Types of Economic Systems
An economic system is a structure for allocating limited resources. There are three types of economic systems: capitalism, planned economies, and mixed economies. They all share similarities and differences.
Capitalism, also known as a “private enterprise system” or a “free market system” is based on individual ownership, economic freedom, and equal competition (Kelly & William,2019, p.26). The primary factor that sets capitalism apart from planned economies is that in the capitalist economy, individuals, businesses, or nonprofit organizations privately hold the enormous majority of companies, with only a limited fraction held by the government.
While planned economies involve heavy government participation, Capitalism values freedom. Private-sector organizations are free to carry out their own decisions regarding everything from what they will produce to how much they will charge, whom they employ and whom they fire. The government does not participate in the decisions the corporations make (Kelly & William,2019, p.26). Freedom does not refer only to the enterprises, but also individuals. Individuals are able to choose what they will purchase, how much they will pay, and where they will work.
For these circumstances, prices are fairly reasonable, since companies compete to attract the best resources and provide the best rates. Competition is notable for capitalism. Different industries experience various levels of competition (Kelly & William,2019, p.27). There are four degrees of competition: pure competition, monopolistic competition, oligopoly, and monopoly. They differ on the number of competitors at each level, monopoly is considered the lowest, followed by a few more competitors in oligopoly. Monopolistic competition and pure competition contained the highest levels of competitions.
The different between them would be competitors are selling different products in monopolistic competition while competitors are selling virtually identical products in pure competition.
Capitalism also values rights. The right to own a business, the right to private property, the right to free choice and the right for fair competition encourages innovation as they act as a motivator for business owners, a key absence found in the planned economy (Kelly & William,2019, p.27). However, there are negative impacts of capitalism. With capitalism, monopolies often occur. Which means a particular producer completely overshadows the industry, allowing no room for any serious competitors. This introduces price inflation and reduces quality and options as there are no competitors (Kelly & William,2019, p.28).
Planned economies encompass socialism and communism. Unlike capitalism, the government plays a more heavy-handed part in dealing with the economies. Socialism is an economic system based on the foundation that the government should keep and operate key enterprises that directly influence social welfare such as utilities, telecommunications, and healthcare (Kelly & William,2019, p.30). It doesn’t produce a serious classism problem like capitalism because there is a thought of public ownership in all matters. It also eliminates the threat of price fixing. In the system of capitalism, monopolies exist which bring about price fixing. However, in socialism, the government either controls, owns or monitors every company that produces goods and services. Instead of running free market demands to lift prices or form mergers or monopolies, the public can govern pricing and regulations to provide access to anybody who may need those items (Lombardo, 2018). Another important distinction is that in socialism, the government manages the essential needs of the citizens by controlling competition. This differs entirely from the capitalist theory of freedom. There may be added benefits to social access, as socialism values public welfare; however, that requires money, which means higher tax rates (Lombardo, 2018).
Communism is also under the category of planned economies. It is similar to socialism as they are both government controlled. However, communism is a more extreme example. It is an economic and political system that calls for public ownership of virtually all enterprises under the direction of a strong central government (Kelly & William,2019, p.30). It has the goal of equalizing a society so that every person works and receives payment based on their needs and abilities (Lombardo, 2017). There is no doubt that everyone gets the same chance, however, it is a suspension of individuals’ rights and choices. People are unable to make even basic choices such as where to work or what to buy as the goal of communism is to have people working toward common goals and needs. For that reason, people are not free to pursue their own interests. Their job assignments are based on what the community requires for survival (Lombardo, 2017). It is different from the world of capitalism where individuals have the rights to choose what they want to do as the economic system values different things.
Last but not least, mixed economies. This is an economic system that embodies elements of both planned and market-based economic systems. It is like capitalism in that it values freedom. In the typically mixed economic society, there are systems in place that preserve the right to own private property. It also allows the government to interfere with economic activities to achieve specific social goals (Gaille, 2018). What makes a mixed economy special is that it minimizes government influence without eliminating it. It attempts to balance the need for private innovation with the need for the massive supports a government provides. Small businesses have limited purchasing power. The government, however, can purchase on a massive scale. They can implement subsidies to help a certain industry and specific policies that encourage specific consumer behaviors (Gaille, 2018). Although the government gets involved, it is not entirely like a planned economy. The government does not take over the businesses or have complete control. However mixed economies are not perfect either, just like other economic systems. Debt became a problem within a mixed economy. One of the greatest dangers of a mixed economy is overdevelopment within the centralized planning of the public sector. Industries managed by the government can quickly turn into subsidized monopolies. Should that occur, high levels of debt accumulate. The government then transfers budget resources from other programs to settle those debts, which then creates new debts (Gaille, 2018).