An economic system defines how the various entities in an economy interact. People have defined an economic system variously to include government policies, which is very important especially in modern times. Ancient systems were pretty simple. Trade was done using systems like barter trade which was very straight forward. There were few treaties and almost no real rules of engagement. You only exchanged what you had for what you needed, or wanted. However, in modern monetary economies, the setting is quite intricate. Huge established companies have a lot of influence in the way business is done. Treaties and agreements are made every day, and governments have made numerous laws to define trade, thus warranting the need for a more comprehensive definition of what an economic system is. In modern economics, therefore, an economic system can be described as an organized manner in which a particular government chooses to allocate goods and services in the country. Modern economic systems are about more than just trade. They define the values of a society, or a country, as well as the political structure of that society.
There are about three or four basic questions in economics. One is, which goods are to be produced? The other one is: how are the goods going to be produced. The third question is: who is going to get those goods and services that have been produced; and the fourth question addresses how change is going to be effected and accommodated in an economy. Effectively, the structure of an economic system seeks to answer these questions. The system sets the rules of play for all participants in an economy, and defines how they are going to interact with each other.
Basically there are three main economic systems. Well, many governments actually have their own peculiar systems, which suit their needs and their aspirations. But consensus has it that all these systems can be classified into just three main ones.
Modern market economies employ what one would call a ‘hands off’ approach by the respective governments. This is to say that the government plays a rather minor role in the economy, and only lays down some rules here and there to facilitate business. Many world economies are essentially market economies, and an outdated word for this type of economy (although not always applicable), is Capitalism.
The perfect opposite of a market economic system is a planned economy. Here, the government calls all the shots. Communism in places like China would perhaps be the closest example of a planned economy. The government is responsible for all the important decisions regarding production, distribution and consumption of goods and services. Some people also refer to it as a command economy.
In a market economy, there arises the need for more government involvement, in cases where there is a threat of collapse, or when the government feels that some players are being exploited unfairly. Likewise in a command economy, sometimes there is a need for more freedom, often just to encourage more investment. When either system seeks to integrate some aspects of the other, the result is some sort of hybrid system commonly referred to as a mixed economy. Strictly speaking, many modern economies are actually mixed economies, although often people don’t even realize it.