Definition: There are different types of economic systems that can be identified by analyzing the strategies employed by each country or society to manage its economy. In other words, economic systems can be classified according to the policies set out by the economic authorities.
Types of Economic Systems Explained
There are four types of economic systems: Traditional, Command, Market and Mixed systems. Each of these systems has different characteristics and strategies to deal with the same problem, which is, how to distribute scarce resources to fulfill unlimited needs. Let’s explain them briefly, one by one.
Traditional System – A Traditional system is one that is ruled by customs and pre-established social covenants. This type of system is not dynamic, since it has kind of a generational structure where social roles are inherited and economic growth is not a goal. This system aims for sustainability rather than productivity.
Command System – Next we have the Command system, which is a system ruled by an entity (government or any other) that centralizes the main productive activities to regulate them and distribute wealth among society participants the most effective way they can come up with.
Market System – In third place, we have the Market system, which is, almost entirely, drove by individuals and businesses’ decisions. The government takes a step back and let everyone pursue their own interests with the hope that the market will self-regulate any affair that comes up.
Mixed Economic Systems – Finally, the Mixed system combines both the command and the market system, to let individuals and businesses’ conduct their affairs freely with a slight and encouraging behind-the-curtain overseeing by the government to ensure the system is fair and equitable for all society participants.
Let’s take a look at this example.
China is a country that has some main cities but also a lot of small towns among the country’s territory. In the main cities, the growth of the society is planned beforehand by the government and any economic activity must be pre-approved by them. On the other hand, the small towns are mostly self-sustained since their main activity is agriculture and they use the proceeds to feed themselves. Which types of economic systems are described here?
By looking at our previous definition, we see that the main cities have the dynamics of a Command system, because the government has a central role; and, on the other hand, the small towns operate through a Traditional system, since the individuals among the community work to sustain their own society circle.