American Public University
Economic systems aim at developing a sustainable economy that is expected to satisfy the needs of the citizens in the country. An efficient economic system produces the maximum amount of goods by using the production factors at the possible highest productivity level. Productivity is one aspect in an efficient economic system. The other aspect of an efficient system is to distribute the economic production fairly and efficiently among the citizens. The equality in the distribution influences the productivity level of the country.
Considering that the citizens of the country are the entrepreneurs, the workers, and the consumers in the country at the same time, an economic system should give relatively more attention to the human resources. Because of that, managing the education system, health services system, and some other services for the people has an essential place to increase the efficiency of the economic system.
Besides the human resources, there are other resources for production such as land, capital, and natural resources. An economic system is a kind of social and economic design that manages resource allocation among different productions, production processes, and allocation of produced goods and services among citizens. In the history, there exist three main approaches in forming an economic system: traditional economic approach, command economic approach and free market approach. In this essay, I will discuss these three kinds of the economic system. Some countries prefer using a mixed economic system that includes principles from the three different economic system approaches at the same time. The economic systems of the countries cannot be classified perfectly by using some differentiating features. Thus, we observe many mixed systems all around the world in general.
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Traditional Economic Approach
The social dynamics in a country shapes the economic system. In the traditional communities, the traditional values shape the economic system, and the citizens face a traditional economy. The traditional values mainly determine the limits for the individual lives, production relations, and many other social interactions in the country.
Nowadays, we observe that the traditional economies are mostly the less developed countries whose economies are dominated by the agricultural production. The traditional economies forms basic services for the people and the system have a simple structure. The traditional values determine how to produce and supply the public services. Production processes, labor markets, and all the other markets in the traditional economies are shaped according to the traditional values.
In general, the level of competition in these economies is at very low level; therefore, increasing the productivity and the efficiency in the traditional economies are relatively harder. Considering that the traditional economies are not so much open to innovations in the economy, the traditional economies face many troubles satisfying the needs of the citizens and it is almost impossible to increase the traditional economic systems’ efficiencies without transforming the traditional economies into modern economic systems. The development problems in these countries cause many social and economic problems. We observe that the international institutions and the developed countries develop some programs requiring a structural transformation in these economies financed by the developed economies.
There are two main problems that those countries face: 1) unqualified workers and 2) lack of well-developed economic and social structures. Because the people or the managers in these countries do not can produce a visionary approach, these countries have a lot of difficulties to design a development program.
Command economies are the central government management dominant countries. The ideological approach in these countries has a communism approach. According to this approach, the free markets and the free individuals might cause inefficiencies in the economies because the individuals and the companies ignore the social utility. Thus, if the free market economy works in the economy, and then the companies try to maximize their profits, and the individuals try to maximize their utilities under their budget constraints. Under these conditions, maximizing the social utility, the main aim of the economic systems, may not come true.
Command economies aim at maximizing the social utility through one hand management in the whole economy. A political organ makes all the economic and social decisions for providing the possible highest efficiency. In the real world implementations, we observe that the communist party makes all the decisions in the country and every individual and every resource are hired or used under the communist party control in the Soviet Socialist Republic of Russia, Cuba, and China. The communist party makes all the calculations, collect information from the markets and people, and makes all the decisions. Therefore, the economy produces all the products and the services those are needed by the people.
The command system is against the waste of resources and the inefficiency in the economy. The communist party regulates all the economy and the social relations. Any behavior against the perfect command economy is considered as a threat and punished.
The main question about the command economic approach is whether a full party controlled system can work in the real world. There is no certain answer to this question. Theoretically, it is possible to control the whole system by one hand; however, the experiences in the real world like the Soviets have exhibited us that the command economic system might fail easily. In Russia, the communist party regime failed to create a sustainable fully controlled system due to the corruptions among the party members.
China and Cuba have different experiences. China is implementing a system that is under control of the communist party inside the country; however, the Chinese international trade is managed through the private companies. In terms of social development, it is not possible to express that China is developed. Discrimination based on religion, race, and gender, and many inequality problems in the country indicate us that China needs to do more for socioeconomic development. Cuba case is completely different. The Cuban economy is a mixture of traditional and command economies. The Cuban economy is based on two main sectors: tourism and agriculture. All the economic activities are regulated by the central government. In terms of economic development, Cuba is a weak country whereas Cuba provides the most developed public services to its citizens. Consequently, there is no certain information on whether the command economic approach is something good or not.
Free Market Economies
In free market economies, the competition in all markets is given the highest privilege. The market mechanism works perfectly if there is no intervention to the markets, and the free markets can maximize the companies’ profits, the individuals’ utilities, and the social utility at the same according to the free market approach theories. Adam Smith explains the success of the free market economies through the invisible hand. There exists an invisible hand in the free markets that match the supply and the demand with each other. The demanders and the suppliers make a deal in the market on a price, and this price level enable the markets clear all the products and the services in the market.
The competition is the way to develop the economies. The competing agents always try to produce the relatively better products and decrease their costs. Thus, in a free market economy, it is theoretically possible to observe an increase in the quality of the products and the services while the price level goes down. Many people believe in the competition’s advantages; however, the real world story of the free market economies is different from the theoretical story.
The most recent global financial crisis and the economic global crisis in 1930s are two main examples indicating that the free market economy might crash easily. Thus, without any intervention, the free market economies cannot be sustainable. After the global financial, economic crisis many economists believe that for a sustainable economic development model, the governments and the economy managements have to take more responsibility and regulate the economies at an acceptable level. This approach means the end of the perfect belief in the free market economies.
Every country has a different economic development experience because there is not certain form of economic and social development. The different conditions in the different countries present us the different development stories. Thus, there are perfectly classifiable economic systems in the world.
Many countries implement mixed strategies, and each global or local financial and economic crises teach us more about developing our economic systems. Therefore, the theoretical approaches are required to be developed and adjusted accordingly. The free market approach and the command economic approach were popular in the past; however, both of them have to be revised.
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