Capitalism is an economic and political system in which the residents control the economy or own factors of production, not the government.

In other words, capitalism is an economic system in which residents make economic decisions and answer economic questions, not the government.

Residents are natural and legal persons. A natural person (ex: David) is a human being entitled to rights and obligations. A legal person (ex: a software developer company) is an entity that is not a human being but the law recognizes as having a legal personality.

In pure capitalism, the government has no economic power. In other words, in pure capitalism, the government has zero influence on the economy.

The policy in which the government has no economic power is known as laissez-faire. According to Merriam-Webster, laissez-faire is a French word that means “allow to do.”

The proponents of laissez-faire believe that the society does not need the government. The market can regulate itself.

Why?

According to capitalism supporters, supply and demand fix everything. Here are some examples of how supply and demand fix the market:

• If a manufacturer prices its products too high, consumers will not buy them. So, the producer has no choice but to cut prices.
• For scarce goods, the one who pays the highest price will get them. For example, diamonds are scarce, and only rich people will buy them. There is no need for government intervention.
• If a society needs specialist doctors, due to the freedom of pricing of doctors’ services more adults will try to become specialist doctors. Over time, the needs will be fulfilled.

Characteristics of Capitalism

Capitalism is an economic system with the following characteristics:

1. Profit-driven Operations

Making a profit is the most prominent characteristic of capitalism.

In fact, capitalism is known for the pursuit of profit.

In this economic system, the primary goal of a business is to make a profit, and individuals seek financial gain.

Profit motivates businesses to make money to the extent they can without considering social and environmental impacts. For example, a factory will not care about air pollution if the government does not introduce regulations. The only that matters the most is money.

Social activists and communists blame the capitalist system for the greed and exploitation of workers to make a profit. Over time, businesses in a capitalist economy gain power by accumulating profits, lobbying in politics, and putting workers in less or no power positions.

Some Marxists and socialists believe that the accumulation of power and profit by minority tycoons will lead to late-stage capitalism and will lead to socialism.

2. Private Ownership

Private ownership is the second most popular characteristic of capitalism.

In capitalism, the private sector controls or owns most means of production. Means of production (land, capital, entrepreneurship) are inputs that humans use to produce goods and services.

The owners of means of production are free to employ their resources as they will under the umbrella of the regulations.

3. Inequality

Inequality means imbalance or disparity.

In economics, inequality refers to the level of differences between income, wealth, opportunity, etc. between individuals in a society. Inequality is the characteristic the critics of capitalism criticize the most. 

• Income inequality: refers to uneven income distribution throughout a population. For example, on average, men earn more than women and managers make more than workers. 
• Wealth inequality: refers to the unequal distribution of wealth across households or individuals. And wealth is the possession of valuable things such as property and money. In a capitalist economy, wealth inequality is higher than in a socialist and communist nation. A high-net-worth individual has more social power and can change circumstances more than poor and less fortunate people.
• Opportunity inequality: refers to unequal income variables over which individuals have no control, such as family socioeconomic status, gender, or ethnic background. For example, rich individuals can send their children to a better school and even hire a personal coach. 

All of the above inequalities relate to each other. It means that one can affect the other one.

Capitalism produces inequalities. In a capitalist economy, rich individuals own the means of production. Means of production are everything (excluding labor) that is used in producing goods and services.

It also means that wealthy people have more power to use natural resources for their benefit. And poor people have no choice but to work for them and help them to grow richer. This trend continues and the disparity gets wider and wider.

 4. Market Economy

Capitalism depends on free markets, where supply and demand set prices. 

Buyers compete for goods, and sellers compete for buyers’ money. And they trade willingly without coercion.

In this system, buyers are free to spend their money on, and sellers are free to engage in any economic activity they want.

5. Innovation and Entrepreneurship

Capitalism encourages innovation and efficiency, leading to technological advancements and various goods and services.

To compete, suppliers need to be innovative and serve their customers which leads to profit.

6. Specialization

In capitalism, both companies and individuals specialize in something to be more productive. A company specializes in the process of producing one or multiple related goods and services. And a person focuses on becoming an expert in a particular subject or skill.

Specialization helps companies and individuals to be more productive and efficient in cutting costs and producing high-quality products. It reduces prices which is beneficial to customers.

7. Competition

Competition refers to attempting to establish supremacy or superiority over the opposition.

Businesses compete by being productive and efficient in producing goods. Competition leads to cheaper prices benefiting customers.

Benefits of Capitalism

Here are some well-known advantages of capitalism:

1. Producers and Consumers Have Freedom

Capitalism provides freedom for producers and consumers. Producers are free to produce whatever their skills match and are good at. Consumers are free to purchase any goods they wish from various choices.

However, laws and regulations exist to prevent harmful drugs and services to society. In that sense, a producer can not produce a harmful product such as cocaine, and the consumer can not buy it.

Moreover, because the government is small, the bureaucracy is also small. That enables individuals to enter and exit the market faster and easier.

2. Companies in a Capitalist Economy Is More Efficient

Because profit is the main motive of a producer, it strives to be efficient.

Efficiency cuts costs and minimizes waste. For a private company to maximize profit and compete in the market must be enough efficient and produce goods that are in demand. In contrast, a government company’s main goal is not to profit, which is why it is less efficient.

3. Competition Forces Companies to Innovate in a Capitalist Economy

Capitalism creates competition that leads to innovation.

Innovation is the practical execution of ideas that result in the introduction of new goods or services or improve providing goods or services.

Entrepreneurs and firms continuously seek to innovate and develop profitable products. So, they need to invest in new products, which may become very profitable in the future.

In contrast, in a governmental company due to bureaucracy for making economic decisions, innovation is not encouraged as much as in a private entity.

4. Economic Growth

In capitalism, consumption is encouraged, and manufacturers are incentivized to be productive and efficient.

So, both consumers and suppliers push the economy to grow.

Economic growth results:

• In decline in the unemployment rate;
• Economic stability;
• Trust and confidence in the economy;
• Real GDP growth;
• Raising living standards; and
• So on.

5. Quality of Goods and Services in a Free Economy Is Higher 

In capitalism, producers manufacture goods of high quality to establish brands and foothold, such as Apple and Samsung. Moreover, private companies respond quickly to the needs of their customers and adapt to new technological environments.

Contrarily, a state-run company does not adapt quickly, and its product quality is hard to change due to a higher bureaucracy.

Criticisms of Capitalism

While capitalism has several advantages over communism, for example, economists also criticize the following disadvantages:

1. Capitalism Produces Inequality

Capitalism makes some rich and others poor. The trend of becoming rich individuals richer and poor individuals poorer continues in a capitalist economy.

It happens due to the self-interest of rich people (owners of means of production). For a country’s economy functions, it uses means of production (ex, natural resources) to produce goods and services. The rich people benefit the most by taking the profits. So, the nation’s wealth may concentrate in the hands of a few individuals, firms, or groups.

Over time, wealthy people increase their wealth by accumulating profit while the majority of residents work to survive and save for retirement.

As a result, rich individuals enjoy luxury lifestyles and poor people remain the same.

A huge gap between the rich and poor classes creates stability risks. It may encourage socialist movements to get bigger and even revolution in some countries.

2. Capitalist Economy Creates Monopoly, Oligopoly, Monopsony, and Oligopsony

Generally, there are numerous market participants in a free market. It makes unable a single company to have an impact on the market.

However, this is not always the case.

In a market economy or capitalism, companies can become huge enough to be a single player or one of a few players in the supply or demand side of the market. For example, if a company manages to develop a vaccine, it can charge as much as it wishes without patients’ will.

We call this phenomenon monopoly, oligopoly, monopsony, and oligopsony.

