Text: Economic Systems

People and societies organize economic life to deal with the basic problems through economic systems. An economic system can be described as the collection of institutions, laws, incentives, activities that govern economic relationships among people in a society and provide a framework for answering the basic economic questions.

Most economic systems use one or more of three basic methods to make economic decisions: tradition, command and markets. So economic systems are classified into four broad categories, according to how most economic decisions are made. These are traditional, command, market and mixed economies.

Traditional economy. People generally repeat the decisions made at an earlier time or by an earlier generation. Can just anyone be king or queen of England? Tradition answers that question. In the US, women were strongly directed to certain “traditional” occupations for many years, such as teaching, raising children, nursing and being librarians.

Command economy. They rely almost totally on government to make economic decisions through centralized authorities. Mixed economy. The economic system used in most countries lies between the two extremes of command and market economies. Mixed economies answer the basic economic questions partly through the market and partly through the government, with some decisions based on tradition as well.