Economic systems
Yvonne Harvey, Contributor

Roger Webb, a fourth grade student at the Howard Cooke Primary School in Montego Bay, greets former Governor-General Sir Howard Cooke, prior to the start of the Governor-General's Achievement Awards Scheme Ceremony, held at the Holiday Inn Sun Spree Resort in Montego Bay, recently. In the background looking on are Webb's peers. - Photo by Noel Thompson

Yes, it's our time again. I hope that you are all in good health and ready to digest this lesson. Last week, you were introduced to certain concepts that would help you to understand this topic better. The specific objective related to this topic is that the candidate should be able to state the types of economic systems and identify their institutional characteristics and goals. In looking at each economic system, we will see how each goes about answering the three basic economic questions, which we looked at last week. Before we go into all of this however, we need to define the term ECONOMIC SYSTEM and consider some of the common goals of governments of these systems.

What is an economic system?

The term describes the ways in which a country allocates or distributes its scarce resources among alternative and competing wants. In other words, it is the fixed plan or programme used by a nation to utilise its resources.

Despite the characteristic differences in the various types of economic system, their governments are concerned with the same issues. Some of these issues include:

• The allocation of scarce resources among alternative uses.
• The distribution of national income among the country's inhabitants.
• The control of inflation.
• Economic growth.

Now, let us look at the THREE main economic systems.

THE FREE MARKET ECONOMY

(Laissez-faire or Capitalist Economy)

• Private individuals and firms own the majority of the productive resources and property, hence, they are the ones that allocate or distribute what they own.
  
  
• The question of what to produce is decided on in response to consumer demand and the price for which they can sell their goods and services.
  
  
• The question of how to produce bears in mind the motive of the producers. Their aim is to maximise profits. Therefore, in producing, they choose methods that will minimise costs while maximising profits.
  
  
• The goods and services produced are for those who demand them and are willing and able to pay the price being asked for them. Price is mainly determined by the market forces of demand and supply. In this system there is freedom of choice. Private individuals and businesses are free to obtain economic resources and to produce and sell in a market of its choice. Consumers are also free to purchase with their limited income, those goods and services they feel will satisfy their wants.
  
  
• Another feature of this type of economic system is that most of the social services, such as hospitals schools, roads and public transport are produced in a haphazard manner. There being little or no government enterprises means that in the free market economy, governments provide mainly defence and security and ensure that the laws of the country are upheld and that the rights of the people are not infringed.

Examples of this type of system are the United States of America and Hong Kong.

THE PLANNED ECONOMY

(Command, State Planned or Collectivist)

• Ownership of the scarce productive resources is by the state or government. Therefore, the state or the Government allocates these resources.
  
  
• The state or the Government produces the basic goods and services that will satisfy the needs of people and that will result in the maximisation of social welfare, rather than in the maximisation of profits.
  
  
• The Government through its planning committee decides on how to combine the various factors of production to produce in the most efficient way and a low costs so they can sell at prices affordable to consumers.
  
  
• The goods and services produced are for the country at large, not just for those who can afford to pay for them. A wide cross-section of persons benefit from goods and services produced in government-owned operations.
  
  
• The state or the Government sets prices and determines the levels of wages in firms and industries; they also dictate production targets and the distribution of incomes and wealth.
  
  
• Freedom of choice is limited to the consumer deciding how to spend his/her money. They are free to buy whatever goods and services are offered for sale.
  
  
• Examples of countries, which practise this type of economic system, are Cuba and China.

Now for the final economic system.

• The dominant feature of this system is the existence of two definite sectors - the private sector and the public sector. Each sector owns some amount of the scarce productive resources and will therefore be involved in allocating what they own.
  
  
• The private sector will produce what allows them to maximise profits. These tend to be luxury-type goods demanded by people who can afford to buy them.

Examples of these goods are furniture and appliances.

• The public sector produces for social welfare to satisfy the entire society, thus they tend to produce utilities such as water, telephone services and transportation. How each sector produces and its motives for production also differs. However, the sectors do not conflict with each other, rather they complement or go hand in hand with each other.
  
  
• Government sometimes exercises control in the mixed economy by intervention, for example, by nationalisation or by regulation in the interest of the citizens. Most Caribbean countries adopt this economic system.

Your assignment this week is to list the advantages and disadvantages of each of the THREE types of economic systems. You can obtain the information from your principles of business texts and from this lesson. Bye for now.