In understanding economics science and its methodologies, there is the need to thoughtfully consider the intricacies of people, resources, agents, institutions and their mechanism. Economics studies the relationship between the people and the institutions in a society with the limited scarce resources in that society. Consequently, there is the need to answer basic economic problems. These questions are answered in different methods, these methods determines the type of economic system that a country is operating. As mentioned earlier, the concern of each economic determines its methodology. Capitalist Economy is usually concerned with an occupational freedom, while the aim of a Socialist Economy is social control over major but selected productive activities. In the same vein, Communist economy system takes control of all major sources of production. In socialist and communist economies, basic economic decision are made by the government while in Market economy, these decisions are made by the invisible hand of market forces. Another methodology of economics science is Market economy where the mechanism is based on free market and free prices.
However,
in a Mixed Economy there is the permutation of both capitalist and socialist
economies. Therefore, a big concern is on how the available resources would be
allocated, to get maximum total output.
Definition of Economic System
An
economic system consists of individual, institutions and their interaction in
the process of answering basic economic problems. Individual and institutions
work together to answer basic economic problems in relation to the resources in
the society, its scarcity and how these scarce resources can be allocated to
meet conflicting and diverse objectives. The mechanism of production,
distribution and consumption varies in our society. This is because each
society answers the basic economic problems in different ways. How each society
answered the basic economic problems; that is the economic decisions they make;
determines the type of economic system they will operate. In the economic
decision making, we have the households as the major
Actor
followed by the institutions and then the government. North (1990) posited that
institutions are the rules of the game in a society. Formally, they are the
humanly devised constraints that shape human interaction which means they
influence human behaviour. In consequence they structure incentives in human
exchange, whether political, social, or economic. Institutional change shapes
the way societies evolve through time and hence it is the key to thoughtful
historical change. An economic system must be able to answer basically three of
the economic problems such as what to produce? That is what types of goods and services
to produce. How to produce? That is what the resources available that can be
employ for production of goods and services. For whom to produce? That is; who
is the receiver of the final products from production. Hence an economic system
encompasses various processes of organizing and motivating labor, producing,
distributing, and circulating of the fruits of human labor. Fruit of labor
refers to products and services, consumer goods, machines, tools, and other
technology used as inputs to future production, and the infrastructure within
and in the course of which production, distribution, and circulation arises.
Types of Economic Systems
Economic
decision made by a society shapes the economic system of that Country. The basic
economic systems:
• Traditional economy
• Controlled economy
• Free market Economy
• Mixed economy
The
Economic System
Economic Systems
Traditional Economic System
Controlled Economic System
Free Market Economic System
Mixed Economic System
Traditional Economy
In a traditional economy, the economic decisions are made based on believes, norms religion and customs of that society. Specifically the economic decision on economic questions of what to produce, how to produce, for whom to produce, where to produce etc. are made based on believes, religion, customs, habit and norms of that society. For instance, the economies of some countries are believed to be traditional. Arab and African Countries such as Saudi Arabia, Nigeria, Iran, Pakistan, Kenya, Ghana, Qatar etc where people produce what they learnt their forefathers produced, following their custom of producing it; sell products that are produced the same way their forefathers produced it are traditional economies. For instance in Nigeria, people of Abeokuta is known for the ‘adire’ cloth business while the Oke-ogun people continue to produce the ‘ofi’ traditional attires. Barter-direct exchange of goods and services with other goods and services are part of the norms. For instance in Yoruba land, an exchange of food for services called ‘agbaro’ is still in operation in some part of the land. ‘Agbaro’ means that a group of friend will assist a member of the group to clear a portion of land while they receive in turn, food for their services instead of money. This is done based on custom of friendship.
Strengths
There
is usually a strong family or societal relationship between the individuals in
the traditional economy. Hence, there may be economic securities and safety for
members of the society. This in turn may promote economic stabilities in the
traditional economy.
Weaknesses
Lack
of innovation or resistance to innovations. Such technical know how may be monopolized
by the family that specialised in a certain profession. Modern ideals may not
be welcome because they usually want to do things the same way it was done
before they were born.