• A monopoly is a market in which there is only one supplier but a lot of buyers;
• An oligopoly is a market condition in which there are a few suppliers but a lot of buyers;
• Monopsony is a market condition in which there is only one buyer and a lot of suppliers; and
• Oligosony is a market in which there are a few buyers and a lot of suppliers.

What are the problems with monopoly and oligopoly?

The final cost-bearers of monopolies and oligopolies are consumers. It is worse if there are monopolies instead of oligopolies.

Here are some problems that consumer economists dislike about monopolies and oligopolies:

• The supplier can charge higher than the product’s value;
• Due to huge profits, the producer may not be willing to be efficient in using resources and unwilling to cut costs;
• The monopoly does not feel to innovate and increase the quality due to the non-existence of competition; and
• The number of consumer choices will be lower.

And what are the problems with a monopsony?

A monopsony occurs if suppliers are in a weaker position than the sole buyer.

This can happen in the labor market when there is a single factory in the community. The factory has the power to exploit workers by setting lower wages and employing fewer workers than required. Moreover, the working conditions may not improve, and productivity will be low due to low motivation.

Businesses can acquire monopsony power in buying raw materials too. For example, supermarkets can abuse their monopsony power to pay low prices to farmers for potatoes and tomatoes. If farmers don’t sell to supermarkets at a low price, their product quality may degrade and become unusable.

3. Capitalism Creates Externalities

An externality is the cost or benefit of an economic activity that an unrelated third party experiences.

There are two types of externalities: positive (external benefit) and negative (external cost).

An example of a positive externality is vaccination not only the one who gets it benefits but also other people in the community by lowering the probability of getting infected.

A negative example of externality is air pollution by a factory in a community.

And in this post, I mean negative externality.

The problem with external costs (negative externality) is that consumers and private firms often ignore these costs. And they only count private costs and benefits in making consumption or production decisions. 

For example, air and river pollution created by industrial production harms and costs the environment and public health. However, these costs are not in the accounting book of factories.

Moreover, external costs hurt the ecosystem and native birds and animals.

4. Capitalism Generates Business Cycles

Business cycles occur in capitalist economies. 

The business cycle refers to ups and downs in the economy. The four phases in the business cycle are recovery, peak, recession, and trough (bottom).

The profit motive in capitalism generates malinvestments, instability, and greed, causing recessions.

Here is the problem.

The economic instability and recession hurt the lower class (the majority of the population) the most. These people are the first who lose their jobs or houses (if purchased by leveraging a loan).

After losing houses by not wealthy people, lender confiscates putting more pressure on them.

Then, rich individuals step in purchasing auctioned houses at a lower price and selling them for huge profits years later.

This trend if continues which happens in capitalism, widens the gap between rich and poor people.

5. Private Sector Does not Produce Public Goods and Services

A public good is a product that everyone can use without reducing its availability to others. It is also known as social good and collective good. Examples are roads, bridges, and dams.

Here is the issue.

In capitalism, the private sector makes most economic decisions on what to produce, how to produce, and who gets it. And it is not interested in producing goods that do not generate profits.

Some infrastructures are essential, such as roads for the transportation of goods.

So, without government intervention, the private sector will not build roads because they are unable to charge a price for these goods due to their non-excludability and non-rivalry characteristics.

6. Short-term Focus Is Common in Capitalist Economy

In capitalism, publicly traded companies are common. They often face pressures to return profit as much and as quickly as possible.

But Why?

Because financial gains immediately impact stock prices in the stock exchanges.

That is why the profit motive of capitalism may lead businesses to prioritize quarterly profits over broader social issues, such as long-term sustainability, environmental problems, and more. Moreover, profit motive may lead businesses to exploit their workers by paying low wages and low standards of working place.

In contrast, in communism, the government makes long-term plans and prioritizes stability over short-term profits.

7. Narrowly Focus on Economic Growth

In capitalism, the economy narrowly focuses on the GDP growth. Other essential factors such as healthcare, happiness, and stability come next and next.

The problem is that lower-class individuals have fewer opportunities to enjoy a better life than rich guys.

For example, the minimum wage in a capitalist economy is lower than in socialist economies. As of 2024, the minimum wage in the USA is $7.25 which is more capitalist, and in Denmark, the minimum wage is approximately $18, considered relatively socialist. Comparing GDP Per Capita, according to Statista, in the USA in 2022 was around 76,343.25 U.S. dollars, while in Denmark about 67,000 U.S. dollars.

8. Innovation Is Not Necessarily a Product of Capitalism

Private firms indeed do their best to innovate in cutting costs and maximizing profits. But, they need the government for huge-budget innovations.

For example, GPS which is in every gadget, Satellite, Rocket Space, and even Touch Screen was invented with government help or a governmental entity.

Recent examples are EVs and clean energy. Almost every government around the world subsidizes or offers tax breaks to change consumers’ behavior.

Types of Capitalism

Capitalism is supposed to be an economic system in that supply and demand set prices and the government does not intervene.

However, this is not the case anymore.

The level of government intervention and some market participants made a variety of capitalisms.

Notice that you may hear various types of capitalism due to different opinions not mentioned here.

Here are four types of commonly discussed capitalism:

1. Laissez-faire or Free Market Capitalism

Laissez-faire which means “let do or let be” is a French word is a type of capitalism with minimal interference from the state. The government exists to protect ownership and introduce laws. It does not intervene in the market at all.

Initially, a capitalist economy was supposed to be Laissez-faire letting people do businesses that they want. However, protectionism and the national interests of countries changed and started intervention.

2. Welfare State Capitalism

Welfare state capitalism also can be called a social market economy.

In this economy, the government plays a major role. The state uses tools such as subsidies, taxes, and benefits to redistribute some of the resources to needy individuals.

Moreover, the government provides some services such as education and healthcare to all to equalize increasing opportunities for all.

Examples of welfare state capitalism are Nordic countries such as Denmark and Finland. In these countries, education is free, with some exceptions healthcare is also free, tax rates are high, inequality is low, and they are happier than other nations.

3. State Capitalism

In state capitalism, the government has a huge role. The state enters the market owning factories, and banks, and is involved in other crucial industries.

The main argument for the state entering the market is economic stability to serve underserved sections and control private companies from becoming too big.

The most well-known example of state capitalism is China. It makes multiple-year economic plans and strictly regulates private companies.

4. Crony Capitalism

Crony capitalism, sometimes also known as corporate capitalism, is an economic system where big corporations have a controlling position in the market. It is usually achieved through lobbying government officials.

Corporate capitalism may achieve an economy of scale resulting in low costs. Some companies may also gain power to exploit workers and achieve a monopoly.

Difference Between Capitalism and the Free Market

Capitalism and the free market are used interchangeably.

Sometimes they are the same, and sometimes not because the free market is a subset of capitalism.

In other words, the free market is an element of capitalism.

When economists and commentators mention capitalism, they often mean profit maximization and private ownership. On the other hand, when they mention the free market, they emphasize the freedom of exchange of goods and services based on supply and demand law.

Capitalism Short History

This section discusses the history of capitalism extremely briefly.

Capitalism has evolved as time passed. They do not share 100% of the same characteristics. But they share important features of capitalism.

Capitalism’s roots trace back to ancient times in one form or another or had some characteristics of capitalism. Free trade, private ownership of the means of production, and profit as the main motivations for producers are the main characteristics of capitalism.

However,

Capitalism which we mean today, emerged in its mercantile (merchant) form in the 14th century. Later, during the 16th century, it started growing with the English cloth industry.

So, this article discusses capitalism’s history in two parts: in ancient times, and from today’s perspective.

Capitalism in Ancient Times

The modern capitalism was defined in the 18th century by Adam Smith. So, the following societies were not capitalist in today’s sense. But they had many elements of a capitalist nation.

