Theoldestanduntil recent times the most common way of solving economic problems was that of tradition. In traditional societies, people use methods of production and distribution that were devised in the distant past and which have become an accepted way of doing things by a long process of trial and error.
A traditional economic system is one in which people's economic roles are the same as those of their parents and grandparents. Societies that produce goods and services in traditional ways are found today in some parts of South America, Asia, and Africa. There, people living in an agricultural village still plant and harvest their own food on their own land. And the ways they produce clothing and shelter are almost exactly the same as those used in the past. Tradition decides what these people do for a living and how their work is performed. Traditional economy provides a sense of security and psychological comfort. Subsequently, there is a relatively low unemployment rate and low crime rate. A traditional economy allows for a greater degree of autonomy and little or no money is used.
A traditional economy does not allow for much economic growth and development as changes are very slow and there is little social mobility. A traditional economy does not take advantage of technology and there is relatively little promotion of intellectual and scientific development. A traditional economy provides few incentives for entrepreneurs, thus limiting choices for consumers and lowering standards of living.
Market Economic System
A market economic system is one in which a nation's economic decisions are the result of individual decisions by buyers and sellers in the marketplace. The market system of economic organization is also commonly described as a free enterprise or laissez-faire, or capitalist system. We shall use all these terms to stand for a market economy. Strictly speaking, the pure market of laissez-faire system has never existed. Whenever there has been some form of political organization, the political authority has exercised some economic functions (e.g. controlling prices or levying taxation). Efficiency is best achieved through a market economy where individual producers each make their own production decisions based on their own profit motive. Some critics of the free-market argue that property rights are in conflict with "human" rights. But the critics fail to realize that in a free-market system, every person has a property right over his own person and his own labor, and that he can make free contracts for those services.
The framework of a market or capitalist system contains six essential features. They are:
1. private property
2. freedom of choice and enterprise
3. self-interest as the dominating motive
4. competition
5. a reliance on the price system
6. a very limited role for government.
Command Economic System
A planned economy or directed economy is an economic system in which the state or government manages the economy. Its most extensive form is referred to as a command economy, centrally planned economy, or command and control economy. In such economies, the state or government controls all major sectors of the economy and formulates all decisions about their use and about the distribution of income, much like a communist state. The planners decide what should be produced and direct enterprises to produce those goods.
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In a command economic system, the main decision maker is the government. No person may independently decide to open and run any kind of business. The government decides what goods and services are to be produced. And the government sells these goods and services. The government also decides how the talents and skills of its workers are to be used. Supporters of planned economies cast them as a practical measure to ensure the production of necessary goods. Critics of planned economies argue that planners cannot detect consumer preferences, shortages, and surpluses with sufficient accuracy and thereforecannot efficiently co-ordinate production (in a market economy, a free price system is intended to serve this purpose). Planned economies are notoriously corrupt. Their inefficiency leads to the formation of informal social networks.
Mixed Economic System
No country has an economic system that is 100 percent communism, socialism, or capitalism. All countries today have mixed economic systems or mixed economies, with some free enterprise and some government ownership. There is not one single definition for a mixed economy, but relevant aspects include: a degree of private economic freedom(including privately owned industry) intermingled with centralized economic planning(which may include intervention for environmentalism and social welfare, or state ownership of some of the means of production).
For some states, there is no consensus on whether they are capitalist, socialist, or mixed economies. Economies in states ranging from the United States to Cuba have been termed mixed economies.
If the government owns and operates almost all of the nation's means of production, then that nation's economic system is called communism. China has a communist economic system. Almost all of the means of production are publicly owned-that is, owned by the government. Government planners decide the answers to the basic economic questions. Farming on private plots of land is sometimes allowed. In recent years, the Chinese government has been allowing more and more private businesses to operate.
If the government owns and operates many of the nation's major industries-such as banks, airlines, railroads, and power plants-but allows individuals to own other businesses, including stores, farms, and factories, that nation's economic system is called socialism.
Sweden is an example of a country whose economic system is often described as socialist. Most of its major industries, such as coal mining, electric power, gas, telephone, and railroads, are owned by the government. Under Sweden's national health insurance system, the people receive free medical services all their lives.
If almost all the stores, factories, and farms in a nation are owned and operated by private individuals or businesses, then its system is called free enterprise, or capitalism. The U.S. has a free enterprise, or capitalist, economic system.
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Language notes:
we are tempted to say ,
a long process of trial and error
the pure market of laissez-faire system has never existed
how the talents and skills are to be used
a degree of private economic freedom intermingled with centralized economic planning
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