Economic systems

An economic system refers to goods and services and the plans to produce them. An economic system determines what is produced, how goods are produced, and for whom. Some economic actions will be more successful than others in different situations.

Experts differ on whether economic systems fall into three or four main categories. Most focus on the market (or free market) economy, the planned (or command) economy, and the mixed economy. Some also include the traditional system.

Overview

In a free market, the government has no involvement, but most market economies involve some regulation. These systems generally exist in democratic states and are not centrally planned. Economic decisions largely lie with the businesses and consumers. A competitive market determines the fair prices of goods and services. A system of information sharing notifies consumers and producers what is in demand and what is available. Producers need this information to decide how much material to procure and how to set prices to make a profit. In reality, the government's role is primarily to ensure the market is stable. The United States has a generally free market.

Command economies are common in Communist states and other authoritarian environments, such as North Korea. The central government makes all decisions about economic matters—production, distribution, and prices. Command economies are inflexible and react slowly to changes in demand and patterns of supply and demand. Though these types of economic systems are associated with communism, the United States has engaged in a command economic system. For example, during wars, the US government has ordered factories to produce military products such as tanks and has rationed goods.

Mixed economies combine elements of both free market and command systems. They are often employed to protect certain industries or aid consumers. Farm subsidies may be used to support farmers while keeping food prices under control. Subsidies also can be used to protect domestic products and crops in the face of cheaper imports.

Traditional economies rely upon the actions of past generations and remain unchanged. Buyers and sellers know their roles and the market. New industries generally do not arise. These economies are common in parts of Africa, Asia, and South America.

Pros and Cons: Command Economic Systems

Command economic systems face particular problems and challenges. The inflexibility of the system often makes it difficult to supply goods and services adequately when needed. Oversupply, undersupply, and distribution may all be problems. Many of these issues plagued the former Soviet Union.

The Soviet Union's centrally planned economic system of collectivization and industrialization was established in about 1917 and remained in place for about six decades. The leaders nationalized banking, foreign trade, land, and more and focused the nation's efforts on industry. Food production was privatized primarily to feed the workforce. Labor forces were shifted to industry.

Agricultural and industrial production generally fell. The singular success was in heavy industry, but the cost to the economy was significant. This pattern repeated itself over the next few decades, as heavy industry devoured the nation's resources at the expense of consumers. Household consumption was nearly stagnant from 1928 to 1950.

The perceived success of the system concealed the truth. The government set prices, but these did not reflect the accurate cost of capital, labor, and resources. Industrial production was high, but quality was poor and service was inferior. An emphasis on meeting production goals did not encourage technological development that could have increased productivity. This lack of advancement hindered production as birth rates fell and workers became scarce.

The low standard of living in the Soviet Union became a sore spot during the 1980s. Soviet censors had kept the nation largely insular, but new developments in communication circumvented censorship. Citizens discovered how far behind they had fallen and clamored for economic reform.

The Soviet Union began focusing on industries that would improve the nation, such as metalworking to upgrade outdated factories. Though the basic structure of central planning remained in place, new laws required industry to be self-supporting. Some central control was ceded to regional and local organizations. Foreign investors were permitted to invest in joint ventures with Soviet cooperatives, ministries, and state enterprises. These changes were not enough because government price controls and the monopoly over most production remained in place. These ongoing problems contributed to the breakup of the Soviet Union in late 1991.

Market and Mixed Economic Systems

Some experts believe that a free market is best for consumers and businesses. They believe businesses would have to protect consumers and products, and services would be higher quality and affordably priced. Critics say government interference increases costs and hinders business. They believe a free market is regulated by consumers, who weigh in on a business's practices through buying decisions. Affordable and quality products and services should find favor with customers and ensure success for a business.

Other experts support some government involvement, which protects consumers and the environment. They believe that businesses will ignore public safety and make profit the top priority in a free market. Critics believe free markets encourage destabilization of the economy because a business will overproduce a popular product to maximize profits. Such miscalculation will lead to boom periods and crippling recessions in the economy.

Critics have pointed to cable industry deregulation as an example of the failure of free markets. The deregulation resulted in high cable rates, and competition did not benefit consumers by lowering prices. Others say that without regulation, businesses are not motivated to invest in ways to protect the environment from damage and pollution. They have cited numerous oil spills and pollution as examples.

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