4 Examples of Economic System

4 Examples of Economic System

It doesn’t matter what aspect of life we consider, a planned system is essential for efficiency. When it comes to the economy, different economists in the past have theorized different systems. While each one brings a unique approach to the community, these do so with downsides as well. It should also be noted that each system was developed in response to a failing system in a community.

What is an Economic System?

A system by which organizations, governments, and firms are able to recognize economic patterns and make plans accordingly to allocate resources and commodities to different sectors is called an economic system. It comprises production, distribution, workforce, resources, and businesses. As the demand for a certain product or service is increased, it sends a signal to all aspects of the business to increase the output and supply. An economic system regulates how the demand for such goods and services is met. Some systems would raise taxes to suppress the demand, while others may give incentives to increase production.

Examples of Economic System

1. Traditional Economy

Economic System Cover
An Inuit tribe member fishing in a frozen lake

As the name suggests, this is the most basic form of the economy because it relies on customs and traditions. In a traditional economy, the government is not involved whatsoever, meaning individuals are the regulating factors of the economy of a community or in a specific region. Traditional economy is mostly present in isolated rural areas or among tribal communities, therefore, the absence of advanced technology, investments, and other modern laws is common. As for trading, the barter system is the only means of conducting business because of the lack of a fixed currency. Unlike other modern economies, subsistence is the driving force in a traditional economy. Another thing that sets apart this economy is that the newer generations follow their elders. For instance, if someone is born into a family of farmers, they will end up farming with the same procedures used by their parents and grandparents. Two positive aspects of this economy are that it binds the community together strongly and it produces minimal waste. Although the traditional economy is dying in the modern world, some places have kept the tradition alive, like Inuit people from the northern regions of Canada, Greenland, and Alaska. They believe in keeping their heritage alive, to them taking what’s needed from the land is the way of living. Despite great distances between the mentioned countries, each Inuit tribe sees other Inuits as cousins.

2. Command Economic System (Socialism)

Command Economic System North Korea
Kim Jong-un waving to his military and public

When a nation is entirely controlled by a single entity, usually by the government or an individual, and the public is commanded to do what is required, it is considered a command economic system or socialism. In such a system, private businesses and the free market are non-existent. Therefore, each aspect of the economy is controlled by the state, meaning methods of production, the amount of production, the value of a product, and the supply of products are strictly regulated by the state. This means it is entirely up to the state if they wish to produce computers for the public or to invest the same resources into constructing a new park, depending on what is best for the society. Similar to producing what is necessary for the country, the workforce can be allocated depending on the requirement. Some positive aspects of socialism are that it can quickly change economic direction, there is no room for uncertainty because the public is made aware of the plans, and lastly, public services, such as education and healthcare, are mostly free. As for the downsides of this system, the workforce can become unmotivated quickly because of a lack of individual decision-making, and day-to-day problems are not targeted by it. In today’s world, North Korea is the prime example of a command economic system.

3. Market Economic System (Capitalism)

Market Economic System Google-compressed
Googleplex in California

The most widely used economic system in the world is the market economic system or capitalism. In this form of the economic system, a free market is encouraged, which means that government doesn’t interfere in the aspects of production, distribution, and competition of private firms. The only interference from the government is to devise rules that protect businesses in case of failure such as bankruptcy. Moreover, this allows individuals to establish businesses based on their unique idea, and since making profits is the driving force behind the market economic system, each business tries to do its best. Some huge advantages of this system are that people can regulate the value of products and services in the market, consumers are free to choose one product over the other, it promotes creativity, and it provides solutions to daily problems. However, there are some downsides to this system as well. Necessities such as healthcare and education can be expensive, it carries a huge risk of business failure, and services that don’t make profits are rarely introduced. Interestingly, no country truly follows a market economic system. With that said, the United States is perhaps the best example of the market economic system, with its openness to new businesses and innovations. Thanks to such an approach, we have companies like Apple, Microsoft, and Google.

4. Mixed Economy

UK Capitalist
A woman walking in the rain in front of the parliament

As one can expect from the name, it is a type of economic system in which both the market and command economic systems are used, i.e., both the government and individuals are involved. In a mixed economy, the government has some industries or certain parts of the economy like production under its control. Moreover, the government is also actively involved in the mixed economy, which can lead to companies feeling restrictive. Additionally, companies, especially the ones known for innovation, can hit a mark, where they no longer get motivated to innovate because of the interventions. While the intervention of the government may seem a little too much, too little involvement can lead to malpractices by businesses. Despite the downsides, the mixed economy also offers advantages, such as individual freedom and the government making sure that the economy is advancing. Interestingly, it is one of the most popular forms of the economic system. For instance, the United Kingdom uses a mixed economy, as private businesses are free to operate, while the sectors like healthcare are controlled by the state.


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