The Basics of any Economy – Economics Term Paper
Every society in the world has some kind of economic system. The three basic economic systems are traditional, command, and market. These three systems have three common forms of organization known as capitalism, communism, socialism, and mixed. Each from of organization has pros and cons, and each system relates to one or more form of organization.
A traditional economy is one that, like the name suggests, stems from tradition. All the economic discussions and how the scarce resources are use is determined by habit and tradition. In this system, people know their place, if your family is a doctor, you will be too. There is little discrepancy about who will do what and how. Because of this however, new ideas or ways of doing things are scorned, thus there is little growth and the standard of living is lower. Entrepreneurs are very rarely found in a traditional economy, Life becomes very stable and predictable. This type of economy is best shown in the Eskimos in Alaska and the Amish people.
In a command economy, instead of tradition making the decisions, one central government will do it. The controlling unit will make all of the choices and expect the common people to go along with the leader’s decisions. Command economies can be found in Cuba and North Korea. This government is capable of making drastic changes in a short period of time since one unit is controlling everything. Also since the government makes all the decisions, it will sometimes overlook the needs of its people.
The last type of economy is a market economy. The people and firms are the ones in this economy that decide what to produce, for whom, and how much. This economy is the one that allows for growth and change. Actually, it encourages growth and new ideas. The consumers and businesses will determine the prices of products and how much of the are to be produced. In this economy, sometimes resources and jobs are not distributed equally, thus leaving some people in the dust.
Capitalism is the type of organization of an economy that corresponds with a market economy. In this organization, the consumers and businesses make all of the decisions. Businesses are privately owned and the concept of supply and demand controls the prices. Adam Smith, the leading capitalist thinker, wrote the book the wealth of nations in which he talks about the Invisible hand as he calls it would make the prices as low as they could be and the economy efficient (Grant).
The major advantage to capitalism is that it is extremely efficient. The society’s recourses are put to the best use by the businesses for the consumers. Also another advantage that stems from efficiency is individual freedom. The individuals decide what they want to buy and when they buy it. This economy is also flexible to allow for change. The disadvantages of capitalism are that it doesn’t always supply for everyone’s needs. It leaves out those who can not make a competitive living, such as the elderly. Pure capitalism would leave out the production of public facilities and a national defense system, but this pure capitalism has never been achieved. Pure capitalism is also prone to depressions. The best example of Capitalism is in our own country, The United States.
On the other end of the spectrum there is communism, which is the organization of a command economy. In this economy, one central unit, or government, owns all the property. It is then distributed so that everyone has equal amounts land and recourses. This economic system works to make everyone equal. Also the central unit makes all the decisions for the society. Carl Marx wrote a book about communism called The Communist Manifesto. In his book he talks about the fall of capitalism because of its defects, like the tendency to create depressions. The working class would then use Communism to tear down the foundation of private property (Nault, William H.). No country has achieved the pure communism that Marx talked about in his book, but the Soviet Union and china tried.
Communism has many advantages and disadvantages. Advantages are that the workers are guaranteed a job thus creating a sense of security. There are public goods and services that the government will provide for everyone, such as, health care, education, and a military. The consequence of the security a person would receive, is little or no individual freedom. A citizen has almost no say in what he or she does for a living and they can not change jobs is they hate what they do. Also no matter how hard a worker may work, everyone will receive the same pay. This leaves people with no incentive to work harder or to strive to create new products.
Then there is socialism, which is mix of a command and a market economy. In a socialist economy, the government owns the basic productive recourses, and the rest of the businesses are privately owned. The government will plan how the key businesses and industries are to be handled. The government has more say in the economy than it does in capitalism but less than in communism. The officials are usually elected and they are the people who will direct the use of the society’s industries and recourses.
In socialism everyone is provided for. Those who aren’t able to earn decent pay will still share in the benefits of society. This is done through things such as health care, welfare, and guaranteed jobs in the government. In this economy everyone can have say in government and the benefits of it, through the electing of its officials. There are a few downfalls to socialism however. It is usually not as productive or efficient as capitalism. Since the government guarantees jobs, in theory more workers will be hired than are really necessary. This will drive the prices of production up. Sweden is probably the best example of this in our world today.
Then there is a mix of capitalism and socialism, which we rightfully call a mixed economy. This is a mix of a command and a market economy as well. People can go about their affairs freely but there is some government intervention. This is demonstrated in almost every country. This system is good because it allows for change as the people do with some of the benefits of socialism like welfare.
Mixed economy is the best. In a mixed the best of all the economies is offered. A person can choose their job and also receive some of the benefits of a socialist economy like welfare and social security. This economy will provide people with the best form birth to death. The three different economies are all set up in four different organizations. All of which have pros and cons. The world is full of societies with examples of each.
1. Grant, R.G. Capitalism. RSVP publishers: New York, 2001.
2. Nault, William H. World Book Millennium, Vol 18, “Socialism”. World Book Inc: