----------------Chapter 2: Economic Systems----------------
Economic Systems:
A particular set of institutional arrangements and a coordinating mechanism for solving the
ECONOMIZING problem.
It is a method of organising an economy, of which the market system and the command system are
the two general types.
NOTE: The economic system determines what goods are produced, how they are produced, who gets
them, how to accommodate change, and how to promote technological progress.
How does economic systems differ?
Economic systems differ as to:
(1) Who owns the factor of production
(2) The method used to motivate, coordinate, and direct economic activity.
Explanation:
The TWO MAIN FACTORS that DIFFERENTIATE economic systems are:
(1) Ownership of the factors of production:
o Private ownership (capitalism) → Individuals or businesses own land, labor, and capital.
o State ownership (communism/socialism) → The government controls resources.
(2) Decision-making process:
o Market-driven → Supply and demand determine prices.
o Government-driven → The state decides what to produce and how to distribute goods.
Example:
In South Africa, the government regulates some industries (electricity, water), but private
companies drive most of the economy. This makes it a mixed economy.
Role Players in an Economic System
Original Note:
Any economic system can be described with reference to its role players (economic subjects and
decision-makers), objects (e.g., products, goods, and services), and processes (e.g., production,
consumption, investment, and saving).
THE FOUR MAJOR ROLE PLAYERS IN ANY ECONOMIC SYSTEM ARE:
Households
Business enterprises
The government
The foreign sector
Each role player has principles, motives, and means within their capabilities. These principles, motives,
and means can differ in different economic systems.
In simpler terms:
Each of these role players interacts with one another to keep an economy functioning.
1. Households – Provide labor, consume goods and services.
2. Businesses (Firms) – Produce and sell goods/services, hire workers.
, 3. Government – Regulates economic activity, collects taxes, provides public services.
4. Foreign Sector – Trades with other countries, affecting exchange rates and economic stability.
Example:
When households spend money on groceries, it benefits businesses.
If the government increases corporate taxes, businesses may raise prices to maintain profits.
When South Africa exports gold, it interacts with the foreign sector.
Classification of Economic Systems
Economic systems can be classified by THEIR DEGREE OF CENTRALIZED OR DECENTRALIZED
DECISION-MAKING.
At one extreme lies laissez-faire capitalism, in which government intervention is minimal, and
markets and prices direct nearly all economic activity.
At the other extreme lie command systems, in which governments have total control over all
economic activity.
The vast majority of national economies lie somewhere in the middle.
NOTE: These economies have market systems or mixed economies.
Economic systems exist on a spectrum:
Market economies (Capitalism) – Individuals control businesses, prices set by supply and
demand.
Command economies (Communism) – Government makes all economic decisions.
Mixed economies – Combination of free markets and government control.
Example:
Market economy: The United States, where businesses decide prices based on consumer demand.
Command economy: North Korea, where the government controls businesses and sets wages.
Mixed economy: South Africa, where private businesses operate, but the government provides
public services like healthcare.
, Laissez-Faire Capitalism
In laissez-faire capitalism – or ‘pure capitalism’ – the government’s role is limited to protecting private
property and establishing a legal environment where contracts are enforced.
The term ‘laissez-faire’ is French for ‘let it be’, meaning the government does not interfere with the
economy.
Supporters of laissez-faire capitalism believe:
Government intervention reduces human welfare.
Governments are corrupted by special interests, which use government power for their own
benefit.
The Argument for Laissez-Faire:
The government’s only role should be to prevent coercion.
This ensures that only mutually beneficial transactions occur.
The free market leads to the highest possible human satisfaction.
Explanation:
In a laissez-faire system, businesses make their own decisions with no government interference.
The market self-regulates through competition.
Governments should only step in to enforce contracts and prevent fraud.
Example:
During the Industrial Revolution, Britain followed laissez-faire principles.
o Businesses grew rapidly, but workers were exploited.
o Child labor and unsafe working conditions became major issues.
Reality Check on Laissez-Faire Capitalism
Original Note:
In reality, no society has ever employed a pure laissez-faire system.
Every government in history has undertaken a wider range of economic activities, including industrial
safety laws and consumer protections.
Explanation:
True laissez-faire capitalism has never existed because governments must regulate businesses to
prevent market failures.
Without regulations, businesses might exploit workers or harm consumers.
Example:
Even in the U.S., the government enforces minimum wage laws and anti-monopoly regulations.
Command System
Original Note:
The opposite of laissez-faire capitalism is the command system.
The government owns most property resources.
Economic decision-making is centrally planned.
Used in Soviet Union, Cuba, North Korea.
Under a command system:
The government owns most businesses.
A central planning board sets production goals.
Explanation:
Command economies focus on equality over efficiency.
