Types of Economic Systems

For most of the past two centuries, economics has been the science of studying how a country uses the resources available to create and deliver goods and services to its citizens. The United States is a rich, globally recognized example of how economies successfully utilize both human and economic capital to build economic strength. In the United States, economics governs the government as well as private enterprise. There are five principles that guide the process of successfully applying economics to the day-to-day decisions that businesses must make.

First, economics considers the interactions between individuals, firms, markets, governments, and institutions. All of these interact to create and deliver goods and services to consumers. The process of doing so involves the creation of markets, which allow producers and consumers to exchange and sell goods and services based on their own needs and the needs of others. Exchanges of scarce resources, for instance, such as energy and natural gas, are a key component of economic activity.

Second, mixed economies are societies that include both capitalism and public control. In such systems, market prices are influenced by the incentives created by government regulation and intervention. The mixed economy also requires the simultaneous operation of a market economy and a government sector. Mixed economies exhibit tendencies toward laissez faire and a strong public sector, but sometimes suffer from excessive regulation and protectionist tendencies toward certain industries.

Third, there are two types of regulation: fundamental and secondary regulation. Fundamental regulation refers to rules and laws that establish the parameters governing the production, distribution, and sale of the goods and services of a market economy. Secondary regulation is designed to ensure that the initial market economy rules are followed in the formulation of economic policies. There are three main types of secondary regulation: government regulations, private agreements, and external constraints. A brief explanation of each below.

Governmental Regulators. Examples of government regulators include the Federal Trade Commission (FTC), the Consumer Protection Division of the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve, and the Office of the Comptroller of the Currency. The FDIC serves as an agency of the U.S. Department of Treasury. It implements policies to maintain the safety of bank account holders, protect investment and financial institutions, and promote the payment of taxes and other monetary liabilities. The Consumer Protection Division enforces the laws that govern all consumers. The Federal Reserve Bank, which is controlled by the U.S. central bank, is an independent trustee.

Private Agreements and Regulations. Private agreements and regulations are either formally established by legislation or formally determined by private arbitration proceeding. Examples of such regulations include the following: Professional and occupational licenses; worker compensation; telecommunications; insurance; mortgage financing; insurance products; food safety; alcohol retailing; and state taxation. Many states also establish their own rules for licensing and certification of small businesses and self-employed professionals.

Control by Private Faculties. Similar to government regulation, many private organizations, such as charities and trade associations, participate in economics. Some economists argue that the economy is too complicated to be led by private sector initiatives alone, pointing out that a small number of charities and trade associations alone can have a significant impact on the overall economy. Moreover, a business’s involvement in the economy can result in new ideas, new research, and new technologies that are the basis for economic growth.

Microeconomics. Microeconomics refers to the conduct of economy-wide events and activities by individual firms. In the broadest sense, microeconomics can be considered as an economic system composed of a small number of economic units, all of which are focused on specific sectors or aspects of the economy such as production, sales, investment, and trade. Because microeconomics comprises a small number of firms, information on microeconomics can be difficult to collect and analyze. For example, it would be impossible to monitor the activities of individual firms in detail; microeconomics, however, can be studied using economic indicators, such as consumer spending, output, unemployment rates, inflation, and balance of payments. This type of microeconomics has been called “mini economics” because it usually relies on aggregates rather than detailed statistics.

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