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Types of Economic Systems

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Every economic system tries to predict and then meet human needs through the production and distribution of goods and services. The economic system is the mechanism that brings together natural resources, labour supply, technology and necessary entrepreneurial and managerial resources. The type of economic system, used by a nation is a result of political decision. It is also a result of historical experience, over time it becomes a national culture.

Economics is a science that analyses for what purpose society produces. The central economic problem is to reconcile the conflict between people’s unlimited demands on the one side and society’s limited ability to produce goods and services on the other side.

In a command economy a central planning office makes decisions on what, how and for whom to produce. There was extensive planning in Soviet bloc countries. Everything belonged to the state and government was to organize all the production. The system was not regulated by prices. In recent years Russia and East-European countries moved away to more market-oriented economy.

In developed Western countries markets are to allocate resources. The market is the process by which production and consumption are coordinated through prices. Pure market economy has no government intervention. However, there are different forms of restrictions and regulations. Sometimes government limits profit of firms, controls prices and wages. In Britain, for example, eight basic industries are nationalized. Absolutely free market economy does not exist in the world, the level of economic regulation varies: in some countries it grew in recent years, in others more freedom was granted to firms and individuals. But in general, government regulation is kept on quite a high level.

Modern economies in the West are mixed – they rely mainly on the market but with a large dose of government intervention. The optimal level of it is a problem which is of interest to economists. Government does not regulate consumption, production and exchange of goods. Government and market are both of importance, but play different roles.

The economy of the USA proved to be a success for half a century. It is usually described as a capitalist economy. But this term meant the concentration of control over the most important parts of economy by a small group of capitalists. By contrast, most Americans perceive modern economic system as one which benefits millions of people not just a few. It is “free enterprise system”. Still government played an important role in American economy in different periods – it intervened to stimulate depressed industries, provided protection in the form of tariffs and sometimes even redistributed wealth. Government’s role ebbed and flowed according to the needs of the time.



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