1. Indian Maurya and Gupta Empire Era

The Maurya Empire of India lasted from 321 to 185 BCE.

The economy of the Maurya Empire of India was extremely developed at that time. During this period, internal and external agriculture, trade, and other economic activities flourished and expanded across South Asia due to a developed monetary system, administration, and proper security.

These empires had several characteristics of capitalism, such as free trade, profit-driven economic operations, and very likely ownership of land.

2. Song Dynasty in China

During the Song Dynasty, China was the most developed place in the world. This empire lasted from 960 to 1279.

Some historians consider Song China an “early modern” economy, centuries before Western Europe.

The Song Dynasty achieved remarkable technological advancements. Examples are the world’s first banknote, movable print, improved seeds for rice and other crops, gunpowder, water-powered mechanical clocks, and enhanced iron and steel production.

The emperor and government had influences on the economy, but the private sector and trade flourished.

Market mechanisms in the Song Dynasty era played a crucial role, leading to a national income that was about three times that of 12th-century Europe.

During this era, trade expanded globally, with merchants investing in trading vessels. Trade routes reached distant ports, including those in East Africa and Istanbul.

3. Ancient Rome

Ancient Rome began in the city of Rome in the 8th century BC and ended with the Western Roman Empire in the 5th century AD. It had three states: the Roman Kingdom, the Roman Republic, and the Roman Empire.

The Roman economy mainly relied on agriculture and trade. However, industry and mining existed on small scales.

Among the three stages of Ancient Rome, the Roman Empire had several characteristics of capitalism. Examples are private ownership and the law that protected it, trade, and banking.

Capitalism in Modern History

Mercantile Capitalism, 14th to 18th Century

Professor William I. Robinson the writer of over 10 books about global and economic issues believes that mercantile capitalism began with the arrival of Columbas in the Americas in 1492. And mercantilism expanded with Britain’s cloth industry making it the most wealthy country in the world.

Mercantilism is about trade, profit generation, and protectionism.

According to this system, in the trade between nations, one side wins and the other loses. The one who exports goods the most wins by accumulating gold and silver and the other side loses.

Protectionism is a trade policy in which imports are restricted by levying tariffs or the introduction of quotas. Mercantilism encourages import restriction and export boosts and has a surplus balance of trade. That is why mercantilism is viewed as a form of economic protectionism.

During that time the wealth of a nation was measured by the amount of gold and silver it had. Europe tried to import gold and silver and export finished goods.

Europe also, through colonization, shifted crop production to colonized nations and profited off of raw materials, and enslaved labor. Finally, Mercantilism was replaced by capitalism in the mid-19th century after the American, France, and Haitian revolutions.

Classical Capitalism

Adam Smith wrote the ‘The Wealth of Nations’ In 1776. In his book, he talked about a policy of ‘Laissez-Faire’ suggesting the government should leave the economy alone and not interfere. 

Today, this economic policy is known as ‘free market capitalism’ or classical capitalism. It is also the type of capitalism when we think and talk about.

Why should not the government intervene? 

Adam Smith believed that the invisible hand fixes economic problems. The invisible hand refers to self-interest, motivation for profit, and competition that results in equilibrium and benefits all.

However, the invisible hand did not solve economic problems. Free markets saw continuous recessions and monopolies were created. During the 1930s recession hit the market and supply and demand were in equilibrium but the massive unemployment rate continued.

It was the time Maynard Keynes introduced government intervention to solve economic failures.

Keynesian (New Deal) Capitalism

Keynes published the General Theory of Employment, Interest, and Money, in 1936.

In short, he didn’t believe in the invisible hand that Adam Smith introduced. If an invisible hand does not work for the economy, then the government should step in during hurdles.

His theory was that governments should interfere in the economy during insufficient demand and regulate the companies. The government should subsidize Small companies and prevent large companies from getting monopolies, and there should be strict rules and regulations in place.

In the decades that followed Keynes, countries all over the world implemented a model of capitalism Keynes had suggested.

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A trading checklist is a list of points to consider and use as a reminder to stick to your trading plan.

If you are trading stocks, Forex, or cryptocurrencies, a checklist makes your risks manageable and more disciplined.

So, don’t forget to prepare a trading checklist or use ours provided in this post.

You don’t have to do everything on this checklist. Just do the best you can, or make a checklist yourself. The more disciplined you become, the more will be your reward.

Something should be crucial to consider adding to your checklist. So, I have collected things that most professional traders agree to stick to them.

Questions in Your Trading Checklist

1. Do You Take Care of Your Health?

Health is one of the most important factors in becoming a winning trader.

Both mental and physical health are crucial. Specifically, mental health can separate you from losing traders.

And you have to take care of both every day.

Related article: Trading Psychology: 8 Tips to Become a Better Trader

Mental Health

Your mental health is about how you think, feel, and behave. 

Mental health affects daily living, relationships, physical health, and of course, your trading behavior.

So, take your mental health extremely seriously.

If it is difficult for you to control your emotions, greed, and behavior; it is a must to bring them under your control. 

More importantly, if you are not satisfied with your mindset, emotions, and so on, I recommend you visit a therapist or a counselor. Moreover, do things that improve your health which you will read later in this section.

According to Johns Hopkins Medicine, “an estimated 26% of Americans ages 18 and older — about 1 in 4 adults — suffers from a diagnosable mental disorder in a given year.” So, it is very likely for you to be one of them. Do not get shy, visit a doctor if you need it.

What about if you are mentally healthy?

Even if you are healthy, you still need to take care of it.

Here are things that keep you mentally healthy:

• Sleep early. You have to sleep around 10 PM. It is crucial for high-quality sleep and getting up early in the morning.
• Get up early in the morning, take a shower or at least wash your face with cold water, and drink a cup of coffee. According to Dr. Eric Berg DC, one black cup of coffee in the morning is enough. I am not a doctor, but I agree with based on personal experience. Excessive drinking coffee makes me feel very bad and difficult to concentrate.
• Do Meditation. Learn to meditate if do not know. According to Healthline, meditation reduces stress, controls anxiety, promotes emotional health, enhances self-awareness, lengthens emotional span, reduces memory loss, generates kindness, and helps fight addictions.
• Practice yoga. Yoga benefits your body whatever meditation does plus strengthens your physical health.
• Read books. Reading books is the best way to learn something deeply. Watching videos may help you to grasp something but you need books to understand it well. Moreover, reading books is the best way to improve your concentration.
• Limit your social usage. Social media is only beneficial if your usage is under control. If you are wasting hours on TikTok or Instagram, it kills your mental health. Follow only those that matter to you and limit your daily usage. If you need to follow market news, follow those accounts on X (formerly Twitter) that help your analysis. Do not follow a thousand accounts.

Physical Health

Physical health is the state of how well your organs and body systems function and how fit you are.

You are healthy if:

• Your nervous system functions properly;
• Your internal organs (heart, lever, kidney, and so on) function well;
• You have healthy sense systems (vision, hearing, touch, smell, and taste); and
• You have a fit body (you are obese, overweight, or underweight).

Taking care of your health should be on your trading checklist. Because if you are not healthy physically, it will hurt your brain and your decision quality.

The National Institute of Health recommends being active, maintaining muscle mass, maintaining a healthy weight, having a healthy diet, minding your metabolism, and building healthy habits.

For more information, visit the NIH physical wellness toolkit.

2. Are You Trading with Trend?

Trend is your friend.

You can not win trading against the trend even if you are a billionaire.

No one knows when a trend is over or a new trend has started. A trend should reverse and establish a new trend to be valid. Or, it is an established trend.

So, ensure that you are a friend with the trend.

