Economic systems are defined by the method that a nation uses to allocate its goods and services. These systems have varying degrees of government control, and range from free market economies to those that have total control of ownership, taxation and resources.
Small business owners must have an awareness of the type of economy in which they operate. This is important, because the firm must adapt to changes in the economic system.
The oldest form of an economic system is the traditional approach. It follows guidelines created by social customs, religion and morals. Males and females work in occupations deemed suitable for their gender. Sons tend to follow the occupations of their fathers. Resources are allocated based on traditional criteria of age, sex and birthrights.
Traditional economic systems are found mostly in primitive, farming societies. Today, they exist primarily in less-developed countries.
These traditions fade away as a society becomes more complex.
A free market economy begins to take over, as traditional values change. In a free market, consumers become the dominant force, and producers make products that people want to buy. Production is based solely on the demands of the marketplace.
In a market economy, the government does not control which goods and services are produced. All resources are owned by private individuals. Production and buying decisions are driven by the desire to make a profit.
Critics argue that a free market economy does not serve all people. It only accommodates those consumers who have the money to buy products. Those without enough money are overlooked and left out of the marketplace.
In a command economy, the government controls everything. It decides which products are produced, how they are made and who gets to receive them. The government makes these decisions based on its perception of what is best for society.
If everything worked perfectly, a command economy would provide jobs for all of its citizens. However, workers must take whatever jobs the government decides is best. The government sets prices for all products and allocates enough resources to satisfy its people.
A disadvantage of a command economy is the absence of innovation. It is not necessary to come up with new ideas, since there is no risk and no reward.
Communism is a model of a command economy. China, North Korea and Russia are examples of command economies.
As the name implies, a mixed economy is a blend between a command system and an entirely free market. Consumers and businesses control the economy in the private sector. The government is the owner and decision-maker for the public sector.
In reality, no country uses the pure form of a traditional, free market or command economy. They are all modified to fit the demands of the people.
Unfortunately, a government can decide to intervene when it believes that private companies are not acting in the best interest of society. A good example is when a government may take over a healthcare system to provide medical care to all of its citizens.
While a discussion of economic systems is interesting, what is the worth of this information to the small business owner? An understanding of these economic systems is important because a business owner must operate his company in these environments to make a profit. While most developed countries have mixed economic systems, the rules are constantly changing. Companies can become so successful that they become a monopoly, and the government steps in to break them up.
Pressures from society may force the government to assert itself more into some aspects the private sector. A small business owner has to keep his eyes open to these types of changes coming down the road. They can either open up opportunities or put him out of business.