The 4 Primary Economic Systems

1. Traditional

2. Command

3. Capitalist

4. Mixed/Socialist

Any economic system has to answer 3 Basic Questions:

• What to Produce?

• How to Produce it?

• Whom to Produce it For?

How to Produce?Which goals will be given priority?

• Growth—maximizing production of goods & services

• Employment—making sure everyone has a job

• Efficiency—getting more production out of the resources you’ve got

• Stability—No fast or disruptive changes

1. Traditional

How to produce

• Growth• Employment• Efficiency• Stability

Based on Need

What to produce and for whom?

African Tribes

Amish

Native Americans

2. Command

Government Planning

What to produce and for whom?

How to produce

• Growth• Employment• Efficiency• Stability

Collectivized Agriculture in China

Government Ownership of Industry

Soviet Politburo—made all decisions

3. Capitalist

Supply & Demand/Price

What to produce and for whom?

How to produce

• Growth• Employment• Efficiency• Stability

New York Stock Exchange

Hong Kong Consumerism

Competition

Adam Smith (1723-90)

• Argued: Free markets best promote the social welfare

Wrote “The Wealth of Nations”

Adam Smith & The Invisible Hand

Law #1: People follow their own self-interest

Therefore: Markets are self-regulating

Government should notInterfere!

Law #2: Competition keeps them in check

--market runs as if directed by an invisible hand

4. Mixed/Socialist

Part Supply & Demand, Part Gov’t Planning

What to produce and for whom?

How to produce

• Growth• Employment• Efficiency• Stability

French National Transportation system

British National Health System (NHS) Hospital

Denmark