Any system that involves the mechanism for production, distribution and exchange of goods apart from consumption of the goods and services within the different entities can be classified as an Economic System. The various kinds of economic systems and their classifications broadly follow the methods by which means of ownership are established. Thus, the mode of ownership of capital leads to the different kinds of economic systems in vogue. This article focuses on three types of economic systems, such as market, command, and mixed economy. It compares and contrasts these types in terms of the role of the government in their functioning, property and land ownership, mechanisms of price formation, division of labor, and income distribution.
Market Economy vs. Command Economy
A market economy can be described as an economic system where the production means are largely privately owned and aimed at profit and the process of capital accumulation. In general, this system implies investment, distribution, income, and prices being determined by markets, both regulated and unregulated. In contrast, a command economy represents an economic system where production, investment, and capital goods allocation are conducted according to economy-wide economic and production plans. The extent of centralization and decentralization in decision-making and participation can vary depending on the type of planning mechanism utilized.
In a market economy, decision-making and investments are determined by individual owners of wealth, property, or production ability in financial and capital markets. Meanwhile, prices and the distribution of goods and services are primarily determined by competition in the markets of goods and services. Ideally, the role of government is reduced to solely maintaining order by enforcing established formalities. However, in reality, the government can play an active role in serving special interests and promoting social welfare. Labor division is also subjected to market rules of supply, demand, and competition, which implies disparities in workforce distribution as well as the respective income.
Labor division and income distribution are centralized and equalized. In a command economy, the government can harness land, labor, and capital to serve the economic objectives of the state. Consumer demand is limited in favor of more profitable capital investment for economic development in the desired field. Crucial resource allocation decisions are made by governmental authorities and are imposed by laws. Consequently, the central planners process the diversity of goods to be produced and the quotas for each firm. In addition, government controls the labor division, assigning the workforce according to industrial needs. In this context, individual qualities do not affect the received wage.
Market Economy vs. Mixed Economy
A mixed economy can be generalized as an economic system that blends features of a market economy with components of a command economy. In particular, it resembles a mixture of markets practicing state interventionism, resulting in a market economy with strong regulatory supervision and extensive market interventions. The market is subject to varying regulatory control due to governments causing indirect macroeconomic influence through monetary and fiscal policies. However, private ownership’s dominating role in the control of production means, a profit-seeking attitude, and capital accumulation is still present as the market’s fundamental driving force.
While most political and economic ideologies are defined in a strictly idealized sense, a mixed economy represents a realistic compromise. The government acknowledges the market force, viewing it as the natural resource allocation mechanism. It contrasts with a pure market economy, where state activity is limited to maintaining order and security and providing the legal framework for protecting property rights and enforcing contracts. In this context, the government provides various public utilities and essential services, such as healthcare, education, physical infrastructure, and public areas management.
Market Mixed Economies
The first type of a market mixed economy is a combination of state intervention with market forces in the form of macroeconomic policies, regulations, and social welfare aiming to improve market outcomes. It is the most common contemporary market-oriented economy type (the U.S., Denmark). The second type of a market mixed economy refers explicitly to a mix of public and private ownership of production means in the industry. Examples include the economies of Singapore and Vietnam, which feature sizeable state-owned enterprise sectors operating alongside substantial private sectors. The last type of mixed economy combines economic planning with market forces to guide economic production (Hungary).
Command Economy vs. Mixed Economy
Planned economies contrast with mixed economies since the latter allows independent firms operating in the market to make decisions about production, distribution, pricing, and investment. In addition, the planning used in mixed economies is referred to as indicative planning, which is much more specific and limited. A command economy was mainly represented in the administrative-command systems of the former Soviet Union and Eastern Bloc countries before most of them converted to market economies. It highlights the leading role of hierarchical administration and public ownership of production means in guiding the allocation of resources.
Command Mixed Economies
Countries that adopted fascism as their ideology represent the first example of command mixed economies. Fascism ideologically supports state interventionism and private enterprise in a corporatist framework that serves as a middle ground between capitalism and socialism. Through the mediation of labor and business issues, it promotes national unity. Another example is the economy adopted in the new-born Soviet Union. The policy facilitated the constraints of war communism and allowed a return of markets with small and medium-sized enterprises while the state could control foreign trade, large industries, and banks. Finally, the People’s Republic of China provides an example of contemporary command mixed economy. Modern China’s economy draws a lot of scholarly and economic attention. Its command system allows and sometimes imposes various binding interventionist tools. The system’s main enforcement mechanisms include incentives, promotions, monitoring, and financial sanctions. Moreover, CCP strictly controls the top appointments in the larger state-owned enterprises. In particular, CCP representatives generally serve as observers or board members in both state-owned and private companies. Their main objectives aim to monitor and stimulate the implementation of the relevant planning segments. Overall, public ownership plays a dominant role and is the foundation of the socialist market economy.