 DEFINITION |
Every economy, in order to produce and consume, needs to address basic issues such as the following: what goods and services should be produced and in what quantities; how scarce resources such as labour and capital should be allocated to produce goods and services; how the available supplies of goods and services should be distributed across the population; and what price should be charged for a good or service. Individuals, the state or both can make and implement decisions on these issues.
In a capitalist economy, most of these decisions are made by the citizens acting individually. In capitalism, individuals are driven by self-interest, and market forces direct and co-ordinate the decisions they make. As a result, a capitalist economy is often referred to as a ‘market’ economy.
In a socialist economy, on the other hand, most of these decisions are made by citizens acting through the state, which co-ordinates and implements these decisions through central planning and command. In fact, a socialist economy is often referred to as a ‘planned’ or ‘command’ economy.
Nowadays, most economies are known as ‘mixed’ economies because, in reality, both market and state play a substantial role in them.
| EXAMPLES |
The U.S. economic system is based more on capitalism, whereas the Chinese system is based more on socialism. Most other countries, including Canada, rely on both market and state and so are considered to have mixed economies. Within the mixed economies, the role of state in the former socialist economies is still significantly higher than in the other economies.
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