Economic Systems Notes

An economic system consists of institutional arrangements and a coordinating mechanism designed to respond to the economizing problem.
It determines what goods are produced, how they are produced, who gets them, how change is accommodated, and how technological progress is promoted.
Systems are categorized by who owns the factors of production and the degree of centralized versus decentralized decision-making.

Known as pure capitalism, translating from French as "let it be."
Government involvement is minimal, limited to protecting private property, establishing a legal environment for contracts, and preventing economic coercion.
Proponents argue that government interference reduces human welfare because governments are corrupted by special interests.
Pure laissez-faire has never existed in reality; governments consistently implement industrial safety regulations, taxes, subsidies, occupational licensing, and income redistribution.

The polar opposite of laissez-faire, where the government owns most property resources and business firms.
Economic decision-making is governed by a central economic plan where a central planning board determines enterprise goals, allocates resources, and decides the division between capital and consumer goods.
Prominently utilized historically by socialist or communist governments including the Soviet Union (which collapsed in 1992) and China.
North Korea and Cuba remain the last prominent examples of largely centrally planned economies, while Turkmenistan, Laos, Belarus, Myanmar, Venezuela, and Iran also mainly use the system.
Russia, eastern European nations, and China have shifted significantly toward market-oriented systems, though government ownership in China remains extensive.

Also referred to as capitalism, the mixed economy, or the market economy.
Combines centralized government initiatives with decentralized actions from individuals and firms, characterized by private ownership of resources and capital.
Relies on markets and price communications to coordinate activity among competing, self-interested buyers and sellers.
High potential monetary rewards incentivize firms to innovate and entrepreneurs to pioneer new products and processes.
In economies like the United States, the government sets rules, promotes economic stability and growth, provides underproduced goods, and modifies income distribution, though the market remains the primary dominant force.