Economic Systems

There are four types of economic systems:

1)     Traditional economy is based on tradition, custom and habit, primitive societies.

2)     Command/planned economy central authority determines economic behaviour. USSR.

3)     Market economy markets play a dominant role in taking economic decisions process. Western European countries.

4)     Mixed economy both free markets and governments have significant effects on the allocation of resources and the distribution of income. USA, Japan and other highly industrialized countries.

In the United States, their particular answers have provided them with a mixed economy, which is based on laissez-faire capitalism, or private enterprise.

Laissez-Faire Capitalism Laissez-faire capitalism theories of Adam Smith who believed that each person should be allowed to work toward his or her own economic gain, without interference from government. In doing so, each person would unintentionally be working for the good of society as a whole. And society would benefit most when there was the least interference with this pursuit of economic self-interest. Government should therefore leave the economy to its citizens. The French term laissez faire implies that there shall be no interference in the economy.

The features of laissez-faire capitalism are:
Private Ownership of Property the resources that are used to create wealth must be owned by private individuals. three categories of resources: land, labor, and capital, also known as the factors of production. Land includes the land and the natural resources. Labour is the work performed by people. Capital includes financial resources, buildings, machinery, tools, and equipment that are used in an organization's operations. business people use the term capital to mean both capital goods and the money needed to purchase them.

owners of the factors of production should be free to determine how these resources are used enjoy the income and other benefits that they might derive from the ownership of these resources.

Economic Freedom extends to all those involved in the economy. For the owners of land and capital, this freedom includes the right to rent, sell, or invest their resources and the right to use their resources to produce any product and offer it for sale at the price they choose. For workers, this economic freedom means the right to accept or reject any job they are offered. For all individuals, economic freedom includes the right to purchase any good or service that is offered for sale by producers.

Competitive Markets A market composed of large numbers of buyers and sellers. sellers compete for sales and buyers compete for available goods, services, and resources.

This freedom to enter or leave a market at will has given rise to the name free-market economy for the capitalism that Smith described.

Limited Role of Government  the role, of government should be limited to providing defense against foreign enemies, ensuring internal order, and furnishing public works and education. government should act only as rule maker and umpire. As rule maker, government should provide laws that ensure economic freedom and promote competition. As umpire, it should act to settle disputes arising from conflicting interpretations of its laws

What, How and for Whom in the Free-Market Economy

millions of individuals and firms actually provide very concrete and detailed answers to the three basic questions.

What to Produce? answered continually by consumers When consumers buy specific products, they are casting "dollar votes" for these products. These actions tell resource owners to produce more of this product and more of the capital goods with which the product is manufactured. Conversely, when consumers refuse to buy a product at its going price, they are voting against the product, telling producers to either reduce the price or ease off on production. In each case, consumers are giving a very specific answer concerning a very specific product.

How to Produce?

Competition within various markets determines which resources will be used. To compete as effectively as possible in the product markets, producers try to use the most efficient (least-cost) combination of resources. When a particular resource can be used to produce two or more different products, then producers must also compete with each other in the market for that resource. And, if the price of one needed resource becomes too high, producers will look for substitute resources—say, plastics in place of metals. The resources that will be used to produce are those that best perform their function at the least cost.

For Whom to Produce? goods are distributed to those who have the money to purchase them. This money is earned by individuals as wages, rents, profit, and interest—that is, as payment for the use of economic resources. Money is therefore a medium of exchange, an artificial device that aids in the exchange of resources for goods and services. The distribution of goods and services therefore depends on the current prices of economic resources and of the various goods and services. And prices, in their turn, are determined by the balance of supply and demand.

Socialism In a socialist economy, the key industries are owned and controlled by the government. Such industries usually include transportation, public utilities, communications, and those producing important materials such as steel. (In France, the major banks are nationalized, or transferred to government control. Banking, too, is considered extremely important to a nation's economy.) Land and raw materials may also be the property of the state in a socialist economy. Depending on the country, private ownership of real property (such as land and buildings) and smaller or less vital businesses is permitted to varying degrees. People usually, may choose their own occupations, but many work in state-owned industries.

What to produce and how to produce it are determined in accordance with national goals, which are based on projected needs, and the availability of resources—at least for government-owned industries. The distribution of goods and services is also controlled by the state to the extent that it controls rents and wages. Among the professed aims of socialist countries are the equitable distribution of income, the elimination of poverty and the distribution of social services such as medical care to all who need them, smooth economic growth, and elimination of the waste that supposedly accompanies capitalist competition.

Britain, France, Sweden, and India are democratic countries whose mixed economies include a very visible degree of socialism.

Communism If Adam Smith was the father of capitalism, Karl Marx was the father of communism. In his writings (during the mid-nineteenth century), Marx advocated a classless society whose citizens together owned all economic resources. He believed that such a society would come about as the result of a class struggle between the owners of capital and the workers they had exploited. All workers would then contribute to this communist society according to their ability and would receive benefits according to their need.

Today North Korea is generally considered to have communist economy. Almost all economic resources are owned by the government in this country. The basic economic questions are answered through centralized state planning, which sets prices and wages as well. In this planning, the needs of the state generally outweigh the needs of its citizens. Emphasis is placed on the production of capital goods (such as heavy machinery) rather than on the products that consumers might want, so there are frequent shortages of consumer goods. Workers have little choice of jobs, but special skills or talents seem to be rewarded with special privileges. Various groups of professionals (bureaucrats, university professors, and athletes, for example) fare much better than, say, factory workers. Communist economies were in the former USSR, China, Cuba, former Yugoslavia. Nowadays all these countries have market economies, some of them are in the period of transition to the market one.

The so-called communist economies actually seem to be far from Marx's vision of communism, but rather practice a strictly controlled kind of socialism. There is also a bit of free enterprise here and there. For example, in the former Soviet Union, the farmers' markets (rinki in Russian) not only were allowed but were also essential to the nation's food supply. However, like all real economies, these economies are neither pure nor static. Every operating economy is a constantly changing mixture of various idealized economic systems. Some evolve slowly; others change more quickly, through either evolution or revolution. And, over many years, a nation, such as Great Britain, may move first in one direction—say, toward capitalism—and then in the opposite direction. It is impossible to say whether any real economy will ever closely resemble Marx's communism.