Types of Economic Systems
Societies have organized their resources in many different ways through history, deciding how to use
available means to achieve individual and common ends.
Primitivism
In primitive agrarian societies, people tend to self-produce all of their needs and wants at the level of
the household or tribe. Families and tribes would build their own dwellings, grow their own crops, hunt
their own game, fashion their own clothes, bake their own bread, etc. This economic system is defined
by very little division of labor and resulting low productivity, a high degree of vertical integration of
production processes within the household or village for what goods are produced, and relationship
based reciprocal exchange within and between families or tribes rather than market transactions. In
such a primitive society, the concepts of private property and decision-making over resources often
apply at a more collective level of familial or tribal ownership of productive resources and wealth in
common.
Feudalism
Later, as civilizations developed, economies based on production by social class emerged, such as
feudalism and slavery. Slavery involved production by enslaved individuals who lacked personal freedom
or rights and were treated as the property of their owner. Feudalism was a system where a class of
nobility, known as lords, owned all of the lands and leased out small parcels to peasants to farm, with
peasants handing over much of their production to the lord. In return, the lord offered the peasants
relative safety and security, including a place to live and food to eat.
Capitalism
Capitalism emerged with the advent of industrialization. Capitalism is defined as a system of production
whereby business owners (entrepreneurs or capitalists) organize productive resources including tools,
workers, and raw materials to produce goods for sale in order to make a profit and not for personal
consumption. In capitalism, workers are hired in return for wages, owners of land and natural resources
are paid rents or royalties for the use of the resources, and the owners of previously created wealth are
paid interest to forgo the use of some of their wealth so that the entrepreneurs can borrow it to pay
wages and rents and purchase tools for hired workers to use. Entrepreneurs apply their best judgement
of future economic conditions to decide what goods to produce, and are earn a profit if they decide well
or suffer losses if they judge poorly. This system of market prices, profit, and loss as the selection
mechanism as to who will decide how resources are allocated for production is what defines a capitalist
economy
These roles (workers, resource owners, capitalists, and entrepreneurs) represent functions in the
capitalist economy and not separate or mutually exclusive classes of people. Individuals typically fulfill
different roles with respect to different economic transactions, relationships, organizations, and
contracts which they are a party to. This may even occur within a single context, such as a employee-
owned co-op where the workers are also the entrepreneurs or a small business owner-operator who
self-finances his firm out of personal savings and operates out of a home office, and thus acts as
simultaneously as entrepreneur, capitalist, land owner, and worker.
The United States and much of the developed world today can be described as broadly capitalist market
economies.
Socialism
Socialism is a form of cooperative production economy. Economic socialism is a system of production
where there is limited or hybrid private ownership of the means of production (or other types of
productive property) and a system of prices, profits, and losses is not the sole determinant used to
establish who engages in production, what to produce and how to produce it. Segments of society band
together to share these functions
Production decisions are made through a collective decision making process, and within the economy
some but not all economic functions are shared by all. These might include any strategic economic
functions that effect all citizens. These would include Public Safety (police, fire, EMS), National Defense,
resource allocation (utilities. like water, and electric), education, and more. These are often paid for
through income or use taxes levied on the remaining tactically independent economic functions
(individual citizens, independent businesses, foreign trade partners, etc).
Modern socialism contains certain elements of capitalism, such as a market mechanism, and also some
centralized control over some resources. If more of the economic control is centralized in ever
increasing ways, it may eventually become more akin to communism. Note that socialism as an
economic system can and does occur under various forms of government, from the Democratic
Socialism of the Nordic countries to more authoritarian strands found elsewhere.
Communism
Communism is a form of command economy, whereby nearly all economic activity is centralized, and
through the coordination of state-sponsored central planners. A society's theoretical economic strength
can be marshaled to the benefit of the society at large. Executing this in reality is far more difficult than
in theory, in that it requires no conflicting or competing entities within the society to challenge the
allocation of resources. Note that instances of economic communism in the modern era have also been
coupled with an authoritarian form of government, although this need not be the case in theory.
