Different societies or countries have at one time or another adopted or developed their own economic system to deal with the basic economic problems which all societies face. The way and manner in which every society tackles the questions of what to produce, how to produce and how the products are going to be distributed can be referred to as its economic system.  

Types of Economic Systems 

Basically, four types of economic systems have been identified namely: 

  1. Capitalism or Free Enterprise System
  2. Socialism
  3. Mixed Economic System
  4. Traditional Economic System.


1. Capitalism or free enterprise system 

This is an economic system that believes in the efficacy of the interplay of market forces of demand and supply in the allocation and distribution of scarce societal resources . It believes in the right of individuals to own any property through legal means . Countries practicing this system include the USA, Canada, Japan, etc. The principal function of government is enforcement of the rights and responsibilities of private ownership . 

Capitalism or free enterprise system main features 

  1. There is no restriction to the ownership of wealth and all factors of production.
  2. People are free to choose their occupations as far as their abilities and the opportunities of their economic and social environment permit.
  3. There is the existence of competition which encourages specialization, research and innovation.
  4. Prices of all goods and services as well as factor inputs are determined by the forces of demand and supply.
  5. The pursuit of profit is an important feature of a capitalist system . The profit motive prompts individuals, entrepreneurs, producers or business enterprises to undertake a business.
  6. The government’s major role includes the provision of the institutional and legal framework to facilitate the working of the economy and the provision of public goods and the regulation of monopolies.

Advantages of capitalism

  1. Competition and rivalry lead to efficiency and full utilization of societal resources both human and material.
  2. There is a lot of freedom regarding what and how much you want to buy or sell.
  3. People have the incentive to work hard, be innovative and make discoveries because the reward system is adequate.
  4. Freedom to own properties and factors of production.

Disadvantages of capitalism

  1. It may lead to high income inequality in society.
  2. The weak and the handicapped may not be adequately catered for by the system.
  3. Because the system is propelled by profit motives, unemployment of both material and human resources may be high in the face of deficient demand. Cases of strikes, closures and layoffs, may also be rampant.
  4. The costs/prices of social goods and services like water, health, education and energy may be very high because they are usually provided by private enterprises.

2. Socialism

This is an economic system where the state takes the major economic decisions through detailed planning . Countries that adopt this system do not believe in the efficacy of market forces . Countries that practice this system include China and Cuba. The more centralized form of socialism is usually called ‚Äėcommunism‚Äô.

Socialism main features 

  1. The state is the owner of all societal resources or factors of production.
  2. The basic economic problems of what, how and for whom to produce, are left to the Government to decide. 
  3. Decisions concerning production, allocation, distribution and prices to be charged for goods and services as well as wages and profit margins are normally taken by planning agencies on behalf of the state. 
  4. Profit motive on the part of the individuals or firms is virtually absent.
  5. Income seems to be more evenly distributed 

Advantages of socialism 

  1. There is a more even distribution of income and wealth.
  2. There is a higher level of employment of both human and material resources.
  3. There are lower incidences of strikes, layoffs, closures, crime and resentment among people.
  4. The underprivileged and handicapped are taken care of.
  5. There is equal opportunity for work, education, health care services and in fact education and health are free under socialism.

Disadvantages of socialism 

  1. Consumer’s sovereignty is lost. Consumers have a lot of influence on the type and range of goods and services they want.
  2. Shortages and queues are common in socialist countries because of rationing of essential goods and services.
  3. The non-profit maximizing motive on the part of the individuals and firms may make them put in less effort and energy and as a result the society may not achieve its full production capacity.

3. Mixed economic system 

In this system, decisions regarding what , how and for whom to produce are partly handled by the state and partly by the individuals and private organizations.

Mixed economic system main features

  1. Both the private and the public own and control societal resources and factors of production.
  2. Government tends to monopolize the ownership and provision of those resources considered to be essential, while leaving the market or individual firms to provide those that may be regarded as non-essentials.
  3. There is free interplay of market forces as well as intermittent government intervention in establishing prices, wage, location of industries, the type of goods to produce and the direction and distribution of loanable funds by financial institutions. 

Advantages of a mixed economic system 

  1. It eliminates the profit disincentive or motivation to work hard as obtained in the socialist economic system.
  2. It reduces the high unemployment rate and high income inequality associated with a capitalist system.

Disadvantages of a mixed economic system 

  1. There is no clear-cut consensus by economists about the specific sectors that should be left to the market forces and those that should be left to the state as well as the degree of intervention in those specific sectors.
  2. The middle course depicted by this system eventually leads to confusion resulting in low growth and no development.
  3. It encourages corruption and inefficient management in the country.

4. Traditional economic system 

This is the type of economic system that prevailed in all independent human organizations or settlements prior to their contact with the outside world . In Nigeria, for instance, feudalism and communism predominated before contact with Europeans . 

Basic features of traditional economic system

  1. Free access to ownership of factors of production which was later broken by the rise of feudalism.
  2. Subsistence production characterized by gardening, hunting and subsistence farming.
  3. Trade by barter and lack of division of labor.
  4. Basic economic problems were solved by reference to traditional values and customs.

Advantages of traditional economic system

  1. Hunger, poverty and unemployment were rare.
  2. People dissipated little energy to get most of their basic needs and as such they had high levels of leisure.
  3. There were few incidences of social evils such as frustration, alienation, crime, resentment, theft and other social evils.

Disadvantages of traditional economic system

  1. People had little control of their environment.
  2. The use of tradition and custom to address basic economic problems may not be based on modern concepts of economic rationality, equity and social justice.
  3. People’s progress and achievement tend to be ascriptive by reasons of birth and not by achievement.

There is one more Economics system which appears like it falls in between all the four economic systems mentioned above. It is Centrally planned economy


Centrally planned economy 

A centrally planned economy is an economic system in which economic decisions are made by the government of a country through a central economic planning bureau. It is also called a ‚Äėcommand economy‚Äô and is associated with a socialist or communist economic system.¬†

Centrally planned economy main features

  1. Government control of the economy is absolute.
  2. Resources are owned by the government on behalf of the people.
  3. The aim of production is to maximize public welfare and raise the general standard of living.
  4. The prices of goods and services are fixed by the government. 
  5.  Economic decisions are made by the Government.
  6. Little or no individual economic freedom exists.
  7. Labor is adequately engaged in productive activities.
  8. Equitable distribution of income is ensured.
  9. There is a lack of unhealthy competition in the system.

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By Teezab

His name is Tiamiy Abdulbazeet. He is a writer and loves to write about Education, and all types of news. If he is not writing, then know that he is playing a game!ūüėÉ

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