The scarcity of resources has always made it difficult to satisfy wants and needs of people effectively. This has led to the establishment of economic systems, which according to Gregory and Stuart (2013) refer to a collection of organizations that make and implement decisions regarding what resources need to be produced, how they will be produced, and how they will be distributed within a specified geographical area. This study evaluates how the economic systems are formed and their functions within the collaborative systems.
The formation of a system requires several participants with aligned interests for it to succeed. Economic systems are typically made up of economic institutions that impact market performance. Historically, there have been two overlying economic systems: socialism and capitalism. According to Hoppe (2007), socialism seeks to distribute resources equally among the whole community while capitalism encourages individual prosperity.
The three main types of market systems are: traditional, command, and market models (O’Connor & Faille, 2000). Under the traditional economic system, the choice of what to produce is dictated by what is needed for survival. These systems discourage the adoption of modern methods of production and the products are distributed among the community members. Command models have a central governing body, usually the government, which dictates what to produce and how, with respect to the needs of the citizens. There is usually an element of control over the prices of goods and services, as well as wages paid. Finally, the market model gives the various institutions the freedom to determine what goods to produce based on the desires of consumers. In this capitalist model, firms aim at maximizing profits and so have diverse production methods. Similarly, consumption is purely based on a person’s income. Forces of demand and supply are also left to determine the price of products. However, O’Connor and Faille (2000) also add the mixed market system, which is a hybrid model combining all the three models. Having been adopted by most countries, this model enables citizens to determine the best way to produce and distribute private goods, whereas the government handles public goods like road development and distribution of medicines.
An economic system is simply a means of distributing scarce resources amongst people. According to Gottlieb (2013), the most important function of the system is to maximize output through proper organization and efficient utilization of scarce resources. Another major function is to provide a system through which finished products can be distributed to the consumers of the goods. Traditional and command models aim for equitable distribution whereas market models are based on purchasing power. Thirdly, economic systems are expected to provide people with the freedom of choice of the products that they wish to consume. The freedom could also be based on the ownership of property, occupation, income, or even the place to live (Gottlieb, 2013). Economic systems are also tasked with promoting the progress of the people and region economically. The failure in this function usually leads to the adoption of another economic system. Finally, Gottlieb (2013) points out that economic systems ought to ensure the sustainable economic development that would not jeopardize the living environment now and for future generations.
Every society has an economic system that determines how their wants and needs are satisfied given the scarcity of resources. These systems, which are established by community values, the administration, or the free market, determine what products will be produced and how they will be produced and allocated. In terms of functions, the economic systems are expected to enhance efficiency in production, define distribution channels, offer choice, promote economic development, and guarantee environmental sustainability.