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.
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, 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 United States had a near laissez-faire economy. In this system, households and businesses had significant 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. Prices fell during most years, average wages of all income groups grew, and significant private charity giving was very prevalent.
The Heritage Foundation publishes an index that ranks countries and economic areas around the world based on their economic freedom (visit https://www.heritage.org/index/ranking). In 2019, it ranked Hong Kong as the most economically free area in the world. The ranking is based on criteria including the amount of government involvement (taxation, regulation), private property rights, and people’s freedom and encouragement to produce, innovate and advance. The top ten freest countries/areas in 2019 were:
1. Hong Kong
3. New Zealand
7. United Kingdom
9. United Arab Emirates
At the bottom and least free are:
180. 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 has scaled back regulations and has attempted to reduce the role of the government by passing tax reform with lower rates for most households and businesses, but government spending continues to increase and there is more government intervention in the areas of international trade, immigration, and homeland security.
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.