A trend is bullish, bearish, or horizontal. Look for sell patterns if there is a falling trend, and look for buy patterns if it is a rising trend. Do not trade when the market is going in a sideways.

3. Do You Check the Economic Calendar?

An economic calendar is a web tool that compiles macroeconomic data and publishes on time from all major economies.

Traders and investors use it for tracking releases that have the potential to be market-moving events.

For example, the Census Bureau of the USA publishes monthly the Building Permits Survey (BPS) to provide national, state, and local statistics on new privately-owned residential construction. If the data is better than expected, it can move the market.

On Srading.com, we have the best (from our point of view) economic calendar, developed by the Dukascopy Bank for desktop users. And an economic calendar from MQL5.

You can bookmark, and check it daily.

Here is what the desktop version looks like.

And this is what the mobile version looks like.

4. Does Your Analysis Have Confirmations?

Placing a trade based on a single reason is too risky. You need many confirmations. 

For example, if you see a bullish triangle on the EURUSD currency pair chart, it is not convincing enough to risk real money. You need confirmations such as:

• Candlestick patterns;
• A bullish trend; and
• Some macroeconomic data are better than forecasted.

The more confirmations that validate your analysis the higher your chance of success.

Remember that trading is playing with probabilities. No one is 100% sure about his analysis. And you should not be too.

5. Have You Calculated Your Risk and Reward?

A professional trader risks only a fraction of his trading account. Understand that trading is not a quick-rich scheme. So, you should risk the amount of money that you can lose.

In other words, you should risk the amount of money, if you lose it, it does blow up your account and does not impact negatively your or your family’s life.

The reward is the prize of your effort and risk. It should be at least twice the size of your risk.

So, if you have calculated your risk to be $2000, then your possible reward should be at least $4000, for example.

Let me give another example from the Forex market. If you risk 50 PIPs, your reward should be at least 100 PIPs.

As a result, if the reward is not convincing, then do not place a trade. For example, if you need to risk 100 PIPs for 100 PIPs of reward, you are likely making a bad economic decision.

6. Do You Know How to Manage Your Open Position?

Managing an open position is closing or changing stop-loss and profit-loss levels.

Your initial take-profit and stop-loss are not necessarily the levels at which you should close your open position. You can use trailing-stop-loss and target a more profitable level.

For example, if you have targeted 100 PIPs of profit in a bullish trend, trading the EURUS currency pair, you can increase your target if:

• There is a new bullish chart pattern;
• Candlesticks are tall and green;
• There is good news about the Euro and bad news about the USD; and
• The uptrend is very strong.

In other words, you can increase your target level, if find new confirmations.

However, you should never add to your position if you are in a losing position. Moreover, you should not increase your risk. Why? Because they increase your risk. If you are adding to your risk, you are trading emotionally. It will cost you a lot. And very likely emotional trading will empty your account.

Download a Free Trading Checklist [PDF]

Here is the summary of what you read.

If you want a higher quality, download the PDF version.

The post Trading Checklist: What It Is, Info-graphic, and PDF appeared first on Srading.com.

In other words, private equity refers to an investment that is not available to the public to trade its shares.

Generally, the goal of PE investors is to restructure and add value, and then sell in profit, or take it to the public through IPO.

Generally, private equity investors hugely fund a purchased company via loans. That is why it is known as leverage buyout investment. It is called a leveraged buyout because the investors heavily use loans from banks as leverage.

What Is a Private Equity Fund?

A private equity fund is a pooled investment that a PE firm known as the advisor manages. 

It is similar to a hedge fund where the adviser pools together the money invested in the fund by all the investors and invests on behalf of the fund. The difference is that a hedge fund invests in publicly traded companies (mostly) but a PE fund invests in a private business to sell at a profit by restructuring and adding value.

Unlike a mutual fund or a hedge fund that wants to profit from volatility in the stock market, PE aims to hold for 3 to 10 years. And, sell at a profit years later.

Moreover, private equity funds are not registered with the Security and Exchange Commission (SEC). So, they are not required to disclose their performance information to the public.

How Does a Private Equity Work?

First, let’s see the parties involved in a private equity fund.

Generally, two parties are involved in a private equity deal: general partner/s and limited partner/s. In this type of deal, there is at least one general partner and one limited partner. 

Let me explain as there is one general partner and one limited partner.

A general partner is the one who manages and is responsible for the administration of the fund. He has unlimited personal liability for the debts and obligations in case the firm goes bankrupt. He has the power to make decisions.

On the other hand, a limited partner has a limited obligation. He loses maximum the amount he has invested in the fund. And he has limited or no power to make decisions.

Then, how the profit is shared?

The general manager gets 1% to 3% of invested assets as a management fee and a percentage of profit if it exceeds the hurdle rate or level. A hurdle rate is a rate of profit relative to the amount of assets under management. A general manager needs to achieve more profit than a hurdle rate to be eligible to receive a reward as a percentage of profit.

Conversely, the limited partner gets a share of the profit relative to his investment amount after the deduction of the management fee and profit rewards by the general manager.

How to Get Into Private Equity?

A person can invest in PE directly or indirectly.

Investing Directly in a Private Equity

If you want to invest directly, you have to be part of an accredited investor or be a qualified investor. You need to invest a high amount of money in a private equity investment.

An accredited investor is a company or a person who meets certain criteria regarding income, net worth, and qualifications.

Typically, an organization’s assets should exceed $5 million to become an accredited investor.

For individuals, a person should have a net worth of over $1 million excluding his residency. Or, he should have had an income of over $200 thousand in the last two years if he is single and over $300 thousand for couples.

For more information regarding accredited investors, visit the SEC’s guide.

Investing Indirectly in a Private Equity

You can invest indirectly in private equity by participating in an accredited firm, such as a pension plan, brokers, and trusts. They may invest some portion of their large portfolios in PE funds.

Related article: Private Credit: The Definitive Guide

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In other words, government spending consists of salary and wages, investment, transfer payments, and interest payments on the loan.

Government expenditure is a huge part of the gross domestic product (GDP). Its size depends on the economic system. It tends to be the largest pi of the economy in a command economy, a little above or below 50% in a socialist country, and below 40% in a capitalist mixed economy.

For example, the U.S. government spending relative to GDP in 2022 was 36.25%, according to the IMF.

It is even higher in France which is relatively a socialist country. Its government expenses account for 58.33% of the GDP.

Categories of Government Spending

Generally, economists divide government expenditures into three categories: current spending, investment, and transfer payments (benefits and pensions).

But can we ignore the interest payments on national debt? 

Probably not. That is why you will read interest payments as a separate category.

Notice that categorization varies by country. For example, in the USA government spending is broadly divided into discretionary and mandatory spending. Discretionary spending refers to the portion of the budget that Congress approves each year, such as military, education, and healthcare. Congress also legislates mandatory spending one in several years such as unemployment benefits and medicare.

Current Spending

Current spending is ongoing expenses.

The government in most countries is responsible for infrastructure maintenance that costs money. Moreover, it has buildings. The government spends money on buying materials and paying workers for maintenance. It is an ongoing cost.

The government also has employees. For example, according to Statista, the US government had 19.23 million employees in 2022. Salary and wage payments to workers and employees are part of the current spending.

Investment Spending

Investment (capital) spending refers to money spent on things (e.g. roads) for future uses.

The government needs to invest in infrastructures such as roads, dams, and buildings. These investments yield results in the future by lowering the cost of doing or living in the community. Moreover, they make living easier and provide opportunities for new industries.

Transfer Payments

Transfer payments refer to money that the government pays for free, such as social welfare benefits and subsidies.

The government pays welfare to support needy members of society so that they can meet basic human needs such as food and shelter. Welfare reduces poverty and helps children and others to get on their feet by reducing inequality and assisting beneficiaries’ health.

