Most people would assume that there must be hundreds of different types of economies because of all the terms that get tossed around with regard to money, economics, and politics. People tend to mix economy, politics, and ideology together. The truth is that there are only four types of economies.
Traditional Economic System
The tribal village used in earlier examples is a traditional economy. The definition of a traditional economy is an economic system that is based on a group's culture, geographic location, traditions, and needs. There is no need or desire to make profits. There isn't a monetary system in traditional economies because goods and services are bartered, or traded, for other things that are needed. The hunter trades some of their catch for other food, clothing, or goods. In a traditional economy, the answers to most of the economic questions are answered by survival, need, available resources, and climate.
Another important aspect of a traditional economy is its lack of surpluses. Since every day in most traditional economies is a fight for survival, it would be a waste of labor and resources to produce more than the group needs. This especially applies to food that can go to waste if there is a surplus.
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Traditional Economic System Example
It might seem like traditional economies are a thing of the ancient past, but there are many examples of traditional economies that are alive and well in modern times. These economies are usually remote tribes or groups that choose to continue their traditions. One example is the Inuit Tribes that are found in the far northern reaches of Alaska and Canada. These tribes exist in traditional economies based on the resources available and the climate. Most of their economy is based around hunting and fishing because growing crops is nearly impossible where the permafrost is present all year long.
Planned Economic System
Planned economic systems are economies that are built and structured around a central power authority where that authority makes all the decisions. Communism falls into this type of economic system. The central power can be a government, a small governing body, or a single individual. Regardless of what form the central power take, they make the rules.
One of the most important things to understand about a planned economic system is that the answers to the foundational economic questions are answered by the central power. They decide everything from prices to production. The central powers also own the means of production, so not only do they decide production, they own all the facilities that produce things. Companies don't own or control anything. If the central powers decide they want to focus on a certain good for production, they can shutter one plant and reallocate workers to another facility.
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Planned Economic System Example
In the 1950s and 60s, there was a major scare around the world as communism and central economies became more popular. The Vietnam War resulted from the fear that the idea would take hold in the United States. While communism has declined over the years, there are still places where central economies rule. The most obvious example is the country of North Korea. Its leader, Kim Jung-un, directs the economy, and all decisions on production, distribution and allocation are up to him. The country is impoverished, and the economic system in place doesn't allow people to rise above their economic stations in life. The system can only work if the central power is effective, fair, and flexible.
Pure Market Economic System
Most people confuse the market and mixed market systems. It's a common belief that most economies are market economies or that market and mixed market economies are interchangeable. It's important to distinguish the two. A market economic system is a system where private entities or citizens own production and control everything from pricing and distribution. It is the purest form of capitalism where there is no government intervention. Whether it's a service, a utility, or a product, the decisions are all made by private companies. There isn't a central government or power that regulates economic choices. Governments in pure market economies act to write and enforce laws and deal in disputes.
The reality is that there isn't a real example of a pure market economy because all economies have some sort of intervention or control from the central power. This is where the confusion lies. Many people consider the U.S. a market economy, but it isn't a pure market economy because the government has control over some of the decisions and workings of the system.
Mixed Economic System
A mixed market system is a capitalistic market that has a mixture of planned and pure market systems. The extent of the balance between central power and private entities varies greatly across different economies. In some mixed economic systems, the central government has a small role and does things like set monetary policy or set up regulations to prevent monopolies or abuses of labor. In other economies, the central powers have much more control over the system, but there is still some control by private industry.
Mixed Economic System Example
It's important to look at three examples of mixed market economies to see how the balance of central power is different in each one.
- United States - The United States is a mixed economic economy with much less control from the central government. The government sets monetary policy, enforces laws relating to production and labor, and even owns some means of production and services. The private sector in the United States has a much greater role in the workings of the economy than the government.
- United Kingdom - The United Kingdom is also a mixed economic system and is similar to the U.S., but the government in the United Kingdom. has more ownership over means of production. This is particularly apparent in the fact the entire health care system in the United Kingdom is owned and run by the government and not by private companies like the United States.
- China - Many people would be surprised to see China as an example of a mixed economic system because it is associated with communism. But the reality is that China is a type of mixed economy. The central government still has more control over policies and reforms than private industry, but China has significant influence over its private companies. It's one of the main reasons why China is the second-biggest economy in the world next to the United States and is on track to become number one at its current pace of growth.
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