What Are the Three Different Economic Systems?

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An economic system is a mechanism by which a country, or an entity presiding over a large territory, organizes its economy. This means that it instructs how goods will be produced and allocated and how services should be distributed quantitatively and qualitatively. It can also decide how well the workforce should be paid and how frequently.


Fundamentally, these systems are a plan for production and distribution of resources in a determined territory. And they must all answer three basic questions: What to make? How to make it? And who gets it?

The Three Different Economic Systems

  • In theory, many different economic systems exist. This is because there are varied ways of production and sorting of resources, transformed goods and services. In fact, if we observe the world today, we can see how each country has an economic system in place and rarely is one exactly the same as any other.

    Having said that, there are reasonable similarities between different countries' economic systems. Seemingly, they all start from three distinct types.

    They are: Market Economy or the Market Economic System; Planned Economy or the Command Economic System;

    and the Traditional Economic System.

Market Economy or the Market Economic System

  • In this system the country's governing body, or territory's presiding entity, takes a hands-off approach to the economy. It's characterized by the total absence of subsidies, other benefits, pre-fixed prices, taxation and financial regulation. This means that the market determines the country's/territory's economic situation and progress. A fact that attributes great importance to supply and demand ratios of, and speculation in, the current market.

    This type of economy is also known as a free market.

Planned Economy or the Command Economic System

  • A planned economy occurs when the country's government has a big "interventionist" role in the economy. In this context, the government answers all three of the basic questions. It chooses what to produce, how to produce it and where to distribute it afterward.

    Other than this, large and wide-spread taxes apply, goods have pre-fixed prices and, sometimes, a considerable redistribution of wealth takes place. And most, if not all, companies are of public ownership.

The Traditional Economic System

  • Last, we have an economic system that works on tradition and custom. What this says is that the socio-economic power of an individual is something pre-defined at birth. This type of system functions in societies where wealth is maintained by very few individuals in a high social class. So, whether a person is rich or poor depends on his or her family's social status.

    Most of western civilization's economies worked under this system until the industrial revolution started.

References

  • Photo Credit Thomas Northcut/Photodisc/Getty Images
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