Economic Systems
INTRO: There is more
than one way for a society to organize its economy. Maybe everyone simply
follows tradition, following the same economic pursuits as their parents and
grandparents before them. Or maybe the government decides what’s best, or
perhaps the government stays out of it, leaving the economic system to be
determined by the combined decisions of millions of individual people.
In modern practice, most large
industrial economies offer some balance between the last two approaches, with
individuals, mostly left to do their own thing but with the government still
intervening in economic affairs in important ways.
There are four economic systems and
they each have their strength, weaknesses, sub-economies, tendencies and
sometimes troubled history.
Each of the four will be thoroughly
examined to give ample attention to its attributes and to help in the
understanding of how they each affect different parts of the world, as economy
is one of the strongest forces when it comes to balancing political power,
instigating war and delivering a high or low quality of life to the people it
serve.
DEFINITION:
It can be defined as the medium or
organized way by which the means of production in a state are utilized in order
to satisfy human wants.
It can also be defined as the ways
in which available productive resources in a nation are owned, managed or
utilized for the satisfaction of human wants.
Scarcity is the fundamental
challenge confronting all individuals and nations alike. How we deal with these
limitations, that is how we prioritize and allocate income, time and resources
is the basic economic challenge that confronts individuals and nations throughout
history.
But not all nations nor individuals
have addressed this challenge in the same way. Societies have developed
different broad economic approaches to manage their resources. Economist
generally recognizes four basic types of economic systems.
TYPES:
The types of economics systems are
divided into four major groups namely;
·
Traditional
Economic system
·
Command
or Planned Economy.
·
Market
Economy.
·
Mixed
Economy.
Traditional
Economy
Traditional economy is quite
literally the most traditional and ancient type of economic system in the
world.
This is a system shaped by
tradition. The work that people do, the goods and service they produce, how
they are used, how they use and exchange resources, all tend to follow a long
established pattern.
These economic systems are not very
dynamic, things do not change very much, standard of living is static;
individuals don’t enjoy much financial or occupational mobility. But economic
behavior are predictable, you know what you are supposed to do, whom to trade
with and what to expect in exchange from others.
In many traditional economies,
community interest takes precedence over the individual interest. Individuals
may be expected to combine their efforts and share equally in the proceeds of their
labour. In other traditional economies private property is respected, but it is
restrained by a strong set of obligations that individuals owe to the
community.
Australian aborigines are the modern
day traditional economic system practitioners.
Some features of Traditional economy
include:
·
Traditional
economy is mostly found in rural underdeveloped countries.
·
Customs
and tradition govern economic activities.
·
Over
time there are no significant changes in their method of production or economic
activities, such as farming, hunting etc.
·
Economic
activities are centered on the family, ethnic unit or community.
·
There
is no equality of gender as men and women are given specific roles or tasks to
perform.
Advantages
of traditional economy are:
·
Tradition
and customs are preserved.
·
Traditional
economy usually consists of a close knit and socially satisfied people.
·
Specialization occurs over time as people are
given specific tasks to perform.
·
It
centers on the development of the community or country as a whole.
·
There
are no wastages recorded in the process of experimenting new methods of
production as theirs is already set.
Some
disadvantages of the Traditional economic system are:
·
There
is difficulty in improvement as technology is not used.
·
Changes
are difficult to make as the economic system is related to tradition, and
tradition is not so easily changed.
·
There
is inequality.
·
The
practice of traditional economic system truncates the development of said
country as change is not easily accomplished and new technologies are not being
used.
Command Economy
In this type of economic system
the government controls the economy, it decides how to use and distribute its
resources. The government regulates prices and wages; it may even determine job
specification for individuals. Socialism is a form of command economy
Socialism.
This is a form of Command
Economic System, in this system the means of production and distribution are
collectively/centrally owned and controlled by the government.
Socialism can also be defined as an
economic system which aims to invest in the society as a whole rather than in
individuals, giving the government ownership, control and management of all
means of production and distribution without destroying individual’s economic
motivation or freedom of occupation or choice.
Furthermore it can be defined as
a system where citizens work collectively for the advancement of the country,
and they can also privately produce under supervision, whereas the government
caters for their welfare.
Examples of countries that practice
socialism include Poland, Angola, China, Ethiopia etc. Some of the features of
Socialism are as follows:
·
Enterprises
in a socialist economy are not profit motivated.
·
Income
is equally distributed among citizens in a socialist economy.
·
There
is little or no competition as all resources are owned by the government.
·
There
is a wide range of goods for consumers to choose from.
·
Decisions
like what to produce, for whom and how are taken by majority of the citizens.
·
All
factors of production are optimally utilized in a socialist economy.
·
Welfare
of the citizens is key as it is the primary aim of any socialist economy.
Advantages
of Socialist style of economic system include:
·
Resources
of the state are equitably distributed among the citizens.
·
Employment
opportunities are readily available.
·
There
is economic security in form of guaranteed or secure jobs.
·
Unhealthy
rivalry among individuals is absent.
·
There
is no exploitation as the government provides all goods and services.
·
Goods
and services are produced in large quantities to satisfy all citizens.
Disadvantages of Socialism include:
·
Reduction
of individual initiative as citizens depends solely on the government.