Subsidies refer to the government payments to firms and households to promote a public interest. For example, subsidies to agriculture and mining make a country more independent economically and help other industries to grow. The most well-known subsidy example is payment to purchase electric cars around the world to meet carbon emission targets. Electric cars do not pollute the air and are in the interest of the general public.

Interest Payments on Public Debt

The government accumulates debt by issuing bonds when it runs a budget deficit. A budget deficit is a situation when the government spends more than it generates revenue.

Of course, the loan is not free. The issuer should pay back the loan plus interest. For example, according to the Treasury Department, the US national debt net interest was $659 billion in fiscal year 2023, which ended September 30. It is over $60 billion more than Sweden’s GDP.

In the past decades, many governments such as the USA, France, the UK, and Japan continuously run deficits. Today, they issue new bonds to pay old bonds and their interests.

And they hope to collect more revenue in the future than they spend and pay their loans.

Government Spending Sources

A government needs funds to spend.

Where do those funds come from?

The short answer is taxes and the issuance of debt.

Or,

Government spending resources = taxes + issuance of national debt

Taxes

Taxes are the government’s charges on firms and individuals to cover the costs of government spending.

Generally, there are two groups of taxes: direct and indirect.

Direct taxes are those taxes firms and individuals directly pay the government. The word direct implies that a firm or individual directly pays the government. Here are some of the direct taxes:

• Personal income tax
• Corporate profit tax
• Capital gains tax
• Real estate and property taxes

Indirect taxes are those taxes that firms and individuals pay when they buy or use goods and services. The word indirect implies that a payer pays through a third entity. Here are some examples of indirect taxes:

• Value added tax (VAT)
• Customs tax
• Excise tax
• Sales tax

Issuance of Public Debt

Most developed countries continue running government budget deficits. It means that the government spends more than it collects taxes.

For example, the United States government budget is expected to be $1.6 trillion in 2024 and $1.8 trillion in 2025.

An easy task for the government is just issuing new bonds. It is a burden for future generations because they need to pay taxes to pay back these loans. And, it is not clear how they are going to pay.

Government Spending and National Debt

Governments of the majority of countries in the world spend more than they earn. In other words, they have a budget deficit.

(Some countries such as Ireland, Swiss, UAE, and Azerbaijan have a budget surplus)

Side note: there are three types of budget balance: budget surplus (revenue>expenses), budget deficit (revenue<expenses), and a balanced budget (revenue=expenses). 

As a result, public debt increases over time due to new debts and accumulated interests. Today, these countries issue new debts to pay old debts and their interests.

Is it a problem?

Yes. An increase in government spending adds to taxes that future generations should pay. It is hard to believe that they can pay because:

• It is a lot. And it continues to go up in total.
• Population aging is fast. The working population is aging, and there will be fewer people working and more people consuming. There is no guarantee that they ever will be able to pay old loans.

Check out the following screenshots from usdebtclock.org

The U.S. is not alone. For example, Japan is in a worse situation than the United States.

Government Spending and Inflation

Inflation is the average rise in the price of goods and services.

So, does public spending cause the average price of goods and services to rise?

The short answer is yes. But it depends on the size of spending. If the government increases spending in trillions of dollars, it definitely cause inflation. Just remember what happened after COVID-19. Inflation and government both increased all over the world.

Economists agree that there are two types of inflation: a decrease in the supply side and an increase in the demand side. Government expenditure increases the demand side for goods and services. So, it should have an impact on an increase in demand and inflation.

Government Spending and Economic Growth

Economic growth simply means Gross Domestic Product (GDP) growth.

The following formula is the expenditure approach to measuring GDP, the most popular one.

GDP = G + C + I + (X-M)

In which:

GDP: Gross Domestic Product
C: Household Consumption
I: Investment
X-M: Export-Import (balance of trade)

Any element of the GDP formula affects the size of an economy. Government spending is the largest part of some country’s GDP. For example, in France, it is almost 60% of the GDP.

So, government spending has a direct relation with the economy. If it increases or decreases the economy follows.

For example, the US government stimulus package helped the economy to recover from the COVID-19 recession in less than three months.

Government Spending Relative to GDP

Government spending relative to GDP refers to the size of a government in a country. It states the share of the government in the economy. And, it is described as a percentage of GDP.

Government spending as a percentage of GDP varies from 0% to 100%.

If the share of a government is 0%, it is completely a traditional economy without a government. A small percentage of government spending relative to GDP indicates a nation to be capitalist. Next, if the share of public expenditure is around 50% (mostly above), then it is a socialist nation. Lastly, if it is nearly 100% it is a communist nation.

Notice that it is difficult to say that a country is purely socialist, communist, or capitalist.

For example, a pure capitalist does not exist. The United States is the most popular capitalist nation but still has social programs such as social welfare and Medicare.

Another example is Yemen and Venezuela with government spending around 12%. These countries are in Crisis. Their government’s small share does not indicate that they are mostly capitalist.

The following map shows the level of public expenditure around the world. For more in dept study visit IMF.org‘s website.

G7 Governments Spending Trend

G7 is a political and economic forum including the USA, the UK, Canada, France, Germany, Italy, Japan, and the European Union as a non-enumerated member. They are among the most developed nations in the world.

Government spending as a percentage of GDP has risen in all of these countries. In the past, only during World Wars did expenditures exceed 20% of the GDP. But, today spending accounts for over 35% of the GDP in every single one of these nations.

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• What to produce?
• How to produce? and
• For whom to produce?

Who answers these questions?

The short answer is that the ruling economic system answers and makes economic decisions.

In the following, you will read in more detail each of these questions one by one.

What to Produce?

The first among three basic economic questions is what to produce.

According to economics, people have unlimited wants, but resources are scarce and limited.

If you are a producer and want to decide what to produce, you will produce the most profitable good. You do your research, start production, and hope to get a good result.

What about authorities?

It depends on the economic system. 

In a traditional economy, elders and landlords will decide what to produce. Elders make decisions based on their experience and what they have learned from their fathers.

In a market economy market forces decide what to produce. Companies will produce profitable goods and services. They are free to decide what to produce and the law protects them.

In a command economy, it is the government decides what to produce. Residents have no role in decisions regarding what they need and want.

In a mixed economy, decisions are divided between the private and public sectors. The government decides what to produce to correct the market. And, the private sector produces what is profitable.

How to Produce?

The second question among the three basic economic questions is how to produce.

In a traditional economy, producers produce agricultural products. They use simple tools they have learned how to use from their ancestors. The way that they produce is passed down by generations with small changes.

In an open market, producers make how to produce decisions considering the available technology and cost of the labor force. Generally, in a developed nation, a manufacturer is capital-intensive, which means using more technology and machines. On the other hand, in a poor country, because labor is cheap, producers hire more workers and use fewer machines.

In a command economy, the central authority decides how to produce. Generally, decision-makers choose to use more labor than machines to bring down the unemployment rate. And residents have no choice but to accept their decisions.

In a mixed economy, both the public and private sectors answer economic questions. The private sector tends to use technology more than the public. Bureaucracy causes a delay in the adoption of new technologies by the public sector.

For Whom to Produce?

The final economic question of three basic economic questions is for whom to produce?

In a traditional economy, producers often produce for themselves and exchange the excess for other goods and services. Life is simple and free of mental stress. But, the physical body works hard and tolerates a lot.

In a free economy, the answer is simple. Anyone who pays the highest will receive. If the supply is low, a product can shoot up in price and come down at the same speed if supply increases.

In a command economy, the government decides who should get it and what people should produce. Freedom is non-existent or limited. People get what the central authority gives.

