Economic Systems: Components and Types

An economic system is the system of producing and distributing of goods and services and allocating resources in a society. It includes the combination of the various institutions, agencies, entities (or even sectors as described by some authors) and consumers that comprise the economic structure of a given community. A related concept is the mode of production. The study of economic systems includes how these various agencies and institutions are linked to one another, how information flows between them, and the social relations within the system (including property rights and the structure of management).

Among existing economic yester, distinctive methods of analysis have developed, such as socialist economics and Islamic economic Jurisprudence. Today the dominant form of economic organization at the global level is based on capitalist market-oriented mixed economies. [l] Economic systems is the category in the Journal of Economic Literature classification codes that includes the study of such systems. One field that cuts across them is comparative economic systems.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!

order now

Subcategories of different systems there include: planning, coordination, and reform productive enterprises; factor and product markets; prices; population public economics; financial economics cantonal income, product, and expenditure; money; inflation international trade, finance, investment, and aid consumer economics; welfare and poverty performance and prospects natural resources; energy; environment; regional studies political economy; legal institutions; property rights. There are multiple components to economic systems.

Their interaction may be coherent or result in instability. Decision-making structures of an economy determine the use of economic inputs (the factors of production), distribution of output, the level of centralization in decision-making, and who makes these decisions. Decisions eight be carried out by industrial councils, by a government agency, or by private owners. Every economic system represents an attempt to solve three fundamental and interdependent problems: What goods and services shall be produced and in what quantities?

How shall goods and services be produced? That is, by whom and with what resources and technologies? For whom shall goods and services be produced? That is, who is to enjoy the benefits of the goods and services and how is the total product to be distributed among individuals and groups in the society? [3] Thus every economy is a system that allocates resources for exchange, production, striation and consumption. The system is stabilized through a combination of threat and trust, which are the outcome of institutional arrangements. 4] An economic system possesses the following institutions: Methods of control over the factors or means of production: this may include ownership of, or property rights to, the means of production and therefore may give rise to claims to the proceeds from production. The means of production may be owned privately, by the state, by those Economic Systems: Components and Types By boomerang is eligible to make decisions over economic activities. Economic agents with decision- making powers can enter into binding contracts with one another. A coordination mechanism: this determines how information is obtained and used in decision- making.

The two dominant forms of coordination are planning and markets; planning can be either De-centralized or centralized, and the two coordination mechanisms are not mutually exclusive and often co-exist. An incentive system: this induces and motivates economic agents to engage in productive activities. It can be based on either material reward (compensation or self-interest) or moral suasion (for instance, social prestige or through a democratic decision-making process that binds those involved). The incentive system may encourage specialization and the division of labor.

Organizational form: there are two basic forms of organization: actors and regulators. Economic actors include households, work gangs and production teams, firms, Joint-ventures and cartels. Economically regulative organizations are represented by the state and market authorities; the latter may private or public entities. A distribution system: this allocates the proceeds from productive activity, which is distributed as income among the economic organizations, individuals and groups within society, such as property owners, workers and non-workers, or the state (from taxes).

A public choice mechanism for law-making, establishing rules, norms and standards and levying taxes. Usually this is the responsibility of the state but other means of collective decision-making are possible, such as workers’ councils. There are several basic questions that must be answered in order for an economy to run satisfactorily. The scarcity problem, for example, requires answers to basic questions, such as: what to produce, how to produce it, and who gets what is produced.

An economic system is a way of answering these basic questions, and different economic systems answer them differently. Many different objectives may be seen as desirable for an economy, like efficiency, growth, liberty, and equality. [6] In a capitalist economic system (capitalism) production is carried out to maximize private profit, decisions regarding investment and the use of the means of production are determined by competing business owners in the marketplace; production takes place within the process of capital accumulation.

The means of production are owned primarily by private enterprises and decisions regarding production and investment determined by private owners in capital markets. Capitalist systems range from laissez-fairer, with minimal government regulation and state enterprise, to regulated and social market systems, with the stated aim of ensuring social Justice and a more equitable distribution of wealth (see welfare state) or ameliorating market failures (see economic intervention).

In socialist economic system (socialism), production is carried out to directly satisfy economic demand by reducing goods and services for use; decisions regarding the use of the means of production are adjusted to satisfy economic demand, investment (control over the surplus value) is carried out through a mechanism of inclusive collective decision- making.

The means of production are either publicly owned, or are owned by the workers cooperatively. A socialist economic system that is based on the process of capital accumulation, but seeks to control or direct that process through state making power, are market socialist systems. The basic and general economic systems are:

Market economy (“hands off systems, such as Laissez-fairer capitalism) Mixed economy (a hybrid that blends some aspects of both market and planned economies) Planned economy (“hands on” systems, such as state socialism or communism, also known as “command economy”) Traditional economy (a generic term for older economic systems) Participatory economics (a system where the production and distribution of goods is guided by public participation) Gift economy (where an exchange is made without any explicit agreement for immediate or future rewards) Barter economy (where goods and services are directly exchanged for other goods or services)