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Compare and contrast how the various economic systems (traditional, market, command, mixed) try to answer the questions: What to produce? How to produce it? And for whom to produce?


Focus Question: What are the different types of economic systems?


Topics on the Page
Traditional Economy
Market Economy
Command Economy
Mixed Economy
Teaching Resources
Women in the Global Economy
  • Sweatshops
EconomicSystems1.jpg

Farmers picking coffee beans in Brazil
Farmers picking coffee beans in Brazil

Traditional Economy

A traditional economy is an economic system in which resources are allocated by inheritance, and economic choices are made based on customs and rituals.
  • In a traditional economy, people will produce what they have always made and what their parents have produced before them.
    • It is strongly connected to subsistence farming or hunting and gathering, in which the people produce what they and their community need to survive and any surplus or abundance is traded or bartered for other essential good.
  • Most countries that have historically had a traditional economy have replaced it with a command economy, market economy, or mixed economy.
    • However, traditional economies are still found today in underdeveloped, agricultural parts of South America, Asia, and Africa.
  • European feudalism would be considered a form of traditional economy.

Advantages:
Traditional economy fosters a sense of community, as it causes little friction among members and provides a sense of security and psychological comfort. Subsequently, there is a relatively low unemployment rate and low crime rate. A traditional economy allows for a greater degree of autonomy, and little or no money is used.

Disadvantages:
A traditional economy does not allow for much economic growth and development as changes are very slow and there is little social mobility allowed. A traditional economy does not utilize advanced technology and there is relatively little promotion of intellectual and scientific development. A traditional economy provides few incentives for entrepreneurs, thus limiting choices for consumers and a lower standard of living.

lessonplan.jpgClick here for a lesson plan discussing traditional economies used by Inuit tribes in northern Canada

Click here for an informative article about developing countries with traditional economies

Click here for more on Traditional Economies

Click here for a Video on Traditional Economies

Markets place
Markets place

Market Economy

A market economy is an economic system in which economic decisions and the pricing of goods and services are guided solely by the aggregate interactions of a country's citizens and businesses and there is little government intervention or central planning.
  • Market economies work on the assumption that market forces, such as supply and demand, are the best determinants of what is right for a nation's well being. In this economic system, consumers and their buying decisions drive the economy.
  • Countries which utilize market economies rarely engage in government interventions such as price fixing, license quotas and industry subsides.

Advantages:
The absence of central planning is one of the major features of this economic system. Market decisions are mainly dominated by supply and demand. The role of the government in a market economy is to simply make sure that the market is stable enough to carry out its economic activities properly. In today's global economy, the market economy is seen as the best way to create and maintain economic growth and development. All nations to a greater or lesser extend allow markets to exist to encourage creativity and innovation.

Disadvantages:
In economies based purely on markets forces and consumer consumption, there are few to no provisions set up for the nation to provide for the social needs (health, education, housing .. etc.) of its citizens. Market economies are often criticized for ignoring social costs (for example: companies building major production plants that produce consumer goods but pollute local water resources) and promoting social injustice. Also, occasionally there are market failures. This can cause some companies to become way too powerful and become a monopoly. If the government doesn’t step in, the monopoly can take advantage of the consumers and charge ridiculously high prices, and thus stunting a nations economic growth.

Biography_icon_for_wiki.pngClick here for a biography of Adam Smith, author of Wealth of Nations, and firm advocate of Market Economies

A cow and an oil well show two different economic systems
A cow and an oil well show two different economic systems

Command Economy

A command economy is a system where the control of economic systems is maintained by central planners (the government). In this system, planners estimate what goods will be needed in the future and work backwards to decide what materials and workers are needed now.

Thus, in a command economy it is that government who decides what to produce, who and how to produce it, and how the produced items will be distributed among its citizens.

The Soviet Union was a government command economy that collapsed due to financial debt problems, failing government run markets, high military spending, famine and lack of natural resources.

For more on Soviet communism, see World History II.22

Advantages:
In command economies, equality is focused on specifically as the planners or government try to eliminate all private property and distribute its good equally. If done correctly no one is in poverty and no one is wealthier than another. Social services are also emphasized in this type of economy.

Disadvantages:
In a command economy, people are not provided with many economic choices. There is little innovation and the planners might not be able to detect consumer preferences accurately. This could lead to a situation where resources are misallocated as consumer demands are not satisfied by production (overstaffing problems, poor product quality, lack of efficiency). Also the planners or the government could be wrong about the future needs of their nation, and could end up steering the entire nation and its citizens into economic and social hardship.

Click here for a Video on Command Economies
Biography_icon_for_wiki.png Click here for a biography of Karl Marx

Click here for a paper on Command Economies


Mixed Economy

In a mixed economy there is more government intervention than in a free market economy, for many of the activities of production, distribution, and exchange are undertaken by central government, but there is also more economic freedom for the individual than in a command economy. Most all developed countries are different variations of mixed economies. The United States is a mixed economy, because it allows private industry to compete freely, while the federal government sets regulations and provides a basic safety net for its people.

Advantages:
A mixed economy permits in production which in return allows healthy competition that can result in profit. On the other hand it also contributes to public ownership in manufacturing which can take address social welfare needs. The advantage of this type of market allows competition amongst producers with regulations in place to protect society as a whole. With the government being present in the economy it brings a sense of security to sellers and buyers. This security helps maintain a stable economy.

Disadvantages:
In a mixed economy, unsuccessful regulations may paralyze features of production. This in return can cause the economic balance to shift. Lack of price control management can cause shortages in goods and can result in a recession.

Click here for a Video on Mixed Economies

2014 index of economic freedom according to The Heritage Foundation and The Wall Street Journal
2014 index of economic freedom according to The Heritage Foundation and The Wall Street Journal


Test_hq3x.pngWhich of the following best matches a theoretical model of economic organization with a major strength of that economic model?

a. Command: is less likely than other economic systems to have problems related to scarcity.
b. Mixed: combines the economic productivity of a market system with the distributional efficiency of a command system.
c. Traditional: is more likely than other economic systems to use democratic procedures to make basic economic decisions.
d. Market: provides a strong basis for the expression of state-based initiatives
Answer: A


game_icon.svg.pnghttp://www.purposegames.com/game/economic-systems-game

Multimedia.pngClick here for an informative twelve minute video comparing and contrasting the different economic systems

Click here for a New York Times article on how the global economy has failed in the 21st Century

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Sweatshop Workers, Image by marissaorton
Sweatshop Workers, Image by marissaorton

Female_Rose.pngWomen in the Global Economy:


Click here for more on how Women are a driving force in the global economy

The United Nations speaks about how women affect the economy

Sweatshops


This is how women are exploited in today's global workforce, World Economic Forum (March 7, 2016)

Sweatshop Worker Wages


Helpful Links

Economic Concept Definitions