Definition, Function, and Types of Economic Systems

As a business person, you are required to know about the economic system that applies in Indonesia . Knowing the system that applies, it will affect the business decisions you make in a certain period. It is undeniable that your existence as an owner or business person is part of the economy of a country where you live. So, what is an economic system?

The economic system is a way used by a country to solve or face problems in the economic field. Each country has a different economic system, depending on the situation and conditions that are happening in the country. Get to know more about the understanding of the economic system, its functions and kinds.

What is the Economic System?

Explaining the economic system concretely is quite difficult, because some experts tend to have different explanations about the economic system. To get a more detailed explanation, here is an understanding of the economic system from several experts.

·         Gilarso

The economic system is the overall procedure for coordinating the behavior of the community (producers, consumers, government, banks and so on) in carrying out economic activities (production, distribution, consumption, investment, etc.) so as to form an organized and dynamic unity and chaos in the economic field can avoided.

·         Gregory Grossman and M. Manu

The economic system is a collection of components or elements consisting of economic units and economic institutions that are not only interconnected and interacting but also support and influence each other.

·         McEachern

A set of mechanisms and institutions to answer the question of what, how and for whom goods and services are produced ( what, how, and for whom ).

From these definitions, a conclusion can be drawn about the understanding of the economic system. Basically, the economic system is a way to regulate and organize all economic activities in community members, both by the government and private parties, based on certain principles, in order to achieve prosperity or prosperity.

Economic System Function

The functions of the economic system in general are:

• As a provider of encouragement to produce.
• Coordinate individual activities in an economy.
• As a regulator in the distribution of production results across all members of the community so that it can be carried out as expected
• Creating certain mechanisms so that the distribution of goods and services runs well.

Various Economic Systems

1. Traditional Economic System

A system in the organization of economic life based on habits, traditions of society for generations that rely on factors of production as is. The advantage of the traditional economic system is the spirit of kinship and honesty of each individual in meeting their needs.

·         Pros :

1. Economic activity runs on the basis of honesty because the aim is to meet the necessities of life rather than for profit.
2. Relations between individuals in the community are still very strong and help each other.
3. There is no economic gap between the poor and the rich because income tends to be equitable.
4. There is no inflation, unemployment, and other problems found in other economic systems.
5. The government acts as a supervisor so that there is no monopoly by the government.

·         Weaknesses :

1. Not all community needs can be met properly because they rely on natural products.
2. There is no standard value in the exchange of goods.
3. Economic development and growth is very slow.
4. The quality of goods tends to be low and difficult to develop because the level of competition in the market is very low.
5. A change is considered taboo so that people’s mindsets don’t develop.

2. The Economic Command System

A centralized economic system is an economic system in which the government has dominant power in regulating economic activity. Mastery is carried out through restrictions on economic activities undertaken by community members. Countries that adhere to a centralized economic system include: Russia, the PRC, and Eastern European countries (former Soviet Union countries).

·         Advantages :

1. Can reduce unemployment because the government holds full control of all factors of production.
2. The economic responsibility of the government so that the government will continue to innovate so that the country’s economy remains stable.
3. Assurance to the public that the products and services produced are in accordance with community needs.
4. Easily control prices and equity.
5. Inflation is easily controlled.
6. Domestic market conditions will run smoothly.

·         Deficiency :

1. Rapid mobilization makes this system can cause a lack of community needs because the production produced is not always based on community demand.
2. Allotment is often a need and a solution.
3. This will hamper innovation from the community.

3. Liberal (Capitalist) Economic System

The economic system is based on the widest possible freedom for all people in economic activity without interference from the government. The basis of this economic system is generally aimed at seeking personal gain without the presence of other parties that need to be considered.

·         Pros :

1. Every individual or company hasfreedom and has the right to own personal or unlimited production wealth and resources.
2. Initiative and creativity can be developed.
3. Actions are always based on economic principles so that efficiency and effectiveness are high.
4. Freedom in producing products or services causes competition among producers (companies) to produce quality goods.

·         Deficiency : 

1. Market freedom causes competition to seize markets. This has led to the formation of monopolies, business collusion and conglomerates that threatens weak entrepreneurs.
2. Encouraging the increasingly visible gap between the strong economic group and the weak economy.
3. The economy easily faces instability.

4. Mixed Economic System

Mixed economic system is an economic system on the one hand the government gives freedom to the people to try to do economic activities, but on the other hand the government has interference in the economy with the aim of avoiding full control of a group of people in economic resources.

·         Advantages :

1. Every individual right will be recognized.
2. Pricing in the economy will be controlled.
3. The economic sector is directed for the benefit of the community.
4. There is freedom in business.
5. Guaranteed economic stability.

·         Deficiency :

1. Government burden will be heavier compared to the private sector.
2. The private sector does not maximize the benefits that should be obtained.
3. There is no clarity regarding the limits of government influence in economic activity.
4. Inequality in business competition and inappropriate management of resources.

5. Indonesian Economic System

After seeing the types of world economy, do you know which economy is in Indonesia? The economic system implemented by Indonesia is the Pancasila economic system. The Pancasila economic system was chosen to be implemented in our country because it contained the meaning of economic democracy. Goods that are considered very important for the existence of the state and are needed by many people should not be handed over to the private sector.

The state can make policies, manage, regulate, manage and oversee the strategic production. If the wealth is just left to fall on the wrong side then the prosperity of the community in utilizing the wealth is difficult to realize. Indonesia’s economy is now largely supported by industry and trade, with a majority focus on the export sector. Maybe that’s why now Indonesia is being pushed to enter industry 4.0 and many entrepreneurs have sprung up.

·         Advantages :

1. The freedom to create and innovate as long as it does not interfere with the interests of the community.
2. The national economy is prioritized for people’s prosperity.
3. Economic management runs collectively or together to achieve mutual prosperity.
4. Individual property rights are recognized by the state as long as their use does not conflict with public interests.

·         Deficiency :

1. The economy tends to run less efficiently because this economic system prioritizes democratic processes that require time.
2. The economic decision making process is slow because it must be aligned with common interests.
3. The dominance of the state in managing the economy has the potential to reduce and ‘kill’ the creative power and innovation of the community.