An economy of a country is the strongest force when it comes to harmonizing political power, prompt war, and deliver the finest life to the people it serves. There are countless economies in the world, all of them are unique in their own way. There are still differences in the characteristics of these economies. There are mainly four types of economic systems in the world such as the traditional economic system, market economic system, command economic system, and a mixed economic system.
These economic systems are unique and have a troubled history associated with them. These economic systems depend on the diverse set of conventions and settings and have their own strength and weaknesses.
In this article, you will learn about each system and various attributes associated with it. By understanding these different types of economic systems, you will learn about how different economies of the world function.
1) Traditional economic system
A traditional economic system is the oldest and most traditional type of economic system in the world. A huge part of the world follows this economic system. There are many elements of this economic system which the modern economic system, such as a mixed economic system, lacks. This economy still yields goods and amenities, which are a direct result of their customs, beliefs, tradition, and culture. The parts of the world which follow traditional economy are mostly rural, second or third world and are very close to the land because of farming, fishing, and cattle herding etc. This economy relies on a barter system and does not have any concept of money or currency.
The people who fall under this type of economic system are placed around their tribes and families. The main purpose of this economy is to produce goods to fulfill the needs of its community. There is no concept of trading, therefore, people never think about market surplus under this type of economic system. A traditional economic system is very susceptible to change in their milieu. When this type of economies evolve, they start to implement different farming techniques and start trading their excess crop and evolve from the traditional economy.
When traditional economy interacts with other economies such as command or market it turns into the mixed traditional economy. In this way, money or currency becomes important in the lives of people. The traditional economy is suitable for underdeveloped and developing countries. One most important advantage of the traditional economic system is that it preserves the tradition and custom of the area which is not possible in other economies. Each member of this economy has a specific and distinct role which makes people of this economy socially satisfied.
The disadvantage of the traditional economic system is that they still don’t enjoy the things available commonly in other economies such as medicines, technology, and centralized utilities.
2) Command economic system
Command economic system is more advanced than the traditional economic system. This economic system is directed by a single centralized power such as government, which controls all activities of this type of economic system. The government has the power to take all decisions regarding the economy. It is responsible to make decisions about the type of crops produced and quantities of the crops.
The prize of the goods in the market is also decided by the government. Mostly, the government owns everything from the industrial processes to equipment. Countries like China, Cuba, and North Korea are practical examples of a command economic system. These economies are also called as planned economies because the government controls all the plans of the economy and nothing is elected by the free market. This is also a big disadvantage of this type of economic system because it is impossible for a government to plan and fulfill the individual needs of its citizens.
Hence, it leads to curbing. In contrast to this, there is no competition among the industries in a command economic system, because the government has a monopoly in all businesses and segments. No competition can lead to a lack of innovation because industries don’t find the need to take risks. All businesses and segments have to follow the rules and regulations imposed by the government. One of the biggest challenges in front of these governments is to create jobs opportunity and provide goods and services at reasonable rates, but it has been observed that most of the command economies focus on resources like oil. Command economies have slow growth because of their inflexibility and centralized nature.
Most of the resources are controlled by the government, but the agriculture sector is completely left its population.
3) Market economic system
A market economy is completely opposite of command economy and it is similar to the free market economy. In the market economic system, the government does not control the major segment of the economy such as vital resources and valuable goods and services. In the market economy, industries and households act in self-interest and determine how resources will be allocated, what kind of goods will be produced or bought.
There is absolutely no connection or interference of government or any controlling power, which means that there is no restriction on the buyers or sellers. Hence, the economy is moulded by the contributors to the economy and on the rate of demand and supply. There is no true free market economy exist in the world. For instance, the United States of America is a capitalist nation, but the American government still controls moral businesses, fair trades, monopolies, government programs etc.
The biggest advantage of the market economic system is the separation of government and the market. This makes the government less powerful and gives some power in the hands of private institutions and businesses. In theory, a market economic system empowers a nation to undergo a high expanse of progress. In the free market economy, businesses produce profitable goods and services and give a lot of incentives for private enterprises. In the free market economic system, there is a high scope of innovation because businesses invest a lot in research and development.
On the other hand, competition leads to inequality and there are chances that businesses will only care about the profits and neglect the elderly or disabled. Patrons can be oppressed by monopolies and economic growth will become a priority over social and human needs.
4) Mixed economic system
A mixed economy is a combination of market and command economies. It is also called a dual economic system because of the amalgamation of two economies. However, there is no clear definition of the mixed economic system. In most of the common economies, industries run the economy with a strong regulation by the government in specific areas like public transportation and public goods and services. Most of the western economies are considered mixed economies. In such economies, neither government nor the private sector can run the whole nation.
Both play a critical role in the success of the system. In mixed economies, the government has less interference as compared to it has in the command economy. Therefore, private businesses can run more efficiently. However, the government can intercede to take care of any market failures. For instance, the government has the power to demolish a company if it exploits the monopoly. Another example is the government apply taxes on harmful products such as cigarettes and alcohol. In mixed economies, the government is liable for creating health care and social welfare programs. Besides all this, the government uses taxation policies to lower inequality and distribute income fairly among its population.
However, there are many benefits of applying mixed economic system, but there are still few who believes that over-interference of government is not good and another common problem is that government-run companies become uncompetitive and cause loss to the government and creating debt.
In conclusion, there is a total of four types of economic systems and the type of economy has a lot to do with its progress. It is apparent that many nations are light-years behind the other nations. It is the responsibility of fast-paced economies to help slow-economies to grow. Therefore, all economies are important and have their own advantages and disadvantages.