The happenings "inside" the Wisconsin State Treasury and across the street at the State Capitol

The Economy & You #38: Economic Systems

Throughout the 1980s, there was an international competition between the free market economies of the western world and the command economies of the east.  Authoritarian political systems like those in the Soviet Union were synonymous with government controlled economies.  China was seen a country that followed this same model.  But now that China has attracted large amounts of private capital and continues to experience double-digit economic growth, the assumption that countries with centralized political governments must also have centralized economies has been put into question.

The two main economic systems are command economies and free market economies.  The differences between the two economies in the purest forms are quite large. Yet, the pure forms of either of these economies do not exist in the real world.  All national economies are mixture.  Independent choice and enterprise exists in command economies and there is government regulation and involvement in free market economies. 

Still, what is a command economy? A command economy is an economy where the central government directly, or indirectly, determines supply (output), income, and price rather than market forces. Government planners decide which goods and services are produced and how they are distributed. These are also called a planned economy.

A laissez-faire (or free market) economy implies no government involvement in the economy. Laissez-faire, which is French for “allow them to do,” advocates for individuals to pursue their own self-interest with no direction or regulation from the government. Free market economies leave the decisions of supply (output), income, and price to market.  In other words the interaction between buyers and sellers determine what is produced, how much is produced, and at what price it is sold.
In a free market system, the concept of consumer sovereignty prevails. Consumer sovereignty is the idea that consumers dictate what happens in the market.  Goods and services are only produced if the supplier sells them for more than what it costs to produce them (i.e. a profit). A supplier cannot make a profit unless they sell something that a consumer wants to buy and at a price a consumer is willing to pay.

Under this same system, a producer must determine how to organize the production of the goods and services they wish to sell.  Producers can be a one-person shop or a multi-national corporation.  In either case, decisions about production are made by those private businesses acting in what they see as their own self-interest.  Proponents believe that this free market system allows for more efficient use of resources and faster response to changes in consumer demands.

Command economy proponents argue that a planned economy helps to ensure that resources are focused on the most important needs of the country, economy, and its citizens.  Planned economies can help to address the issue of unfair distribution of goods and services.  A command economy can redirect resources to assist in the development of a region or industry without having to wait for the necessary capital to accumulate. In short, the national objectives of a planned economy model override the individual interests of a free market economy model.


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