Different Economic Systems Essay Outline
This article examines the defining features of the world's three major economic systems: Traditional, free market and command. Each system addresses the fundamental problem of how to allocate scarce resources in a different way. In all three cases, the decision revolves around what and how much to produce, for whom to produce and to whose benefit. Kinship, custom and religion enter into these decisions in a traditional economy. In a free-market economy, self interest alone matters; buyers and sellers bid freely and openly on goods and services, and the price of purchases directly affects supply and demand. Unlike both traditional and free market systems, orthodox command economies ban all forms of private ownership; the state employs everyone and resources are allocated by central planners.
Keywords Allocation of Resources; Command Economy; Division of Labor; Distribution of Wealth; Economic System; Free-Market Economy; Mixed Economy; Traditional Economy
Economics: Comparative Economic Systems
At its most basic level, Economics concerns itself with the complex ways we rely upon each other to meet our material needs. Writ large, this pursuit gives rise to hundreds of millions of people engaging in trillions of exchanges (i.e. transactions) on a daily basis. Nothing remotely approaching the sheer scale of this activity could ever be sustained purely randomly. It takes structure to coordinate the innumerable elements that go into the production and distribution of goods and services that respond dynamically to changing conditions and needs. A system, in other words, made up of institutions, both formal and informal, following mutually agreed upon rules and practices is required to harness divergent individual interests to serve a common good (Dallago, 2002).
In any economic system, the be all and end all is the efficient allocation of resources. This lofty term boils down to the answers of three fundamental questions: What to produce, how to produce it and for whom? Five thousand years ago, the answers to these questions were moot as early humans were only concerned with food and shelter. But as human populations grew from the small, informal groups where the goal was simple survival, a division of labor along functional lines became necessary. How this division was organized and to what ends was and is the preeminent concern of an economic system. Three major models have since emerged: Traditional, free-market and command.
The most long-lived of the major economic systems is the traditional model. It has shaped economic decision-making to one degree or another for over two thousand years. Rooted in custom and often re-enforced by clan, tribal and sectional ties, supply and demand in traditional economies can be governed as much by socio-cultural norms and obligations as by questions of supply and demand. Free-market economies employ a more computational signalling mechanism — Pricing. Here suppliers are free to charge whatever they want. Those who prosper provide goods and services people find useful, desirable and affordable enough to buy. The sum of a given item's purchases over time signals that item's relative economic importance. On the other hand, command economies completely disavow the role of tradition or of a self-regulating marketplace. Here the state decides what and how much will be produced and orders state-owned enterprises to meet specific quotas. These quotas are set based partly on statistical forecasts of existing consumption patterns and partly on economic development plans and ideological agendas.
Such are the broad outlines of each major economic system. Ask any practitioner of comparative economics if such and such a system exists in the real world and he or she will most likely say 'no,' 'not really' or, at best, 'not quite.' This is so because these 'systems' are only conceptual models; clear-cut and idealized versions of much hazier real-world processes. This notwithstanding, they are of value precisely because of the general principles they reveal about the underlying dynamics of supply and demand. Moreover, elements of each system moreover operate to one degree or another somewhere in today's global economy, in many instances cheek by jowl in a mixed economy. Even in the freest of market economies, governments regulate some forms of business. Social, cultural and even religious mores subtly shape the contours of local and regional commerce in developing and advanced nations alike. Vestiges of the command economies of the last century linger in such emerging world powers as Brazil, Russia, India and China.
A lot of 'isms' quickly surface in any comparison of economic systems: Capitalism, Socialism, Marxism, Colonialism (Economy: 4, 2001). Free-market economies can be laissez-faire, corporate or neo-liberal in disposition. Socialism, where the state owns and operates major industries and utilities, is a form of command economy that has had several real-world incarnations: The dirigisme of France and the Social Market system of Post-War Germany, and a number of other variations adopted by developing countries at the advent of the post-colonial era. Marxism, of course, is synonymous with Communism, a system where the state literally owns everything and virtually all economic activity is planned. In its twentieth century heyday, Lenin, Stalin and Mao each sought to shape their national economies in his own decidedly ideological mold. Colonialism, which dominated the global economy in the first half of the twentieth century. Here the major industrial powers occupied and then administered much of the third world for the express purpose of securing access to raw materials and closed markets for their exports.
What matters here is not the distinguishing traits of each off shoot but rather how each major system deals differently with the question of ownership. Private property is a major pillar of the free market economy; it is what people compete to acquire. But, there is always just a fixed amount of land, stocks, savings and the like. One person adds to his or her wealth (property) at the expense, theoretically-speaking, of another. This Scarcity of Resources inevitably leads to an unequal distribution of wealth. Free market enthusiasts believe this imbalance is not only natural but morally just. In their view, the rich achieved their wealth by dent of hard work and business acumen. More importantly, they reinvest a portion of their wealth, thus stimulating economic growth. That investment, in turn, creates jobs and provides additional goods and services and, so, furthers the common good. Proponents of command economies reject these arguments outright. The only cure for a grossly unfair and exploitive economic system, they argue, is collective ownership. And the fairest arbiter of the subsequent egalitarian redistribution of income and investment capital is the state.
