Lakhasly

All economic systems must make three basic economic decisions: (1) what and how many goods and services should be produced, (2) how they should be produced, and (3) who gets the goods and services that are produced. These decisions are made differently in the three major economic systems—traditional, market, and command.

In a traditional economy, habit and custom determine the rules for all economic activity. Individuals are not free to make decisions based on what they would like to have. Instead, their behavior is defined by the customs of their elders and ancestors. For example, it was a tradition in the Inuit society of northern Canada that a hunter would share the food from the hunt with the other families in the village. Today, traditional economies exist in very limited parts of the world. One of the few advantages in a traditional economy is that the roles of individuals are clearly defined. There are also many disadvantages to this type of society. These societies are often very slow to change. When new technologies are introduced, these ideas and techniques are discouraged.
In a market economy, individuals and private groups make decisions about what things to produce. People, as shoppers, choose what products they will or will not buy, and businesses produce more of what they believe consumers want. A market economy is based on the concept of free enterprise, the idea that private individuals or groups have the right to own property or businesses and make a profit with only limited government interference. In a free enterprise system, people are free to choose what jobs they will have and for whom they will work. People have the ability to make as much money as they can and do what is in their best interest. Another positive aspect of market economies is that the government tries to stay out of the way of businesses and there is a great variety of goods and services for consumers. An economic system organized in this way is referred to as capitalism.

One major problem with this type of economy is that it does not always provide the basic needs to everyone in the society. The weak, sick, disabled, and old sometimes have trouble providing for themselves and often slip into poverty.

No country in the world, however, has a pure market economy system. Today, the U.S. economy and others like it are described as mixed economies. A mixed economy is one in which the government supports and regulates free enterprise through decisions that affect the marketplace. In this arrangement, the government’s main economic task is to preserve the free market by keeping competition free and fair and by supporting public interests. Governments in modern mixed economies also influence their economies by spending tax revenues to support social services.
In a command economy, the government owns or directs the means of production—land, labor, capital (machinery, factories), and business managers—and controls the distribution of goods. Believing that such economic decision making benefits all of society and not just a few people, countries with command economies try to distribute goods and services equally among all citizens. Public taxes, for example, are used to support social services, such as housing and health care, for all citizens. However, citizens have no voice in how this tax money is spent.

Socialism and communism are examples of command economies because they involve heavy government control. However, in practice these two economic systems are mixed economies. In a socialist economy, the government owns some, but not all, of the basic productive resources. The government also provides for some of the basic needs of the people, such as education and health care. Communism is an extreme form of socialism in which all property is collectively, not privately, owned. Under communism, the government decides how much to produce, what to produce, and how to distribute the goods and services produced. One political party—the Communist Party—makes decisions and may even use various forms of coercion to ensure that the decisions are carried out at lower political and economic levels.
Recent history has demonstrated, however, that communist economies lack the free decision making and incentives that foster business innovation and generation of products that people need and want. Customers can be limited in their choices, and economies can stagnate. As a result of these problems, command economies often decline. The Soviet Union, as described below by a Russian observer, provided an example of this situation:

“In 1961, the [Communist] party predicted . . . that the Soviet Union would have the world’s highest living standard by 1980. . . . But when that year came and went, the Soviet Union still limped along, burdened by . . . a stagnant economy.”

—Dusko Doder, “The Bolshevik Revolution,” National Geographic, October 1992
By 2000, Russia and the other countries that were once part of the Soviet Union were developing market economies. Communist China and Vietnam have also allowed some free enterprise to promote economic growth, although their governments tightly control political affairs.

Socialism allows a wider range of free enterprise. It has three main goals: (1) an equitable distribution of wealth and economic opportunity; (2) society’s control, through its government, of decisions about public goods; and (3) public ownership of services and factories that are essential. Some socialist countries, like those in Western Europe, are democracies. Under democratic socialism, people have basic human rights and elect their political leaders.