- Recognize the differences between market, planned, and mixed economies
Global Economic Systems
Businesses and other organizations operate according to the economic systems of their home countries. Today, the world’s major economic systems fall into two broad categories: free market economies based on capitalism; and planned economies, which include communism and socialism. However, many countries use a mixed economy that incorporates elements from more than one system.
The major differentiator among economic systems is whether the government or individuals decide:
- How to allocate limited resources—the factors of production—to individuals and organizations to best satisfy unlimited societal needs
- What goods and services to produce and in what quantities
- How and by whom these goods and services are produced
- How to distribute goods and services to consumers
Managers must understand and adapt to the economic system or systems in which they operate. Companies that do business internationally may discover that they must make changes in production and selling methods to accommodate the economic system of other countries. The following table summarizes important characteristics of the world’s economic systems.
| The Basic Economic Systems of the World[1] | ||||
|---|---|---|---|---|
| Capitalism | Communism | Socialism | Mixed Economy | |
| Ownership of Business | Businesses are privately owned with minimal government ownership or interference. | Government owns all or most enterprises. | Basic industries such as railroads and utilities are owned by government. Very high taxation as government redistributes income from successful private businesses and entrepreneurs. | Private ownership of land and businesses but government control of some enterprises. The private sector is typically large |
| Control of Markets | Complete freedom of trade. No or little government control. | Complete government control of markets. | Some markets are controlled, and some are free. Significant central-government planning. State enterprises are managed by bureaucrats. These enterprises are rarely profitable. | Some markets, such as nuclear energy and the post office, are controlled or highly regulated. |
| Worker Incentives | Strong incentive to work and innovate because profits are retained by owners. | No incentive to work hard or produce quality products. | Private-sector incentives are the same as capitalism, and public-sector incentives are the same as in a planned economy. | Private-sector incentives are the same as capitalism. Limited incentives in the public sector. |
| Management of Enterprises | Each enterprise is managed by owners or professional managers with little government interference. | Centralized management by the government bureaucracy. Little or no flexibility in decision-making at the factory level. | Significant government planning and regulation. Bureaucrats run government enterprises. | Private-sector management similar to capitalism. Public sector similar to socialism. |
| Examples | United States | Cuba, North Korea | Finland, India, Israel | Great Britain, France, Sweden, Canada |
- https://openstax.org/books/introduction-business/pages/1-3-how-business-and-economics-work ↵