What is Economy

Let’s discuss the concept of Economy and its types.

Economy is a system of institutions and processes that facilitate or are otherwise a part of production (making) and distribution (sales and use) of goods and services in the society.

Economies determine how we make our money, use our money, how many and what types of goods and services are being offered and what people can afford to buy with the money they make, whether there are enough jobs. Economies determine how financial institutions operate and how markets perform (how high or low mortgage rates are, etc.).

Economy is considered to be in good shape when there is a balance between the supply (what is being produced and offered) and demand (what people want and can afford to buy). When the majority of consumers can afford more than just essential items (such as food, for example) the economy is considered to be doing well. It is easy to find a well-paying job and the majority of small and medium businesses are thriving. The Government can allocate funds towards social programs to support those who are less fortunate.

When for various reasons (natural disasters, poor political decisions, etc) businesses are shutting down, people are losing jobs and the majority of consumers can only afford essentials – the economy is considered to be in poor shape. This can be short or long term. Prices are going up and it is more difficult to maintain social programs for those who are less fortunate.

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Categories of Economic Systems

  1. Traditional economy

The most basic and the most ancient economic system. It is based on people producing basic goods and offering basic services. It is still common in some developing countries where such activities as farming dominate among activities to generate income. This type of economy is very straightforward and least wasteful. However, it is very primitive with no or very little opportunities for innovation.

  1. Command economy

A significant portion of the economy (especially production, natural resources) is controlled by the government. Less significant sectors of the economy are regulated by the people. 

Command economy is centralized, thus is not flexible enough to react and adapt to possible changes. Also, it can only work well if the central body does not abuse its powers.

  1. Market economy

Based on the idea of a free market, this category involves as little government participation in regulating the economy as possible. The supply and demand regulates the economy and the government does not control natural resources. The main downside of such an economy is that a few private entities can gain control of natural resources and start dictating their rules to the rest. In general, a pure market economy does not exist as there is government involvement in the economy of every country.

  1. Mixed economy

This category combines elements of the Command and Market economies. Mixed economy is the most popular and has proven to work best when there is a balance between privately and government owned sectors of the economy and history has shown that governments tend to try to impose more regulations and exercise more power than necessary.

Types of Economic systems

  1. Capitalism

It is largely based on the free market economy idea (supply and demand). Private individuals and businesses own capital goods. In modern times, most countries have a mixed capitalist type of system that includes some government regulations to prevent such things as monopolies, for example (when one company dominates and won’t let anyone else succeed in the same sector) and to provide support to those who are unemployed. In a capitalist economy, property and businesses are owned and controlled by individuals. Competition drives progress. There is no centralized planning and the progress, innovation, etc occur naturally at the initiative of private entities. Jobs depend on the success of the individual companies and in pure capitalism employees have little protection or social security. 

  1. Socialism

In a socialist economy, the state owns and manages the crucial means of production. The primary idea of the socialist economic system is the redistribution of wealth and resources from the rich to the poor. Within this system the goal is to ensure equality in opportunity and equality of outcome (which means competition is discouraged). The collective good is more important than individual achievements or aspirations. History has demonstrated that the efficiency of such an economic system is rather low as there is very little incentive for people to develop new ideas and innovate. There is a greater social security within this type of economic system, though, as the main employer is the state.

  1. Communism

This is a pure Command type of economic system within which the government owns most of the production sector and makes all decisions related to the allocation of resources, as well as decides what products and services should be provided. 

The main goal of communism is to eliminate class distinctions among people, where everyone has their equal share of what the society commonly produces. In the end the idea is that this process becomes self-regulatory and the government is no longer needed. Historically, countries that tried communism, ended up with the following:

  • The government owns all means of production. Everything is managed by the employees of the State
  • The Communist Party determines economic plans and employees are to meet these plans (often with self-interest built in them)
  • Since communist economy lacks efficiency and because of the Communist Party’s need to stay in power, most economic resources are devoted to industrialization and to the military, limiting the production of basic goods and causing huge deficits of some of the basic items such as, for example, soap and toilet paper. 

The topic of economy and its types is a complicated one and has been studied by many scholars for many centuries.

Many countries today practice some form of capitalism incorporating elements of socialism into their economies by creating programs for those who are less fortunate to ensure they have a certain standard of living and opportunities to advance.

Ensuring and preserving the balance between private ownership, competition and government regulations has been and continues to remain the biggest challenge of all types of economies.