In a mixed economy, the government and the private sector make their decisions on who should get a produced product. Generally, the government produces goods that everyone needs and residents get based on laws and regulations. The private sector produces for those who pay a higher price.

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Traditional economy definition: It is an economic system rooted in beliefs, customs, history, and location in which the community’s major resources for survival are farming, raising domestic animals, and hunting.

A traditional economy is rooted in beliefs, customs, history, and location. Their main focus is the survival of the family not private. Moreover, the family has a priority over individuals.

There are a lot of unwritten traditions and beliefs. Residents respect them. People in a conventional economy even may not tolerate disrespecting their beliefs.

Traditional economy is practiced in isolated and rural areas. It has existed for thousands of years.

Even though, a pure traditional economy may be hard to find. But, you read some examples of communities very close to traditional economy later in this article.

Traditional Economy Characteristics

Tradition and Community Beliefs Are Very Respected

Residents of a traditional economy hugely respect their cultures and beliefs. They even may believe that their traditions are superior to others.

Elders transfer these traditions to children as their fathers have done. It continues with little change. Change is hard, but happens due to communication with other people from other places.

Elders Make Economic Decisions

Elders make economic decisions and younger people respect their decisions. Not respecting elders is discouraged. Sometimes younger people obey elders if even their decisions are wrong.

Elders teach their children how to cultivate, hunt, and raise domestic animals. And, this process continues for the future generation.

Parents Define Their Children’s Career

Parents set what their children should do in the future. Generally, a father teaches his son whatever he himself does.

For example, if a father is a farmer, then it is very likely for his son to be a farmer. If a father does not want his son to be a farmer, again, he defines what career should his son pursue. Young people have less freedom than elders.

Barter Is the System of Exchange

Barter is a system of exchanges of goods and services for goods and services. Residents use money, but it is rare.

Here is an example of bartering.

If a farmer has excessive wheat but cannot tailor his clothes then he finds and tailor. The farmer gives the negotiated amount of wheat, and the tailor makes his clothes.

This system is difficult. It is hard to find someone who needs your excessive product and at the same time provides your needs in exchange for receiving your product.

Nature Has a Huge Role in the Traditional Economy

The mercy of nature impacts a traditional economy.

For example, rain affects directly their lives. If in a year, there is enough rain, then they can farm more and raise more domestic animals such as goats and cows. Domestic animals are used for their meats and milk.

Advantages of Traditional Economy

It might be surprising for some to read advantages of a conventional economy.

In fact, it has advantages. Specifically, poor people may like this economy.

Economic Stability and Security

The residents of a traditional economy have a stable and secure life. Almost everything is clear. Father goes hunting or does farming. Mother works at home. And younger children help their mom and elder their father.

There is nothing known as losing a job or paying bills. Life is simple. Their wants are limited. They don’t stress for cars or gadgets. They work for themselves and are happy.

However, their life is not completely stable and secure. Natural disasters can hit them hard. For example, a drought will cause them to lose their animals due to being unable to feed them, and their farming efforts may not produce enough.

Fewer Conflicts

Conflict refers to disagreement and argument about something important. Because in a traditional economy, people know each other and their duties, there are fewer conflicts.

On the other hand, conflict in a city that is ruled by a mixed economy, command economy, or market economy is more. Here are some reasons behind conflicts in a city: population density, poverty, inequality, robbery, and unemployment.

Environment Friendly Economy

A traditional economy is more environment-friendly compared to a modern economy.

In a conventional economy, farmers use not engineered seeds to grow foods and use natural fertilizers instead of chemicals. In terms of health, natural is better than chemical.

Moreover, they are more active and use basic machines to do things. For example, they don’t burn fuel to farm and don’t destroy jungles to build roads.

Traditional Economy Disadvantages

Traditional economy has disadvantages. That is why people do not continue to produce conventionally.

Let us read them.

Less Economic Growth

A traditional economy has stagnant growth. Change is difficult and often discouraged.

When there is no change, life does not get better. And life can become boring for poor people.

Moreover, education is limited. If a person gets sick, he continues suffering from it for a very long time.

Dependency on Nature

Nature is the most important determiner of a people’s life in a traditional economy. Industries do not exist. Most people are working as farmers, raising animals, or hunting and fishing. If a drought hits them, it is expensive and everyone will suffer.

Moreover, the population growth will force them to compete for limited land and put them at the mercy of nature even further.

Lower Standard of Living

People’s standard of living in a traditional economy is lower. They are more likely to experience poverty, less education, poor health, and fewer opportunities.

Example of Traditional Economy

A traditional economy forms in a rural and isolated area. That is why we should look at places that are far from cities and hard to reach.

Wakhan of Badakhshan province of Afghanistan is a perfect example of a traditional economy. It is bordered from east to China, from south to Pakistan and the disputed region of Kashmir (both India and Pakistan claim but Pakistan controls), and to the north to Tajikistan.

Kyrgyz people in Wakhan exactly live the way you read a traditional economy definition. They raise animals, barter, and elders make economic decisions.

Their way of living may be stable and secure but they suffer from health issues and their quality of life is low.

What Countries Have a Traditional Economy?

The closest examples of traditional economies are Bhutan, Burundi, Haiti, and Afghanistan. They are not purely a traditional economy. But they are close.

The Kingdom of Bhutan is bordered by China and India. Its economy relies on agriculture, forestry, and hydropower.

Burundi is the poorest country in Africa, located in central-east Africa. Its economy has not evolved very much and depends on the agriculture industry which employs about 80% of the working population.

Afghanistan is the poorest country in Asia. Its economy depends on agriculture and international donations. Before 2002, it was probably the best example of a traditional economy. Most of them depended on agriculture and were living in rural areas.

Haiti is the poorest country in the continent of America. It is vulnerable to natural disasters and almost 40% of them depend on agriculture.

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In other words, a mixed economy is an economic system in which market forces and the government plan make economic decisions. Market forces are supply and demand or buyers and sellers. And, the economic decisions are production, distribution, investment, saving, etc.

The mixed economy is the most popular economic system in the world. Its goal is to take good parts of planned and market economies and get rid of evil parts. Moreover, this system wants to narrow gaps between rich and poor people but entrepreneurs and innovators also have the opportunity to get rich.

Characteristics of a Mixed Economy

The following are circumstances that put the mixed economy in a favorable or superior position.

Co-existence of Private and Public Sectors

In a mixed economy, the public or government sector and the private sector work together.

The public sector owned by the government is active in industries that are:

• Necessary but not profitable; and
• Expensive; and the private sector is not interested.

On the other hand, the private sector’s incentive is profit. They are free to make a profit as much as possible if are not violating some regulations such as monopoly laws.

Existence of Joint Companies between the Government and Private Owners

There are companies that the private sector owns with the government. These types of companies are common in India. The motive behind these companies is profit, but the promotion of welfare is a priority.

Provision of Social Security

In a mixed economy, the government provides social security to provide growth opportunities for poor people.

Economic Freedom

Economic freedom refers to the right of residents to control their skills and property. In a mixed economy, individuals and businesses freely work, produce, consume, and invest in anything they please. However, the level of freedom is less than the open market.

In a mixed economy, supply and demand set market prices. However, the government may enter the market as a participant to bring changes in the supply and demand of specific goods and services. Generally, these changes are necessary due to oversupply or undersupply of specific goods and services.

Government Intervention

The government intervenes in a mixed economy if there is economic failure. Economic failure refers to a situation where demand and supply are far away from an optimal condition.

For example, if inflation rises too high, the central bank (a governmental financial institution) cuts the interest rate. A higher interest rate discourages spending by making borrowing more expensive which results in low demand and lower prices.

Another example is the high unemployment which is not favorable. In this case, the government can lower corporate taxes to boost investment or increase governmental institutions’ activities.

