1. Getting Organized: Command, Market, and Mixed Economies
Overview of Economics
Introduction
What Is Economics and Who Cares?
Will That Be Large or Small?
A Firm Base
Getting Organized: Command, Market, and Mixed Economies
Three Economists and Their Theories
Not all economies are organized in the same way. The three major ways they can be organized are as a
market economy, a command economy, or a mixed economy.
In a market economy, consumers and businesses decide what they want to produce and purchase in the
marketplace. They make these decisions by “voting with their dollars.” Producers decide what to produce
given the demand they see in the marketplace in terms of their sales and the prices they get for their
goods and services. In a pure market economy, also known as a laissez-faire economy (from the French
“allow to do”), the government plays a very limited role in what is produced. The government does not
direct, and may even lack the power to direct, the private sector to produce certain goods and services.
EconoTalk
In a market economy, the private-sector businesses and consumers decide what they will produce and
purchase, with little government intervention. A laissez-faire economy is one in which the government
plays a very limited role. In a command economy, also known as a planned economy, the government
largely determines what is produced and in what amounts. In a mixed economy both market forces and
government decisions determine which goods and services are produced and how they are distributed.
Welfare refers to government efforts to provide for people's basic needs. Also known as public
assistance, because it comes from the public sector, these efforts take the form of government sponsored
work projects and, more commonly, payments made by the government to support basic needs of those
who cannot afford them. The federal food stamp and Medicare programs are both forms of welfare.
In a command economy, also known as a planned economy, the government largely determines what is
produced and in what amounts. It directs producers to make and deliver goods and services in specified
amounts. In practice, command economies are associated with socialism and communism, two closely
related forms of government. Socialism and communism are characterized by collective ownership of the
means of production and central planning functions that try to produce what people want and need, in the
quantities and at the time required. The underlying philosophy of socialism is “from each according to his
abilities, to each according to his needs.”
In command economies, the people (in the form of the state) own the means of production. The state,
which is seen to embody the will of the people, decides what will be produced according to a plan based
upon what the state calculates to be people's need and desire for various goods and services. The state
also plays an important role in determining how goods and services are distributed, that is, in deciding
who gets how much of what.
In a mixed economy both market forces and government decisions determine which goods and services
are produced and how they are distributed. In general, market forces prevail in mixed economies. The
government does not direct the private sector to produce certain goods and services in certain quantities
at certain times. However, the government's influence in the economy stems from the amount of money
(raised in the form of taxes and borrowings from the private sector) that it spends and, through various
forms of welfare, redistributes.

2. Today, the economies of most industrial countries are considered mixed economies. In Western
European nations the government usually plays a larger role in the economy than in North America. Since
the fall of the Soviet Union in 1991, the only two major planned economies are those of North Korea and
the People's Republic of China. However, China has begun to incorporate some market mechanisms,
such as competition, into its economy.
EconoTip
As we will see, markets, like governments, can be inefficient in delivering some goods and services. They
are considered most inefficient at delivering what are known as ”public goods.” Essentially, a public good
is something that everyone wants, such as clean air or a well-educated populace, but no one wants to
pay for. While the U.S. society is experimenting with market incentives to obtain these goods—for
instance, tradable exemptions from emissions controls and school voucher programs—markets have a
generally poor record of delivering public goods. Universal health care is arguably a good example of this.
Although many people characterize the U.S. economy as a “free market economy,” it is clearly a mixed
economy. The federal government alone accounts for about 19 percent of the U.S. economy (depending
on what forms of government spending are counted). Adding state and local governments brings the
public sector share up to about 28 percent. With that kind of economic clout, government at various levels
has a lot to say about what is produced in our society and who gets what. Nevertheless, the United States
relies on markets to a larger degree than any other major industrial nation in the world, so from a relative
standpoint, it is indeed a free market economy.
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