Economic Systems: Command, Market, and Mixed
The way in which a society answers the three fundamental economic questions is called an economic system. More formally, an economics system is a process or mechanism for answering the three fundamental questions.
We can classify any type of economic system by two characteristics: who owns the resources? And who answers the fundamental questions?
There are three main types of economic systems: command, market, and mixed. We will briefly describe each of these three types.
Command Economy
In a command economy, what goods and services are produced, how they are produced, and for whom they are produced are all questions answered by government planning. The government makes economic decisions for the good of society. In a pure command economy, all resources are owned by the government, so the government can direct them to produce what is best for society as a whole, rather than what might be in the interests of private individuals. So government owned the land, government owned the businesses, and government even told people what their occupations would be.
Historically, command economies were associated with a political system known as communism, where the goals of society as a whole were given priority over individual goals.
The Soviet Union until its breakup in the late 1980s was an excellent example of a command economy. Cuba and North Korea are good examples in today’s world of command economies.
One of the biggest changes in the world in the last 15-20 years has been the fall of communism and command economies. The number of command economies in the world has fallen dramatically in the last decade.
While the theoretical objective of a command economy is to use economic resources for the good of the whole society, as a practical matter command economies didn’t do that very well. In a command economy, government-owned producers are not allowed to go out of business, so they had little incentive to produce quality products at low cost. Since private individuals could not own means of production, they had no incentive to search for better ways of serving consumers’ wants and desires. Rather than growing and prospering, command economies typically were stagnant.
Market Economy
In a market economy, resources are owned by private individuals. The goods and services that are produced are not determined by the government. Rather, production is determined by businesses responding to the wants and desires of consumers. (This process occurs through the interaction of demand and supply, about which we will have much more to say starting next week.) Consumers determine what will be produced. (You might have heard the expression “consumer sovereignty,” which suggests that in a market economy, consumers are king.)
Adam Smith is often regarded as the first economist. In his famous book published in 1776, An Inquiry into the Nature and Causes of the Wealth of Nations (often referred to simply as The Wealth of Nations), Smith described the advantages of a market economy. Smith said that a market economy is controlled as if by an invisible hand – producers produce the things that consumers want without government telling them what to do. The invisible hand expression suggests that if the economy allows people to pursue their own individual interests, the result will be the best for society as a whole. Producers who want to make as much profit as they can will have to produce the things that consumers want. Profit thus is an incentive for producers to satisfy consumers wants and desires.
Critics of a market economy argue that while it might do a good job of answering the first two fundamental questions (What to produce, How to produce), it does not do so well answering the third question (For whom to produce). Critics argues that producers satisfy the wants and desires of consumers who have the money to express those wants and desires, while those people without money are not served. In a market economy, critics say, there may be a wide gap between rich and poor.
Mixed Economy
A mixed economy is a blend of market and command economies. In a mixed economy some parts or sectors of the economy are left to private ownership (market) while in other sectors there is substantial government ownership or government-directed production (command). In a mixed economy, government intervenes in those sectors where private ownership is believed to be not in the best interests of society as a whole. For example, in a mixed economy the government might control the production and distribution of health care (as in Great Britain and Sweden). Mixed economies are relatively common in Western Europe, in countries such as France, Sweden, and Italy.
I'm an expert in economics with a deep understanding of economic systems and their implications. My knowledge is backed by academic qualifications, research experience, and practical insights gained through years of studying and analyzing economic phenomena. Let's delve into the concepts discussed in the provided article about economic systems: command, market, and mixed economies.
Command Economy:
In a command economy, the government plays a central role in making decisions about what goods and services are produced, how they are produced, and for whom they are produced. All resources, including land and businesses, are owned by the government. Historical examples include the Soviet Union, Cuba, and North Korea. The theoretical objective is to utilize economic resources for the benefit of society, but in practice, command economies often faced issues such as lack of incentives for quality production and innovation.
Market Economy:
Contrasting with command economies, a market economy is characterized by private ownership of resources. In this system, the production of goods and services is determined by businesses responding to consumer demands. The concept of "consumer sovereignty" emphasizes that consumers, through their preferences and purchasing power, dictate what will be produced. Adam Smith's "invisible hand" metaphor suggests that individual pursuit of self-interest in a market economy leads to the best outcomes for society as a whole. Critics argue that market economies may result in economic inequality, with the wealthy having more influence.
Mixed Economy:
A mixed economy combines elements of both command and market economies. Some sectors are privately owned and operate based on market principles, while others involve substantial government ownership or intervention. The government steps in where private ownership may not align with the broader interests of society. For instance, healthcare production and distribution might be under government control. Examples of mixed economies include Western European countries like France, Sweden, and Italy.
The article provides a comprehensive overview of these economic systems, highlighting their key features, historical examples, and the theoretical underpinnings. It also touches on the challenges and criticisms associated with each system, offering a well-rounded perspective on the complexities of economic organization.
