An economic system is how a government organizes a country’s economic activity. The economic system impacts how a country’s production is managed and how the labour market functions.
There are three types of economic systems:
- planned economy (command economy)
- mixed economy
- free enterprise (market economy)
Each of these systems has specific characteristics that can be influenced and adapted based on each country’s situation.
Like ideologies, economic systems can fall somewhere along the left-right spectrum.
In theory, these three economic systems are distinct. However, in practice, it isn’t always black and white. Even if a country has a command economy, it may still have some features of a free enterprise (market) economy. On the other hand, a state with a free market economy may include some features of a command economy.
For example, even though the U.S. economy is largely based on private enterprise and market laws, some government intervention exists in certain economic areas, such as regulating the price of certain goods. These are characteristics of a mixed economic system.
It is therefore possible for the economy of a single state to be described as a mixed economy in one source and a market economy in another.
A planned economy requires the nationalization of the means of production. The government plans the nature and quantity of production at least one or more years in advance. In a planned economy, prices are determined by the government. A planned economy falls to the left of the spectrum since the government is heavily involved in the economy and there is little to no room for private enterprise.
Nationalization occurs when a State takes ownership or control of certain assets, resources or private companies. A good example of this phenomenon is Hydro-Québec, a company that was created following the nationalization of electricity in Quebec. Hydro-Québec became a public enterprise and is under the control of the government of Quebec.
The Union of Soviet Socialist Republics (USSR) had a command economy. All decisions concerning the production and distribution of goods were made by the central government and sent to locations for production or distribution. Each year, a factory would be assigned the number of car wheels it had to produce. From clothing to residential buildings, from machinery to nails and screws, the central government planned all economic production in the USSR.
In a mixed economy, the government and private enterprise each play a different role. Freedom of enterprise takes priority, but the government intervenes to regulate and, sometimes, nationalize enterprises to achieve certain objectives. This economic system sits in the middle of the spectrum. Most Western countries currently have a mixed economy.
Quebec is a province with a mixed economy. The government controls certain industries, such as the production of electricity with Hydro-Quebec or the sale of alcohol with the Société des alcools du Québec, but beyond these Crown Corporations, the market laws of supply and demand dictate the economy. Private enterprise is very present and can operate on its own initiative.
However, the government often intervenes to regulate certain areas of the economy. One example is the implementation of environmental standards for certain industries or a floor price for the sale of certain products such as milk. In order to ensure that producers earn a minimum income, milk cannot be sold at a price lower than the floor price
Free enterprise, also called market economy, is an economic system that promotes private enterprise. Unlike a command economy, where the government plans production, a market economy allows the market laws of supply and demand to determine prices and dictate how the economy functions. Free enterprise falls to the right on the spectrum, with little government intervention and private enterprise being prominent.
The United States has a market economy based on private enterprise. Companies decide what they want to produce, when and how much. Government intervention is very limited other than granting certain subsidies and setting certain regulations that companies must comply with. However, market laws remain the foundation of the US economic system.
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