The fourth economic system is known as the Classical Economic System. This economic theory postulates that the economy is a continuously changing, self-perpetuating mechanism which adjusts to changes in demand and supply of goods and services through the intervention of economic agents or market makers. According to this system, no form of economic activity, be it production, saving or distribution, is undertaken out of the knowledge of the society. The concept of the economic system goes hand in hand with the classical political economy.
This type of economy is based on the principles of laissez faire. It believes that excessive government regulation and control of business harm the market because it alters the allocation of resources and raises the cost of goods and services. An economy of laissez faire allows individuals and small businesses to engage in economic activities and generate wealth without external constraints. The classical system also advocates the principle of free enterprise. It does not believe that large-scale economic activity should be regulated by a society since it tends to create unbridled competition and instability in the market.
The intervention of central economic authority, either governmental or non-governmental, is not necessary in order to achieve laissez faire. The main function of these authorities is to provide guidance in the conduct of economic activities. They influence the production, allocation of resources, distribution of income and prices of goods and services. They ensure that a society operates smoothly by allowing individuals and small businesses to participate in economic decisions and activities. The various economic policies are designed to ensure that all segments of society are economically balanced.
In the United States, the US market economy is characterized by the presence of a number of economic systems which differ in their level of laissez faire attitude. These different economic systems have varying effects on the society. Some affect private citizens directly by making purchases and investments. Some indirect their impact on the society by influencing governmental policies and laws which, in turn, affect the production, allocation and distribution of resources. Some systems also indirectly help regulate the economy by ensuring a balance between technological advancement and the need for basic infrastructure.
The other system, called the Knowledge Economy, consists of those economic structures that result from the process of education. These include academic institutions, professional bodies and the media. The laissez-faire system of the knowledge economy allows economic activity to be highly competitive and allows individuals to compete for position in the market through skills and knowledge. Knowledge is the main driving force behind economic development.
The other three economic systems are characterized by extensive state control over the economy. The first system, called capitalism, provides limited freedom of choice in the economic domain and is characterized by the concentration of economic resources in the hands of a few powerful companies. Capital is controlled by the state to ensure the efficient utilization of economic resources. The state controls the distribution of resources so that the end result is consistent with the social goals and objectives of the society. This system is characterized by great economic strength and prosperity, but at the cost of increased state bureaucracy and social injustice.
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