Economic Systems Explained: 4 Types of Economic Systems

An economic system refers to the production and allocation of goods in a society. Economic systems determine a great deal about the nature and features of a society—how equal it is, how affluent its members are, even how people think about seemingly unrelated things, like justice and rights.

Economics is a social science that examines how people affect markets and industries. Sometimes pejoratively called “the dismal science,” it seeks to connect human behavior to the production, distribution, and consumption of society’s goods and services. Economics is divided into branches of study. The two broadest branches are macroeconomics—which directs its focus toward large-scale economies, such as those of an entire nation—and microeconomics—which focuses on smaller-scale economic trends and behaviors.

Economics influences the political systems in which they operate, and vice-versa. Historically, wealth translates into power, which converts into more wealth. Most economic systems, real or theoretical, attempt to balance the distribution of wealth and thus of power to promote stability and predictability.

There is a great deal of variety to economic systems throughout human history and in the world today, but there are four main categories of economic systems:

1. 1. Traditional economy: Traditional economic systems refer to everything that came before the rise of modern market economies. As such, the term covers a vast swath of history and a great diversity of different systems, such as bartering and sourcing resources as needed, like hunter-gatherer societies drawing on the local environment for food.
2. 2. Command economic system: A command economy, also known as a planned economy or a command system, is one in which a centralized authority, usually in the form of a government, makes the major decisions about that economy. In a command economy, a governing body controls the means of production, which refers to all the resources, from human to environmental, needed for the economy to operate. Although command economies are often associated with modern states, some much older economies, such as the Inca, were essentially command economies. In the twentieth century, the USSR and China exemplified such systems.
3. 3. Capitalist economic system: A capitalist system is when private firms primarily run the economy, and the marketplace constitutes transactions between individuals and firms. This system requires state power to enforce property rights, possibly affecting large-scale planning decisions. However, business profits go to the owners of those businesses, with some taken out in taxes. This practice is sometimes referred to as a laissez-faire system, a market system, or a free market, with the word “free" implying an ability to engage in economic activity with less government regulation or input. Prized for promoting high economic growth and variety due to widely dispersed and dynamic economic activity, it also allows for the accumulation of capital—basically, the excess resources that can be either concentrated or redistributed—in relatively few hands.
4. 4. Mixed economic system: A mixed economy features elements of both command and capitalist economies. In practice, most modern economies are examples of this approach, though some tend more in one direction than others. Some economists claim economies can’t be either entirely capitalist or entirely command-based. The United States is a mixed economy with both state and private ownership of the means of production. There is significant government involvement in various sectors—such as large-scale infrastructure, police and firefighters, some forms of education, and high tech. In other areas, such as retail goods and healthcare, the private sector is dominant.
   

In theory, there are many different economic systems, usually featuring a specific combination of private enterprise and government involvement.

1. 1. Libertarianism: This is a form of purely market-based economics that advocates for the complete abolition of the state. In libertarianism, commerce and private property are the exclusive means of creating social and political order.
2. 2. Gift economy: A gift economy uses the voluntary bestowal of gifts to organize the allocation of resources. These economies were reasonably common in the years before large populations settled down and began agriculture. The use of gifts helped to create a sense of mutual gratitude, as well as mutual obligation.
3. 3. Anarcho-syndicalism: This is one of many forms of horizontal, decentralized, democratic economic systems involving organized workers who come together to decide the production and allocation of society’s goods. Some brief experiments have been tried, including during the Spanish Civil War, but they were crushed in that conflict’s destruction and chaos.

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