Compare 4 types of economic systems to learn about different types of economies. Explore the definitions of a market economy, command market economy, and more.
Updated: 11/21/2023
Economic System | Overview, Types & Examples
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Frequently Asked Questions
What is an example of a traditional economic system?
Examples of traditional economic systems can be found among indigenous groups who have kept their traditional ways of life alive. Some Inuit people, for example, still practice whale hunting and reindeer herding.
What are the 4 main types of economic systems?
The 4 main types of economic systems are traditional economies, command economies, market economies, and mixed economies. Traditional economies are based on conventional forms of providing sustenance. In command economies, rulers hold the power over production and distribution. In market economies, private individuals and groups hold economic power, rather than the government. In mixed economies, aspects from traditional, command, and market economies are combined.
What economy is called a market economy?
A market economy is an economy which is decentralized. In a market economy, the means of production and distribution of goods and services is shared among private individuals and groups, rather than consolidated in the hands of a ruler or ruling class.
What is a focus of the traditional economic system?
The focus of a traditional economic system is to provide sustenance for groups held together by established social ties, such as bonds between family and tribe members. This does not lead to economic growth, but it also produces little waste.
Table of Contents
ShowWhat are the four economic systems? An economic system refers to the way in which cultures and societies arrange and distribute their material goods and services. Although there are unique social customs and institutions in every society, economic systems are broadly thought of as falling into one of three categories: traditional economies, command economies, and market economies. However, all aspects of any economic system can rarely be said to fall cleanly into one category. Therefore, the concept of a mixed economy is often introduced as a fourth type of economy. The United States economy, for example, is a mixed economy which incorporates aspects of a command economy and a market economy.
Market Economy
A market economy is an economy which is decentralized in its nature. A decentralized economy allows private individuals and groups to control the production and distribution of goods, rather than the government. Historically, the development of market economies meant that economic and governmental power, which had formerly been held in the same hands, was split between different groups of people. Market economies developed in Europe from around the 16th century, and went through several stages over the following centuries: mercantilism, commercial capitalism, industrial capitalism, and, most recently, state capitalism. A pure market economy is known as a capitalist system, although most economic systems that are widely regarded as capitalist require a certain level of government oversight to function fairly and efficiently.
Traditional Economic System
A traditional economy is one in which humans provide themselves with sustenance by customary means, such as hunting, fishing, gathering, or slash and burn agriculture. This has been the most prevalent economic system for most of human history. In a traditional economy, sustenance is distributed by traditional social relations, such as by family ties. Traditional economic systems do not lead to economic growth, but they produce little waste.
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Command Market Economy
A command economy is one in which the power of production and distribution is centralized in the hands of a society's rulers or ruling class. Such centralized economies were characteristic of the earliest civilizations, such as Ancient Egypt, China, and the Incan and Mayan kingdoms. These economies could produce massive amounts of surplus wealth, and rulers ordered the construction of impressive monuments such as the Pyramids of Giza and the Great Wall of China. Unlike in traditional societies, these societies had a large slave or slave-like class which worked for the benefit, and even glory, of the elites. The feudal system of medieval Europe is also considered a type of command economy.
In the twentieth century, command economies became a feature of socialist and communist societies. Although these economies allowed for quick industrialization, they were often marked by extreme inefficiency, compelled labor (such as in brutal work camps) and starvation. Except for North Korea, most communist societies today have oriented their policies toward a market economy vs a command economy.
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Mixed Economy
A mixed economy is one in which the characteristics of different types of economies coexist in the same system. In a sense, all economies are mixed economies, combining some traditional, command, and market aspects. It is likely that there has never been an economy which was purely a command economy or a market economy. The great command economies of the past had traditional aspects to them, and the centralized economies of the communist countries became more market like after planned economies lead to major crises. Likewise, capitalist countries have found it necessary to exercise some economic control in order to break up monopolies, enforce safety standards, and provide for public services such as education and infrastructure. Mixed economies are the most common economic system in the world today.
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Today, traditional modes of sustenance can be found in the developing world, in regions such as in Asia, Africa, and South America. Various indigenous groups have kept their traditional ways of life alive. Many of the Inuit people, for example, who live in Artic and subarctic regions of the globe, have retained traditional means of sustaining themselves such as whale hunting and reindeer herding. Even in such cases, however, modern technology such as snowmobiles and money have often become part of people's lives.
The economy of the Soviet Union in the 20th century was largely based on command economy principles. A central economic planning body created goals for the economy that were usually based on a five- to seven-year period. The planned economy allowed for rapid industrialization and repairing of the country after WWII. It also fostered achievements in the space technology because skills could be harnessed regardless of cost. However, major economic failures plagued the civilian economy and lead to supply shortages, even in such critical areas as food production and distribution. The failures of the command economy are frequently cited among the forces which brought about the collapse of the Soviet Union.
The era of the "robber barons," men who made fortunes by monopolizing industries in the 19th century U.S., represents a market economy with very little regulation by the government. Although the 19th century saw the explosive growth of American capitalism, many American industrialists and financiers engaged in unethical business practices, such as exploiting workers and shutting down competition. These men used intimidation, violence, corruption, and fraud to secure vast fortunes and monopolies. The United States government passed the Sherman Antitrust Act in 1890 and the Clayton Antitrust Act in 1914 in order to give themselves the power to break up monopolies and promote competition in various industries.
