Foundations of Business (6th Edition) Edit edition

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Economic system refers to the system of production, distribution of goods and services, resource allocation that prevails in a country.

The following are the types of economic system that prevails in any country:

• Capitalistic economic system: It is a system where individuals own and operate majority of the business activities.

• Command/Socialist economy: It is an economy where means of production is owned and operated by public and government. However, government holds a major share and decides what will be produced in what ways and in how much amount.

• Mixed economy: It is a combination of both the capitalistic and social economy i.e. both the government and individuals hold a fair share in the distribution system.

The economic system in America is based on the Adam Smith’s Laissez-Faire Capitalism which states right to create wealth, right to own private property, and resources, right to economic freedom, right to compete, and right to limited intervention of the government.

The government thus, was expected to be just an umpire and rule maker. But in actual the government plays a very crucial role in the real-world economy. It acts as more than just an umpire and rule maker. The government had to intervene because of the following reasons:

• During the period of great depression companies tried to make more profits from their business by raising the prices of products and services as per their own wish. For example, during this period when farmers needed to ship their crops, companies tried to enact laws to regulate the rail road prices. This factor violated the Constitution’s Commerce Clause. Thus, government had to intervene. Hence, both the government and individual players made their place in the economy.

• The answer to four basic questions i.e.

1. What and how much of goods/service must be produced?

2. How to produce?

3. For whom goods/services need to be produced?

4. Who will own and control the major production factors?

could be given effectively by the combination of both the government and individuals. Hence, the mixed system i.e. a system including fair share distribution among government and public.

• During the period of World War, I and II, the country required supplies for military. This was managed by the government by making it compulsory for several companies to produce for the country. Thus, leading to a combined economic environment.

Thus, the above factors can be stated as the reasons for developing American business into a mixed economy.