Topic 2

Topic 2: Characteristics of the Economic Systems
There are different types of economic system. These include: the traditional, the
command/socialist economy, pure capitalism, and mixed economic systems.
 The traditional economy. This is the type of economy in which the organization of
production and distribution of the production factors is frequently governed by tribal rulers
or customs. This type existed mostly in the early stages of development where the economy
is strongly linked to the social structure of the community and people perform economic
tasks for non-economic reasons.
Characteristics:
i. Economic matters are largely determined by social or religious customs and traditions.
For example, women may plough fields because that is their customary role and not
because they are good at doing so.
ii. They are often found in less developed countries
The command economy
The government creates a central economic plan. The five-year plan sets economic and
societal goals for every sector and region of the country. Shorter-term plans convert the
goals into actionable objectives.
Characteristics
i. The government allocates all resources according to the central plan. It tries to use the
nation's capital, labor and natural resources in the most efficient way possible. It promises
to use each person's skills and abilities to their highest capacity as they seek to eliminate
unemployment.
ii. The central plan sets the priorities for the production of all goods and services in order
to meet the needs of everyone in the country.
iii. It also sets national priorities. These include mobilizing for war or generating
robust economic growth.
iv. The government owns monopoly of businesses. These are in industries deemed
essential to the goals of the economy. That usually includes finance, utilities, and
automotive. There is no domestic competition in these sectors.
v. The government creates laws, regulations, and directives to enforce the central
plan. Businesses follow the plan's production and hiring targets. They can't respond on
their own to free market forces.
Advantages
i. They can quickly mobilize economic resources on a large scale.
ii. They can execute massive projects, create industrial power, and meet social goals.
iii. They aren't slowed down by lawsuits from individuals or environmental impact
statements.
iv. Command economies can wholly transform societies to conform to the government's
vision e.g. the new administration nationalizes private companies. Its previous owners
attend "re-education" classes. Workers receive new jobs based on the government's
assessment of their skills.
Disadvantages
i. This rapid mobilization often means command economies mow (clip) down other
societal needs. For example, the government tells workers what jobs they must fulfill. It
discourages them from moving.
ii. The goods it produces aren’t always based on consumer demand.
iii. Leaders' attempt to control this market weakens support for them.
iv. They often produce too much of one thing and not enough of another since it is
difficult for the central planners to get up-to-date information about consumers' needs.
v. Command economies discourage innovation. They reward business leaders for
following directives. This doesn’t allow for taking the risks required to create new
solutions.
vi. They struggle to meet the needs of the domestic market let alone meeting the needs of the
international market.
Pure capitalism/ free exchange economy

This is an economic system based on private ownership of the factors of production and the
freedom of individuals to conduct their economic affairs without interference from government
bodies or other groups.
Characteristics
i. Price Mechanism: Here prices are determined by the interaction of demand and supply
without the interference of any kind by the government or any other external forces.
ii. Freedom of Enterprise: In this system every individual is independent to his means of
production in any occupation that he/she likes.
iii. Consumer sovereignty: Under this system, consumer plays the most vital role. The
entire production pattern is based on the desires, wishes and the demand of the consumer.
iv. Profit Motive: The maximization of profit is the main motive of the producer.
v. No Government Interference: The government does not interfere in the day-to-day
running of the economic activities. This means producers and consumers are free to take
decisions.
vi. Democratic: The capitalistic system is more democratic in comparison to other
economic systems as decisions are taken according to new environments of the economy.
vii. Self-Interest: The inspiring force in this system is self-interest. It leads to hard work and
to earn maximum income by satisfying their consumers.
Advantages
i. Capitalism results in the best products for the best prices. That's because consumers will
pay more for what they want the most.
ii. Prices are kept low by competition among businesses.
iii. They make their production as efficient as possible to maximize profit.
iv. There is a higher reward for innovation.
Disadvantages
i. They do not provide for those who lack competitive skills like the elderly, children, the
mentally disabled, etc.
ii. Although it advocates for equal opportunities, those without the proper nutrition, support,
and education may never make it to the playing field.
iii. They may also use their power to "rig the system" by creating barriers to entry. For
example, they will donate to elected officials to sponsor laws that benefit their industry.
They could send their children to private schools while supporting lower taxes for public
schools.
iv. Capitalism ignores external costs, such as pollution and climate change. This makes
goods cheaper and more accessible in the short run. But over time, it depletes natural
resources, lowers the quality of life in the affected areas, and increases costs for
everyone.
Mixed Economic System
Introduction:
In the real world today a pure free market economy and pure command economy or a centrally
planned economic system are not found. Almost all economies have now become mixed
economic system in which government plays an important role in allocation of resources and
distribution of income.
Thus mixed economy or mixed economic system refers to an economic system in which both
free market and Government have significant roles in the working of the economy.
Two Forms of Mixed Economic Systems:
Mixed economies can be classified into two forms.
a) Mixed capitalist system : Where the means of production are in the ownership of private
sector and the Government regulates and controls the activities of private enterprise
through direct controls (such as price control, licensing system, control over imports, etc.)
as well as through monetary and fiscal policies. In such a type of economy, the
government does not take over the means of production, and if it does, it does so
relatively on a small scale.
b) Mixed socialist system: Where the Government not only regulates and controls the
private enterprise through various types of direct controls and appropriate monetary and
fiscal policies, it also directly participates in the production of various goods and
services.
Characteristics
From the capitalist economy, it borrows the following:
i. It protects private property.
ii. It allows the free market and the laws of supply and demand to determine prices.
iii. It is driven by the motivation of the self-interest of individuals.
From the command economy, it borrows the following:-
i. It allows the central government to protect its people and its market using the police, the
military and even the courts.
ii. The government can also create a central plan that guides the economy.
iii. In other cases, they may allow the government to own key industries including the
aerospace, energy production and even banking. The government may also manage
health care, welfare, retirement programs etc.
Most mixed economies retain characteristics of a traditional economy. But those traditions don't
guide how the economy functions.
Advantages
i. It distributes goods and services to where they are most needed.
ii. It allows prices to measure supply and demand.
iii. It rewards the most efficient producers with the highest profit. That means customers get
the best value for their dollar.
iv. It encourages innovation to meet customer needs more creatively, cheaply or efficiently.
v. It automatically allocates capital to the most innovative and efficient producers.
vi. The expanded government role also makes sure less competitive members receive care.
That overcomes one of the disadvantages of a pure market economy. That only rewards
those who are most competitive or innovative. Those who can't compete remain at risk.
Disadvantages
i. If the market has too much freedom, it can leave the less competitive members of society
without any government support.
ii. Successful businesses can lobby the government for more subsidies and tax breaks.

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Topic 2: Characteristics of the Economic Systems

Pure capitalism/ free exchange economy

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