Lesson Objective

At the end of this lesson, you will be able to:

• Define an economic system
• Compare and contrast the main types of economic systems.

Brainstorming Question

What are the main types of economic systems? How do you classify them?

Key Terms and Concepts

The way a society tries to answer the basic economic questions mentioned above can be summarized by a concept known as the “economic system.” An economic system is a set of organizational and institutional arrangements established to answer basic economic questions. The different types of economic systems are classified on the basis of ownership of economic resources. The main types of economic systems
are: traditional economy or subsistence, capitalist economy, command economy, and mixed economy. These economic systems are discussed as follows.

1.Traditional Economy

A traditional economy is a system that relies on customs, history, and time-honored beliefs. Tradition guides economic decisions such as roduction and distribution. Societies with traditional economies depend on agriculture, fishing, hunting, gathering, or some combination of them. They use barter instead of money. Most traditional economies operate in emerging markets and developing countries. They are often in Africa, Asia, Latin America, and the Middle East. Traditional economies can also be found in pockets throughout the world, even in developing countries.

Main features of Traditional Economy:

• Traditional economies are centred on a family or tribe, and they use traditions gained from the elders’ experiences to guide day-to-day life and economic decisions.
• Traditional economies exist in hunter-gatherer and nomadic societies, where people cover vast areas to find enough food to support them and migrate with the seasons.
• Most traditional economies produce only what they need, with little to no surplus, making trade and money unnecessary.
• When traditional economies do trade, they rely on barter, exchanging goods and services directly without using currency.
• As traditional economies start farming and settling down, they may develop a surplus and create some form of money to facilitate trade over longer distances.

2. Capitalist Economy (Capitalism)

Capitalism is the oldest formal economic system in the world. It became widespread in the middle of the 19th century. In this economic system, all means of production are privately owned, and production takes the initiative of individual private entrepreneurs who work mainly for their own profit. Government intervention in the economy is negligible. This system is also called a free market economy, simply a market economy, or laissez-faire.

Main features of Capitalist Economy:

• The right to private property is the central feature, where all economic or productive factors are under private ownership.
• Consumers have freedom of choice to buy the goods and services that suit their preferences, and producers respond to consumer demand.
• Competition exists among sellers, buyers, and workers, driving economic activity.
• The government has limited involvement, mainly focused on defense and law and order.
• Individuals are motivated by self-interest and the pursuit of economic gain.
• Income inequality is often high, with a significant gap between the rich and the poor.

3. Command Economy (Socialism)

A command economy is also referred to as a socialist economy. In a command economy, the economic institutions that are engaged in the production and distribution of goods are owned and controlled by the state and are put to use under a centralized plan. Socialism started in Russia with the outbreak of the Great October Revolution in Since then, many countries in the world, including China, Vietnam, former East Germany, Poland, Hungary, Cuba, and Ethiopia, have adopted it. Several countries adopted this system after the Second World War. Nevertheless, socialism lost its acceptance, and most of the former socialist countries adopted free market economies.

Main features of Command Economy:

• All means of production are owned by society as a whole, with no private property.
• Resource allocation is done by a controlling authority based on socio-economic goals.
• The government has complete control over all economic activities.
• There is a relative equality of incomes, as the profit motive is absent and opportunities for wealth accumulation are limited.

4. Mixed Economy

A mixed economy is one of the economic systems having the combination of both the characteristics of capitalism and socialism: a combination of private and public ownership of the means of production, with some measures of control by the government. It incorporates some of the features of both capitalist and command economies and allows private and public sectors to co-exist.

Main Features of Mixed Economy:

• The public and private sectors co-exist, with their respective roles and aims well-defined.
• The government uses economic planning instruments to achieve coordinated and rapid economic development, making use of both the private and public sectors.
• Private property is allowed, but rules exist to prevent the concentration of wealth, promoting economic equality.