Four Types Economic Systems and their Environmental Implications

word cloud describing features of the different types of economic systems

These four types of economic systems have overarching implications for the environment and the management of the climate crisis. Economic systems determine the way a state or nation allocates its resources and apportions goods and services in the national community. Economic systems determine production, distribution and consumption as a function of a philosophical orientation.

While there are a number of economic systems we can divide them into four basic classes: The traditional economy, the market economy, the command economy and the mixed economy.

Here is an explanation of each of these four economic systems and their respective environmental implications:

1. The traditional economy

The type of economic system involves a culture and tradition based on agriculture and hunting. Traditional hunter gatherer economies dominated in aboriginal societies prior to colonization. The traditional economic system was the basis of human existence around most of the world. In this approach their tends to be less harmful environmental impacts as decisions are made by community with precedence over individuals and families. Every member contributes an equal share for equal proceeds of their labor. Previous generations develop patterns and pass them to the next generation, making this market predictable. Indigenous tribal populations and under-developed nations sometimes fit into this category. However, this type of economic system cannot sustain large populations such as we see in big cities.

2. The market economy

In this type of economic system persons own and operate different factions of production. The capitalist system is a widely practiced example of this type of economy. Capitalism is characterized by maximizing for private profit with competition between business owners. Key to this economy is market based pricing system for goods and services which are premised on supply and demand. Today, the market economy is known as a free enterprise and encompasses the major share of production. In this type of economic system individuals and industries are free exploit resources without concern for human and environmental impacts. The profit incentive drives activities and commonly results in significant environmental degradation and economic disparity between people. The market ecosystem does not exist in its purest form because governments regulate how businesses and private individuals operate.

2. The command economy

In this economic system the government owns and operates all of the factions of production. One form of this type of economy is commonly known as socialism. A socialist economy is characterized by decisions that prioritize the State. A command economy implies a centralized government with the authority to assign pricing. However, state controlled economies are commonly inefficient in assigning pricing when compared to market based systems. While state control enables a centralized authority to impose national priorities, such as clean energy, it is subject to inefficiencies (resulting in over or under production) as a function of its centralized control.

4. The mixed economy

In this economic system both market and command economy systems are used or featured (ie an economic system that combines both private and state enterprises). A mixed economy shares attributes of both free enterprise and centralized authority thus it reflects characteristics of both capitalism and socialism. This blend is the dominant economic system in the vast majority of advanced nations in the world today. When applied to environmental concerns, this system has the benefit of state imposed regimes of regulation, while still benefiting from the efficiencies of market pricing and leveraging the power of the profit incentive.