Economic Systems:
A particular set of institutional arrangements and a coordinating mechanism for solving the
ECONOMIZING problem.
It is a method of organising an economy, of which the market system and the command system are
the two general types.
NOTE: The economic system determines what goods are produced, how they are produced, who gets
them, how to accommodate change, and how to promote technological progress.
How does economic systems differ?
Economic systems differ as to:
(1) Who owns the factor of production
(2) The method used to motivate, coordinate, and direct economic activity.
Explanation:
The TWO MAIN FACTORS that DIFFERENTIATE economic systems are:
(1) Ownership of the factors of production:
o Private ownership (capitalism) → Individuals or businesses own land, labor, and capital.
o State ownership (communism/socialism) → The government controls resources.
(2) Decision-making process:
o Market-driven → Supply and demand determine prices.
o Government-driven → The state decides what to produce and how to distribute goods.
Example:
In South Africa, the government regulates some industries (electricity, water), but private
companies drive most of the economy. This makes it a mixed economy.
Role Players in an Economic System
Original Note:
Any economic system can be described with reference to its role players (economic subjects and
decision-makers), objects (e.g., products, goods, and services), and processes (e.g., production,
consumption, investment, and saving).
THE FOUR MAJOR ROLE PLAYERS IN ANY ECONOMIC SYSTEM ARE:
Households
Business enterprises
The government
The foreign sector
Each role player has principles, motives, and means within their capabilities. These principles, motives,
and means can differ in different economic systems.
In simpler terms:
Each of these role players interacts with one another to keep an economy functioning.
1. Households – Provide labor, consume goods and services.
2. Businesses (Firms) – Produce and sell goods/services, hire workers.
, 3. Government – Regulates economic activity, collects taxes, provides public services.
4. Foreign Sector – Trades with other countries, affecting exchange rates and economic stability.
Example:
When households spend money on groceries, it benefits businesses.
If the government increases corporate taxes, businesses may raise prices to maintain profits.
When South Africa exports gold, it interacts with the foreign sector.
Classification of Economic Systems
Economic systems can be classified by THEIR DEGREE OF CENTRALIZED OR DECENTRALIZED
DECISION-MAKING.
At one extreme lies laissez-faire capitalism, in which government intervention is minimal, and
markets and prices direct nearly all economic activity.
At the other extreme lie command systems, in which governments have total control over all
economic activity.
The vast majority of national economies lie somewhere in the middle.
NOTE: These economies have market systems or mixed economies.
Economic systems exist on a spectrum:
Market economies (Capitalism) – Individuals control businesses, prices set by supply and
demand.
Command economies (Communism) – Government makes all economic decisions.
Mixed economies – Combination of free markets and government control.
Example:
Market economy: The United States, where businesses decide prices based on consumer demand.
Command economy: North Korea, where the government controls businesses and sets wages.
Mixed economy: South Africa, where private businesses operate, but the government provides
public services like healthcare.
, Laissez-Faire Capitalism
In laissez-faire capitalism – or ‘pure capitalism’ – the government’s role is limited to protecting private
property and establishing a legal environment where contracts are enforced.
The term ‘laissez-faire’ is French for ‘let it be’, meaning the government does not interfere with the
economy.
Supporters of laissez-faire capitalism believe:
Government intervention reduces human welfare.
Governments are corrupted by special interests, which use government power for their own
benefit.
The Argument for Laissez-Faire:
The government’s only role should be to prevent coercion.
This ensures that only mutually beneficial transactions occur.
The free market leads to the highest possible human satisfaction.
Explanation:
In a laissez-faire system, businesses make their own decisions with no government interference.
The market self-regulates through competition.
Governments should only step in to enforce contracts and prevent fraud.
Example:
During the Industrial Revolution, Britain followed laissez-faire principles.
o Businesses grew rapidly, but workers were exploited.
o Child labor and unsafe working conditions became major issues.
Reality Check on Laissez-Faire Capitalism
Original Note:
In reality, no society has ever employed a pure laissez-faire system.
Every government in history has undertaken a wider range of economic activities, including industrial
safety laws and consumer protections.
Explanation:
True laissez-faire capitalism has never existed because governments must regulate businesses to
prevent market failures.
Without regulations, businesses might exploit workers or harm consumers.
Example:
Even in the U.S., the government enforces minimum wage laws and anti-monopoly regulations.
Command System
Original Note:
The opposite of laissez-faire capitalism is the command system.
The government owns most property resources.
Economic decision-making is centrally planned.
Used in Soviet Union, Cuba, North Korea.
Under a command system:
The government owns most businesses.
A central planning board sets production goals.
Explanation:
Command economies focus on equality over efficiency.