·
Economic
development advances slowly in a socialist state.
·
It
leads to a form a monopoly as the government produces all the essential goods
and services.
·
There
is no creativity or innovative spirit present in a socialist economy.
·
As
individuals do no produce there is no specialization.
·
Citizens
in an socialist economy are said to be lazy as they produce nothing but depend
on the government
·
The
consumers do not have alternative choices as it is only what the government
produces that is available.
Market Economy
In this form of economic system,
economic decisions are made by individuals. The interactions of individuals and
companies in the market place determine, how resources are allocated and how
goods and services are distributed.
Individuals reserve the right to
choose how to invest their personal resources, what training to pursue, what
jobs to undertake, what goods and services to produce, and what to consume.
Within a pure market economy the government is entirely absent from economic
affairs.
Capitalism is a form of market
economy.
Capitalism
This is an economic system where
the means of production are owned, controlled and managed by private
individuals.
It is characterized by private
ownership of the means of production, therefor private individuals play greater
roles than the government in decision making pertaining towhat to produce, how
to produce and for whom.
Capitalism gives incentive or
freedom to private individuals to invest their capital and maximize profit.
Countries that practice capitalism include the likes of Japan, France, Italy,
U.S.A etc.
Some of the features of Capitalism
include:
·
High
degree of private ownership of means of production with minimal participation
from the state,
·
There
is healthy competition as individuals and firms strive to acquire wealth or
control of the means of production.
·
It
is characterized by a high level of profit maximization by individuals or
firms.
·
It
brings about satisfaction to individual as they pursue endeavors that will
bring them the highest satisfaction with the least sacrifice
·
In
a capitalist state individuals choose their occupations based on their
capabilities.
·
The
price system decides what to produce in a capitalist state.
·
In
a capitalist state consumers have a wide range of products to choose from as
many commodities are available
·
All
activities in a capitalist economy are aimed at maximizing profit
·
Individual
accumulation of wealth occurs as means of production are privately owner.
Advantages
of the practice of a Capitalist style of Economic system include:
·
It
encourages individuals to own their own business or enterprise.
·
Hard
work is encouraged as enterprises are privately owned.
·
It
leads to specialization.
·
Provision
of alternative choice of goods for consumers
·
Hard
work is encouraged as enterprises are privately owned.
·
It
promotes or raises the standard of living of the populace.
·
It
brings about different types or forms of production.
·
Utilization
of all individual talents during the production process.
·
It
brings about self-regulation and self-reliance.
Some
of the disadvantages of the capitalist form of Economic system are:
·
Monopoly
is easily crated.
·
Economic
inequality, as only a select few are in charge of the various means of
production.
·
Wastage
and inefficiency are recorded in an effort to produce goods and services.
·
There
is an increase in the crime rate in a capitalist economy as everybody wants to
own means of production.
·
There
is exploitation of the minority by the rich majority.
·
Unhealthy
rivalry or competition arises.
Mixed Economy.
This is an economic system where
both private and public ownership of means of production exist.
In a mixed economy means of
production are jointly owned and managed by both the private individual and the
government.
Mixed economy has been defined as a
mixture/combination of both the socialist and capitalist form of economic
system.
Some features of mixed economy are
as follows:
·
Freedom
of choice for the consumers.
·
There
is fair competition between the private and government owned enterprises.
·
Major
decisions are jointly taken by the private and public sectors in a mixed
economy.
·
A
mixed economy has the participation of both the private and public sector.
·
Effective
checks and balances are put in place with the combination of the public and
private sector.
Advantages
of Mixed Economy include:
·
It
prevents monopoly as neither the public or private sector solely owns the means
of production.
·
Income
is equitably distributed among citizens in a mixed economy
·
Mixed
economy encourages individual initiative.
·
Consumers
in a mixed economy have a wide range of goods and services to choose from.
·
Mixed
economy combines the good qualities of capitalist and socialist economies.
·
Mixed
economy promotes various economic activities leading to steady and progressive
economic growth.
Some
disadvantages of mixed economy are:
·
Excessive
exploitation of labour.
·
Lack
of efficiency
·
Enterprises
are more profit motivated as opposed to citizen welfare
·
The
Wealth of the nation is not equitably distributed.
·
Corruption
and mismanagement are more pronounced in a mixed economy.
·
With
the combination of the capitalist and socialist economics systems, a lot of
problems arise.
Overview:
In a nutshell what role should the
government play in the economy? None? Lots? Something in the middle?
Different people will have different
answers, but that the key question in shaping the worlds different economic
systems. Economists generally recognize four types, the critical factor
separating these four types is the degree of government involvement in the
economy.
Most economic decisions are made in
the market place by individuals who exercise a great deal of control over their
economic lives. But the government also plays a large role in the economy,
acting as a referee for market activity and influencing the allocation and
distribution of resources. How big that role should be is something of a war
between the political and economic aspects of the said country and it can be
quite a controversial topic.
Reference
Ewa
Udu – West African economics (1978) Evans Brothers
Alfred
Marshall – Principles of Economics (2000) 8th Edition. Macmillian
and co. Ltd
Ken
Cole – Understanding Economics (1995) Pluto
Press
A.
C. Pigou – The Economics of Welfare (2013) 4th Edition Palgrave
macmillian