Macro Moves

Types of Economies; Does an Ideal Economy Exist?

Created on 16 Aug 2022

Wraps up in 5 Min

Read by 653 people

Updated on 11 Sep 2022

Have you ever been a member of an exclusive club or even something simpler like a reading or yoga group? If not, don't feel bad. What if I were to tell you that you are already a part of the biggest club there is? You enter it by just buying and selling or even existing in a nation! I am talking about the economic system, of course! 

Now, when we hear the word economy, most people would associate it with the class of flights, the mode of air conditioners and cars, or the packs of biscuits and soaps- and none of them would be wrong. When studying economics, it is essential to fully understand what we mean by a nation's economy. So let's begin… 

What is an Economy? 

Did you know the term economy comes from the Greek words 'oikos' meaning house and 'nemein' meaning manage? This way, in its crux, economy means management of a household. An economy is a large set of interrelated production, consumption and exchange activities through money supply. These activities aid in determining and managing the allocation of scarce resources of a nation.

While an economy includes all goods and services traded in an area, its participants are not restricted to only buyers or sellers of such commodities. All individuals, entities and the government are also included in this system. The study of economies and the many factors affecting such economies is called economics. The discipline of economics can be divided into two approaches- microeconomics and macroeconomics.

Microeconomics studies the behaviour of internal elements of any economy, like individuals and businesses, to understand the impact of their individual choices on the overall economy. Simran's decision to quit her current job will be a microeconomic decision. On the other hand, the problem of unemployment- a nationwide issue, comes under macroeconomics which focuses on the aggregate economy and its large-scale impacts. 

Types of Economies

An economy is governed by many factors such as the country's culture, laws, history, demographics, market, etc., which is why no two economies are the same. Each is unique in its functioning. Although economists were able to broadly categorize these as mentioned below-

1. Traditional Economy

In his book The Wealth of Nations, economist Adam Smith suggested that economies have evolved from a prehistoric barter system to money-driven and, eventually, credit-based economies. As the name suggests, Traditional Economy is the most basic form of economy based on a traditional approach of subsistence and barter trading. Although infrequent today, these can still be found in rural areas where farming is predominant, such as pockets of Africa and South India or the Middle East. Here, the economic decisions are based on customs, traditions and beliefs of the community or tribe. 

2. Capitalistic Economy

A capitalist or free market economy is an economic system in which all means of production are owned by private individuals/firms for profit, i.e. profit motive is the driving force. Market forces regulate demand and supply. The government has limited interference in managing economic affairs, and there is freedom of economic choice. Some notable capitalist economies include the U.S., U.K., Singapore, Germany, Japan, etc. 

3. Socialist Economy

Most of us don't like it when our decisions are made for us, even for our good. When we are commanded into doing things, and our independence is compromised, that's when we tend to "act out", which gives birth to rebels. Imagine the whole country being told what to do! The Socialist economy or Command economy was propounded through the 'Communist Manifesto' of 1848. Here, all material means of production, i.e. factories, mines, capital etc., are owned by the whole community represented by the government.

Market forces have no role in the allocation of resources. The central planning authority controls what is to be produced and sold, in what quantities and at what prices. This is aimed at maximizing the welfare of the community as a whole. Though today there is no country which is purely socialist, erstwhile U.S.S.R, North Korea, China, and Cuba are the most prominent examples. 

4. Mixed Economy

Have you heard of the idiom "to have your cake and eat it too"? It means to enjoy the good parts of something without dealing with the bad parts. Not everything is black or white; there are also those safe grey in-betweens. A mixed economy is set in those grey in-betweens where it includes the best features of both the market and socialist economy while avoiding their demerits.

It appreciates the emphasis on self-interest and profit motive of the private enterprises as well as the community welfare objectives and regulations of the public sector. India is the most prominent example of a mixed economy. 

Is there such a thing as an "Ideal Economy"?

We dedicate much of our time to deciding where and what to eat. We always have a long checklist of characteristics for our "ideal this" and "ideal that". But what about the ideal economy? There are specific criteria which must be checked off to call an economy "ideal". These include-

  • Participation and satisfaction of different stakeholders involved
  • An increasing trend in GDP, employment and growth
  • A stable political environment and set of laws providing security to and protecting the interest of the society
  • Equity in opportunity and welfare schemes to enable upward mobility for more people 
  • Sustainable economic wealth through prudent resource utilization  

But let's be honest, this isn't realistic! In dissecting each economic system, we notice the shortfalls in almost all of them, only to realize there is no magic recipe :(

Capitalism may increase a country's GDP, but in doing so, it exploits its consumers as the ruthless competition works against consumer welfare. It creates vast inequalities and social injustice due to the precedence of property rights over human rights. There is an exploitation of labour and no security of employment. Resources are wasted and misallocated into the production of luxury goods instead of necessities. 

You may now be drawn towards socialism, but that's no good either! Due to the heavy role of government, there's also severe corruption, red-tapism, favouritism etc. which leads to inefficiencies. Consumers have no freedom of choice. Since there is no incentive to earn profits, labourers start slacking, reducing productivity and overall growth. 

How about a mixed economy? You may think it can't be that bad; after all, its sole purpose was to eliminate the demerits of the other two economies- but if only it were that easy. A mixed economy is not always the 'golden path between socialism and capitalism, and often it becomes challenging to maintain a balance between the public and private sectors. 

The Bottom Line

We see that an economy is a complicated playing field which is more than simply buying and selling goods. It is affected by and is a result of so many factors that some aspects will get compromised no matter what we try to focus on, which is why it's essential to keep adding the right ingredients and hoping for the best. So, in whatever activity, our primary focus should always be to add value to our economy, of which we are minions members! 😅

An Article By -

Yashi Ojha

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Yashi is currently pursuing Chartered Global Management Accounting. Her creative, artsy heart but number-crunching mind has led her to financial content writing. She would prefer to be the observer & the listener in the room so she can soak in all the knowledge from the rest, but wouldn’t compromise on being the funniest.

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