Show Me the Money / Economic Systems

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All economic systems address the same questions: what to produce, for whom to produce, and how to produce. There are three forms of economic systems -- traditional, command and market. The feature that defines a traditional economy is economic decisions based on how things were done in the past. For instance, a child’s occupation is determined by his or her parents’ and grandparents’ occupations. In a command economy, the main characteristic is the government making the economic decisions. In a market economy, the most important feature is buyers and sellers making the economic decisions.

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The three economic systems are models of systems. They seldom exist in the real world as completely one or the other. Real-world economic systems are a mixture of the three systems. The reason for this mixture of systems is because individuals and governments adjust economic decision making when it is in their best interest. The former Soviet Union was a communist or command economy until 1989. Because their economy was performing poorly, government officials decided to move to a more market-based economy. Consequently, their gross domestic product and standard of living have improved.

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In comparison, the United States is a capitalist or market economy, with some features of a command economy. Unlike the former Soviet Union, which reduced the level of government management of the economy, the United States found it necessary to increase government management to ensure economic growth and stability. The United States also has elements of a traditional economy because of families passing down businesses to succeeding generations. On the other hand, this feature is less apparent in Russia because of its history of a command economy in which the government owned and controlled all businesses. It may become a more important feature in the future now that there is private ownership of property in Russia.

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Increased government control of the economy in the United States came about because of market failures, such as the Great Depression in the 1930s. This was a time of very high unemployment, and business and bank failures. A reason the government stepped in to aid the economy was that the problem was so large that the market was unable to correct itself. In fact, this was a global problem, not just a problem in the United States. The federal government increased spending by building roads and public buildings. As a result of this program, more people had jobs. Bank failures meant people lost their savings, so to prevent this problem from occurring again, the government created the Federal Deposit Insurance Corporation (FDIC), insuring bank deposits.

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From our colonial beginnings to today, the United States has been a mixed market economy with elements of all three economic systems. In fact, one of the reasons for the colonists declaring their independence was too much government control of the economy, from taxes to trade restrictions. It is not surprising that from the beginning, government controls over the economy are politically controversial and likely to remain so in the future. In the past as well as in the future, the question will be how much government control should there be.