An economic system is a structure of production, distribution of goods and services, and allocation of goods and services observed by a country and its government, or a particular society or geographic region. In addition, such structure is responsible for controlling the different factors of production, as well as the interactions between production and consumption or supply and demand.
Central to all economic systems is the need to provide a primary framework for determining what and how to produce, what are the required quantities of products, and who receives the output of production. Nonetheless, there are four major types of economic systems.
The four major types of economic systems
1. Traditional Economy
In traditional economies, customs and belief systems, as well as heredity or historical practices serve as the primary basis for determining what and how to produce, who will produce and in what quantities, and how production outputs are distributed and consumed. This type of economic system has been observed even prior to the dawn of ancient civilization.
There are many examples of traditional economies. For instance, the “economies” of prehistoric hunter-gatherer communities centered only on securing food to satisfy current needs through foraging, especially by collecting wild plants and pursuing wild animals. Note that there are still modern hunter-gatherer communities such as the Inuit in the Arctic Region and other indigenous tribes in Africa, Asia and the Pacific, and Latin America.
Some agricultural societies also follow a traditional economic system, especially if they only produce a single type of crop, such as in the cause of tea plantations in South India. Another example of a traditional economy is subsistence agriculture in which a family or community focuses only on growing feed to feed themselves.
Pastoralism or the raising of grazing animals as observed by nomadic tribes is another example. Furthermore, a parasitical society also follows a traditional economy because they depend on raiding or conquest, or scavenging for food or other resources.
Other characteristics of traditional economies include the use of primitive tools and methods in production, particularly in foraging and farming, as well a low degree of specialization or distribution of labor, limited access to natural resources, low production outputs or minimal surplus, and the absence of money as medium for trading or dependence on bartering.
2. Planned Economy
Countries in which the government or state directly controls and regulates different facets of the economy have planned economies. Note that these economic facets include investments and allocations of resources, as well as the production and distribution of goods and services. The means of production are also owned and controlled by the state. Essentially, the state makes extensive economic decisions.
There are different subtypes of a planned economy based on the different forms of economic planning. These are a command economy or a centrally planned economy and decentralized planned or horizontally-planned economy.
A centrally planned economy is characterized by absolute control of all economic activities by a central author, particularly by the central government. This type of planned economy has been observed in “socialist” or “communist” states. In contrast, a decentralized planned economy distributes and localizes authority and decision-making across state-mandated economic agents rather than concentrating such under a single central authority.
Depending on the specifics of implementations, a participatory economy is also another type of a planned economy. Note that this economic system follows the core principle of decentralized planning but also includes the principle of promoting the right of everyone to exert an influence over the management of the economy, mainly by giving them a say in decisions proportionate to the degree to which they are affected by them.
3. Market Economy
A market economy has a more organized structure than traditional economies. To be specific, this type of economic system depends on the forces of supply and demand, as well as the resulting price signals to shape the economy, especially with regard to decisions about investments or business creation, production, and distribution.
Furthermore, when compared to a planned economy, a state or a single entity does not control economic activities, including the factors and means of production. Instead, the direction of the economy is based on the interactions between business organizations and the consumers or the sellers and buyers. The people essentially choose what to produce and what business to own and operate, as well as for whom they work or what to buy.
There are different subtypes of a market economy. One is capitalism in which private ownership of the means of production is at the core of the entire economic system. Furthermore, a capitalistic system promotes competition, capital accumulation, wage labor, voluntary exchange between sellers and buyers, and a price system.
Under capitalism are more specific subtypes or varieties. Such include minimally regulated free market economies and laissez-faire systems in which the role of the state is limited to providing public services and promoting the interests of capitalists by safeguarding private ownership. However, both varieties of capitalism do not exist in their purest ideological forms.
4. Mixed Economy
Other market economies and subtypes of capitalism have overlaps with socialism or have borrowed some characteristics from a planned economic system. These include state capitalism in which the economy is dominated by state-owned business organizations, welfare capitalism in which the state provides extensive social welfare systems, and market socialism in which the means of production are owned and controlled by the state.
The aforementioned economic systems are collectively called mixed economies. By definition, a mixed economy blends elements of market economies with elements of planned economies, capitalism with state interventionism or a free market with private and state-owned enterprises. Of course, there is no single definition for this type of economic system.
Other examples of a mixed economic system include the social market economy that aims to establish fair competition between the market and the welfare state by combining a free market economic system alongside social policies, as well as market socialism that promotes the social ownership of the means of production within the framework of a market economy.
However, there are contentions that mixed economies are just a variant of market economies or a reiteration of capitalism. Furthermore, there are arguments that mixed economies are not the middle ground between capitalism and socialism.