While you may have heard the word “economy” and perhaps even know what it means, there is still plenty of uncovered information that you may not know about. Hopefully, by the end of this article, you will have a more sophisticated understanding of economies.
To begin, what is an economy? An economy is the type of system that manages the resources or wealth that a country gains, especially from its production and consumption of goods and services. Another way to understand how an economy functions would be to think of the economy of a country as a field for growing crops. The type of economy that is implemented would be determined by the type of soil on the field. If the soil was rich and nutritious, you could grow anything you wanted (figuratively). On the other hand, if the soil was extremely limited in fertility, you would have to govern what crops could be grown heavily and other decisions related to growing to maximize output.
These different types of systems implemented in the growing of your crop can be translated into the different types of systems, or economies, that governments implement in their countries’ markets and production. The four main types of such “systems”, or economies, used by governments across the globe are as follows: Market, Command, Mixed, and Traditional.
Specifically, in a market economy, the government does not involve itself in the planning of the market. Instead, privately owned businesses have most of the control and determine their prices and products using unrestricted competition. In this type of economy, the want for goods, or demand, determines how much output (or the supply) is produced. The no-restriction aspect of the economy also leads to high levels of innovation and competition. This means that opportunity is available to all and profit is there for those with the best goods or services. As a result, for the consumer, this means diverse products and services at low prices and high quality.
However, for the worker, there are a few downsides to market economies. No government intervention means no protected labor unions and no help to fight for better compensation, working hours, and working conditions. Government organizations such as OSHA (Occupational Safety and Health Administration) would not ever come into existence. This also means high levels of unemployment in the working class, for if someone is unwilling to work for the poor working conditions provided to them, they find themselves out of work. For these reasons, no actual market economies exist, but the countries closest to market economies are Taiwan, Hong Kong, Singapore, New Zealand, and Switzerland.
The next type of economy is the Command Economy where many aspects are the inverse of a market economy. Here, all planning for the economy is done centrally by the government, as are all the resources and capital. In a command economy, the individual business has little to no say, and the government controls all goods and services produced.
There are quite a few downsides to having a command. For example, with the government in “command,” innovation is low as the individual has no incentive to go above and beyond. Another downside is a lack of efficient resource allocation, and governments in these economies tend to underutilize their resources to reduce their work. For this reason, society tends to suffer, and their wants and needs tend to go unaddressed. Examples of countries with command economies are scarce, with North Korea being the most prominent. China and Cuba have strong command tendencies in their economies, but neither classifies as true command economies. Past countries that operated under a command economy include East Germany and the Soviet Union.
The next type of economy, also the most common economy in the world, is a mixed economy. As the name implies, it is a “mix” of a command and a market economy. In a mixed economy, private property is protected, producers see major economic freedom, and consumer sovereignty is protected. However, the government also involves itself in the economy and takes control over certain areas, such as defense, public infrastructure, roads, public education, etc. The government also reserves the right to interfere with economic activity if it sees the need to.
Some examples of countries with mixed economies include the United States, France, India, and the United Kingdom.
The final type of economy is the traditional economy. In a traditional economy, as the name suggests, cultural customs, religious beliefs/traditions, and other beliefs are responsible for the operation of the economy. These beliefs shape the goods and services produced and the resources allocated.
The downsides to this type of economy are obvious. Advancement and development in economic practices are rare, for they are usually bound by ancient traditions. Additionally, due to these rigid customs, the adaptability of these types of economies is low. Starvation and isolationism are major threats to countries (like Alaska, Yemen, Haiti, Greenland, etc.) that operate with such economies.
Overall, the two opposite types of economies (market economies and command economies) have their positives and negatives. Market economies give both the producer and the consumer the ability to make their own decisions at the expense of the underpaid and mistreated worker. Command economies provide structure and equality to the consumer at the expense of innovation and public necessity. To attain the benefits and exclude the negatives of these two economies, most countries choose to operate in mixed economies. Traditional economies used to be common but with the rapid urbanization of the modern world, they have seen sharp decreases in usage and are slowly disappearing into irrelevance.
Sources:
