growth, at times the economy can slow down. That can cause companies to lay off workers, or temporarily let them go. When workers lose their wages, they have less money to buy goods. When they buy less, the companies that produce the goods cut back production even more. That can result in letting even more workers go. This downward cycle can go on for many months before the economy begins to grow again.

System 3: Command Economy

• In a centrally controlled economy, also called a command economy, the government controls and makes the three basic economic decisions. The government decides what is produced based on what it thinks people need. It decides how those goods are produced based on plans that government officials make for the overall economy. The government also decides who gets what is produced based on what government officials think is the best way to distribute goods.

• ​Some centrally controlled economic systems are based on either communism or socialism. In communism, the government owns and controls all the land, factories, and other resources. It makes all the major economic decisions—including how much each worker will earn in wages. In the economic system called socialism, the government owns only some of the resources needed to produce goods and services. In socialism, the government distributes the products and wages.

Command Economy: Benefits

• Those who favor centrally controlled economies say that they provide more equality. The government can focus on making things that people really need and make sure that all people can get them.

• Also, people often have more security. The government hires and pays all workers, so the government could make sure that all people who are able to work have jobs.

• Centrally planned economies also have a certain amount of stability. People know what to expect over time. Government controls can be used to reduce the risk of major economic slowdowns like those that can strike market economies.

Command Economy: Drawbacks

• Economies that are centrally controlled have very little freedom since the government makes all economic decisions.

• These economies also tend not to be very efficient. Without the hope of profits, the officials who run the companies that produce goods may not look for new and better ways of doing things.

• Workers cannot hope to get a raise in wages by working harder since the government decides how much they earn. These issues also result in low growth.

• This is similar to a totalitarian or unitary system of government, where the central government has all the say and control over its citizens but in an economic way. A strong dictator or central government is needed to enforce government control of resources, goods, and services to distribute them.

System 4: Mixed Economies

• In a pure free market economy, the government plays no economic role. However, there are no pure market economies in the world.

• The governments of many countries with market economies have found that some of the drawbacks of that system need to be addressed to help their people.

• Even some countries with centrally controlled economies have made some changes to grant more economic freedom. An economic system that has some elements of both the free market and central control systems is called a mixed economy.

Advantages of a Mixed Economy

• One reason for a mixed economy is to provide more equality and security than a free market economy offers. Governments in many countries have stepped in to provide a safety net. A safety net is government-supplied aid given to individuals or families that helps them meet their economic needs.

• For example, state governments in the United States provide free or low-cost school lunches to some students if their families cannot afford the cost of buying lunch. The governments in many European countries provide health care to all people.

• Governments in mixed economies also supply services, such as building roads, bridges, and tunnels. Other services are related to education, such as providing schooling. Another reason for government to take a role in the economy is to protect people’s health and safety.

Disadvantages of Mixed Economy

• Some companies use methods of producing goods that can be dangerous to workers. Or they might require workers to work long hours. Sometimes the goods produced can be unsafe.

• For these reasons, governments may choose to watch over the economy through regulation. Regulation means governmental action to put limits on the freedom of companies for the purpose of protecting the well-being of workers and consumers.

• Even with regulation, however, countries with mixed economies have the highest output in the world. The top six largest economies in 2019 were all categorized as mixed economies.

​Video 1: Is Capitalism Broken?

Video 2: BrainPop: North Korea

Go to the following Link on BrainPop and watch the video. Answer the questions while watching.

https://www.brainpop.com/socialstudies/worldhistory/northkorea/movie

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