The basic kinds of economic systems

The wants people have are almost unlimited. However, each society has a limited amount of resources from which to provide the goods and services to satisfy these wants. This scarcity of resources forces every society to make decisions about the following questions:

– Which goods and services will be produced?

– How will these goods and services be produced?

– How will the goods and services be distributed?

The answers for every particular country will depend on its priorities. Some countries consider it very important to be powerful and to feel safe. Other countries are concerned with providing food and clothing to all inhabitants. The decision that a country make will determine the type of economic system it has.

The basic types of economic systems are traditional, command and market. Traditional system is the system in which people do things the way they have always done them. They rely on the same tools and methods used by their parents. There is little or no change in such systems because most people methods are based on habit, custom and religious belief. Individuals are not free to make decisions according to what they want to have. Traditional system is not as widely spread as it was before. Though it is still a major force in some areas on the west coast of Canada, in Latin America, Africa and Middle East.

In a command system, the basic economic decision of what and how to produce and distribute is made by a central authority. The members of the society in the system obey. The central authority consists of one person or a small group who control factories, equipment and land. This system is still powerful in China and Cuba and recently our country and the countries of Eastern Europe operated under strong command system.

In a market system, the basic economic decision is based on the actions of people and business firms participating in many different markets. A market system produce goods and services that people are willing to buy and that can bring a profit to the sellers. The interaction of consumers and producers makes the system work. US, Canada and Japan are the best examples of this type of economic system.

The fact is that none of today's economic system is based totally on one of three principles just described. Modern economics have some element of all three influences in them. However one of the principles is usually stronger than the others and defines the whole system.

A society's standard of living is one way to evaluate an economic system. The standard of living is a measure of how well the people live. It depends on the amount and kind of goods and services the people of a country enjoy, or their income.

 

MARKET ECONOMIES

A society may attempt to deal with the basic economic problems by allowing free play to what are known as market forces. The state plays little or no part in economic activity. Most of the people in the non-communist world earn and spend in societies which are still fundamentally market economies. 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). It is useful, however, to consider the way in which a true market system would operate because it provides us with a simplified model, and by making modifications to the model we can approach the more realistic situations step by step.

The framework of a market or capitalist system contains six essential features: private property, freedom of choice and enterprise, self-interest, competition, the price system, the role for government.

 

Private property

The institution of private property is a major feature of capitalism. It means that individuals have the right to own, control and dispose of land, buildings, machinery, and other natural and man-made resources. Man-made aids to production such as machines, factories, docks, oil refineries and road networks are known as capital. Private property not only confirms the right to own and dispose of real assets, it provides the owners of property with the right to income from that property in the form of rent, interest and profits.