Four type of Economic system

Let us start this topic with a question of need of economic system, before defining it.
Why we need Economic system ?
In previous articles we saw, economics is all about making choice in world of scarcity. People in an economy follow a fashion of making choice. This fashion have nothing to do with mindset of people but it develops from another fashion in which resources become available. That is whether resources in economy are regulated, one person can buy one car or resources are freely available, buy as many car as you can till you’ve money in your pocket.
But hey, the question is why we need economic system ? The answer is we don’t need it, it is already there since first man on earth exchanged his banana for a mango, from first woman. That was a free market decision made under no compulsion. So we just named it.

Economist have named 4 basic type of fashion( a.k.a Economic system) in which resource become available. These are namely:
A) Traditional Economic System
B) Command Economic System
C) Market Economic System
D) Mixed or Dual Economic System

A) Traditional Economic system: This system is most difficult to define as some connate it with only barter system, or a system based on religious & traditional beliefs. It gives a feeling of dark age and unhappiness. This is true to large extent, as slavery was robust under it, but new form of slavery and unhappiness also exists in latest economic system adopted.
Traditional Economic system keeps traditional values, religious customs and beliefs on highest place. There are very less chances of change in person financial position (Until he wins lottery by collecting coupons in newspaper), as this system consider him to retain exactly the same position of his parents. Tradition decides his work, his living place etc. etc. His set of choice ends before it starts.
On a positive side, this system had the advantage of warm bonds among people. However, People largely remain connected to land. More land or more gold = more influence. This notion ended when world recognized power of intellectual property.
To summarize, this system is most stagnant and individual preference are inferior to society preference.

B) Command Economic system (Planned economy):
In command economic system, sole agenda of authority (read as Government) is socialism. Everyone is equally assigned resources available. It is also known as planned economic system as Govt decides the allocation by planning. What do you think, is govt really providing everyone equal opportunity or the govt just assumed the position of most influential (and is just acting right).
The economy under this system becomes centralized and people are left with less choice (among options available). Though it can’t be said stagnant, that’s what China of today has proved it.

C) Market Economic System (Free market economy):
Before thinking of USA as pure free market economy, you should read manifesto of republicans and democrats(Political parties of USA). Both of them are in race to spend highest on public welfare. There is socialism in assumed free markets of today.
So what is going to be pure free market. A politician ignoring a person dying of hunger in front of him. The politician thought process should be, he should get a job asap, of his own choice(Subject to his capability and qualifications). There is no restriction on opportunities in this system. Market act freely, both buyers and seller have no influence other than that of their personal interest. Production of industry are based on consumer demand, both have zero regulations from government side. Instead they come out with their own policies which changes in interest of their own.

D) Mixed Economic system:
Most advance economic system, as world felt power and weakness of both Command and Market economic system, this was solution to not to interfere in consumer-buyer relation but also save the person dying of hunger in front of politician by making him beneficiary of any social scheme. Businesses as well as govt. have a say in allocation of resources. Extent of freedom to business is decided by government. But those are businesses who pitch for their favorite party in elections and have influence on upcoming govt. policies

When we read the next topic, Factor of Production(FoP), we will come to know type of resources we have discussed above (Namely labor, capital, entrepreneurs, raw material, information resource).

  1. Dear Sir

    Hats off….study material is just too good .

    Plz confirm if you will cover the whole economy for RBI Grade B Exam before 21 Nov.

    If yes plz tell the specific topics you are going to take up in next few days


    1. I am planning to complete it before 15th of october. You can post queries at .All the best for your exam.

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