Introduction
The manner in which each individual live in a society depends on how a country handles questions and problems concerning their economy. These issues involve dealing with consumer needs, inflation, and recession just to mention a few. When dealing with economic issues, three basic questions come into mind involving the type of goods to be produced using the available resources, the method of production, and the market for these goods. The way of handling these questions is based on the economic system of a country. As such, an economic system refers to the way in which the resources of a country are allocated to produce goods and services, and the manner in which these services and goods are distributed to the consumers. There are four different types of economic systems, including traditional economy, free market/capitalism economy, planned/socialist/command economy, and mixed economy. Each type of economic system has its distinct features regarding functions, characteristics, and the role of the government in each economic system.
Traditional Economy
A traditional economy refers to a system where customs, traditions, and beliefs and inheritance determine the answer to the three economic questions. Commonly referred to as subsistence economy, a traditional economy is defined by trading and bartering (Sullivan, 2009). Under such economic system, little is produced and in any cases of surplus, they are typically donated to the landowner or the ruling authority. Traditional economies do not use modern technology in the production of goods and services. The main tasks of workers in a traditional economy include hunting, gathering, and cultivation. There many parts of the world that continue to operate in traditional economies, primarily in developing countries with large indigenous populations. Examples of traditional economies include the Australian aboriginals, the Mbuti in Central Africa, and Amazon tribes.
In most cases, traditional economies do not have official currency, with any available wealth going to the upper class. Traditional economies can morph into a mixed, command, or market economy due as influences from neighboring countries permeate the economy. One advantage of a traditional economy is that each member of the society has a role to play. This typically results into strong social networks, as people feel more unified with the society, while increasing a sense of worth. Additionally, because goods and services are only made for survival, the natural resources of the country may not be compromised as in other types of economies. The disadvantage of traditional economy is that individuals have set roles and lack the ability to accumulate wealth. Undeniably, most people who live in this type of economy remain in poverty for their entire life. According to Hart (2007), about four billion people may exist in traditional economies.
The basic economic in a traditional economy are answered by past experience and practices. The roles of individuals are defined by the customs of elders and ancestors. The custom of collaborating and sharing for the benefit of the society defines a traditional economy.
Market Economy
In a market economy, the private sector (private firms and individuals) answer the three basic economic questions. It is an economic system in which the three economic questions are answered by the interplay of demand and supply in free markets, with no government interference through rationing, price-fixing, and other coercive mechanisms. The government plays a limited role in the economy, with emphasis on freedom of the individual consumers and producers. In theory, no government interference can be found in this system, but in reality, governments regulate and legislate economic systems. In a market economy, price mechanism determines prices. Under this economic system, only the most efficient method of production is employed, and the production of goods and services takes place where labor is cheapest. There is no real life example of a purely free market economy. In the late nineteenth century, the United States was about close to becoming a pure market economy.
In his book, The Wealth of Nations, Adam Smith asserts that there is limited but important role for governments to play in our economy (Zhou, 2011). The role of the government in market economy is to guarantee fluidity and complete functioning of the world of business. Under this type of economy, the government plays a significant role in providing a legal system to make and enforce laws and regulations to protect private property rights. The government also plays a significant role in providing public goods that individuals or private businesses would not provide. Additionally, government may come in to correct market failures such as external costs and economic slowdowns. The government also plays a significant role in maintaining competition by regulating monopolies. This is because competition among sellers ensures fair market prices and wide variety of products and services at fair prices. The government can also redistribute income by taxing people earning larger incomes to help the poor.
Command Economy
Command economy is a type of economic system where supply and demand are regulated by the government rather than market mechanism (Orr, 2011). Economic agents in a controlled economy, particularly producers operate primarily under specific directives from the government or the highest administrative authority, as in the former Soviet Union, Cuba, and China. A command economy does not take into account mutual interest and agreement between parties. As the name implies, command economy orders the affairs of a nation through coercion. The former Soviet Union, China, and Cuba dismantled their planned economies from 1990. North Korea practices this type of economic system to present day.
The main advantage of this economy is that it takes the welfare of all citizens as the primary goal. It also ensures employments of all available resources. The government has the information required to direct resources where they are most needed. Under controlled economy, wasteful competition and industrial unrest such striking are avoided because the government controls wages. The downfall of this economic system is the lack of economic freedom for producers and consumers. This results into lack of incentives and low morale among workers due to rigidity of the system. There is no equal distribution of wealth and income in a command economy. The production is for need rather than profit, which demoralizes the producers.
In a command economy, the government controls all aspects of the economy with those on the top of the hierarchy giving economic commands to those further down the ladder. The government plans what to produce, how to produce it, and prices. The government also sets wages for all its citizens. The government employee most of the workers and determines how they do their jobs. The government organizes, plans, and coordinates the whole production process in all industries.
Mixed Economy
A mixed economy is an economic system that incorporates some government involvement into a market economy (Rosefielde, 2008). Most modern economies incorporate the elements of both centrally planned economies and market economies. This is due to the limitations that arise from the aforementioned systems. In countries such as Sweden where the government plays significant economic role in social provision, taxes will be higher and distribution of wealth and income more equal. Conversely, in countries such as the U. S. where the private sector plays the most significant economic role, social provision and taxes will be lower and the distribution of income and wealth less equal (Duignan, 2013). The government allocates some of the resources while the rat by the market mechanism.
The public sector holds the responsibility of supplying public goods and service, and amenities. These goods and services are provided to all citizens for free and paid by taxes, for example healthcare, roads, street lights, and police services. The local or the central government makes decision regarding allocation of resources. The state owns large proportion of production factors in the public sector. The private sector is responsible for meeting the needs and wants of consumers.
The government or state can intervene in areas of the economy through passing laws and legislation to protect citizens from unfair trading practices. In a mixed economy, the government functions as a guide or reference in economic activities by intervening through regulating policies of industries. In order to adequately meet the demands of their citizens, government have adopted mixed economy to try to provide for both consumer and national interests.
Bibliography:
Duignan, B., 2013. Economics and economic systems. New York: The Rosen Publishing Group
Hart, S. L., 2007. Capitalism at the crossroads: Aligning business, earth, and humanity. 2nd ed. New Jersey: Pearson Prentice Hall.
Orr, T., 2011. Understanding economic systems. New York: The Rosen Publishing Group.
Rosefielde, S., 2008. Comparative economic systems: culture, wealth, and power in the 21st century. New Jersey: John Wiley & Sons.
Sullivan, L. E., 2009. Economic system. California: Sage Publications, Inc
Zhou, H 2011, 'Economic Systems and Economic Growth', Atlantic Economic Journal, 39, 3, pp. 217-229, EconLit with Full Text, EBSCOhost, viewed 10 June 2013.
