Economics Systems
Types of Economy There are four types of economic systems; authoritarian (command), mixed, Laissez Faire, and traditional; although traditional is rarely used. These economic systems fall on a scale ranging from the most amount of government control to the least. Authoritarian having the most government interference and Laissez Faire having the least. Countries call fall anywhere in between Authoritarian and Laissez Faire on the spectrum. Authoritarian Mixed Laissez Faire
Authoritarian, Mixed, & Laissez Faire Economic Systems
Authoritarian/Command Francisco Franco- Spain's leader during WWII Authoritarian governments command almost every aspect of their citizens lives; only their private lives being left alone. The economy is completely controlled by a central authority which is why it is also known as a centrally planned economy. A political party in charge orders farms and factories to produce goods and services that the government feels will be proficient and tells the businesses how much of these goods will be produced and how much they will be sold for. Communism is a government system that almost always runs on a command economy. An example of a authoritarian economy would be Spain during WWII under the control of Francisco Franco. While there are some governments who believe in keeping their country running on a command economy, there are some countries who are making a the change from command to mixed economies to try and boost economic growth. This change is known as economic transition. Advantages Gives the government the means to overcome market failure, inequality among its citizens, and create a society that maximizes social status and welfare rather than maximize profit and widen the social gap. Can prevent abuse of monopolies Prevent mass unemployment because everyone would have a job to do to maximize production Could produce goods that benefit the society as a whole, ensuring that everyone has the basic necessities Disadvantages The government usually has a lack of information about what to produce. The people in the government usually have no idea what is happening outside of themselves. Unable to respond to consumer wants and needs A threat to people's rights and liberty. This type of economy has a strong government that limits individual rights to ensure their economic goals. This can create a situation where government can extend its control into other aspects of peoples lives. Bureaucratic, the governments decisions are made by planning and committees rather than elected officials
Mixed Economy A mixed economy is an economy that is partly controlled by the free market or the people and part is controlled by the government. Most countries have mixed economies but have varied degrees if state interference. Mixed economies are formed on the basis of allowing private companies to run most of its business. Governments intervene in certain areas of the economy such as regulation and spending money on public services. An example of a mixed economy is modern day Sweden. Fredrik Reinfeldt- Sweden's current prime minister Advantages Most business & industry are privately controlled. Private firms tend to run more efficiently that government controlled firms because they have a profit incentive to cut costs & be innovative Can reduce the amount if government regulation & control Can allow some government control in areas of market failure (ex. monopoly power, prevent meters, prevent excessively high prices) Taxation & regulation on goods with negative factors such as pollution Subsidy for goods & services that are underused Ina free market (can include public goods such as police & goods such as education and health care. Can create greater equality and provide a safety net for people living in complete poverty while at the same time allow people to enjoy the financial awards to hardworking and entrepreneurship Government can pursue policies to provide economic stability in hard times such as a recession. Disadvantages Can be difficult to know how much government should intervene Mixed economies are often criticized by socialists for allowing too much market forces which leads to inequality and inefficient distribution of resources Mixed economies are criticized by free market economists for allowing to much government interference. Libertarians argue that governments make poor leaders & managers in economic situations because they are often swayed by political and shortterm factors.
Laissez Faire Ueli Mauer- Switzerland's president for 2013 A Laissez Faire or free market economic system is system in which all economic decisions are made by private individuals and firms. Everything is owned and operated by private individuals. In a successful free market economy there would be no government intervention whatsoever in the economy. The people living Ina country with a Laissez Faire economy believe strongly in privatization, or buying all government owned businesses to make them owned by private owners and investors. However, government is sometimes involved in the formation and enforcement of certain laws & public services-- even if only national defense. Advantages Competition between businesses leads to increased efficiency because the businesses will do whatever is necessary (even lay off workers) to lower their costs. Most people will then work harder because the threat of losing their job is s good motivator There is an increased amount of innovation as businesses will look for new products to sell & and cheaper ways to produce & sell products Foreign investment is attracted as word gets around about new opportunities for profit Size, power, & cost of state bureaucracy is reduced because activities that are associated with the government are taken over by private business Forces of production are always changing with what the people want; or at least what the people with money locally or abroad want Consumer goods become available to those who have money to buy them Disadvantages Public goods are not provided in a free market. Ex. Street lights & national defense Provides no social security net for those who are unemployed or have a low income. Benefits tend to apply to a small number of people who have advantages in property & monopoly power Monopolies can easily develop because the market is regulated solely by the people Education & healthcare is under provided because people underestimate their benefits Occupational unemployment because of lack of skills The gap between the rich and the poor is expands further because products being produced usually only benefit those with money
Shining Moments Authoritarian This economic type is strong in a war. The government controls almost every aspect of what goes on within the country and citizens lives. When a war breaks out, a command economy supports the effort by shutting down factories then restarting them to produce only war supplies and weaponry. Command economies can survive for long periods of time during wars because they dedicate all everything to it, including their citizens, who don't seem to mind because it gives everyone an opportunity to work and make the same wages as everyone else. In war efforts, everyone has a job to do. This economy is the most efficient in narrowing income inequality gaps because citizens are paid to produce what the government wants in mass production. This leaves little room for unemployment and unequal wealth distribution because everyone is needed and they are doing similar jobs. Diagram showing how a command economy works
Shining Moments Mixed Mixed economies are stronger than command and Laissez Faire economies in some instances because they are a combination of the 3 economic systems. The economy runs on balance of both public businesses and public property & privately run businesses and private property, having the benefit of allowing citizens to provide the goods and services they choose, but still have government run businesses to make sure there is still the option of public health care and insurance for its citizens. Although private business is free to produce what they want, the government is involved in the distribution and allocation of the resources. Mixed economies are also more efficient than command and Laissez Faire economies in a regulations & restrictions factor. Both Command and Laissez Faire hire & fire people base on the sole purpose of producing & selling as many products as possible. Mixed economies have regulations & restrictions on businesses that we're created to benefit the greater good such as environmental regulations, antitrust, labor restrictions, and intellectual property rights (ex. patents, trademarks). Diagram showing four key benefits to capitalism
Shining Moments Laissez Faire Free market economies are stronger than Command and mixed economies in the aspects of having limited or no government involvement the economy or peoples lives. The benefit of having no government say is that business are able to produce what they want, just like a mixed economy, but Laissez Faire economies have no government involvement in the distribution or allocation of their goods giving private businesses the right to decide for themselves where they will gain the most profit from. This economy has the ability to change production much easier that the others; if a product is not selling or their is a high demand for a product, companies can change what and how many products they make without having to consult government guidelines. There is also a higher economic growth rate because of the ability to alter production if need be and because free market economies encourage competition to produce better, effective products. The competitive atmosphere gives people the incentive to work harder and faster than their competitors. Diagram comparing a free market and capitalist economies
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