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The Understanding Economics textbook defines an economic system as, "the organisation of an
economy, which represents a country's distinct set of social customs, political institutions and
economic practices". In this report I will discuss two of the worlds' leading economic systems,
Capitalism and Communism. As well, I will discuss our Nation's economic system, the mixed
economy. I plan to research the three elements stated by the textbook for each of the economic
systems mentioned.

Economic systems are divided into three basic types: Traditional, Market and Command.

A traditional system is one in which people's economic roles are the same as their parents

and grandparents. These societies produce goods and services in traditional ways, mainly

basing their work on the resources of the land and the way that has been practiced for


A market system is one in which nations economic decisions are the result of individual decisions by
buyers and sellers in the marketplace. These societies have the freedom to produce what and how
much related to demand of the product by consumers.

A command system is one in which the government makes all of the decisions. The government
decides which goods and services are produced, it regulates the distribution, and as well, dictates
how the skills of workers are to be used. The Command system is more commonly referred to as

Throughout history, every society has faced the basic economic problem of deciding what to
produce, how to produce it and for whom it will be produced. A country's leader has been responsible
at the forefront of the ultimate well being of the economy. To decide which economic system is most
beneficial, results from history and its effectiveness. Systems can be affected by global trends and
forceful influences from more powerful nations. It is obvious that a country's economic growth and
development are directly correlated to governmental control and regulation.

Market Economy

The earliest forms of capitalism (then called mercantilism) originate in Rome, the Middle East, and
the early Middle Ages. Goods were bought at one site for a certain price ad moved to another site
and sold at a higher price. As the Roman Empire expanded, mercantilism expanded as well. But the
contraction of the Roman Empire from the 5th century onward also contracted mercantilism until it
was not a substantial aspect of European culture. Arabic cultures on the other hand, had a long
history of this practice. It was substantially aided by to the fact that these countries were lying on the
trade routes between the three great empires: Egypt, Persia, and Byzantium. Because Islam spread
so rapidly across North Africa, Spain, the Middle East and Asia, the Arabic mercantilism became a
phenomenon worldwide as well. From the 1300's Europeans began once again expanding their
mercantile practices. As time went on in Europe, mercantilism gradually evolved into economic
practices known as capitalism. Capitalism refers to a set of economic practices that were
institutionalized in Europe between the 16th and 19th centuries. Today the "center" of capitalism is a
combination of the US, Europe and Japan.

Capitalism mainly involves the right of individuals and groups to buy and sell goods in a free market.
Market economies are decentralized, flexible, practical and changeable. This results in freedom for
the consumer to choose among competing products and services, start or expand a business and to
choose a job or career at ones discretion.

There are three main benefits associated with this economic system. They are the effect of
consumer needs and wants on production decisions, prices and innovation. Customer sovereignty
means that the decision of what to produce is guided mainly by the needs and wants of households.
Take the emergence of DVD players as an example. The reason that VHS tapes are becoming
increasingly scarce is because consumers are not buying as many VCRs because of the quality and
status of the new DVD players. The demand is switching and therefore the industry has to respond
accordingly. Prices can either increase or decrease the value of a good. This is used to stop either
too much or little production of the good. Higher prices for DVD players will give businesses the
opportunity to make a higher profit and therefore create an incentive for businesses to produce more.
Another benefit related to the incentive to make a profit is that this drive encourages innovation and
entrepreneurship. Innovation leads to the creation of goods and services that can develop a society in
many ways. Someone created the wheel right?

There are three main weaknesses with the Market economy. They are income distribution, market
problems and potential instability of output. Inequity has been an area of concern for many
challengers of this type of economy. The theory that "the rich get richer and the poor get poorer" is
significantly obvious. Without the government intervention that does exist, the probability of some
individuals not earning enough to merely survive is too high. One of the main market concerns is that
private markets don't always operate in a way that benefits society as a whole. There is ample
opportunity for businesses to create monopolies of certain goods and services. For example, if all of
the Maritimes had only one source of electricity, it could charge outrageous prices due to the lack of
competition. Consumers need the service and will pay the fees necessary. Market economies also
can easily fluctuate in its production of output from year to year. This creates uncertainty for
consumers regarding the prices of goods and also effects employment levels. If production levels go
down the prices of goods and services may rise. This uncertainty causes issues for those on limited
budgets because they are depending on the prices to remain constant. Also related to production, if
production levels drop, the need for employees drops as well. The concentration on job security
becomes and area of concern. The motivation of employees is unequivocally correlated with the
aspect of job security. If employees are unsure if they will have employment a month down the road,
they will be less likely to perform at the standard they are able.

