The Economic System
Scarce resources bring up the need of a system to allocate resources efficiently. We need to decide what to produce, how to produce and whom to produce for. The economic system is a spectrum of different economy, with market and planned economy being the extremes. The economic system of different countries is defined by who owns or control the factors of production.
In a planned economy, government or the public sector controls the factor of production. Countries with this type of economy are generally considered as communist or socialist. A total planned economy doesn’t work in the real world. The lack of competition means that quality of products can be thrown out the window.
In a market economy, private sectors or businesses controls the factor of production. The invisible hand or the price mechanism play the biggest part in this type of economy. It’s when producers want the maximize profit and consumers want to maximize utility for the best price. The market economy mostly work, the system promotes competition in the market. But things that are harmful for society could be produced (such as drugs) or resources are not allocated efficiently, this is called market failure.
Since both economy aren’t perfect, all countries have adopted a mixture between them, a mixed economy. This mixed economy is based on the price mechanism with government intervention to help combat market failure. Government can provide support to the public by subsidising businesses to decrease the cost of certain products or regulate and harmful produce from circulating in the market.
All countries have uses the mixed economy, with the exception of North Korea. North Korea is the only country that uses the commanded economy (worse than planned economy). Everything there have already been decided of what to produce, how and for who. Laws and regulation are strict in this country. New Zealand on the other hand, have little to no regulations and taxes. There economy is the closed to a free market, closer than the US.
Over time, countries can slowly change there economic system, like China. For centuries China was following the planned economic system. After their economic system changed to a more free market, China became one of the biggest power house of the global market. Thailand on the other hand, is slowly turning into a planned economy (in my opinion).
No economic system is perfect, all have opportunities and obstacles. But planned economy generally doesn’t work, it limits the countries that adopted it from growth. Look at current North Korea and past China as an example. When they adopted planned economy, it stopped them from inventing or innovating things and stunt their economic growth.
Like before the market economy mostly work, but it’s risky. It depends on the responsibility of the producers and consumers to reduce market failure. But with the right amount of government involvement in the system, the mixed economy will bring any country a long way.