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Economic Systems
People must choose which methods to use to allocate different kinds of goods and services. There are four basic ways that societies have come up with over the years to allocate scarce goods and services among their people. These include a Traditional Economy, a Command Economy, a Market Economy and a Mixed Economy. Each of these economic systems are described below. Market Economy The economic system in most industrialized countries is the one used in the United States: a market (or capitalist) economy. Under a market economy, people, rather than the government, own the resources and run the businesses. The purpose of most businesses operating under a market economy is to earn a profit. Individuals, not the government, make most economic decisions in a market economy. Businesses are free to choose which products to produce and how to produce them. They can set their own prices. Customers are free to buy any goods and services they choose. Buyers and sellers are free to make transactions among themselves, without government interference. Command Economy During the 20th century, several nations had command economies (like the former Soviet Union). In a command economy the government owns most resources and makes most economic decisions. Each company receives a government plan that tells it what to produce. The government determines all prices, styles, colors and even the amounts of products produced. Individuals within a command economy have no say in production and often not even their role in it. If the government tells you that you will be an assembly‐line worker, then that is what you will be. Today (since the break‐up of the Soviet Union), the best‐known command economies are North Korea and Cuba. Mixed Economy In reality, most countries today have economies that contain a mix of economic systems. Even in the U.S., the economic system is not a pure market economy (although we still consider our system a market economy). Our government does control the economy in some ways. For example, it sets the rates that public utilities, such as electric and water companies, can charge consumers. For the good of society, the government also sets limits on what businesses and individuals may do. For example, neither you nor a business is allowed to discard hazardous waste into a river. Also, a business may not make false claims about the quality of its products. Most economies in the world are actually mixed economies, falling somewhere between a pure command economy and a pure market economy. Traditional Economy Throughout most of human history, people have lived in traditional economies. In a traditional economy, the ways to produce products are passed from one generation to the next. Parents teach children how to produce goods and services. Children pass these methods on to their children. Tribes in remote areas of the world still live in a traditional economy. Parents teach children how to hunt, weave baskets, and create jugs to carry water. Our society still contains some elements of a traditional economy. Broad Social Goals of Economic Policy
All economic systems strive to achieve broad social goals for the good of the citizens.Each of these social goals, however, require tradeoffs. All economic systems strive to achieve a set of broad social goals, including economic efficiency, equity, freedom, growth, security, and stability. How these goals are prioritized, and how successful an economy is at attaining these goals, influences the quality of life for its citizens. Recent events such as the breakup of the former Soviet Union; the aging of the population in the United States, Japan, and most nations in Western Europe; remarkable advances in technology; and public policy discussions relating to social security, health care, job training, and international trade have focused attention on the broad social goals, and especially on how different countries and types of economic systems tend to value some goals over others. American citizens and policymakers must decide how best to achieve these goals, working within the framework of a market economy. Achieving these goals is often difficult to do, because although the goals complement each other in some cases, in many cases there are serious tradeoffs to face. When that happens, policies or programs designed to achieve one goal often interfere with achieving another goal or goals. Resolving these conflicts when people have different opinions about the relative importance of each of these goals, and even different interpretations of what the goals mean, is a perennial challenge in every country, and in every economic system. The six broad social goals of economic policy are: Efficiency .... Optimal use of scarce resources; preventing waste and ensuring most benefit for least cost. Equity ............ People within society are treated fairly and equally. Freedom ...... Individuals’ economic freedom of choice is protected and fostered. Power of government and other interest groups is constrained. Growth ......... Increasing the productive capacity of the society. Security ........ Protecting individuals against such economic risks as unemployment, bank failure, poverty, business failure, etc. Stability ........ Maintaining an economic environment characterized by little or no inflation and no rapid price fluctuation.