What is a Traditional Economy?
In societies with a traditional economy, the use of scarce resources and nearly all other economic activity stems
from ritual, habit, or custom. Habit and custom dictate MOST social behavior. Individuals are generally NOT FREE to
make decisions on the basis of what they want or would like to have. Instead, their roles are DEFINED by the
customs of their elders and ancestors.
EXAMPLES of a traditional economy would be the central African Mbuti, Australian Aborigines, and other
indigenous peoples around the world.
ADVANTAGES
Everyone has a role to play and there is little uncertainty over WHAT to produce. If you are born into a family of
farmers you are a farmer. If you are born into a family of hunters you are a hunter. There is little uncertainty over
HOW to produce because you simply do things the way your parents did them. The FOR WHOM is decided by
customs and traditions.
DISADVANTAGES
Traditional economies tend to DISCOURAGE new ideas and new ways of doing things. These strict roles punish
people for acting differently or break rules. This lack of progress leads to ECONOMIC STAGNATION and a lower
standard of living than in other economic systems.
What is a Command Economy?
In a command economy, a central authority makes the major decisions about WHAT, HOW, and FOR WHOM to produce.
A command economy can be headed by a king, a dictator, a president, a tribal leader, or anyone else who MAKES the
MAJOR ECONOMIC DECISIONS. A modern, and somewhat more liberal, version of the command economy is socialism.
Socialism is an economic and political system in which the government owns some, but not all, of the factors of
production.
EXAMPLES of a pure command economy would include North Korea, Cuba, Venezuela under Hugo Chavez, and the now
dissolved Soviet Union (USSR).
ADVANTAGES
A major strength of the command system is that it can CHANGE DIRECTION drastically. The former Soviet Union went
from a rural agricultural society in 1910 to an industrial nation in a few decades by emphasizing growth in heavy industry.
Another advantage is that it allows most citizens to receive some goods and services that they would otherwise not be
able to afford.
DISADVANTAGES
Leaders of command economies provide themselves at the EXPENSE of the general population. People LOSE the
individual FREEDOM to choose, and produce low quality goods. It requires a large decision making body that SLOWS
advancement and uses up resources in order to function.
What is a Market Economy?
A market economy is one in which the WHAT, HOW, and FOR WHOM questions are primarily answered by people
who make supply and demand decisions in their own best interests. A market economy is characterized by a great
deal of freedom. People can spend dollars like they are “votes” to indicate to producers what they like the most.
This helps producers answer the question on WHAT to produce and leaves the producers with the ability to best
decide HOW to produce it and FOR WHOM.
EXAMPLES of a market economy include the United States, Canada, Australia, Japan, the United Kingdom, South
Korea, and the majority of Western Europe.
ADVANTAGES
There is a high degree of INDIVIDUAL FREEDOM in a market economy. A market economy is able to gradually adjust
over time. There is a relatively small degree of government interference compared to command economies.
Decision making is DECENTRALIZED, which allows economic decisions to be flexible and heavily involve the general
population.
DISADVANTAGES
A market economy does not provide for EVERYONE. It also may not provide some basic goods and services for
people such as roads. There is also a high degree of UNCERTAINTY.
What is a Mixed Economy?
A mixed economy is an economic system that has some combination of traditional, command, and market
economies; or is a modified free enterprise economy. Mixed economies exist because the world is NOT neat and
orderly. Often mixed economies form when one type of economy comes into contact with other cultures and they
borrow ideas. Major events such as revolutions and economic depressions may cause economic systems to change,
and sometimes a mixed economy is the result of an economy simply changing over time.
EXAMPLES of mixed economies would include countries like China, Brazil, South Africa, Russia, Vietnam.
ADVANTAGES
It is DIFFICULT to assess the advantages of a mixed economy because they are often VERY DIVERSE. One advantage
that most mixed economies provide is assistance for some people who might be left out of the country’s economic
progress.
DISADVANTAGES
Mixed economies tend to provide more goods and services, but the costs of these benefits can be EXPENSIVE,
which leads to high tax rates for their citizens. Often these services can be limited in quality and quantity as a result.
For example, Cuba has free health care, but the standard of care given is below that of the United States unless you
are politically connected or wealthy.
What is the Free Enterprise System?
If an economy has BOTH capitalism and free markets, we refer to this economy as being based on free enterprise.
Under free enterprise, resources are privately owned, and competition is allowed to flourish with a minimum of
government interference. Because the terms are similar, people often use free market, free enterprise, and
capitalism INTERCHANGEABLY to describe the United States economy.
REQUIREMENTS: A capitalistic free enterprise economy must have five important characteristics.
1. Economic Freedom
2. Voluntary Exchange
3. Private Property Rights
4. The Profit Motive
5. Competition
ADVANTAGES
Individual freedom, which is almost the same thing as economic freedom; a variety of goods; the ability to adapt to
change; promotes progress; creates wealth.
DISADVANTAGES
Uneven economic growth; Growing gaps between rich and poor; large “supply-side” tendencies.