The way scarce resources get distributed within an economy determines the type of economic system. There are four different types of economies; traditional economy, market economy, command economy and mixed economy. Each type of economy has it’s own strengths and weaknesses.
The Four Types of Economies
1. Traditional Economic System
The traditional economic system is the most traditional and ancient type of economy in the world. Vast portions of the world still function under a traditional economic system. These areas tend to be rural, second- or third-world, and closely tied to the land, usually through farming. In general, in this type of economic system, a surplus would be rare. Each member of a traditional economy has a more specific and pronounced role, and these societies tend to be very close-knit and socially satisfied. However, they do lack access to technology and advanced medicine.
2. Command Economic System
In a command economic system, a large part of the economic system is controlled by a centralized power. For example, in the USSR most decisions were made by the central government. This type of economy was the core of the communist philosophy.
The government is often involved in everything from planning to redistributing resources. A command economy is capable of creating a healthy supply of its own resources and it generally rewards its own people with affordable prices. Example: China or D.P.R.K. (North Korea).
In a command economy, it is theoretically possible for the government to create enough jobs and provide goods and services at an affordable rate. However, in reality most command economies tend to focus on the most valuable resources like oil.
3. Market Economic System
In a free market economy, firms and households act in self-interest to determine how resources get allocated, what goods get produced and who buys the goods. This is opposite to how a command economy works, where the central government gets to keep the profits.
There is no government intervention in a pure market economy (“laissez faire“). However, no truly free market economy exists in the world. For example, while America is a capitalist nation, our government still regulates (or attempts to regulate) fair trade, government programs, moral business, monopolies, etc.
In this type of economy, there is a separation of the government and the market. This prevents the government from becoming too powerful and keeps their interests aligned with that of the markets.
4. Mixed Economic System
A mixed economy is a combination of different types of economic systems. This economic system is a cross between a market economy and command economy. In the most common types of mixed economies, the market is more or less free of government ownership except for a few key areas like transportation or sensitive industries like defense and railroad. The government is also usually involved in the regulation of private businesses. The idea behind a mixed economy was to use the best of both worlds – incorporate policies that are socialist and capitalist. India is an example of a mixed economy.
Advantages of Mixed Economies
- There is less government intervention than a command economy. This means that private businesses can run more efficiently and cut costs down than a government entity might.
- The government can intervene to correct market failures. For example, most governments will come in and break up large companies if they abuse monopoly power. Another example could be the taxation of detrimental products like cigarettes to reduce a negative externality of consumption.
- Governments can create safety net programs like healthcare or social security.
- In a mixed economy, governments can use taxation policies to redistribute income and reduce inequality.
Disadvantages of Mixed Economies
- There are criticisms from both sides arguing that sometimes there is too much government intervention and sometimes there isn’t enough.
- A common problem is that the state run industries are often subsidized by the government and run into large debts because they are uncompetitive.