An economic system is basically described as specific set of principles that addresses the production, distribution, and consumption of products and services. The involved parties in the production, distribution, and consumptions processes are usually determined by or dependent on the economic system. Throughout the history of humanity, different types of economic systems have evolved because different societies have placed varying emphasis on distinctive goals and priorities as part of their efforts to obtain answers to certain economic questions. In addition, the difference in economic systems is fueled by the tendency by different societies to develop very broad economic approaches to manage their resources. One of the main reasons for the development of different economic systems is to address the challenge of scarcity. The challenge of scarcity is an essential problem that confronts individuals and nations. While there are four major types of economic systems recognized by economists, there are still huge disagreements on the system that effectively addresses the challenge of scarcity.
Types of Economic Systems:
As previously mentioned, there are different types of economic systems that have been developed by different societies to deal with the challenge of scarcity. The four basic types of economic systems that are generally recognized by economists are & #8230;
Traditional Economic System:
A traditional economic system is basically fueled by customs and inheritance through which skills and techniques are passed down from generation to generation (“Economic Systems,” p.2). As a result of inheritance of skills and methods, the entire community works toward the realization of a common good. Moreover, individuals’ activities, the production of goods and services, and the exchange and use of resources tend to follow long-established patterns in the traditional economic system. Unlike other economic systems, the traditional economic system is not very dynamic to an extent that it’s characterized by static standards of living. This characteristic emanates from the fact that individuals do not enjoy occupational or financial mobility since their economic relationships and behaviors are predictable.
With regards to resolving resource allocation issues, community interests take precedence over the individual in the traditional economic system (“Types of Economic Systems” par, 5). As a result, people may be expected to merge their efforts and share equally in the proceeds of their labor in order to address the underlying resource allocation issues. In some cases, there is respect for certain types of private property though some limits are established by a strong set of obligations that people owe to the whole community. Since the traditional economic system places significant interest on the entire community, the government play very minimal role in governing these systems. These systems were mainly used during the pre-colonial periods and are currently found among Australian aborigines.
Command or Planned Economic System:
This type of economic system is one where resources and business activities are fully controlled by the state or government (“Economic Systems,” p.2). These activities such as the production of goods and services are determined by the central government or state because it usually owns the means of production. One of the major characteristics of command or planned economic system is that production does not necessarily reflect the demands of consumers because of governmental control and decision making. Secondly, the state or central government makes decisions on what to produce, how to produce them, and for whom to produce through its planners. Some major examples of countries with command or planned economic systems include China, Cuba, and the former Soviet Union.
In relation to dealing with resource allocation issues, such challenges are usually addressed by government planners. The government planners deal with the issues by making assumptions on the needs of consumers and the mix of goods and services. Since this type of economic system is controlled by the government, the government has three major roles. These roles include making the most economic decisions and giving economic commands, addressing the entire production process for several industries, and employing workers.
Market or Free Enterprise Economic System:
This is an economic system in which individuals and businesses have total freedom on what to purchase and produce. Therefore, the production of goods and services in this economic system is determined consumers’ demand. The first characteristic of a free enterprise economic system is that decisions regarding the production of goods and services are determined by the demands of consumers. Secondly, economic activity in this type of economic system is dependent on the consumption choices of consumers. Third the production means and processes are…