7 Economic Systems and Their Strengths and Weaknesses

Various Forms of Economic Systems – The economic system as rules and procedures that govern people’s behavior in economic activities. Every country has its own form of economy. And, every economic system used is influenced by various factors, ranging from ideology to economic structure. Check out a more complete explanation of the following economic system:

Definition of Economic System

The economic system is all the procedures used in coordinating people’s behavior including producers, consumers, government, banks and others in carrying out economic activities both in terms of production, distribution, consumption and investment which in an integrated manner form a unified whole, orderly and dynamic so that they are able to avoid chaos in the economic field.

McEachern himself defines the economic system as a set of mechanisms and institutions to answer questions about what, how, and for whom goods and services are produced. The economic system can also be understood as 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 economic field.

In a country the existence of an economic system is very important because it functions as a driving force for the production system. In addition, the economic system also functions to create a mechanism so that the process of distribution of goods and services runs well. In other words, without a good economic system, economic growth can also be maintained properly.

Indonesia, which is a country where the majority of its people are Muslims, can make a book entitled Islamic Economic System from Dr. Muhammad Sharif Chaudry, MA, LL.M. as a reference.

Understanding of the Economic System According to Experts

Here are some definitions of the economic system according to experts:

1. Dumairy (1966)

The economic system is a system that regulates economic relations between humans and institutional formation in an order of life. The economic system does not have to stand alone, but is related to the views, patterns and philosophy of life. He is also the one who regulates and establishes economic relations between humans with a set of institutions in a resilience.

2. Gilarso (1992)

The economic system is a method used to coordinate the behavior of the entire community in carrying out economic activities, be it production, distribution, consumption, investment, and so on so that it becomes an orderly and dynamic unit, which can also avoid chaos.

3.Mc. Eachern

An economic system can be defined as a set of mechanisms and institutions that answer the questions what, how, and for whom goods and services are produced.

4. Chester A Bemand

The economic system as an integrated unit in which there are parts and each; it has its own characteristics and limits.

5. Gregory Grossman and M. Manu

The economic system is a set of units, agents and economic institutions that are not only interconnected and interact but also influence each other to a certain degree.

6. M. Hatta

A good economic system must be based on the principle of kinship.

7. L. James Havery

The economic system as a logical and rational procedure to be able to design a series of components that are interconnected with one another, with the aim of achieving a predetermined unity and purpose.

Types of Economic Systems

1. Traditional Economic System

The traditional economic system is the most conventional system with two main elements in it, namely respect for tradition and the minimum amount of waste produced. The traditional economic system itself is identically applied in rural communities with economic results in the form of agriculture.

The transaction method used was by exchanging goods because the results of nature and human labor were the main assets in society at that time. In the traditional economic system, the government is not directly involved in economic activities, it only acts as a guardian of order. The main objective of this economic system itself is only to fulfill the daily needs of the people, not to seek profit.

Economic activity is still related to tradition and culture. 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. If conventional business people use this economic system, then they must try to keep their business from stagnating or running in place, here are some of the advantages of the traditional economic system:

Advantages of the Traditional Economic System:

  • The purpose of this economic system is to meet the necessities of life, not to make a profit. So it has a very close family nature. Although this family trait usually only appears between people who have known each other for a long time. The characteristics of the thick nature of this kinship is the phenomenon of accounts payable. Because each member involved feels that the boundaries between them are biased so that the debt and credit phenomenon then emerges.
  • Rarely occurs fraud or tackle each other for the benefit of one party. Because it has a family nature, the threat of unfair competition can also be kept to a minimum against various types of existing business entities. Unfair competition is an action that can harm many parties. However, because production activities in the traditional economic system are very limited, unfair competition can be avoided.
  • The low level of economic inequality is due to fairly evenly distributed income between individuals
  • The government is merely a supervisor and does not exercise a monopoly.
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Disadvantages of Traditional Economic Systems:

  • 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.
  • Low Work Effectiveness due to the absence of a clear work structure so that all activities carried out are not properly controlled and evaluated. Not only that, work effectiveness also has a considerable impact on the level of community welfare where if the effectiveness is low, it means that the level of community welfare there is also low, and vice versa.
  • Economic growth is very slow, because unlike the liberal economic system, the traditional economic system runs as it is, so it is not innovative and tends not to develop. This also happens because the mindset of people in traditional economic systems is generally difficult to accept change.

2. Command Economy System

The command economy system is centralized and dominated. Most of the system will be controlled by the government involved in the production process from equipment to facilities. The domination factor itself is clearly visible in valuable resources, because something that is capable of producing the greatest profit will be controlled by the government and other resources will be managed by the people.

However, if the government is able to make the right policies, there will be many benefits to be gained, such as the creation of equitable development from the utilization of the country’s resources. Countries that implement this economic system include North Korea, the People’s Republic of China, Vietnam and Cuba.

