Types of economies

Throughout history, every society has faced the fundamental economic problem of deciding what to produce, and for whom, in a world of limited resources. In the 20^th century two competing economic systems have provided very different answers: command economies directed by a centralized government, and market economies based on private enterprise.

Market economies are decentralized, flexible, practical and changeable. The central fact about market economy is that there is no center. Market economies rest upon the fundamental principles of individual freedom: freedom as a consumer to choose among competing products and services; freedom as a producer to start or expand a business; freedom as a worker to choose a job or career, to change employers.

Command economy or planned economy is the type of economy where resources are allocated by the state through a system of planning. For example, in the former Soviet Union state planners decided what was to be produced. They passed orders down to factories, allocating raw materials, workers, and other factors of production to them. Factories were then told how much they should produce with these resources and where they should be sent. If there was a shortage of goods in the shops, then goods would be rationed through queuing. The market mechanism plays little role in a command economy.

Historical experience shows that planned economies have not produced as high growth as free or mixed economies. For this reason, the command economies of Eastern Europe and the former Soviet Union are currently being transformed into mixed economies.