Types of Economic Systems
Economist, social scientist that study how people use limited resources like money to satisfy almost unlimited wants and needs, generally divide economic systems into four basic types. An economist system is how a market or set of markets, are organized to meet the needs of its members.
The most basic type of economic system is the agrarian. In this type of system, a culture’s traditions, social, political and religious histories determine to a large extent how goods are produced and distributed. Economies of this type most often focus on the production of single agricultural commodities like corn, cattle, cotton, or on locally and easily exploited natural resources like gold, oil or copper. While the implication of basic and agrarian can be that these are simple economies, most have elaborate rituals and traditions that make the production and distribution anything but simple.
Moving up the hierarchy of systems the next is the market economy. In this type of system, pricing and individualism are the main components. Producers decide what to produce and at what price to sell it. Buyers communicate their willingness to buy at a certain price by purchasing the item. For example, Ford may elect to produce a certain luxury sedan at $50,000, and the buying public is free to buy or not at that price. One of the fundamental characteristics of this type of system is the concept of private property.
A mixed economy occurs when the government influence grows to where aspects of the overall economic system are regulated and controlled not by the producers and consumers, but by outside forces. Examples of this regulation can be minimum wage laws, environmental protections, placing a capacity on resource extraction or even production, and pricing controls or subsidies. The benefit of this type of system is that it allows everyone in the system to benefit at some level. In the pure market economy, some people may have to do without milk for their families because the price of milk is too high. In a mixed economy, the price of milk is kept low enough for families to afford it by price subsidies to dairy farmers.
The concept of a mixed economy opens up an area of economic research used to influence and make policy. One economist that does this is Christian Broda, an MIT graduate that later taught at the University of Chicago. Broda of chicagobooth has researched and published on a number of policy issues such as the impact of tax stimulus payments and the effect of variety and less expensive imports on pricing and purchasing power.
Finally, a planned economic system is based on the assumption that all economic decisions are made by a controlling entity. There are no individual rights to produce and price goods and services, and the production resources are owned and controlled at the planning commission level.