Types of economic systems

comparisons

The economic organization is one of the basic pillars of any social group. Over the centuries, human beings have organized their resources in various ways, until they reach the systems that best suit each society.

All these ways of organizing a society can be included to a greater or lesser extent in one system or another. In this article we describe the most important classifications of economic systems.

These two classifications have been made according to whether or not there is private property, and according to the decision-making mechanism.

Economic systems according to whether or not there is private property

  • Capitalist economy: Also called free or market economy. They are economies in which individuals and companies carry out the production and exchange of goods and services through transactions involving prices and markets.
  • Socialist or planned economy: They defend the interventionism of the State in the economy. In their purest state, they demand the substitution of private by collective property in the means of production, exchange, and distribution; in the same way, it calls for the equal distribution of wealth and the elimination of social classes. Socialism is generally associated with a planned economy, although there are exceptions.

Economic systems according to the coordination or decision-making mechanism

  • Traditional economy: They are simple economies whose decisions are based on tradition.
    • They are characterized because to solve the basic problems of the economy: what, how and for whom to produce. They make decisions that were successful in the past, that is, their survival will depend on whether the decisions of the past were correct.
    • They have a reduced economic surplus so they will not be able to invest in improvements in the production process.
    • They are low-income societies, and will depend on aid and loans from rich nations.
  • Authoritarian economics: Are those in which economic decisions are made by a central authority.
    • Decisions about what, how and for whom to produce are made by the central authority (dictator, king…).
    • The price is set by the authority.
    • It interferes with the freedoms of citizens.
    • The state owns almost all the means of production.
    • It is an economy typical of countries that apply communism.
  • Market economy: It is one in which most economic decisions are made by citizens. They are the so-called capitalist economies. In which we can highlight:
    • There is private ownership of both capital and the means of production.
    • Free enterprise, individuals are free to establish and dissolve their businesses.
    • They are competitive markets, in which the price is set by supply and demand.
    • Individuals can choose between the different alternatives offered by the market.

In the 21st century, a large part of the economies are considered mixed economies. That is, economies in which a part of the decisions are made by the citizens and others by the government, this allows correcting the market failures that exist.

See mixed economy

Keynesianism, for example, advocates a capitalist system in which companies are privately owned and there is a free market economy. However, he defends government intervention in markets to avoid economic cycles and promote a more stable economy.

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