Economic Systems

Economic Systems

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.

Technically, every world economy today is a mixed economy. They all have some elements of both market economies and command economies. Of course, this statement provides no distinction between economies that in reality are vastly different from one another. In order to note the differences, we tend to designate an economy as either market or command, depending on which features seem to be most prominent.

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 a market economy. Characteristics of a market economy include:

Private ownership of land and other means of production
Private ownership of businesses
Individual and firm decision-making
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 a command economy. Characteristics of a command economy 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 goal.

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 political philosophy, it mandates a socialist economy.

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 all market economies 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 (who to tax, why, and how much to tax); subsidies of specific industries; trade restrictions; decisions about transfer payments; antitrust laws; environmental laws; and in many other ways.

Market forces exert some influence even in command economies, and this trend has grown in recent decades. Countries with command economies are finding more and more that over time they cannot contain market forces, and that it is not always desirable to do so. They have allowed private businesses to develop in specific areas. They have also become more open to certain types of private economic decisions and incentives.

Specific types of economic systems do not require any specific type of political system. A democracy can have a market economy; so can a dictatorship. A democracy can have a command economy; so can a dictatorship.