Welcome back to Economics from Home. Today we'll explain the concept of an economic system. An economic system is the way in which a society or state organizes economic activity in terms of the production of goods and services and their distribution among the members that make up the society or state. That is to say, the economic system is the means by which societies or governments organize and distribute the resources, services and goods available in their country. As we saw in the scarcity video, these goods and services are limited, but human needs and desires are unlimited; that is, they never end. Human beings always want more. This makes the main objective of an economic system to manage and distribute the resources available to a country in the best possible way to achieve the greatest possible efficiency. Now, depending on how these resources are produced and distributed, we can distinguish 4 main types of economic systems: Market economy or capitalism The capitalist economic system is fundamentally based on the free market. That is, there is little or no state participation in the economy. Therefore, market regulation comes from within itself through the law of supply and demand. Among its tenets are the defense of private property, the setting of prices through the law of supply and demand, and the existence of competitive markets. In reality, pure capitalism is simply a theoretical model, since in all countries there is state intervention in the economy to a greater or lesser extent, whether through the enactment of laws that favor fair trade, the prohibition of certain monopolies, or the sanctioning of companies that produce numerous negative externalities, such as the dumping of waste into rivers or oceans. Among the advantages of a market economy, we can cite as the most important the economic growth that the country would achieve in the short and medium term, since the inefficiencies caused by state management would disappear. On the other hand, among the drawbacks, we find high social costs that could jeopardize the future of humanity and a very unequal distribution of wealth, with very few entities or individuals holding most of the money. The high social costs that arise in a market economy are very easy to understand. For example, if there were no state intervention, there would be no environmental laws prohibiting companies from deforesting forests, polluting the seas, etc. This would cause many companies, in an attempt to save costs and increase profits, to engage in unethical practices that stimulate economic growth in the short term but cause disastrous consequences for humanity in the medium and long term. For example, a company that dumps its polluting waste into rivers because it's cheaper than disposing of it safely would be making greater profits but causing serious problems for society and the environment. The most characteristic example of a pure market economy is found in the 19th century in the United States. Planned economy This economic system is directed by a single centralized power, the government, which controls all or most of the economic structure. Among its postulates are the defense of collective property and the regulation of markets through state-setting prices. This system in its purest state is also called communism since all production decisions are the responsibility of the government. Economic decisions, such as which goods to produce, how much to produce, and their price, are made by the government since it is the owner of the means of production. For example, they are the ones who can divert these means of production to wherever they see fit. That is , if the country's government decides it wants to start manufacturing more technological components, it can move workers from a construction site to a factory dedicated to producing motherboards, for example. Or, they are the ones who decide whether it is socially optimal to manufacture computers or robots, or whether it is better to divert those resources to housing construction or agriculture. Today, pure communism is virtually nonexistent, and only a few countries (notably North Korea) operate with rigid, centrally planned economic systems. This is because, in theory, communism works very well because the central authority, that is, the government, exercises control taking into account the interests of all individuals in society, preventing a small percentage of the population from taking advantage of the rest. However, in every situation where attempts have been made to implement a communist model, it has failed due to government corruption. Finally, we would like to mention that among the disadvantages of this economic system is its rigidity. Compared to other systems, they react slowly to change because power is centralized. This makes them vulnerable to economic crises or emergencies , unable to quickly adjust to changing conditions since all decisions must be approved by the government. Mixed economy Mixed systems are a combination of characteristics of capitalist and planned economic systems. It is currently the economic system par excellence in most countries in the world. Of course, depending on the country, it will be closer to the capitalist system or closer to the communist system. In mixed systems, industries that provide essential services, such as education, banking, or healthcare, are often government-owned. However, the rest of the services, such as nightclubs, cultural centers, cafes, clothing stores, cinemas, etc., are privately owned. As I said before, depending on the degree of mixed economy, it will have a greater number of public services or a greater number of private companies. While private companies' primary objective is profit, public companies focus on other objectives such as environmental friendliness , allocative efficiency, promoting a stable and full-employment environment, etc. One advantage of private companies is that they are more efficient and innovative than public companies, as they need to be profitable to continue operating. This means that, as a general rule, employees in public sector companies have longer vacations and greater protection against dismissal than workers in private sector companies. However, in planned economies, a high tax policy is often implemented to offset the high cost of public services . Some examples of socialist countries would be Sweden and France. Finally, in practice, the main challenge facing mixed economies is finding the right balance between free markets and government control. Traditional Economy In a traditional economic system, production, consumption and distribution decisions are based on long-standing beliefs and customs . Focused on family and human relationships, each member of society has a specific role that contributes to the overall progress of the community. In essence, traditional economics is very basic and the oldest of the four types. Today, this system can be found among Australian Aborigines and some Amazonian tribes who live much as they did hundreds of years ago. As a general rule, in communities with traditional economic systems there are usually very few resources to share. Either there are few natural resources in the region or access to them is restricted in some way. Therefore, the traditional system, unlike the other three, lacks the potential to generate a surplus. However, precisely because of its primitive nature, the traditional economic system is highly sustainable. Furthermore, due to its low production, there is very little waste compared to the other three economic systems. Aside from these benefits, it has the main advantage that the people who make up this society are more connected to themselves and socially satisfied through work, since they know the role they play in the rest of the community. On the contrary, among the main disadvantages of this economic system are its severe technological backwardness and its heavy dependence on climatic conditions, as there are insufficient supplies to cope with potential causes that could ruin hunting or agriculture. With all this, we say goodbye for today. If we 've helped you and you'd like to continue learning, here are two videos for you to click on based on YouTube recommendations. 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