In fact, the term “economic system” should be understood as the means by which decisions are made in society related to economic variables. In this light, the economic system of society determines how society answers its fundamental economic questions, again, what to produce, how to produce products, who should receive these products, and how the future growth of the state in the world market will be ensured.
Significant differences in economic systems lie in the degree to which economic decisions are made by an individual in contrast to state bodies, and whether the means of production are private or state property.
This article will talk about what are the functions of economic systems, as well as what their types exist.
The functions of the economic system
Regardless of what the economic system is, it performs a number of traditional and non-traditional functions.
The first ones include the following:
- Definition of what needs to be produced within the state and what is not.
- The choice of method. Here, the economic system decides which combination of factors should be used to maximize the use of limited resources by minimizing costs and increasing productivity. A solution may include the use of labor-intensive or capital-intensive production methods.
- Determining who to produce goods and services for. Another problem faced by the economic system is to decide for whom to produce certain goods. To get the most out of limited resources, the product must be produced in the area where it will be in demand and where costs will be minimized. A production unit may be located near a source of raw materials or a market center, depending on the nature of the product.
Non-traditional functions of each economic system:
- Sustainable economic growth. Economic systems must ensure economic growth. Due to lack of resources, society must know whether its ability to produce goods and services is expanding or decreasing. Some of the main ways to promote economic growth include ensuring adequate growth rates of per capita income, improving technologies through the introduction of more advanced production methods, as well as better and more extensive education and training of the workforce and others.
- Ensuring full employment. Society must also provide full employment. The objective of economic systems is to ensure that resources are not inactive or unemployed, as resources are limited. In a market economy, full employment is achieved by stimulating demand.
Now, knowing the basics of the economic system, you should consider what it can be.
Traditional economic system
The traditional economic system is the oldest type of economy in the world. This is a type of economy in which the organization of production and distribution is often governed by tribal rules or customs. This type existed mainly in the early stages of development, when the economy is closely connected with the social structure of the community, and people perform economic tasks for non-economic reasons. In a traditional economy, economic issues are largely determined by social or religious customs and traditions. For example, women can plow fields because this is their usual role, and not because they know how to do it.
To date, there are states in the world with this economic system. As a rule, these are countries of the second or third world, closely related to the fact that their main way of making money is agriculture. In this type of system, surplus (excess of income over expenses) is almost impossible.
Advantages and disadvantages of the traditional economic system
Each member of the traditional economy plays a specific and pronounced role, and these societies, as a rule, are very united and socially satisfied. This can be called a great advantage, because a cohesive society can withstand even the greatest difficulties.
But the disadvantages of this economic system are the lack of access to technology and modern medicine. This is what affects the standard of living, which is usually low compared with other more developed countries.
Team Economic System
The command economic system is determined by the fact that in it the authoritarian central government sets the rhythm of the entire social life of the state. In this type of economy, decisions related to the functions of the economic system are made on a collective or group basis.
There is collective ownership of factors of production. A group that owns production factors and makes decisions can be some kind of state body.
The main feature of the economic system is planning. Employment, the quantity of goods to be produced, and the distribution of income are determined by central planners who organize future economic growth. Cuba, North Korea, Russia and Iran are examples of economies that are closest to a perfect command economy.
Advantages and disadvantages of a command economic system
The advantages include the fact that with the clear work of the entire state, almost one hundred percent employment of the entire economically active population is ensured. In addition, such an economic system of society makes it possible to correctly use all available resources.
The disadvantages include the fact that the government focuses on society as a whole, but not on the personality of each person.
Market system
A market economy or pure capitalism is an economic system based on private property and the freedom of people to carry out their economic affairs without interference from government bodies or other groups.
Capitalist economic systems are characterized by great freedom of choice, which is enjoyed by consumers and commercial firms in the market of goods, services and resources. The capitalist economy is also known as the economy of free exchange.
The essence of pure capitalism is freedom. There is freedom to own property, freedom to buy and sell, and freedom from government interference in the economic aspect of every person’s life. Capitalism is best characterized by the economy of the United States, although it is not a purely capitalist economy.
Advantages and disadvantages of a market economic system
Speaking about the advantages of this economic system, we can distinguish that competition leads to efficiency, because companies that have less cost are more competitive and earn more money. Innovation is encouraged because it provides a competitive advantage and increases the chances of wealth. A wide variety of goods and services is available as companies try to differentiate themselves in the market.
However, there are a number of disadvantages of a market economy. First of all, it is that inequality in wealth and mobility arises because wealth tends to generate wealth. In other words, it is easier for rich people to become richer than poor. In addition, freedom in the market leads to the fact that private enterprises often harm the environment, saving on environmental safety. Another important drawback is that under such a system, society is deprived of social guarantees and security, since the market is determined by the personal interests of entrepreneurs, not workers.
Mixed economic system
A mixed economic system is a combination of several types of systems. In a mixed capitalist economic system, both public and private decisions are important. In other words, with this system, everyone can play a free game in the economic market, but at the same time, the state does not allow it to negatively affect social and other components. It is worth noting that the economic system of the Russian Federation is mixed.
Advantages and disadvantages of a mixed economic system
The advantages include the fact that there is control over the business monopoly by the state and the protection of the rights of all participants in economic life (both entrepreneurs and workers) is ensured.
But it is fashionable to attribute the disadvantages to the fact that private business suffers frequent government interference in its affairs.