Advantages of a Mixed Economy

Here are factors that put a mixed economy in a favorable position.

The State Provides the Essential Goods and Services

In a mixed economy, the government provides essential goods and services to people who cannot afford them.

For example, in Denmark, if you are a resident, you get higher education for free. The Danish government even finances the private schools partly, but some tuition fees apply.

However, in the United States, which is more capitalist, higher education, such as college and university, is not free. Moreover, in the USA, the amount of funds that public schools get from the federal government varies by community.

Competitions Benefit Consumers

In a mixed economy, a private company not only competes with other private companies but also competes with governmental companies.

This intensive competition brings down prices to the lowest possible level.

Doing Business Has Lower Risk

Strong regulation governs a mixed economy. If there is a market failure, the government steps in to fix it. That is why it has a lower risk compared to a free market.

Economic Freedom Exists

Even though the state is a participant, individuals and businesses enjoy economic freedom.

Manufacturers are free to produce whatever they want except those banned under laws. The government does not tell producers what to produce and they enjoy pricing freedom too.

Individuals can own and buy whatever they want, which is impossible under a command economy. They even have more options than a free market because monopolies can kill competitors and, bring down the number of choices.

Disadvantages of a Mixed Economy

Here are issues that put a mixed economy in a less favorable position.

Higher Taxes

The state funds its spending by levying taxes on residents. Residents are individuals and active institutions.

Compared to residents of a free market, mixed economy residents pay higher taxes because the state spends a lot.

Higher taxes cut residents’ disposable income and consumer expenditures. This may lead to lower growth of the economy. Moreover, higher taxes may lower entrepreneurship motivation.

The Government Could Become Large

The problem with a bigger government is that it makes it difficult for private businesses to run operations.

Why?

The primary objective of state companies is not profit. If the government owns too many businesses in various sectors, it may bankrupt private businesses which may lead to less efficiency of national resources.

A private company almost always is better and more efficient than a state enterprise. Private companies make a country more competitive in international trade and boost the trade balance.

Moreover, a huge government discourages foreign direct investment which can hurt the balance of payments too.

Why Is Mixed Economy Popular?

Every system, everything, and everyone has some good and bad features.

This is true for economic systems as well. Both market economy and planned economy have some good and some bad characteristics. And the mixed economy wants to get the best features from both.

The mixed economy has become popular because it is supposed to address issues from a command and a market economy.

Here are some issues that a mixed economy address but a market economy does not:

• A free market economy does not fulfill certain needs. For example, the free market does not answer questions about unprofitable but necessary infrastructures. Another example would be the military, which makes government involvement necessary.
• A market economy does not have a plan for poverty problems. Poverty exists and the free market creates it. So, the government comes to the help of people in need (welfare system).
• Government involvement is necessary for fair trade and protection of property rights. 

Here are some issues that a mixed economy does address but a command economy does not:

• A command economy lacks invention, innovation, and a motivated workforce due to residents not getting benefits directly. Conversely, the government in a mixed economy even subsidizes through taxes or payment inventions and innovation that increases motivation. Moreover, the government also protects the intellectual and property rights that in a pure command economy do not exist.
• A command economy does not count the needs of residents. On the other hand, in a command economy, residents have freedom of choice in which they choose what they want.
• The resource allocation in a command economy is inefficient due to centralized decisions. On the other hand, due to numerous market participants and the government supervisory helps the resource allocation efficiency.

Role of Public and Private Sectors in a Mixed Economy

Both private and public (government) sectors have roles in a mixed economy.

The size of the government spending relative to GDP defines the approach of the economy toward socialism or capitalism. If the the size of government spending is more than private sector, the economy tends toward socialism. On the other hand, if the private sector is larger than the public sector, the economy is inclined toward capitalism.

For example, according to Statista, the French government spending relative to GDP will stand at 56.07% while in the US, it will be 37.7%. It says that the USA is more capitalist and France socialist.

Roles of the Public Sector in a Mixed Economy

According to Statista, in 2024, the US government spending relative to GDP will stand at 37.7%. In 2020, it was 44.82%. This data says that the government has a huge role in a mixed economy.

Generally, the government provides public and merit goods. 

Public goods refer to commodities or services that the government provides for free to everyone in the community. The government funds these goods through taxes and other means. Examples of public goods are national defense, infrastructure, education, and security.

Merit goods are commodities that the government sector provides for free or cheaply because it wishes to encourage their consumption. The public sector provides merit goods because they are under-produced or under-consumed. The goals of merit goods provision are to promote social welfare, stability, and economic growth. Examples of merit goods are childcare support, public education, and public health care.

Moreover, the government intervenes to correct market failures through such as taxes, interest rates, and new regulations.

Last but not least, the government may privatize or nationalize industries over time. Privatization means selling governmental companies to private businesses. And, nationalization means taking private companies under state control.

Roles of the Private Sector in a Mixed Economy

When we deduct the government spending from the GDP, we get the size of the private sector in an economy.

The size of the private sector is larger than the public sector if a mixed economy is inclined toward capitalism. And, it is smaller if it is inclined toward socialism or communism.

One thing is clear. The private sector is crucial for an economy. Here are some reasons:

• Abundance of choice: The private sector brings more choices to the economy than the government. Private sector members compete with each other to provide various services and sell goods.
• Innovation and invention: The private sector manages invention and innovation better than the government. That is why SpaceX sends rockets to space cheaper than NASA. The financial and market gains are private companies’ motivators to innovate and invent new ways of doing things. 
• Competition with foreigners: The public sector is less capable of competition with foreigners. The private sector increases exports by competing with foreigners and innovation. Exports boost Forex reserves and bring stability to the economy.
• Efficiency: The profit forces the private sector to be efficient. A company in addition to competing with another private company, competes with governmental companies too to bring better services and products to the market.

All the above reasons help every citizen to have a better life.

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Economic decision definition: the allocation of scarce resources in a way that maximizes the benefits of beneficiaries.

The goal of an economic decision is to make the best use of scarce resources. Any decision regarding scarce resources is an economic decision.

Major Economic Decisions

Economists divide economic decisions into production, distribution, trade, consumption, saving, investment of resources, and provision of services. And, this article explains them one by one.

Production

Production is the process of converting inputs into outputs. It is one of the most important economic decisions in a company and a nation as a whole.

Inputs are resources such as raw materials and human resources. Examples of raw materials are metal and plastic used to make a chair. Human resources are the people who work in an organization, such as engineers and workers.

Outputs are finished or semi-finished goods. Finished goods are products that are ready for use. Semi-finished goods are outputs that have already undergone some processing and are used as inputs for the production of other goods.

In a market economy, the private sector makes the most economic decisions regarding production. Conversely, in a command economy, it is the government that makes production decisions on how much and how to produce.

Distribution

Distribution is the transportation of goods to various geographic locations.

Transportation is costly and time-consuming. Distribution should be efficient so that the right goods arrive at the right time in the right quantity.

Consumption

Consumption is the use of goods and services by households.

It is the most important economic decision in a nation because it is a big chunk of a nation’s economy. Moreover, consumption constitutes a major part of a household’s spending.

Saving

Saving is the part of income not spent. It is also known as deferred consumption because it is meant to be spent later.

Saving goes to investment directly or indirectly. If a person invests his savings it is a direct investment by this person. If he deposits to a bank, the bank invests by lending or taking part in the financial market.

Investment

Investment is the commitment of resources to achieve benefits later.

For example, if you invest in the stock market, you want its price to rise and benefit later. Or, if you build a factory you want to benefit later by producing goods and selling in profits.

Service

Service is an economic activity offered as a product, such as coaching, consulting, and labor. In other words, service means helping or doing work for someone.

