12 Examples of an Economic System

John Spacey, April 27, 2018 updated on October 30, 2019

An economic system is a system that a society uses for resource allocation, production and distribution of value. This includes the institutions, organizations, structures, laws, regulations and processes that produce goods, manage wealth and create the quality of life of a society. The following are the basic types of economic system.

Capitalism

Capitalism is a system that provides property rights and economic freedoms such that individuals can start businesses, produce and capture value. Capitalism is a competitive system that assigns resources to those who have created and captured value. This provides strong motivations for education, work, improvement and innovation and tends to be efficient. Capitalist societies may create large amounts of wealth that is distributed unevenly.

Crony Capitalism

A capitalist system that has replaced free and open competition with a system of control by a small elite that may include monopolies, government officials and influential members of the upper class. This is inefficient as consumers are given few alternatives and goods may become low quality as competition is muted. Public funds, laws and regulations may be designed to enrich the upper class as opposed to improving things for all.

Market Economy

A market economy is a system of free markets for goods, labor and investments whereby entities acting in their own self-interest compete for customers, employees, jobs, products, services, capital and investment returns. This tends to be remarkably efficient at allocating resources to produce the goods and services that people desire and need. A market economy is also efficient at setting prices for labor, goods and investments such that prices accurately reflect underlying value. This helps to prevent shortages and surpluses.

Planned Economy

An economy that replaces free markets that are efficient with a large bureaucracy that decides what to produce and how to distribute goods. This may be done in the "common good" but tends to produce poor quality products, shortages, surpluses, famine and environmental mismanagement at vast scale. The relatively large bureaucracy required for central planning creates a bureaucratic elite who tend to allocate resources in a way that benefits themselves.

Communism

Communism is a system whereby the state owns everything such that private property rights don't exist. This typically requires a planned economy. Communism is analogous to having a single company that owns all property and land, controls all labor and also controls every aspect of society, culture, health, education and media. In theory, this organization has a goal of maximizing the "common good" as opposed to profits. In practice, the bureaucratic elite that control such an organization may prioritize their own interests over the common good. Communism tends to be inefficient due to the centralization of trillions of economic decisions. It also prioritizes the "common good" over personal freedoms such that the state may control every aspect of life and require all to give up on their personal aspirations for the common good as decided by the state. Historically, communism systems have produce low quality of life and most have failed or transitioned to a different system.

Social Market Economy

A social market economy is a system based on capitalism and markets that has strong protections for labor, environment, consumers, quality of life and open competition. Such economies allow capitalists to produce value and provide a profit motive that creates a bourgeois and upper class. They may heavily tax the upper class and middle class to provide a basic quality of life for all in areas such as subsistence, housing, education and healthcare. A social market economy makes certain things public that are viewed as above the profit motive such as healthcare and education.

Socialism

Socialism is an ideological term that describes any society that theoretically prioritizes the needs of the working class. Socialism as a system can refer to social market economies or communist states.

State Capitalism

A system whereby a state owns profit-seeking companies. This includes former communist societies that have transitioned to a market economy but still own most of the capital of firms. State capitalism can also occur when a nation gets in the habit of investing in companies in order to bail them out or to boost the stock market. This tends to be a bad idea as it creates zombie companies and prevents creative destruction. The backing of the state allows inefficient large firms to buy or crush all threatening competition eventually leading to economic stagnation and decline.

Mixed Economy

A term for state intervention in a capitalist economic system including social market economies and state capitalism. In the former case, a state owns things like hospitals and universities. In the latter case, the state owns profit-seeking firms such as manufacturers and construction companies.

Traditional Economies

A traditional economy is any historical community-based economic system that still exists today such as a tradition of gift-giving, barter and volunteerism. These coexist with the economic systems above and aren't used to organize complex modern societies.

Barter System

A system of value exchange whereby you offer a good that you produce to others in exchange for goods they produce. This is incredibly inefficient. As such, every major historical civilization had some form of money. For example, commodities such as rice were historically used as a form of money.

Subsistence Economy

An economy without trade such that families and small communities directly produce what they need. This is remarkably inefficient as it offers little or no specialization of labor. For example, it may take you days to produce your own shoes and they may be low quality relative to someone who specializes in shoes and knows what they are doing.