Controlled Economy
In
a controlled economy, it is the government that makes the economic decision and
it is solely done meaning that there are no private sector initiatives.
Government planners decide on what to produce, how many shoe industry will
produce the number of shoes the government decided should be produced. How to
allocate resources to the producer is the business of the government planners.
Controlled or Planned economies are usually associated with Socialism and
Communism where government determines the wages of workers, the prices of goods
and services and level of output. Former Soviet Union, Cuba, Germany, Russia,
North Korea etc are close examples of Controlled or Planned economies. Albeit,
Germany and Russia seems to have move to mixed economy as it is the case with
countries under other economic system.
Strengths
Ability
to accomplish social goals quickly. Planning for more labor in production in a
control economy can reduce unemployment. There is plausible provision of more
economic securities to the participant in this economy. This type of economy
may be able to provide an equal distribution of income and goods and services.
Weaknesses
It
is difficult for Controlled economy to match consumer’s wants and needs with
the productions. Complexity of production may lead to production problems. The
economic participants may have to depend on a small number of economic choices
as provided by the government planners. There may be overproduction of some
products and underproduction of other products.
Free Market Economy
Free
market economy or market economy is an economic system where the basic economic
decisions are made by the buyers and sellers, individual households and
businesses in the economy through the price mechanism. Unlike the controlled
economy where private sectors are non existence; free market economy allow
individuals to operate their own businesses and answer economic problems using
their owned resources, make profits and determine the prices of goods and
services. Companies and businesses can choose cost effective method of production
to maximize profit and minimize cost of production. For example, adire cloth
can be made using the traditional hand methods, the modern machine and
combination of the two methods. If the combination of the two methods is the
cheapest method of production, then the company will go for it. It should be
noted that Government Interventions in free market economy is not allowed.
Strengths
There
may be a good opportunity for innovation and incentive to produce. There is
usually economic freedom in a free market economy. There may be a direct link
between the buyer and the seller through price mechanism.
Weaknesses
There
may be few incentives to protect the environment. Market power may be
concentrated in the hand of few. People without marketable skill may lack
adequate protection.
Mixed Economy
The
economic decision on what to produce; how and where to produce; for whom to
produce; is made jointly by the government and the private sectors in the
economy. This is achieved through the demand and supply mechanism (price and
profit) based on free market enterprise. Mixed economy is a combination of
controlled economy and market economy.
Most economies of the world show evidence pointing to characteristics of mixed economy. Therefore, we may conclude that there is no pure controlled; traditional or free market economy. Countries like Nigeria, United State of America, United Kingdom, Malaysia, China and all modern economies are mixed economies. It should be noted that in a mixed economy, government intervention is limited somehow to market regulation in the business and household sector as well as input and output market. This is because businesses own resources, they also determines how the resources are put into use. That is what to produce, to whom to produce and how to produce. There should not be government intervention in a truly free-market economy. But as a result of the mixed economy, government serves as regulators to some sectors or industries in the economy.
Strength
There
is effectiveness in achieving social goal. There is likelihood or providing
economic security
Weaknesses
There may be lack of incentives to create quality goods and services. There may be lack of environmental protection.
Each
market has its own strengths and weaknesses as stated above; market economy
seems to be a better option. Its ability to promote efficiency and growth, to
protect environment and economic freedom to own resources and to employ it in
efficient ways is outstanding.
Especially
when compare to traditional economy and command economy. Nevertheless, most
economies are moving towards mixed economy where command or traditional
economies ideas are combined with market economic values.
This
site discussed four basic economic systems in the world which were determined
by how a country answered the basic economic question especially questions on
what to produce and how to produce. Traditional economy is based on answering
economic problem of what to produce by producing what their forefathers
produced employing also the way they produced it. In command economy,
government answer the basic economic problems and determines how and what to
produce without private sector initiative. Market economy allows forces of demand
and supply to determine what and how to produce, with protection of economic
freedom. While mixed economy combines market and controlled economies ideas.
Most modern economies tend to adopt mixed economy system.
Also read on << Fundamental Principles of Economics >>
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