Economies Based on Tradition In a traditional economy, resource use and social behavior are dictated by ritual, habit, or custom. Examples of traditional economies include the central African Mbuti, the Australian Aborigines, and the Inuit of Northern Canada. The main advantage of a traditional economy is that the answers to WHAT, HOW, and FOR WHOM to produce are determined by customs and tradition. The main disadvantage of a traditional economy is that it tends to discourage new ideas and new ways of doing things.

Economies Based on Command In a command economy, a central authority makes the major decisions about WHAT, HOW, and FOR WHOM to produce. Socialism is a modern, somewhat more liberal version of a command economy. The main advantages of a command economy are that it can change direction quickly, and it allows many citizens to receive goods and services they otherwise could not afford. Disadvantages include the loss of individual freedom to choose, the production of low- quality goods, a large decision-making bureaucracy, and lack of individual initiative.

Economies Based on Markets A market economy is based on capitalism. Supply, demand, and the price system help people make decisions and allocate resources. People can spend money on what they want and can own resources privately. Advantages of a market economy include a high degree of individual freedom and customer satisfaction, a variety of goods and services, the incentive to take care of private property, and decentralized decision making. Disadvantages include not providing for basic needs of everyone, a shortage of some services, and a high degree of uncertainty.

Characteristics of a Mixed Economy In a mixed economy, tradition, government, and markets each answer some of the WHAT, HOW, and FOR WHOM questions. Mixed economies come about when people from one type of economy come into contact with other cultures and adopt their technologies and ways of doing things, or when people are unhappy with the way their economy is performing. In a mixed economy, the state’s involvement in economic decisions can vary considerably. A mixed economy includes characteristics of traditional, command, and market economies.

Examples of Mixed Economies Communist economies are based on the theoretical ideal of communism, in which everyone contributes according to their abilities and consumes according to their needs. There has never been a true communist economy; those who claim to be communist are actually a version of extreme socialism. In mixed socialism, the government owns and controls some, but not all, of the basic productive resources. Mixed market economies are market economies that have elements of socialism or traditional economies. The United States is considered a mixed market economy.

Evaluating Mixed Economies Advantages of mixed economies include: Providing assistance for people who might be left out of the country’s economic progress Faster growth than command economies Disadvantages of mixed economies include: Higher tax rates to support social benefits Limited availability of services or decreasing quality of services Lower efficiency than pure capitalism Governments are likely to see market- oriented reforms as a threat

Problems of Transition The transition of communist and socialist economic systems to capitalism has been the dominant economic trend of our lifetime. Privatization is necessary for the conversion of state-owned property to private ownership. The ruling party in a communist or socialist economy fears the loss of political power during a transition to capitalism. Citizens have to learn to make their own decisions, take initiative, interpret prices, and fend for themselves in free markets. Many countries underestimate the costs of converting to capitalism.

Countries and Regions in Transition In Russia, the decades-long transition to capitalism has resulted in the current market- based economy, with the exception of government-controlled energy, natural resource, and defense-related industries. After the failure of the Great Leap Forward, China was influenced by successful market economies in Asia and today is undergoing some privatization and other capitalistic endeavors. In Latin America, socialism still exists in Venezuela and Argentina, but Chile has made the transition to capitalism. After the Soviet Union collapsed, many Eastern European countries transitioned to capitalism, including Poland, Hungary, the Czech Republic, and Slovakia.

Other Faces of Capitalism Compared to the U.S. government, the Japanese government is much more involved in the day- to-day activities of the private sector. By opening its markets to world trade, South Korea has progressed from one of the poorest countries in Asia in the mid-1950s to a leading producer of electronics and automobiles today. The government in Singapore has focused on a few select industries, pouring money and resources into pharmaceuticals, medical technology, and financial and high-tech industries. Taiwan has always depended on economic planning and was one of the early economic powers in Asia, but its centralized planning may hamper future economic growth.