Economic System – Quick Comparison of 4 Types of Economies

Every economy functions based on certain predetermined principles and conditions. Do you know how products, resources, and services within your society or country get produced, organized, allocated, and distributed?

Understanding how economic systems work and impact our daily lives is essential for maximizing profit. When searching for the best countries to start a business, check if their economic systems can best support your business.

This article looks into the different types of economic systems and how they operate in the modern world.

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Quick Comparison of Different Economic Systems

Economic Systems	Comparison
Traditional Economic System	The traditional economic system focuses on resources and goods that agree with and help to strengthen their customs and traditions. The people in these communities produce goods that are sufficient for them and their tribe.
Market Economic System	The market economic system is also known as the free market system. This economic system gives the citizens the right and ability to own resources without dealing with governmental intervention.
Command Economic System	The command economic system is the direct opposite of the free market system. In this economic system, the government exercises absolute control over the affairs of the economy. They set the prices of goods and services and make the final decision regarding resource distribution.
Mixed Economic System	The mixed economic system combines the best features of the pure market economic system and the command system. The government and the people are involved in making major decisions regarding the economy of the country.

What is an Economic System?

An economic system is the method societies and organizations use to distribute and organize scarce resources, goods, and services, within a geographic location. Every country requires a viable economic system for its smooth running and development.

The most popular economic systems.

• The socialist economy where market socialism thrives.
• The free market economy features public ownership of resources.
• The command economy is where the government controls the resources, and the people earn a fixed income.

An economic system goes beyond the distribution of resources. It is an instrument for regulating factors like land, capital, labor, and physical resources.

A country’s economic system features agencies, entities, institutions, and decision-making processes.

Types of Economic Systems

Every economic system has unique features that separate it from others. Let's check out some of the economic systems in the world.

1. Traditional Economic System

The traditional economic system follows a unique pattern that differs from the other three economic systems. This economic system is people focused, and its mode of operation follows an already-established traditional method or doctrine.

Traditional economy originates from old norms making it the basic type of economic system.

In a traditional economy, people prioritize goods and services that agree with their customs, beliefs, and traditions. They do not deviate from them. Materials that do not fall into this category are considered worthless.

Natural resources are valuable in traditional systems. For example, communities that prioritize agriculture, cattle herding, fishing, and other traditional economies run an ideal traditional economic system.

Owning industries isn’t part of their agenda because the people in such communities live simple lives and are satisfied with producing enough for themselves and their households.

Diagram of a Traditional Economic System

Tribes and immediate families are the centers of the traditional economic system. External trade is not a topic for discussion as they consume most of what they produce.

The trade or barter systems are predominant because people have to rely on each other to get specific resources they lack. For example, a fisherman with excess fish can exchange some goods for yam if the fisherman wants yam and vice versa.

However, the barter system has disadvantages like a lack of double coincidence of wants, lack of a common measure of value, and indivisibility of certain goods.

Traditional economy has a short lifespan because of constant environmental change.

As these economies develop, there is a dire need to exchange their excess goods, causing them to move away from the old economy.

The best way to manage their economic processes during their transition is to convert the regular traditional economy to a traditional mixed economy. A traditional mixed economy combines the features of a traditional economy and a market or command economy.

Advantages of a Traditional Economy

• Free from the Problems of the Global Economy: The crises that arise in the global economy will not affect communities that run a traditional economic system.
• Reduces Resource Waste: These communities produce and use resources for their tribe, thus reducing the wastage of resources.
• Preservation of Customs and Traditions: The traditional economy preserves the people’s customs and traditions because knowledge is easily passed down from one generation to the next.
• Eco-Friendly System: There is limited use of technology in such communities, resulting in environmentally friendly economic activities.

Disadvantages of a Traditional Economy

• The Tendency of Short Supply: People may face difficulty surviving times of famine and food shortage because they don't produce goods in large quantities.
• Lack of Development: Economic, social, and political development is limited in traditional communities because they focus mainly on preserving their customs and traditions rather than finding the ways to improve their economy.
• Isolation from the World: Traditional societies are cut out from the rest of the world in areas such as trade relations, the exchange of culture, and the development of new techniques. This makes their growth and development stagnant.

2. Market Economic System

The market economic system supports international trade and limits the control the government has over the country’s economic sector.

Governments have minimal control over economic resources and do not interfere with segments of the economy and its activities. Rather than having governmental regulation, the people and the relationship between supply-demand create laws to regulate fair trade.

The market economic system has its origin in the principles of free markets. This economic system shows people having control over every aspect of the economy without much influence from external bodies.

A pure market system does not exist, but in theory, it is the best economic system. In theory, free market economies feature significant economic growth and development. Economic growth is at its highest peak under a free market economic system.

