Economic Systems

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1.1      Different Economic Systems

An economic system refers to the sum total of the arrangements for the production and distribution of goods and services in a society. Economic systems can be divided into three broad classifications based on their mode of production, exchange, distribution and the role which government plays in economic activity.

economic systems

1.1.1     Capitalist Economy

Capitalism is an economic system in which all the means of production are owned and controlled by private individuals for profit.    Characteristics

  1. The right of private property: The right of private property means that productive factors such as land, factories, machinery, mines etc. are under private ownership.
  2. Freedom of enterprise: This means that everybody engages in any economic activity he likes. More specifically he is free to set up any firm to produce goods.
  3. Freedom to choice by the consumers: This means people in a capitalist economy are free to spend their income as they like.
  4. Profit motive: In a capitalist economy it is the profit motive which forces or induces people to work and produce.
  5. Competition: Competition prevails among sellers to sell their goods and among buyers to obtain goods to satisfy their wants.
  6. Inequalities of income: There is generally a wide gap of income between the rich and the poor in the economy which mainly arises due to unequal distribution of property in such economies.

Merits of Capitalist economy:

  • To attract the consumer the producer will bring out newer and finer varieties of goods.
  • The existence of private property and the driving force of profit motive results in high standard of living.
  • All activities under capitalism enjoy the maximum amount of liberty and freedom.
  • Under capitalism freedom of choice brings maximum satisfaction to consumers
  • Capitalism preserves fundamental rights such as right to freedom and right to private property.
  • It rewards men of initiative and enterprise.

Demerits of Capitalism

  • In capitalism the enormous wealth produced is apportioned by a few. This causes rich to become richer and poor to become poorer.
  • Welfare is not protected under capitalism, because here the aim is profit and not the welfare of the people.
  • Economic instability in terms of over production, economic depression, unemployment, etc., is very common under capitalism.
  • The producer spends huge amounts of money on advertisement and sale promotion activities like fair, exhibitions etc.
  • Class conflict arises between employer and employee. They will be paid low wages and this leads to strikes and lock-outs.

1.1.2     Socialist economy

In this economy, the material means of production i.e. factories, capital, mines etc. are owned by the whole community represented by the State. All members are entitled to get benefit from the fruits of such socialised planned production on the basis of equal rights.    Characteristics

  1. Collective Ownership: There is collective ownership of all means of production except small farms, workshops and trading firms which may remain in private hands.
  2. Central Planning Authority: There is a central authority to set and accomplish socio-economic goals; that is why it is called a centrally planned economy.
  3. Absence of Consumer Choice: Freedom from hunger is guaranteed but consumers’ sovereignty gets restricted by selective production of goods. The range of choice is limited by planned production.
  4. Relatively Equal Income Distribution: A relative equality of income is an important feature. Among other things, differences are narrowed down by lack of opportunities to accumulate private capital.
  5. Minimum role of Price Mechanism or Market forces: Price mechanism exists in a socialist economy but it has only a secondary role, e.g., to secure disposal of accumulated stocks.

Merits of Socialism

  • Equitable distribution of wealth and income and provision of equal opportunities for all help to maintain social justice
  • In socialistic economy there will be better utilization of resources and it ensures the maximum production. Socialist economy means planned economy.
  • Waste of all kinds is avoided through strict economic planning.
  • In planned economy unemployment is minimised, business fluctuation are eliminated and stability is brought about and maintained.
  • The absence of profit motive helps the community to develop a co-operative mentality and avoids classwar.

Demerits of Socialism

  • Socialism involves the predominance of bureaucracy. Moreover, there may also be corruption, redtapism, favouritism, etc.
  • It restricts the freedom of individuals as there is state ownership of the material means of production and state direction and control of economic activity.
  • Socialism takes away such right as the right of private property.
  • It will not provide necessary incentive to hard work in the form of profit.
  • There is no proper basis for cost calculation. In the absence of such practice, the most economic and scientific allocation of resources and the efficient functioning of the economic system are impossible.
  • Under socialism the consumers have no freedom of choice. Therefore, what state produces has to be accepted by the consumers

1.1.3     Mixed Economy

In a mixed economy the aim is to develop a system which tries to include the best features of both the controlled economy and the market economy while excluding the demerits of both. It appreciates the advantages of private enterprise and private property with their emphasis on self-interest and profit motive.    Characteristics

  1. Co-existence of private and public sector: The first important feature of a mixed economy is the co-existence of both private and public enterprise.
  2. Existence of Economic Planning: A mixed economy is a planned economy, i.e. an economy in which the government has a clear and definite economic plan. Public sector enterprises have to work according to a plan and to achieve the objectives laid down.
  3. Positive role of the government: In a mixed economy balanced regional development is expected.
  4. Administered Price: In a mixed economy, a dual system of pricing exists. In private sector, prices of goods and factors of production are determined through the free play of market forces of demand and supply. In public sector, the state determines prices of various products. The state reserves itself the right to keep different prices for public sector units and private sector units.

Merits of Mixed Economy

  • Mixed economy secures the merits of both capitalism and socialism while avoiding the evils of both.
  • Mixed economy protects individual freedom. Under the system, individuals have the freedom of consumption, choice of occupation, freedom of enterprise and freedom of expression.
  • Price mechanism is allowed to operate under mixed economy.
  • Reducing the inequalities of wealth and class struggle is one of the aims of mixed economy.
  • Economic fluctuations can be avoided due to centrally planned economy.
  • Mixed economy helps under-developed countries to have rapid and balanced economic development.

Demerits of Mixed Economy

  • Mixed economy is difficult to operate. Balancing and adjusting the public and private sector is often difficult.
  • Excessive controls and heavy taxes are likely to prevail under mixed economy. These will discourage production in the private sector.
  • Problems of red-tapism, nepotism, favouritism, officialdom, etc. are also found in this type of economic system.