The Three Economic Systems

1. A laissez-faire economy.
Laissez-faire is French for “let do.” It means “hands-off” and 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 individuals and 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, Mexico, South Africa, China, 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 economic role of the United States’ government was limited, so it had a mostly laissez-faire economy. Households and businesses had significant economic freedom. There were 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. Prices fell during most years (this is a good thing), average real wages of all income groups grew during most years, and private charity was common.

The Heritage Foundation publishes an index that ranks countries and economic areas around the world based on their economic freedom (visit In 2023, it ranked Singapore and Switzerland as the most economically free areas in the world.  The United States ranked 25th, well below the four Scandinavian countries, which are ranked 9th through 12th. The 2023 ranking is based on criteria including the amount of government involvement (taxation, regulation), a government’s fiscal health, private property rights, and people’s freedom and encouragement to produce, innovate and advance. The top ten freest countries in 2023 are:
1. Singapore
2. Switzerland
3. Ireland
4. Taiwan
5. New Zealand
6. Estonia
7. Luxembourg
8. Netherlands
9. Denmark
10. Sweden

At the bottom and least free are:
174. Venezuela
175. Cuba
176. North Korea.

The increasing role of governments
In the years leading up to and including 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 most 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. Also in 1913, the United States adopted the income tax. 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 many 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), but government spending continued to grow and government budget deficits took off . 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 scaled back regulations and attempted to reduce the role of the government by passing tax reform with lower rates for most households and businesses. The pandemic caused structural shifts in the economy and central banks injected lots of money into the economy, which caused high rates of inflation. Under the Biden administration government spending increased and there is more government intervention in the areas of social welfare, green energy, international trade, and regulations in general. National debts around the world increased significantly and this will limit future spending and raise future tax rates.

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Significantly increased government involvement during the past century has shifted the United States economy away from its mostly free market philosophy during significant parts of the 19th century. The desired degree of government involvement beyond its essential functions (protector of private and personal property, provider of a legal system, provider of essential public goods) will remain an important and controversial debate.