The living standards of the people of any country determined by how the economy of the country is doing. For that, each country develops an economic system that helps them to respond to economic problems better. When a country chooses its economic system they actually check how that system answers the following questions:
- What goods are produced?
- How to produce these goods?
- Who gets to use them?
- How to accommodate the new changes?
- How to promote technological progress?
Economic systems differentiate on the bases of two factors first is who owns the production factors and second is the ways would be used to motivates, direct, and coordinate the economic activities. Economic System classified into three categories on the bases on these factors.
- Laissez-Faire Capitalism
- Command System
- Market System
Now below we will see the characteristics of which system separately.
Laissez-Faire is a French word which means “leave us alone” because in this system government intervention is limited and people themselves decide their economic matters that why its called Laissez-Faire. The government’s role is limited to protecting the property from thefts and developing the environment in which legal contracts would be enforced.
According to this system theory, human welfare would be reduced by government interventions. They believe that if government roles increases in economic matters than the system would end up working for the interest of government instead of society at large. To prevent this from happening the government should limit its roles in economic matters. That would allow mutually beneficial contracts to be negotiated.
The point to be noted here is, this system is just hypothetical no government actually limits it’s rights to what Laissez-Faire Capitalism allowed. Instead, every government takes an active part in the countries economic system. Like some of these activities are taxes, safety regulations, income redistribution, licensing, subsidies, and much more.
The Command system is the exact opposite of the Laissez-Faire system because in this system government has most of the rights of economic actions of the country. This system is also called communism.
The government is the one who owns most of the enterprises in this system. The board of directors of the companies is selected by the government who make all the important decisions of the companies. These decisions range from how to use resources, distribution of output, to production activities. In this system, enterprises work according to the central plan set by government representatives, as the allocation of government-owned resources.
Some of the countries that are actually using the command system are North Korea, Laos, Myanmar, Cuba, Turkmenistan, Belarus, and Iran. Other countries that are changing their economics systems from command to capitalistic or market systems are China, Russia, and other European countries. However, in China, the government still owns a large number of enterprises but they start using the Market System for its economic activities instead of a centrally planned system.
This system is the mixture of the last two systems which is Laissez-Faire Capitalism and Command System. So that’s why this system is also called the Mixed Economy.
In the market system, some decisions are centralized means taken by the government and some are decentralized that are taken by enterprises and people. This mixture of decisions varies from country to country. At the same time, there is one feature that is common across the world that the property is owned privately, not by the government. Enterprises take their own decisions regarding production, resources, goals, and consumptions. In this system, the prices are set by the market through demand and supply methodology.
The market system allows great monetary benefits for the participants. In this system, participants work for their self-interest which results in competition in individually working buyers and sellers.
This system is used by a large number of countries in the world including the USA. It not only provides growth and economic stability in the country but also a source of certain goods which otherwise would not be produced or underproduced. The government is not a powerful force in this economic system. It’s the market itself that gives the answers to five fundamental questions.