Economics Online Tutor
Because every world economy today does have some elements of both market economies and
command economies, they are all technically mixed economies. Since this provides no distinction
between economies that in reality are vastly different from one another, economies that have mostly
market economy features are considered to be market economies, and economies that have mostly
command economy features are considered to be command economies.
What follows is a summary of the major features of a market economy, the major features of a command
economy, and how a mixed economy differs from each.
Market economy: the private sector is the principle component of the economy. Characteristics
include: private ownership of land and other means of production; private ownership of businesses;
individual and firm decision-making; risk and reward for risk-taking; job availability depends on
economic conditions; workers are compensated based on contributions to efficiency and output,
creating incentives for innovation, hard work, education, and entrepreneurship; market forces provide
efficiency; equality of opportunity is a common goal. An economic system based on a market economy
is called capitalism.
Command economy: the public sector is the principle component of the economy. Characteristics
include: no private ownership of land; limited private ownership of property; businesses are state-
owned; workers are employees of the state; workers are guaranteed jobs, with little incentive for hard
work; businesses have little incentive for efficiency and innovation; consumer choices are limited;
prices and output are often set by the state rather than market forces, creating shortages; rationing
occurs via long lines, quantity limits on purchases, and a black market where incentives exist for
corruption. Command economies are often associated with socialism, where equality of outcome is a
The terms command economy, socialism, and communism are often confused with one another, or are
treated as being interchangeable. Actually, there are distinctions. A command economy is an economy
with the features listed above. Socialism is pretty much the same, but with a narrower definition;
socialism is an economic system that is characterized by state ownership and control of the means of
production, and the distribution of output. Communism is different: communism is a political
philosophy that uses a socialist economic system as part of its philosophy. Communism requires
socialism as a step in the development of society. In order to advance the philosophy, it mandates a
Mixed economy: a mixed economy, as defined above, will have major aspects of both market and
command economies. These take many different forms. In general, they would involve economies
where large segments are left alone for market forces to work, while other large segments are
controlled by the government for various reasons, such as national interest and national security.
Governments exert influence over every type of economy, so market economies all have some areas
where market forces alone do not determine economic outcomes. Government involvement
influences economic decisions by such means as: government-provided infrastructure, government
regulations of businesses and industries, tax decisions, especially taxes that are targeted towards
specific industries (think sin tax), subsidies of specific industries, trade restrictions, which groups to
tax by how much, which groups to give transfer payments to, antitrust laws, environmental laws, and in
many other ways.
Market forces exert some influence even in command economies, and this trend is growing. Countries
with command economies are finding more and more over time that they cannot contain market forces,
and that it is not desirable to do so, especially in remote, rural areas. So they have started allowing
private businesses to develop in specific areas, along with allowing more private economic decisions
A market economy does not depend on a democratic form of government for its existence. A market
economy can exist even with a dictatorship. However, the incentive for interference is great when any
person or group of people have centralized political power, so that a market economy with a more
decentralized form of government is more likely to survive over time. In times of national emergency,
when quick action is required, a powerful central government, with few bureaucratic snags in the
system, can be more effective than a democracy, where decision-making is more decentralized. But
such situations may require government interference in economic decision-making. Since this often
results in a transfer of economic power, dictatorships may be reluctant to return the economic power
to the control of market forces.
The economic systems used in specific countries:
As stated earlier, modern economies tend to have varying degrees of mixed economy elements. They
tend to be unique in the details. Changes in the economies of nations occur rather frequently in
response to economic and political events. Instead of using this site to describe the details of the
economic systems of the many individual countries, i will offer a suggestion:
In order to learn the details of a specific country's economy, try searching the internet. For example, if
you want to learn about china's economy, search “china economic system”. The search results should
bring up many useful sites.
Market Economies, Command
Economies, and Mixed
|Modern economies are generally classified
as either market economies or command
economies. Economies that have elements
of both market economies and command
economies are called mixed economies.
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