The pure market system allows private enterprises and entities to amass economic power. Through the private ownership of economic resources, the country will experience economic inequality. This situation gives a faction of people with economic power control over others.

Note that all economic systems are subject to governmental authority. Most governments enact laws that regulate fair trade and enhance monopolies even when operating under a market economic system.

Advantages of a Free Market Economy

• Market Freedom: Entrepreneurs are free to choose and set policies, prices, products or services, and their hours of operation.
• Encourages Competition: The market economic system is free from quotas and tariffs that can prevent competition. New businesses can easily enter the market and challenge existing businesses for market share.
• Profit-Driven: The goal of a free market economy is to generate profit. Business owners pick the most efficient production methods to reduce their production costs and maximize profits.
• More Options for the Consumer: Consumers can choose from a variety of options in the market. The lack of government interventions and restrictions allows businesses from multiple countries to compete for market share.

Disadvantages of a Free Market Economy

• Neglects the Weak and Poor: The free market economic system does not give appropriate attention to the less privileged, like the elderly and disabled. These individuals will not be able to compete effectively for resources, and they may end up in poverty.
• Self-Interest over Collective Interest: The market is run based on self-interest. Economic needs receive more attention than social and human needs, such as providing healthcare for poor people.

3. Command Economic System

Command economic systems are characterized by a powerful and influential central government with absolute authority over a considerably large fraction of the economic structure. Another description for command economies is a centrally planned system.

A command system works effectively in a communist regime, where the centralized authority, usually the government, influences economic decisions. Communist nations like North Korea practice the command economy.

Command systems thrive where the country’s economy has excess resources. In such economies, it is easy for the government to manage these resources effectively.

The central authority exercises control over resources of great value, like gold or oil. Due to the centralized control of this economic system, the government fully involves itself in every aspect of the economic system, from planning to redistributing resources.

A command system has the potential to create a well-structured supply system of resources without the selected few having more to themselves.

The government owns and runs major industries, utilities, aviation, and railroads without a private enterprise in operation.

In theory, every government regulation in the command economy focuses on control and even distribution of resources. This system will work effectively if the government has the people's best interests at heart.

In reality, there is less focus on providing enough jobs and offering goods and services at an affordable rate to citizens.

Command economies are not flexible, unlike free market systems that thrive in a capitalist economy.

The command economic system is usually vulnerable to economic crises or emergencies and struggles to adapt to changing conditions because economic power is fully centralized.

Advantages of Command Economic Systems

• Potential Benefits for Citizens: If the government in power can execute the principle of this economic theory correctly, mobilization of resources on a massive scale is possible. Citizens will enjoy various benefits, such as good jobs, education, and social amenities.
• Government Control: This system allows the government to pay attention to the growth and proper management of the economy and its resources, resulting in development.

Disadvantages of Command Economic Systems

• Unrealistic Expectations: The command economy has unrealistic expectations, and the central planners cannot create a system to meet every individual’s needs.
• Blocks Innovation and Growth: This system cripples the creativity and innovative ability of its citizens since the government performs vital economic functions. People can only get available jobs without striving for more and receive a fixed income, unlike a capitalist system where they can own businesses.

4. Mixed Economic System

Mixed economics is the most popular economic system globally because it is easier to practice than other types of economies.

A mixed system comprises the features of command and market systems. It is a combination of government intervention in the affairs of economic resources and the existence of private businesses.

Another name for mixed economic systems is dual systems. Countries with a market system under strict regulatory control fall into this category. Areas like transportation or sensitive industries like defense and railroad are under the domain of the government.

Many countries in the developed western hemisphere practice a mixed system. They have the government and the people regulating the economy, although the government has more influence than the people.

The mixed economy is the most realistic economic system used by most countries globally. It combines the best features of the free market and command economy system to create an environment that advocates individual expression and promotes order.

There’s a downside to this system. It’s impossible to find the balance between the market and command economic systems because one always tends to overshadow the other.

Advantages of Mixed Economies

• Less Government Control: The level of governmental control is less than that of a command system, leaving room for private businesses to enter the market.
• Government Regulations Against Market Manipulations: The government has the authority to intervene when there is a need to correct market failures. Large organizations may receive penalties for abusive operations and exploiting their customers.
• Benefits the Consumer: The people benefit from governmental initiatives and safety net programs like healthcare or social security. Governments can use schemes like taxation policies to help redistribute income and reduce inequality among the people.

Disadvantages of Mixed Economies

• Unbalanced System: A mixed economy system is not balanced because the government may be too involved in the economic process, or its contribution is not significant.
• Subsidy and Debt Problems: Most state-run industries receive some form of subsidy from the government, causing them to run into large debts because they are uncompetitive.

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