Economic System Definition, Its Types And Traits

ECONOMY, ACTIVELYSHARE.com – The economic system is a familiar term. Each country has its own economic system. The use of this economic system is influenced by various factors, ranging from ideology to economic structure. What is an economic system?

Understanding the economic system

Quoted from Study.com, the economic system is the means by which the state distributes resources and trades goods and services. This system is used to control the five factors of production such as labor, capital, entrepreneurs, physical resources and information resources.

The economic system is all the procedures used in coordinating the behavior of the community including producers, consumers, governments, banks, and others in carrying out economic activities.

Economic activities here include production, distribution, consumption, and investment which are integrated to form a unified whole, orderly and dynamically so as to avoid chaos in the economic field.

Meanwhile, according to the book Economics for SMA and MA Class X by Ismawanto, the economic system is a way to regulate or organize all economic activities, both the economy of state or government households, as well as public or private households.

The economic system is a tool used by a country to manage economic factors and allocate its resources through economic units and institutions in order to avoid chaos in the economy.

It can be said, the economic system is an arrangement of interrelated economic elements and work to solve economic problems and achieve certain goals.

In a country, the existence of an economic system is very important because it functions as a driver of the production system. In addition, the economic system also functions to create a mechanism so that the distribution process of goods and services goes well.

Types of economic systems

In general, the economic system is composed of five types. Here’s the explanation:

1. Traditional economic system

The first type of economic system is the traditional economic system. Economic activity in this system is closely related to tradition and culture. This system is identically applied in rural communities with economic results in the form of agriculture.

The main purpose of this economic system itself is only to meet the needs of the people’s daily life, not looking for profit.

The production method used is still very simple and does not have a work structure, nor does it use centralized facilities, technology and things that are symbols of progress.

Each member of the traditional economy has a special role so that each member has a close relationship.

Advantages of traditional economic system

  • Production is not intended for profit
  • Every society is motivated to become a producer
  • Has a very close family nature.
  • Rarely cheating or tackling each other for the benefit of one party.
  • Low level of economic disparity between communities
  • The government is only a supervisor and does not carry out a monopoly.

Disadvantages of traditional economic system

  • It is difficult to predict the quality and quantity of production so that in the end, standardization is carried out because it relies on natural products.
  • Work effectiveness is low because there is no clear work structure so that all activities carried out are not controlled and evaluated properly.
  • Economic growth is very slow
  • People’s mindsets in traditional economic systems are generally difficult to accept change.

2. Command economy system

As the name implies, a command economy system is a centralized economic system. Most of the system will be controlled by the government involved in the production process from the equipment to the facilities.

Advantages of a command economy

  • It is easy for the government to supervise and control the price of goods in the market
  • The government can control various economic problems such as high unemployment, poverty, inflation, and others because it acts as a controller.
  • The government can also maintain a more stable economic condition because everything is carried out according to its design.
  • There is no gap because all communities have relatively stable economic conditions.
  • Equitable income can be achieved and less frequent economic crises
  • It is easy to control economic activity not only in production, but also in distribution and consumption because the government understands the flow of goods and services very well.

Disadvantages of a command economy

  • Individual rights are not recognized, therefore even if someone has creativity, this is not allowed.
  • The government monopolizes the economy so that other parties are not given the opportunity to get involved.
  • Economic growth tends to be slow, although income distribution can be achieved, but when viewed globally, economic development tends to be slower.
  • The market system depends on the quality of the government. If the quality of the government is good, the economic condition will also be good. On the other hand, if the government does not have a high enough quality, it will have an impact on the economy.

3. Liberal economic system

A liberal economic system is a system in which the state gives freedom to everyone to carry out economic activities.

This system is based on the theory put forward by Adam Smith (1723–1790) in his book entitled ‘The Wealth of Nations’, published in 1776, with the main teaching providing individual freedom in every sector of the economy.

The characteristics of a liberal economic system include property rights over the means of production in the hands of individuals. The price of goods is determined by supply and demand in the market.
In addition, in this system there is free competition and there is no government intervention in the economy.

Capital plays an important role in a liberal economic system. Even so, the liberal economic system opens up opportunities for individuals to pursue profits.

The advantages of a liberal economic system

  • Can improve efficiency and quality of goods produced.
  • Driven to pursue prosperity for himself.
  • Every person or entrepreneur is motivated to seek profit.
  • The selection of the business sector is adjusted to the ability.

Disadvantages of a liberal economic system

  • Give rise to unfair competition.
  • There is a gap between rich and poor.
  • Create a monopoly.
  • There is human resource exploitation.
  • Utilization of natural resources often does not pay attention to environmental sustainability.

4. Mixed economic system

The mixed economic system is a combination of market and command economic systems, which draws a middle line between freedom and control, which also means the line between the absolute role of the state/collective and the prominent role of the individual.

In a mixed economic system, the government and the public or the private sector work together to participate in increasing economic activity. The government is the controller and stabilizer of economic activity, while the community is given the opportunity to carry out production, distribution and consumption activities.

Advantages of a mixed economic system

  • The government and private sectors of the economy are clearly separated.
  • Price fluctuations can be more controlled.
  • Individual property rights are recognized and the government encourages them.

Disadvantages of a mixed economic system

  • If the role of government dominates, etatism will arise.
  • If the role of the private sector dominates, a monopoly will arise which is detrimental to society.

5. People’s economic system

The economic system used in Indonesia is based on economic democracy. This means that production is carried out by all people, and for all under the leadership or ownership of community members.

The prosperity of the community is prioritized, not the prosperity of an individual. The economic system in Indonesia is based on Pancasila, the 1945 Constitution, and the GBHN, so it is called an economic system based on Pancasila economic democracy.

Positive traits

  • The economy is structured as a joint effort based on family principles.
  • Production branches which are important to the state and which affect the livelihood of the people are controlled by the state.
  • The earth and water and the natural resources contained therein are controlled by the state and used for the greatest prosperity of the people.
  • The sources of wealth and state finances are used with the consensus of the people’s representative institutions and supervision of their policies lies with the people’s representative institutions as well.
  • The poor and abandoned children are cared for by the state.
  • Citizens have the freedom to choose the work they want and have the right to work and a decent living.
  • Individual property rights are recognized and their use must not conflict with the interests of the community.
  • The potential, initiative, and creative power of every citizen are fully developed within limits that do not harm the public interest.

Negative traits

  • The system of free fight liberalism, which fosters exploitation of humans and other nations.
  • The etatism system, namely the state and the economic apparatus is dominant, urges and kills the potential and creative power of economic units outside the state sector.
  • Monopoly, namely the concentration of economic power in one group.


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