Text: Economic Systems

People and societies organize economic life to deal with the basicproblems through economic systems. An economic system can be described as thecollection of institutions, laws, incentives, activities that govern economicrelationships among people in a society and provide a framework for answeringthe basic economic questions.

Most economic systems use one or more of three basic methods to makeeconomic decisions: tradition, command and markets. So economic systems areclassified into four broad categories, according to how most economic decisionsare made. These are traditional, command, market and mixed economies.

Traditional economy. People generally repeat the decisions made at anearlier time or by an earlier generation. Can just anyone be king or queen ofEngland? Tradition answers that question. In the US, women were stronglydirected to certain “traditional” occupations for many years, such asteaching, raising children, nursing and being librarians.

Command economy. They rely almost totally on government to make economicdecisions through centralized authorities. Mixed economy. The economic systemused in most countries lies between the two extremes of command and marketeconomies. Mixed economies answer the basic economic questions partly throughthe market and partly through the government, with some decisions based ontradition as well.