Advantages of the Command Economy System:

  • It is easy for the government to supervise and control the prices of goods in the market, when a problem occurs it will be easier to deal with because the government has all the data related to the economy.
  • The government can control various economic problems such as high unemployment, poverty, inflation, and others because it acts as a controller. He can also maintain a more stable economic condition because everything is run according to his design.
  • There is no gap because all people have relatively stable economic conditions.
  • Income equality can be achieved and economic crises are less frequent. Due to income inequality, unemployment, inflation can be handled better, as a result countries following this system rarely experience crises.
  • It is easy to control its economic activities not only in production, but also in distribution and consumption because the government understands very well the flow of goods and services.

Disadvantages of the Command Economy System

  • 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. This is very detrimental for residents to increase their capacity.
  • Economic growth tends to be slow, even though income distribution can be achieved, but if viewed globally, economic development tends to be slower. Because the economy is only controlled by a handful of people, progress has not been made.
  • The market system depends on the quality of its government. If the quality of the government is good, then the economic conditions will also be good. However, if the government does not have high enough quality, it will impact the economy. Therefore, the government then seeks to find competent parties in economic affairs.

3. Mixed Economic System

A mixed economic system or also known as a dual economy because it combines market and command economic systems. As a result, the government and the market then work together in managing existing resources. The government recognizes individual property rights provided that they do not harm the public interest.

The government plays a role in providing boundaries and can intervene. The government makes plans, regulations and policies related to the economy. Competition then occurs in the market within reasonable and clean limits where the government also supervises. The market mechanism will determine the type and quantity of goods produced.

The government controls all vital resources that concern the lives of many people. The government and the private sector have the same role in economic activity. However, this system is also prone to problems, especially when the power of the government increases.

This is triggered by excessive control or difficulty of access and a less flexible economy. In addition, the government is also involved in market mechanisms through various economic policies and monetary policies. The disadvantages of this economic system include the government which has greater responsibility than the private sector, besides that even though the government plays an active role in the economy.

However, economic problems still occur, such as inflation, unemployment, and so on. Equal distribution of income is also very difficult to achieve in this economic system. Economic growth tends to be slower than the liberal economic system.

The private sector cannot maximize its profits because there is intervention from the government as well as restrictions on production sources that are controlled by the government and the private sector are difficult to determine. Countries that adhere to this economic system include: Indonesia, India, the Philippines, Malaysia, Morocco, France, Egypt and Australia.

Advantages of a Mixed Economic System

  • Economic fluctuations have become more manageable and stable.
  • Individual economic rights can be recognized and supported by the government.
  • In the economic sector, the private sector and the government can be clearly distinguished.

Disadvantages of a Mixed Economic System

  • If the private sector is more dominating, it can lead to a monopoly.
  • If the government is more dominating, it can cause etatism.

4. Socialist Economic System

A socialist economic system is a system in which the people have equality in ownership of the factors of production (workers, entrepreneurs, capital and natural resources owned by the community but whose management is fully regulated by the state).

The government also plays a full role in regulating distribution and production. In Indonesia itself there is a form of Pancasila economy which is based on Pancasila ideology with the meaning of democratic economy and adheres to the principles of kinship and mutual cooperation with the concept of, by and for the people. In the Pancasila system, cooperatives are also used as one of the spearheads by the Indonesian government in advancing the economy.

The book entitled Islamic Public and Social Finance, written by Solikin M. Juhro, will help Sinaumed’s understand Islamic economics and the role of Islamic public and social finance in greater depth.

Advantages of the Socialist Economic System:

  • All economic activities and problems are controlled by the government so that it is easy for the government to supervise the course of the economy.
  • There is no economic gap between the rich and the poor, because government distribution can be done evenly.
  • The government can also more easily regulate the goods and services that will be produced according to the needs of the community. In addition, it is also easier for the government to interfere in price formation.
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Disadvantages of the Socialist Economic System;

Turning off the creativity and innovation of each individual. There is no freedom to own resources. Lack of variation in producing goods, because it is only limited to government regulations.

5. Market Economy System

The market economy looks more identical to the free market. In this system, it is the organization run by the community that determines how the economy will run, how supply is generated to what demands are needed. In fact, no country in the world has fully implemented this system. The biggest advantage of this market system is the separation of market and government.

This reduces government dominance and progress and innovation can develop more quickly. With this system, businesses must also be able to respond quickly to various risks from the free market such as the possibility of inflation and quickly understand the causes of this inflation.

6. Liberal Economic System

The liberal economic system is an economic system in which all members of society are given freedom by the state to carry out economic activities. Therefore, this one economic system is often also referred to as the capitalist economic system. The liberal economic system can be regarded as an economic system that prioritizes making profits, so entrepreneurs will always try to be productive so that profits are maintained.