Economic systems are complex, multidimensional entities where decisions about what is produced, how to produce and for whose benefit have a moral and political context. An economy and the society it serves are inseparable. What differentiates one from the other is the nature of the basic problem being addressed. Social cohesion and regeneration are society's most pressing perennial concerns. Capital formation, productive capacity and full employment are necessary for a healthy economy. For, without adequate levels of investment, an efficient manufacturing base and enough wage earners to buy the goods produced, economies fail. If this happens, the social order itself has the potential to unravel. More often, though, economies simply under perform, and tight credit, high prices, and low wages thwart the average person's aspirations for 'the good life.' Even when an economy performs well, the prosperity created may be far from universally enjoyed and come with very real social costs. Traditional, free-market and command economies approach each of these problems...
Types of Economic Systems
"You can't always get what you want." That's what the Rolling Stones sang, anyway (check it out: great song even if it's a bit before your time). And while Mick Jagger probably didn't have Econ 101 in mind, he managed to sum up perfectly the core concept underlying all economics.
Scarcity is the fundamental challenge confronting all individuals and nations. We all face limitations... so we all have to make choices. We can't always get what we want. How we deal with these limitations—that is, how we prioritize and allocate our limited income, time, and resources—is the basic economic challenge that has confronted individuals and nations throughout history.
But not every nation has addressed this challenge in the same way. Societies have developed different broad economic approaches to manage their resources. Economists generally recognize four basic types of economic systems—traditional, command, market, and mixed—but they don’t completely agree on the question of which system best addresses the challenge of scarcity.
A traditional economic system is—here's a shocker—shaped by tradition. The work that people do, the goods and services they provide, how they use and exchange resources… all tend to follow long-established patterns. These economic systems are not very dynamic—things don’t change very much. Standards of living are static; individuals don’t enjoy much financial or occupational mobility. But economic behaviors and relationships are predictable. You know what you are supposed to do, who you trade with, and what to expect from others.
In many traditional economies, community interests take precedence over the individual. Individuals may be expected to combine their efforts and share equally in the proceeds of their labor. In other traditional economies, some sort of private property is respected, but it is restrained by a strong set of obligations that individuals owe to their community.
Today you can find traditional economic systems at work among Australian aborigines and some isolated tribes in the Amazon. In the past, they could be found everywhere—in the feudal agrarian villages of medieval Europe, for example.
In a command economic system or planned economy, the government controls the economy. The state decides how to use and distribute resources. The government regulates prices and wages; it may even determine what sorts of work individuals do. Socialism is a type of command economic system. Historically, the government has assumed varying degrees of control over the economy in socialist countries. In some, only major industries have been subjected to government management; in others, the government has exercised far more extensive control over the economy.
The classic (failed) example of a command economy was the communist Soviet Union. The collapse of the communist bloc in the late 1980s led to the demise of many command economies around the world; Cuba continues to hold on to its planned economy even today.
In market economies, economic decisions are made by individuals. The unfettered interaction of individuals and companies in the marketplace determines how resources are allocated and goods are distributed. Individuals choose how to invest their personal resources—what training to pursue, what jobs to take, what goods or services to produce. And individuals decide what to consume. Within a pure market economy the government is entirely absent from economic affairs.
The United States in the late nineteenth century, at the height of the lassez-faire era, was about as close as we've seen to a pure market economy in modern practice.
A mixed economic system combines elements of the market and command economy. Many economic decisions are made in the market by individuals. But the government also plays a role in the allocation and distribution of resources.
The United States today, like most advanced nations, is a mixed economy. The eternal question for mixed economies is just what the right mix between the public and private sectors of the economy should be.
Why It Matters Today
Half of the twentieth century went down as a global battle between defenders of free markets (democratic capitalist nations, led by the United States) and believers in command economies (the communist bloc, led by the Soviet Union).
The US and USSR never went to war against each other directly, but dozens of smaller (yet still tragic and significant) wars unfolded around the world as bitter fights over economic systems turned bloody. Korea, Vietnam, Nicaragua, Afghanistan, Angola… millions of people died in the various "hot" theaters of a Cold War fought to decide whether markets or states should control economic affairs.
The great irony was that the Cold War finally ended not on a battlefield, but because the Soviet economy finally self-destructed by the late 1980s. For most of the world, the Soviet collapse proved that command economies were simply inferior to the market-dominated mixed economies of the capitalist world. Of course, China – still ruled politically by an authoritarian Communist Party, even though its economy is now more mixed if not exactly free – is now the biggest creditor nation to the United States.
Sometimes, a Song Says it Better: Revolution, by The Beatles
“You say you want a revolution”, the Beatles sang, advising:
“But if you go carrying pictures of chairman Mao You ain't going to make it with anyone anyhow”