The Four Types of Economies Intelligent Economist

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The Four Types of Economies | Intelligent

Economist
By Prateek Agarwal
6-7 minutes
The way scarce resources get distributed within an

economy determines the type of economic system.
There are four different types of economies; traditional
economy, market economy, command economy and
mixed economy. Each type of economy has it’s own
strengths and weaknesses.
1. Traditional Economic System
The traditional economic system is the most traditional

and ancient types of economies in the world. Vast
portions of the world still function under a traditional
economic system. These areas tend to be rural, second-
or third-world, and closely tied to the land, usually
through farming. In general, in this type of economic
system, a surplus would be rare. Each member of a
traditional economy has a more specific and
pronounced role, and these societies tend to be very
close-knit and socially satisfied. However, they do lack
access to technology and advanced medicine.
2. Command Economic System
In a command economic system, a large part of the

economic system is controlled by a centralized power.
For example, in the USSR most decisions were made by
the central government. This type of economy was the
core of the communist philosophy.
Since the government is such a central feature of the

economy, it is often involved in everything from planning
to redistributing resources. A command economy is
capable of creating a healthy supply of its resources,
and it rewards its people with affordable prices.
This capability also means that the government usually
owns all the critical industries like utilities, aviation, and
railroad.
In a command economy, it is theoretically possible for

the government to create enough jobs and provide
goods and services at an affordable rate. However, in
reality, most command economies tend to focus on the
most valuable resources like oil.
China or D.P.R.K. (North Korea) are examples of

command economies.
Advantages of Command Economic Systems
If executed correctly, the government can mobilize

resources on a massive scale. This mobility can
provide jobs for almost all of the citizens.
The government can focus on the good of society
rather than an individual. This focus could lead to a
more efficient use of resources.
Disadvantages of Command Economic Systems
It is hard for central planners to provide for

everyone’s needs. This challenge forces the
government to ration because it cannot calculate
demand since it sets prices.
There is a lack of innovation since there is no need to
take any risk. Workers are also forced to pursue jobs
the government deems fit.
3. Market Economic System
In a free market economy, firms and households act in

self-interest to determine how resources get allocated,
what goods get produced and who buys the goods. This
is opposite to how a command economy works, where
the central government gets to keep the profits.
There is no government intervention in a pure market

economy (“laissez-faire“). However, no truly free market
economy exists in the world. For example, while America
is a capitalist nation, our government still regulates (or
attempts to control) fair trade, government programs,
honest business, monopolies, etc.
In this type of economy, there is a separation of the
government and the market. This separation prevents
the government from becoming too powerful and keeps
their interests aligned with that of the markets.
Historically, Hong Kong is considered an example of a

free market society.
Advantages of a Free Market Economy
Consumers pay the highest price they want to, and

businesses only produce profitable goods and
services. There is a lot of incentive for
entrepreneurship.
This competition for resources leads to the most
efficient use of the factors of production since
businesses are very competitive.
Businesses invest heavily in research and
development. There is an incentive for constant
innovation as companies compete to provide better
products for consumers.
Disadvantages of a Free Market Economy
Due to the fiercely competitive nature of a free

market, businesses will not care for the
disadvantaged like the elderly or disabled. This lack
of focus on societal benefit leads to higher income
inequality.
Since the market is driven solely by self-interest,
economic needs have a priority over social and
human needs like providing healthcare for the poor.
Consumers can also be exploited by monopolies.
A mixed economy is a combination of different types of
economic systems. This economic system is a cross
between a market economy and command economy. In
the most common types of mixed economies, the
market is more or less free of government ownership
except for a few key areas like transportation or
sensitive industries like defense and railroad.
However, the government is also usually involved in the

regulation of private businesses. The idea behind a
mixed economy was to use the best of both worlds –
incorporate policies that are socialist and capitalist.
To a certain extent, most countries have a mixed

economic system. For example, India and France are
mixed economies.
Advantages of Mixed Economies
There is less government intervention than a

command economy. This results in private
businesses that can run more efficiently and cut
costs down than a government entity might.
The government can intervene to correct market
failures. For example, most governments will come in
and break up large companies if they abuse
monopoly power. Another example could be the
taxation of harmful products like cigarettes to reduce
a negative externality of consumption.
Governments can create safety net programs like
healthcare or social security.
In a mixed economy, governments can use taxation
policies to redistribute income and reduce inequality.
Disadvantages of Mixed Economies
There are criticisms from both sides arguing that

sometimes there is too much government
intervention, and sometimes there isn’t enough.
A common problem is that the state run industries
are often subsidized by the government and run into
large debts because they are uncompetitive.

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intelligenteconomist.

The Four Types of Economies | Intelligent

The way scarce resources get distributed within an

1. Traditional Economic System

The traditional economic system is the most traditional

2. Command Economic System

In a command economic system, a large part of the

Since the government is such a central feature of the

In a command economy, it is theoretically possible for

China or D.P.R.K. (North Korea) are examples of

If executed correctly, the government can mobilize

Disadvantages of Command Economic Systems

It is hard for central planners to provide for

3. Market Economic System

In a free market economy, firms and households act in

There is no government intervention in a pure market

Historically, Hong Kong is considered an example of a

Advantages of a Free Market Economy

Consumers pay the highest price they want to, and

Disadvantages of a Free Market Economy

Due to the fiercely competitive nature of a free

However, the government is also usually involved in the

To a certain extent, most countries have a mixed

Advantages of Mixed Economies

There is less government intervention than a

There are criticisms from both sides arguing that

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