What type of economic system is it when the government owns and controls all means of production and distribution?

so·​cial·​ism | \ ˈsō-shə-ˌli-zəm

1 : any of various economic and political theories advocating collective or governmental ownership and administration of the means of production and distribution of goods

2a : a system of society or group living in which there is no private property

3 : a stage of society in Marxist theory transitional between capitalism and communism and distinguished by unequal distribution of goods and pay according to work done

A market economy is an economic system where two forces, known as supply and demand, direct the production of goods and services. Market economies are not controlled by a central authority (like a government) and are instead based on voluntary exchange.

Market economies rely on the interplay between supply and demand to function. “Demand” refers to the amount of goods and services people need or want. “Supply” refers to the amount of goods and services available for purchase. If the supply is low while the demand is high, it drives up the price that someone can charge for it. Conversely, if there is a greater supply of a certain good and people do not want it as much, the price will go down. The levels of supply and demand for any given good or service tend to move toward an equal balance—but this equality, if achieved, cannot be held for long, so the tension between supply and demand creates a fluctuating market.

Market economies have other characteristics as well. The concept of private property is central to the market economy, because it gives owners the right to sell their goods. Competition is also an important factor, because it affects supply and demand. When there is more than one seller of a particular good, competition to make a sale can drive down the cost of that good—and the buyer has a choice of where to shop, which gives them additional leverage they would not otherwise have.

Market economies evolved from traditional economies where people bartered for goods and services, and did not have a currency. As the concepts of money, voluntary exchange, and individual property rights developed, market economies arose as one of three modern economic systems. Another modern economic system is the command economy, where the government controls all economic decisions, in sharp contrast to the market economy. The government sets the price for goods and services and controls the means of production. The other modern economic system is a mixed economy, which has characteristics of both a market economy and a command economy.

Market economies are tied to capitalism, an economic system where private entities or people own the means of production. Capitalism needs the forces of supply and demand in the market economy to distribute goods and services and set prices. Conversely, command economies are tied to socialism and communism, where the collective group owns the means of production. Most countries today, including the United States, have a mixed economy with elements of both market and command economies.

Media Credits

The audio, illustrations, photos, and videos are credited beneath the media asset, except for promotional images, which generally link to another page that contains the media credit. The Rights Holder for media is the person or group credited.

Director

Tyson Brown, National Geographic Society

Author

National Geographic Society

Production Managers

Gina Borgia, National Geographic Society

Jeanna Sullivan, National Geographic Society

Program Specialists

Sarah Appleton, National Geographic Society, National Geographic Society

Margot Willis, National Geographic Society

Economic Systems: Command, Market, and Mixed

The way in which a society answers the three fundamental economic questions is called an economic system. More formally, an economics system is a process or mechanism for answering the three fundamental questions.

We can classify any type of economic system by two characteristics: who owns the resources? And who answers the fundamental questions?

There are three main types of economic systems: command, market, and mixed. We will briefly describe each of these three types.

Command Economy

In a command economy, what goods and services are produced, how they are produced, and for whom they are produced are all questions answered by government planning. The government makes economic decisions for the good of society. In a pure command economy, all resources are owned by the government, so the government can direct them to produce what is best for society as a whole, rather than what might be in the interests of private individuals. So government owned the land, government owned the businesses, and government even told people what their occupations would be.

Historically, command economies were associated with a political system known as communism, where the goals of society as a whole were given priority over individual goals.

The Soviet Union until its breakup in the late 1980s was an excellent example of a command economy. Cuba and North Korea are good examples in today�s world of command economies.

One of the biggest changes in the world in the last 15-20 years has been the fall of communism and command economies. The number of command economies in the world has fallen dramatically in the last decade.

While the theoretical objective of a command economy is to use economic resources for the good of the whole society, as a practical matter command economies didn�t do that very well. In a command economy, government-owned producers are not allowed to go out of business, so they had little incentive to produce quality products at low cost. Since private individuals could not own means of production, they had no incentive to search for better ways of serving consumers� wants and desires. Rather than growing and prospering, command economies typically were stagnant.

Market Economy

In a market economy, resources are owned by private individuals. The goods and services that are produced are not determined by the government. Rather, production is determined by businesses responding to the wants and desires of consumers. (This process occurs through the interaction of demand and supply, about which we will have much more to say starting next week.) Consumers determine what will be produced. (You might have heard the expression �consumer sovereignty,� which suggests that in a market economy, consumers are king.)

Adam Smith is often regarded as the first economist. In his famous book published in 1776, An Inquiry into the Nature and Causes of the Wealth of Nations (often referred to simply as The Wealth of Nations), Smith described the advantages of a market economy. Smith said that a market economy is controlled as if by an invisible hand � producers produce the things that consumers want without government telling them what to do. The invisible hand expression suggests that if the economy allows people to pursue their own individual interests, the result will be the best for society as a whole. Producers who want to make as much profit as they can will have to produce the things that consumers want. Profit thus is an incentive for producers to satisfy consumers wants and desires.

Critics of a market economy argue that while it might do a good job of answering the first two fundamental questions (What to produce, How to produce), it does not do so well answering the third question (For whom to produce). Critics argues that producers satisfy the wants and desires of consumers who have the money to express those wants and desires, while those people without money are not served. In a market economy, critics say, there may be a wide gap between rich and poor.

Mixed Economy

A mixed economy is a blend of market and command economies. In a mixed economy some parts or sectors of the economy are left to private ownership (market) while in other sectors there is substantial government ownership or government-directed production (command). In a mixed economy, government intervenes in those sectors where private ownership is believed to be not in the best interests of society as a whole. For example, in a mixed economy the government might control the production and distribution of health care (as in Great Britain and Sweden). Mixed economies are relatively common in Western Europe, in countries such as France, Sweden, and Italy.

What is an economic system where the government controls all the means of production called?

What is the economic system where the government owns all of the means of production and private property doesn't exist?

Which economic system has the most government control?

What are the 4 types of economic systems?