Advantages of Liberal Economic System 

  • Easily improve or grow productivity on the quality of products to be produced and sold.
  • Entrepreneurs can increase their creativity by innovating the products they produce.
  • Only focus on self or group benefits.
  • Profit is a top priority, so that it can be used as a motivation in building a business.

Disadvantages of Liberal Economic System 

  • Can create a business monopoly, resulting in social inequality, such as rich and poor.
  • Business competition becomes unhealthy or unbalanced.
  • Instability in the economic sector often becomes unstable.

7. People’s Economic System

The people’s economic system is an economic system based on economic democracy. In other words, all economic activities are under the control of every member of the community, so that the prosperity and welfare of the members of society is the main thing. Therefore, this economic system is often referred to as the Pancasila economy.

Advantages of the People’s Economy System

  • Every state resource and finance that will be used goes through a process of deliberation on the people’s representative institutions first.
  • The economy is structured in a familial way.
  • Every earth and water resource is controlled by the state with the aim of prospering the people.

Disadvantages of the People’s Economy System

  • In the economy, the state becomes more dominant, so that it can kill economic sectors that are beyond the capacity of the state.
  • Can lead to a monopoly in a particular group.

Economic System in Indonesia

In the 1950s, Indonesia adopted a liberal economic system until communism entered the country and the economy then changed again to a socialist economic system. Furthermore, the old order era was replaced by the new order government, the form of the economy was changed again to become an economic democracy system because it was considered more in line with Indonesia’s self-image.

It didn’t stop there when the reform order rolled around, the Indonesian economy changed again to a populist economic system or Pancasila economy. The populist economic system is a mixed type of system. Until now, Indonesia adheres to the Pancasila economic system which is the development of a mixed system.

The foundation of the Indonesian economic system itself is Pancasila and the 1945 Constitution which are based on kinship and mutual cooperation from, by and for the people under the leadership and supervision of the government. The state controls the factors of production which are strategic and concern the interests of the people at large.

The government plays a role in overseeing economic activities carried out by the private sector. The concrete form of this concept is a cooperative business entity that focuses on the welfare of its members. In addition, there is a difference in roles between state-owned enterprises (BUMN) and privately-owned enterprises (BUMS), which then play a role in facilitating government oversight. Characteristics of the economic system in Indonesia, including:

  1. Economic activity is considered as a joint activity by prioritizing elements of kinship or also known as gotong-royong.
  2. The production branch which is considered strategic is considered to have a major influence on the people’s livelihood. Then the branch must be controlled or managed by the state for the prosperity of its people.
  3. Applying environmentally sound and sustainable principles to all economic activities.
  4. The government supervises every economic activity carried out by the private sector. This aims to prevent fraudulent practices, for example: trade mafia, monopoly, and fraud. In this way, an element of justice will be created for all Indonesian people.

The importance of legal support in economic activities in Indonesia, where until now the growth and development of the economy and Islamic financial institutions has been increasing rapidly and significantly in Indonesia. The book entitled Law of the Islamic Economic System by Dr. Mardani is used to find out how the law forms the economy in Indonesia.

Characteristics of the Economic System

To make it easier to understand the 7 economic systems, you need to recognize each of its characteristics. The characteristics of the economic system as follows.

1. The characteristics of the traditional economic system

  • Still using simple production tools
  • Very dependent on natural resources
  • Buying and selling transactions are synonymous with the behavior of the surrounding community
  • Often applied in rural communities

2. Characteristics of a command economy system

  • Economic regulation is regulated by the government
  • Almost all types of work under government regulations
  • The price of a product is also determined by the government

3. The characteristics of a mixed economic system

  • Resources and goods that have the potential to be regulated and supervised by the government
  • The private sector can play a balanced role in the economic sector
  • The government makes rules to create healthy economic competition

4. The characteristics of a socialist economic system

  • Every means of production is under government control
  • Production, consumption, and distribution are regulated by the central government
  • Limited proprietorship rights

5. The characteristics of a market economy system

  • Every economic transaction is carried out by the public or private parties
  • Business capital is a fairly important role
  • There is no intervention from the government
  • The business built is devoted to making a profit
  • Each individual is given the freedom to buy any item

6. The characteristics of a liberal economic system

  • Government parties have limitations in interfering in economic transactions
  • The price of a product is more often determined by the free market
  • Prioritizing the principle of yield
  • Entrepreneurs are free to determine their business

7. Characteristics of a populist economic system

  • There is no control over a natural resource by certain parties
  • Every natural resource that is needed by the community is under the supervision of the government
  • Economic growth always prioritizes justice, thereby creating healthy competition
  • Consumers get the right to protection

Recommendations for Economic Books and Articles

For those of you who are studying economics, here are some recommendations for studying economics that you can have:

1. Islamic Economic System

2. Pancasila Economic System

3. Indonesian Economic Politics