The Three Economic Systems
1. A laissez-faire economy.
Laissez-faire is French for “let do.” It represents a pure capitalist system, or a so-called price system, in which the supply and demand behavior of businesses and households determine prices of goods and services and factors of production. The government plays an important role in a pure capitalist economy, but its role is limited to only the most essential functions such as providing a legal system, protecting private property, providing infrastructure and providing certain public goods.
2. A command economy.
A command economy is a communist system in which a country’s government determines prices of goods and services and factors of production. The government is in control of all of the country’s economic decisions.
3. A mixed economy.
A mixed economy is a combination of the two systems. Most industrialized countries around the world have mixed economies. The exact mix differs depending on the amount of government involvement.
Economic Systems around the World
The United States, Canada, Sweden, England, Norway, Japan, South Korea, Holland, Germany, and most other industrialized countries are examples of mixed economies. The private sector (businesses and households) plays a significant role, but so does the government in the form of various types of government spending, taxation, regulations, price controls, and monetary policies.
During a significant part of the nineteenth century, the United States had a more laissez-faire economy. In this system, households and businesses had maximum economic freedom. There was very little government involvement, minimal regulations, and free banking. The government was only in charge of the most essential economic and political functions, such as providing defense and national security, providing a legal system, and providing public goods, such as roads, highways and other infrastructure. The government collected taxes merely to pay for these essential functions. Prices, wages, interest rates, and other economic variables were determined by the economic decisions of private businesses and households. The United States experienced significant industrial growth during this time period. Wages of all income groups grew, and private charity giving by those who could afford it was very prevalent.
In the 1920s and 1930s, due to influences of economists such as Karl Marx, Friedrich Engels, and John Maynard Keynes (pictured) and the events of the Great Depression, industrialized countries experienced a dramatic change in economic beliefs about the role of the private sector and a country’s government. Since this time the role of governments around the world has increased considerably.
In 1913, the United States Federal Reserve System was created. Central banks took control of the country’s monetary system. Throughout the 1920s and 1930s, labor unions, supported by government legislation, gained in influence. Regulations about worker safety, anti-discrimination and anti-trust laws grew significantly. In 1934, the Federal Deposit Insurance Corporation was formed. Social programs, such as Social Security, Unemployment Compensation, various welfare programs, minimum wage laws, and farmer support programs became indispensable. New Deal types of government spending to create jobs, such as the Tennessee Valley Authority project, became commonplace. To fund these expenses and to pay for the growing number of government employees, taxes on individuals and businesses increased considerably. Government deficits also grew.
During the 1960s, the war on poverty added new government programs. During the 1970s, environmental concerns increased government regulations to fight pollution. The Reagan administration supported limited growth and favored a smaller role for the government (except in the area of national security). The George W. Bush administration supported a strong build-up of the military and homeland security in the aftermath of 9/11. Bush also supported corporate bailouts and government stimulus packages (increased government spending) during the 2007/2008 recession. This increased our already high national debt level. The Obama administration further increased the government presence in our economy, especially in the areas of national health care, energy, education and even in traditionally private sector industries such as banking, housing, and auto manufacturing. The Obama administration and a divided Congress struggled to find ways to reduce large deficits and a potentially disastrous growing national debt. The Trump administration has scaled back regulations and has attempted to reduce the role of the government, except in the areas of international trade, immigration, and homeland security. Newly passed tax reform aims to revive a slow growing business sector (for example, by lowering corporate tax rates) and reduces the net amount of taxes paid by most households.
The United States is truly a mixed economy. Increasing government involvement accompanies a traditionally strong private sector. What the ideal mix is of these two components is the topic of many controversial debates.