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.
Overview of Economics System
Different
individuals live together in a community with a set of objectives and shared
values. A community is a place where these individuals with set of objectives
and shared values interact. In a group of people in a community or society,
each individual possibly may have different and competing objectives.
As
a result, social institutions emerge to resolve the conflict between individual
objectives. People of similar objectives usually meet together as a result of
demand and supply of goods and services. Their meeting place is referred to as
the market. Market is a social institution where people of similar objectives
meets to exchanges values and meet their demands.
In
doing this, different types of economic decision making processes are adopted
by the individual and social institutions. Social institutions have its
influence on human behavior which determines their decisions in answering basic
economic problem.
What is 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 consumptions 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 behavior.
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
following are the basic economic systems:
1.
Traditional economy
2.
Controlled economy
3.
Free market Economy
4.
Mixed economy
1. 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.
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 knowhow may be monopolized
by the family that specialized 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.
2. 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.
3. 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 maximized
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.
4. 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.
Conclusion
on what is Economic System? - Overview, Types,
and Examples
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.
The
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.
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