A society needs to select an economic system – a particular set of institutional arrangements and a coordinating mechanism – to respond to the economizing problem. Economic systems can differ as to (1) who owns the factors of production and (2) the method used to coordinate and direct economic activity.
The private ownership of resources and the use of a system of markets and prices to coordinate and direct economic activity characterize laissez-faire capitalism, or pure capitalism. In such market systems each participant acts in his or her own self-interest; each individual or business seeks to maximize its satisfaction or profit through its own decisions regarding consumption or production. The system allows for the private ownership of capital, communicates through prices, and coordinates economic activity through markets – places where buyers and sellers come together. Goods and services are produced and resources are supplied by whoever is willing and able to do so. The result is competition among many small, independently acting buyers and sellers of each product and resource. Thus, economic power is widely dispersed.
Advocates of pure capitalism argue that such an economy promotes efficiency in the use of resources, stability of output and employment, and rapid economic growth. Hence, there is little or no need for government planning, control, or intervention. The term «laissez-faire» means «let it be», that is, keep government from interfering with the economy. The idea is that such interference will disturb the efficient working of the market system. Government's role is therefore limited to protecting private property and establishing an environment appropriate to the operation of the market system.
The polar alternative to pure capitalism is the command economy or communism, characterized by public (government) ownership of virtually all property resources and economic decision-making through central economic planning. All major decisions concerning the level of resource use, the composition and distribution of output and the organization of production are determined by a central planning board appointed by government. Business firms are governmentally owned and produce according to government directives. The planning board determines production goals for each enterprise, and the plan specifies the amounts of resources to be allocated to each enterprise so that it can reach its production goals.