Service is the largest part of developed economies. As a result, economic decisions are focused on services in these countries.

Who Makes Economic Decisions?

Everyone, every entity, and every government make economic decisions. Any decision using something scarce such as time, material, and money, is an economic decision.

Individual decisions are more about expenditure and investment. When you travel and choose to stay in a three-star or five-star hotel, it is an economic decision. On a trip, you spend your scarce resources which is money. When you go to watch a football match, it is a choice to spend your scarce resource of money is also an economic decision. And, getting a college degree is a personal investment decision.

When a private company decides how to handle costs, revenues, and how to treat its customers, they are economic decisions. This company has a limited amount of human, financial, or other resources.

The same is true for a nation. A nation has to choose to use its scarce resources such as its workforce and natural resources wisely.

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The goal of a command economy is the fair distribution of goods and services.

A command economy tends to exist under a socialist or communist government which provides many regulations. This type of economy is possible if the government controls all the essential elements of an economy.

This article explains almost everything that you need to know about the command economy.

What Is a Command Economy?

Command means an authoritative order. Economy means the system of production, distribution, and consumption of goods and services in an area.

As its name implies, a command economy is an economic system in which a central authority makes economic decisions. This central authority decides how to use scarce resources to produce and consume goods and services. Individuals have little or limited economic power.

We can also say that a command economy is an economic system in which supply and demand forces have little impact on economic decisions. It is the authority (government) that decides what to produce, how to produce, and who should get it.

A completely centralized economy is a component of communism. Communism is a political and economic system in which the community owns all property, and each person contributes and receives according to their ability and needs.

Characteristics of a Command Economy

Some qualities make a planned economy different from the free market and mixed economy. In the following, you will read them. You may notice these characteristics in a mixed economy as well. However, the degree of appearance is higher in a command economy than in a mixed economy.

Centralized Economic Decisions

Here we mean macroeconomic decisions. Economic decisions are activities related to the production, consumption, and trade of goods and services in a country.

In a command economy, economic decisions are in the hands of politicians. They make and control economic decisions. The private sector does not exist or is limited. If a limited private sector exists, it is controlled by the government.

The opposite of the planned economy is the market economy in which the market forces make economic decisions.

Private Ownership Rights Do not Exist or Is Limited

Private ownership means the right of possession by a private individual or organization, rather than by the state or a company owned by the state.

In a pure command economy, private ownership does not exist. However, if a central authority makes the majority of economic decisions, it is still considered a command economy.

For example, in Cuba and North Korea, private ownership exists on a small scale that is not influential in macroeconomic decisions. Individuals can own small businesses such as shops and repair shops but cannot own huge factories. So, we can call them planned economies.

No Competition

Since the government owns almost everything, there is no room for competition. Individuals do not have the right to own or compete. Working for the state and provision of goods and services by the state makes the competition unnecessary.

Emphasize Social Welfare

Social welfare, or welfare, is a type of government assistance to the members of a society that need basic human needs such as health care, food, water, and shelter.

The command economy emphasizes welfare more than the free market. Social welfare is crucial for communities and people’s health, survival, and security. Less fortunate people will have more chance of changing their future with government assistance. For example, free or inexpensive health care and education enable poor people to raise their living standards.

Price Control

The government in a planned economy imposes restrictions on price hikes of goods and services to remain affordable. It is considered essential to create a fair market that is accessible to all.

The price control leads to lower prices for consumers but it may lower supply and create a black market.

Advantages of a Command Economy

Most people indeed hate a command economy. However, it has some advantages.

Macroeconomic Decisions Are Made Quickly

In a centralized economy, authorities can make decisions quickly and start action, unlike the market economy where many processes should take place. Where there is an emergency, or innovation is not necessary, a planned economy does better than a free market. For example, China (even though it is not a complete command economy) managed the COVID issue much better than the USA because decisions were made quicker.

Inequality is Low

Even though complete equality does not exist in a command market, inequality is low. Regular workers have less to worry about and get things at no cost or pay little. In fact, it is the most important point of proponents. They argue instead of the profitability of private corporations, the government ensures the fair distribution of goods and services.

Recession and Market Failure Don’t Exist

Market failure refers to an imbalance of supply and demand. Since the government controls almost everything, there is not too much room for imbalance.

Related article: What Is an Economic Recession? Everything You Need to Know

Related article: Sector Rotation: A Complete Guide For Beginners

Unemployment Rate Is Low

Due to centralized decisions employment does not fluctuate often and the unemployment rate is low.

Disadvantages of a Command Economy

The disadvantages of a command market is a lot. That is why except for North Korea and Cuba every nation has not chosen or has it in limited sectors.

Low Productivity, Innovation, and Motivation

In a centralized economy there is little or no competition. Because of that: (1) they do not innovate to do things in a new way and do not become productive, and (2) because they are not necessarily beneficiaries they are not motivated.

The Vacuum of Information

The vacuum of information refers to a lack of information about a particular issue. Top officials in the government receive information that has been transferred from person to person several times. It can be distorted because everyone receives and interprets information differently.

As a result, the information vacuums can be breeding grounds for misinformation and disinformation and even may exacerbate incorrect data.

This information vacuum can be detrimental to the economy. Instead of solving problems, it may make it difficult for authorities to make the right decision at the right.

Inefficient Resource Allocation

Resource allocation refers to the process of assigning and managing the available materials and expertise within a country or organization to specific projects. Resource allocation is critical for maximizing productivity and delivering high-quality products and services to residents. Moreover, efficient resource allocation ensures the production of the right products at the right time, and people who need it most get it. However, a planned economy is less flexible, and government interference in directing resources causes in inefficient resources.

Lack of Consumer Choices and Low Satisfaction

The tastes and needs of residents vary and the government can not consider everyone’s choice. So, the central authority decides to provide limited options to residents. This issue leads to low satisfaction by residents.

Bureaucracy

In simple terms, bureaucracy is a system of government in which state officials make the most important decisions, not elected representatives. It has a complex hierarchical structure that has complex rules and formal procedures.

Bureaucracy aims to bring order, efficiency, and responsibility to the decision-making process. However, it has excessive red lines, the decision-making process is slow, and there are rigid rules.

Due to rigid and complex rules and slow processes, the bureaucracy creates corruption and delays implementation.

Although macroeconomic decisions are made faster than in a market economy, in everyday jobs bureaucracy fails in implementation.

How Does a Command Economy Work?

In a centralized economy, the center is the government that makes economic decisions. It prioritizes the allocation of resources to more important industries.

The government has a monopoly or a huge presence in industries considered essential to the goals of the economy, such as finance, utilities, healthcare, and education. It supplies goods and services to meet the basic needs of everyone in the country.

The government establishes several multi-year plans and goals. A shorter-term plan is clearer, and the goals may convert into actionable objectives. While the longer term, for example, a 20-year plan, depends on shorter achieved goals and is more amendable.

After creating plans and setting goals, the government allocates resources according to priorities. The success depends on how the government uses the nation’s resources (capital, labor, and natural resources).

Command Economy Examples

Here are some examples of planned economies from now and the past.

North Korea

North Korea is the closest example of a true command economy.

The government of North Korea controls every aspect of the nation’s economy, including wages and prices. The government controls all means of production and sets priorities for economic development.

However, in recent years, North Korea has begun to experiment with a more market economy slowly. The government has loosened restrictions on private enterprise, but still, technically it is a command economy.

Cuba

Cuba is a socialist country with a mixed-planned economy. The government owns most enterprises and employs about 80% of the labor force.

From the early 1960s to 2018 Cuba was a pure socialist planned economy. However, in 2018, with a constitutional reformation, the state permitted foreign direct investment and some private property rights.

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