An economic system is the system of production, distribution and consumption of goods and services of an economy. On the other hand, it is the set of principles and techniques whereby problems of economics are addressed, for instance, the problem of scarcity through allocation of limited resources. The economic system is comprised of individuals and institutions. There are seven types of basic economic systems:
1. Market economy or laissez faire
2. Centrally planned or command economy
3. Mixed economy
4. Traditional economy
5. Participatory economy
6. Gift economy
7. Batter economy
The contemporary economic systems are market economy system, centrally planned system, mixed economy, and Islamic economy. Besides, economic system includes the study of pertinent systems.
Market economy (Capitalism):
One important difference between societies is in the degree of government control of the economy. Free-market economy is an economy in which all economic decisions are taken by individuals and firms without any government intervention. At the other extreme lies the completely, households decide how much labor and other factors to supply, and what goods to consume as well as firms decide what goods to produce and what factors to employ. These decisions in a free-enterprise are impressed by the pressures of competition, supply, and demand. In this economic system, individuals and private businesses own everything. Some significant characteristics of market economy are communicating through prices, coordinating in economic activities through markets, limited government intervention, and assigning high monetary rewards for businesses to innovate and also for entrepreneur to pioneer in new products. This system involves both advantages and disadvantages such as unfairly assigning resources among individuals, auto-adjustment, auto-motivation through high degree of competition even under monopoly or oligopoly, diversifying consuming goods and services, emerging inflation and unemployment rate through economic turmoil, and existing great inequality between the rich and the poor through lack of fairly distribution of wealth.
In real world, there is no longer free-enterprise system because powerful oligopolistic companies dominate the world economy and control markets.
Command economy (Socialism):
Centrally planned economy is an economic system in which all economic decisions are taken by the central authorities and government owns most property resources. At the other extreme lies the completely, central authorities plan the allocation of resources between current consumption and investment for the future. Also, this economic system leads to shortages and surpluses. Some significant characteristics of command economy are producing productions and serving services by firms according to central planning board`s guidance, not determining prices in terms of demand and supply, assigning real capital (capital goods) among industries based on central planning board`s long-term priorities. This economic system involves both advantages and disadvantages such as providing social welfare for individuals by government with serving job security and social security like pension, not appearing serious unemployment and downturn, distributing income and wealth equally among all citizens, wasting resources through providing unrequired production for people like military equipment, not existing competitive environment leads to less research and development (R&D) and consequently less quality of productions, lacking motivation and invention by individuals due to economic inefficiency, and not existing economic freedom and consumer sovereignty due to the fact that government directs all economic activities and does not give any choice to consumer.
Mixed economy is comprised of both capitalism economy and socialism economy in which some industries are owned by government and some ones are controlled by private companies, and decision making are made partly by the government and partly through the markets. At the other extreme lies the completely, in this system both private industries and governments play a significant role to assign productive resources and distribute income.
Some significant characteristics of mixed economy are employing price mechanism to price goods and services, utilizing of economic planning to get to social justice and economic growth, legislating on risky products by government like military equipment, enhancing standard of living as education and hygiene by government, advancing especial projects or producing certain productions by government in which private sector is not beneficial such as constructing low-cost houses, and legislating on monopolists by government to avoid exploiting their customers.