An economic system is a network that forms the economic relationships between individuals in society. In other words, how the people of a nation come together to create a complex whole and conduct economic transactions with each other.
An initial surge in demand can create a multiplying effect that ripples throughout the economy. This surge in demand sends a signal to the whole supply chain that more of these products are required, so more are made. An economic system can change the way by which these supply and demand signals transfer through society. For instance, some economic systems may be more restrictive and place tariffs or quotas on imports. In turn, this can affect the signal between, buyer, seller, and supplier.
These are broad types of economic systems but will capture the different varieties that exist in the world today.
Traditional Economic System
Out of the four types of economic systems, the traditional economic system is the most basic. There is no involvement by the government, so people are largely left to conduct economic activities without influence. However, it is a very basic system that relies on basic customs and traditions. Under a traditional economic system, subsistence is the main driver for economic trades, whilst profit is not the main motive. Instead, this system relies on communities and the cohesion between them to provide and sustain each other.
Socialism – Command economic system
A command economic system is often referred to as a socialist or communist system. Under this structure, power is centralised either to the government or a sole ruler. In turn, they decide the rules of the game and command how economic interactions take place. Under a command economic system, central powers own the means of production, so can, therefore, shift it to where they see fit. For instance, if the nation’s central powers want to start making more steel, they may move workers from a construction site and transfer them to a steel factory.
Capitalism – Market economic system
A capitalist economic system is where the means of production is owned and controlled by private enterprise rather than the government. Instead of government dictating what goods and services should be produced, these are driven by supply and demand mechanisms. The capitalist economic system relies on private individuals using capital to produce goods and return a profit. In turn, this increases the private enterprise’s capital stock. The issue with this however is that many individuals can amass great economic power and wealth. Not only does this create social discontent, but can also lead to unscrupulous business practices.
A mixed economy is one of the most common forms of economic systems in the world today. We see it in many developed nations such as the US, Japan, and throughout most of Europe. It is simply a mixture of capitalist and command economic systems. A mixed economic system often has some level of private ownership of the means of production. However, in a mixed economy, some industries are controlled by the government, whilst others are privately owned.