Command Economic System
A command economic system is characterized by a dominant centralized power (usually the government) that controls a large part of all economic activity. This type of economy is most commonly found in countries with a socialist or communist political system. It is sometimes also referred to as a planned economic system because most production decisions are made by the government (i.e., planned), and there is no free market at play.
Economies that have access to large amounts of valuable resources are especially likely to establish a command economy. In those cases, the government steps in to regulate the resources and most processes surrounding them (e.g., distribution). In practice, the centralized control aspect usually only covers the most valuable resources within the economy (e.g., oil, gold). Other parts, such as agriculture, are often left to be regulated by the general population and other parts of society.
A command economy can work well in theory as long as the government uses its power in the best interest of society. However, this is, unfortunately, not always the case. In addition to that, command economies are less flexible than the other systems and react slower to changes because of their centralized nature.
Market Economic System
A market economic system (also known as a market economy or capitalism) relies on free markets and does not allow any government involvement in the economy. In this system, the government does not control any resources or other relevant economic segments. Instead, the entire system is regulated by the people, and resources are allocated based on the law of supply and demand. Therefore, this system is sometimes also referred to as laissez-faire capitalism or capitalist economy.
The market economic system is a theoretical concept. That means there is no real example of a pure market economy in the real world. The reason for this is that all capitalist economies we know of show characteristics of at least some kind of government intervention, no matter how market-oriented they are. For example, many governments pass laws to regulate monopolies or to ensure fair trade, social equality, and so on.
In theory, a free market enables an economy to experience high growth rates. Arguably the highest among all four economic systems. In addition to that, capitalism also ensures that the economy and the government remain separate. At the same time, however, a capitalist system allows private actors to become extremely powerful, especially those who own valuable resources, which can cause social inequalities. Or in other words, the distribution of wealth and other positive aspects of the high economic output of a capitalist economy may not always be beneficial for society as a whole long-term.
Mixed Economic System
A mixed economic system refers to any mixture of a market economy and a command economic system. It is sometimes also referred to as a dual or mixed economy. Although there is no clear-cut definition of a mixed economic system, in most cases, the term is used to describe free market economies with strong regulation and government control in specific areas (e.g., public goods and services).
Most western economies nowadays are considered mixed economies (e.g., the U.S. economy). Most industries in those systems are privately owned, whereas a small number of public utilities and services remain state-owned. Thus, neither the private nor the government sector alone can maintain the economy; both play a critical part in the success of the system.
Mixed economies are widely considered an economic ideal nowadays. In theory, they are supposed to combine the advantages of both command and market economic systems. In practice, however, it’s not always that easy. The extent of government control varies greatly, and some governments tend to increase their power more than necessary.
Frequently Asked Questions (FAQs)
How do the transitions between different economic systems occur, and what are the common triggers for these transitions?
Transitions between economic systems often result from significant political, social, or economic shifts. These can include revolutions, economic crises, or gradual reforms where the limitations of the current system become increasingly apparent, prompting a move towards a system thought to address societal needs better.
Can a country have sub-economies operating under different economic systems, and how would these coexist within the national economy?
Yes, a country can have sub-economies operating under different economic systems, often seen in mixed economies. These systems allow for a blend of government intervention and market freedom, enabling different sectors to operate under varying degrees of control or freedom, depending on the strategic goals or needs.
What are the real-world examples of countries that have successfully transitioned from one economic system to another, and what were the outcomes of such transitions?
Examples of countries transitioning between economic systems include China’s shift from a command economy to a more market-oriented system since the late 20th century, leading to significant economic growth and development. Similarly, many Eastern European countries transitioned from command to market economies after the fall of the Soviet Union, experiencing various degrees of success and challenges.
Summary
In economics, four types of economic systems characterize most economies around the world: traditional, command, market, and mixed economies. A traditional economic system focuses exclusively on goods and services that are directly related to its beliefs and traditions. A command economic system is characterized by a dominant centralized power. A market economic system relies on free markets and does not allow any government involvement. Finally, a mixed economic system is any mixture of a market and a command economic system.