What is an Economic System?

Definition: An economic system is a set of organized principles that regulate the production and distribution of goods, services and productive factors. To explain this differently, the system is a structured collection of guidelines used to promote the economy’s proper functioning.

What Does Economic System Mean?

Economic systems are necessary to ensure functionality. The most commonly known systems are capitalism, communism and socialism. Most of these systems also address political aspects but this definition will be focused on the economic side of each. The first one, capitalism, is an economic system that promotes private property rights and free market policies. In capitalist economies the state has an external role and the degree of State intervention in business and productive activities is low.

On the other hand, socialism is a very different system. The State has a central role of both planning and managing productive forces and ownership. Private property exists but private businesses are very limited and they must comply with the central state plans. The State is responsible for providing the people with their basic needs.

Finally, communism is a system that restricts private property deeply and the State is in charge of managing all productive forces and entities. There’s full employment because the government guarantees a job for everyone even if it affects productivity negatively. The government provides a small remuneration for basic expenses but primary services are provided by the State. Finally, some countries apply a mix of some of these systems to organize their economies.

Here’s an illustration of this concept.

Example

A research analyst is currently evaluating Country X economy. He’s carefully investigating and describing some broad characteristics that define the country’s economy. He identified that the stock market is open and easily accessible for individuals and corporations. Also, the State has a limited role in terms of its relationship with businesses and labor forces and there’s an increasing entrepreneurial culture.

On the other hand, the country facilitates primary care and food reliefs to unemployed individuals and if a company goes bankrupt the government has shown an increasing tendency to step in and take control of the business. What is this analyst evaluating?

According to our concept, an economic system is a set of organized principles that regulate the production and distribution of goods, services and productive factors. In this case, the analyst is researching the country’s current economic system by analyzing the dynamics and processes that regulate the country’s economy.