Economic Systems Overview
In a Nutshell
What role should the government play in the economy? None? Lots? Something in the middle?
Different people will have different answers, but that's the key question in shaping the world's different economic systems. Economists generally recognize four types: traditional economies, command economies, market economies, and mixed economies. The critical factor separating the last three is the degree of government involvement in the economy.
The United States, like most advanced democracies, has a mixed economy. Most economic decisions are made in the marketplace by individuals who exercise a great deal of control over their economic lives. But the government also plays a large role in the economy, acting as a referee for market activity and influencing the allocation and distribution of resources. How big a role that should be is something of a political and economic balancing act, and one that can be very controversial. Just show up for a Tea Party rally or sign up for MoveOn's email list and you'll see what we're talking about...
But controversies over the role of government in the economy are nothing new; they go back to the Founding Fathers and beyond. There has been a broad trend, though, for the role of the government in the economy to expand over time. Two hundred years ago, America’s economy more fully reflected the free market ideals advanced by Adam Smith. But during the twentieth century, in particular, the role of the government increased substantially. Some people thought this was great; others thought it was awful. In recent decades, a movement best embodied by President Ronald Reagan attempted, with mixed success, to reverse that long trend toward increased governmental involvement in the economy. The debate continues today.
Why Should I Care?
You may have figured out the American economy—you know your way around the local mall and you know how to shop online (during math class, no less). But if you ever move to another country, you may have to make some adjustments. Not every country’s economy operates in the same way; not every country has developed the same economic system.
For example, if you moved to some remote areas of South America or Africa, you would need to learn how to function in a traditional economy—one in which tradition (no kidding) sets prices and wages, determines what you will do for a living, and limits your potential business partners. Born a goat herder, die a goat herder. (Words to live by?) And if you move instead to someplace like Norway, you'll need to learn to live with a great deal more government control over your economic life. (You'll also need to get a nice warm jacket for the winter. Or a villa in Spain to escape those endless winter nights.)
So unless you are thinking about staying in Omaha for the rest of your life, it's worth thinking about the world's different economic systems. An even if you do plan on standing pat, you might want to read on in order to understand how and when the American economic system took on the character that it did. It’s changed considerably over the years—and it will most definitely change again in the future. How it will change, however, is subject to debate... a debate that you might be able to influence. But only if you know what you're talking about. Hopefully.