One of the most important roles of government in a capitalist economy is regulation or placing
boundaries on the markets. Market limits prevent businesses from engaging in practices that are
harmful or unfair. These regulations are often strongly opposed by employers and the rich. This is
because limits on market activities usually mean limits on profits. Some of the limits might include
minimum wage rates, product safety requirements (automobiles, food, and workplace) and child
labour laws. Because these boundaries are set in response to our constantly changing system, the
boundaries are often moved. This means that government regulations are sometimes changed to
give businesses more freedom or restrict certain activities. Some say that the government is
infringing on our freedom by implementing these limits. However, the limits are in the public's best
interest. When properly utilized, the government can provide freedom from poverty, discrimination,
pollution, illiteracy, and from the power of those who have the wealth and inclination to oppress
without limits. It is necessary to keep in mind that the government is responsible for offering such
services as Social Security and Benefits, healthcare, schools, libraries, enforcement of health and
safety laws, parks, and public interest buildings. Without the support of these government services,
most of our country would be at a loss. This economic system offers the best opportunity for
preserving freedom and providing the widest avenues for economic growth and prosperity.

Command Economy

The communist party was known at its inception as the Bolshevik Party (a major sector of the
Russian Social Democratic Party). A system such as this usually fell into the hands of one person
with a strong personality, Stalin or Lenin for example. The leaders could not be replaced by votes of
other members or ordinary citizens. This meant that the leader at the time could run a system that
was incredibly powerful and corrupt. The former Soviet Union was a key player in this system of rule.
It was at major conflict with the United States throughout the 1900's. Woodrow Wilson, president of
the US, stated in his "Fourteen Point Plan" that nations should have the right to choose their own
form of government. The Soviets viewed this demand unacceptable for it indicated that the US was
taking too much control over what specific form of government a country ought to have. Stalin, leader
of the Soviet Union created the Iron Curtain in response to the American's stand. The ultimate
reasons for this could have been two-fold. He could have wanted to set up a world wide communist
movement or simply protect the borders of his country from American intervention. From this the cold
war erupted and the US and the Soviet Union were at odds for many years.

Many communist nations' (the former USSR in particular) economies did not grow because of this
form of government. Mikhail Gorbachev was monumental in introducing reforms to the Russian
economy. He introduced the Law of State Enterprises in June 1987. This gave businesses much
more independence from the government, and encouraged workers to form small, privately owned
businesses (i.e. grocery stores and hair salons). Along with these changes he encouraged the
workers that were still employed under the government to be more open and speak out against
corruption. He also began changing the structure of the government so that these changes being
implemented would not be met with resistance from state officials. After being chosen as President,
he introduced more reforms so the economic and political systems of the country could be opened
up. Unfortunately, Gorbachev became uncertain of his abilities challenged by extremists and was
replaced as President by Boris Yeltsin.

The driving force behind Communism is an attempt to equalize the social conditions of life. A
country's wealth and resources are owned by the government and distributed evenly so that everyone
benefits, according to the dictators. Clear market rules and a stable system of taxation were two
areas of focus for the economy of a communist nation. Taxation was based on income. Because of
the equal distribution of wealth throughout the nation, governments knew the exact revenue that
taxes would generate. For communist nations, most of this taxation revenue went to the development
of the military and other government controlled organizations. This distribution of wealth compromises
work ethic and general motivation, and also gives little incentive to those who want to become more
skilled and qualified in a given area of expertise.
In a strictly Communist country, no one person may own anything exclusively, privately to them self.
Homes, automobiles, those things that we as a democratic society take ownership of freely, cannot
be attained by citizens of a communist country. Again, what is one working for in this type of
systematic regulation if not ownership of something? In Canada, we work for money, possessions,
and status; all things that we can "own". In a communist system, one has nothing to show for his/her
time and effort. Allegiance and patriotism to the country? This is what the government thinks is
motivation for their workers.