However, the governments of the United States and Europe have generally seen the role of the government increase as they moved during the 20th century to what is known as state capitalism. In state capitalism, the size and functions of the public realm are greatly increased. In the United States, for example, the economic crisis that the market experienced during the Great Depression led to the development of pensions for the old and of government relief for the hungry and impoverished. These expansions of the public realm were preceded by similar expansions in Britain, France, and Germany. In this sense, these economies have moved more toward being mixed economies.
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An economic system is how a society organizes the production and distribution of goods and services. Economic systems can be divided into four categories: traditional economies, command economies, market economies, and mixed economies.
In traditional economies, people provide for themselves by direct means, such as fishing, hunting, gathering, and slash and burn agriculture. These are the oldest types of economy and have been the most prevalent throughout human history. Today, traditional economies exist in areas of the developing world. The Inuit people, who practice traditional means of sustaining themselves such as reindeer herding and whale hunting, retain aspects of a traditional economy.
Command economies were characteristic of ancient civilizations, where people worked for the glory of a ruler or a ruling class. These civilizations produced surplus wealth and great monuments. A large slave or slave-like class usually worked to glorify a ruler. The feudal societies of Europe are another example of a command economy. In the 20th century, Communist societies relied on command economy principles. The planned economy of the Soviet Union, although it allowed for rapid industrialization and achievements in space technology, suffered from major inefficiencies and shortages. The failures of the command economy are considered to have played a significant role in the fall of the Soviet Union.
A market economy is one in which control over the production and distribution of goods is held by private individuals and groups, rather than the government. A pure market economy is called a capitalist system. Historically, the development of market economies meant that economic power (formerly in the hands of the rulers) was decentralized and divided among various people. However, most market economies are really mixed economies. Governments find it necessary to exercise some control to break up monopolies, enforce safety standards, and fund projects for the public good such as education and infrastructure. The United States and Europe have increased the size and functions of the public realm over the course of the 20th century. In this sense they have moved farther from away from being market economies toward being more mixed economies.
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Video Transcript
Types of Economic Systems
Whenever you buy something at a store, you are participating in the basic transaction found in any kind of modern economy. A modern economy includes the production, buying, and selling of all goods and services, including the people that work to make these activities happen.
Now, imagine your simple store-based transaction happening all across the globe, millions of times a day. Who organizes and coordinates all this buying and selling? Who decides how many employees are needed to handle these transactions efficiently? And who makes sure there's enough products to match the demand?
In this lesson, we'll explore the four different types of economic systems found across the globe. These types include: a traditional economy, command economy, market economy, and mixed economy.
A Traditional Economy
The oldest type of an economy found around the world is a traditional economy, which is based upon a people's belief and customs. In these self-sustaining economies, communities and families grow crops and manage their farms using traditional methods. What they produce is what they get to consume.
Traditional economies can still be found in the developing world, like parts of Asia, Africa, and South America. Although they lead to little economic growth, they also produce little waste, and surpluses are rare. As individuals in traditional economies have clearly defined roles and are invested in their success, these systems also help to keep small communities and societies close together. On the other hand, members of traditional economies often go without things that more complex systems enjoy, like technology and advanced medicine.
Command Economy
Instead of an economy based on tradition, a command system is based on goals passed down from a central ruler or ruling class. In a command economy, the ruling class or government makes all of the economic decisions, such as what goods and services will be produced, how much they should be sold for, and how much workers will be paid for producing them. Modern day examples can be found in many Communist countries, like North Korea and the former Soviet Union.
Other examples, albeit much older, include the medieval feudal system, where the lord provided the land for growing crops. In return, vassals were allowed to live on the land while providing labor and soldiers to the lord. In theory, this economic system may be beneficial if the government has the best interest of its people in mind. However, command economies can also devolve into wide-scale inequality and corruption.
Market Economy
Whereas a command economy is based around a central body, a market economy is a system where pricing decisions are decentralized. When we call something a market, we're talking about anything that brings buyers and sellers together. For instance, e-commerce is a type of market where people are able to use the Internet to buy and sell goods.
Since market economies are decentralized, they are based on private individuals and groups rather than the government. This prevents the government from becoming too powerful and too controlling. In a market economy, society is the driving force in determining how successful the system becomes.
Competition between groups in a market economy creates demand for products: The more successful a group is in meeting the demands of society, the more profitable the system becomes. We should also mention that pure market economies, known as capitalist systems, rarely exist. In most cases, the government institutes some regulations to create a semblance of order.
Mixed Economy
While our own economic system in the United States may seem to fit the definition of a market economy, ours is actually more of a mixture of market and command economies. We call these combined systems mixed economies, which account for most of the economic systems that exist in the world.
Some mixed economies may lean more heavily towards a command economy, whereas others shift more towards a market economy. In most mixed economies, the market is more or less free of government ownership except for some key areas, such as the planning and use of public resources. In mixed economies, the government can also exert control over businesses in the private sector. For a mixed economy to operate at peak efficiency, it must always find the right balance between private business and government control.
Lesson Summary
In this lesson, we learned about the four types of economic systems that oversee the goods countries and societies produce, buy, and sell. We first described the oldest and least profitable type of economic system known as a traditional system. We then discussed a system based on the central goals of a ruling body known as a command system. A market system is the opposite of a command system; here, private enterprise determines economic goals. Most economic systems in the world are mixed systems, which are a combination of command and market economies.
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Economic System | Overview, Types & Examples
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