Freedom of expression is monitored by the government; religious and otherwise. Those living in the
nation must conform to the accepted way of thinking, the values and beliefs. This conformity was a
major challenge in many communist countries. It was, in effect, one of the most significant areas of
contention for the citizens. Tolerance for those of different faiths and nationalities was unheard of.
Citizens were persecuted if they voiced any opinion that was in conflict with that of the dictators.

Currently there are no entirely communist nations in the world. The only countries that still practice
many of the ideals of Communism are Cuba, China, Vietnam and North Korea. Still, these countries
are making substantial changes to their form of government in becoming more capitalist in nature.
More privitisation of businesses plays a key role in this transformation. Governments are slowly
loosing the firm grasp that they held over nations for so long. The global economy is also having an
enormous impact on these countries. More international trade, business, industry development all
stem from the capitalist nations. The world is moving away from the once largely, communist ruled
Eastern form of economic rule.

Mixed Economy

In the 19th century, governments began to play a larger role in exerting some control over the rapidly
growing capitalist countries. The Canadian government was a key player in this movement. It passed
laws and regulations and established agencies in the attempt to smooth out the worst features and
inequities the capitalist systems embraced. This developed and became known as the mixed
economy. Mixed economies fall between a pure capitalist system and a pure socialist system.

Economic goals are crucial to the success of any nation. Canada has four main economic goals that
it directs its focus towards: economic growth, full employment, price stability, and income equity.

Economic growth is generally stated as a continuous increase in an economy's output of good and
services. Maintaining a rise in Canada's growth is in direct correlation with the living standards of
Canadians. As we are allowed to prosper without the restrictions comparable to those Command
economies, Canada has shown constant growth since the Depression in the 1930's.

The unemployment rate in Canada is hovering around 6-7%. The Government's aim is to minimize
involuntary unemployment. With a mixed economy, Canada has the ability to have programs and
regulations in place to deter the population from becoming unemployed. Topics such as minimum
wage, Employment Insurance, and other government interventions allow for the Government to
control the unemployment rate. The costs of involuntary unemployment are significant both to
individual citizens and the economy as a whole. Total output is decreased with a high unemployment
rate as well. This affects trade and the exchange of goods and services with other countries.

Through Government intervention, the inflation rate is minimized, or at the least, stabilized. In some
types of economic systems, inflation rates can grow to enormous amounts. This reduces spending in
the economy and affects economic growth. To maintain the purchasing power of Canadian dollars,
the government monitors and sustains price stability. This ensures that people have equal opportunity
to purchase those items that they require for everyday life.

A major topic of discussion in the mixed economy debate is equal income distribution. As stated
earlier, in the Market economy, there seems to be a huge gap between the "have" and the "have-
nots". The goal of a mixed economy is to lessen the severity of this stigma. It is incredibly difficult to
ascertain how incomes should be distributed. It should be based on skills, knowledge, and work ethic;
and of course this is the logical point of view. However, to what extent should these attributes gauge
the level of income one is warranted? And to those who aren't capable of working or have limited
capacities, why should they not have the equal opportunity for a fulfilling life? That is where
Government intervention of a mixed economy steps in. With programs such as Social Services and
disability payments, those who wouldn't have the chance otherwise are given opportunities to live a
relatively stable lifestyle.


Economic systems can vary from one side of the globe to the other as easily as they can within a
continent. Extremes are seen throughout Market, Command, Mixed and Traditional systems. For
each individual country it is necessary to choose the economic system that is most efficient and
effective for its people. That is the key: not focusing on a particular group but the nation as a whole.

In Canada, we are privileged enough to have a system that accommodates most people while
maintaining structure and economic prosperity. We have public and private ownership, government
intervention programs, and freedom of choice, speech, religion and other social aspects that we hold
on invisible pedestals.

It is important to acknowledge that no country is 100% of a specific system alone. There is an

increasing number of countries that are adapting their practices to be more like one system than
another. This is part of their ultimate quest to become more economically successful.




Lovewell, Mark, Understanding Economics, 2nd Canadian ed., McGraw-Hill Ryerson,

Toronto, 2002, pp. 12-15

Nickels et al., Understanding Canadian Business, 3rd Canadian ed., McGraw-Hill Ryerson, Toronto,
2000, pp. 38-41

Welson, Daryl, Communist Economies, Toronto: Pitman, 1994

Wilson, Sarah, Money, Money, Money- The Key to Capitalism, Toronto: Lawson, Cole, Morgan,