Economic System

Mr. Rohit Kumar Vishwakarma

Asst. Professor
UIM
 Economic System

“An economic system may be defined as the sum-total of the devices which through
their interactions give affect to the economic choice from an idea into action.”

Classification of Economic System –

An Economic system is a way in which a society is organized to decide the following 3
basic questions

Q. What to produce?
Q. How to produce?
Q. For whom to produce?
 Capitalism

According to Loucks & Hoots, “Capiatalism is a system of economic organization

featured by the private ownership & the use for private profile of man made and
nature made capital.”

Types of Capitalism-
Two type of capitalism may be distinguished –

The old, Laissez-faire capitalism, where government intervention in the economy is

absent or negligible.

The modern, regulated or mixed capitalism, where there is a substantial amount of

government intervention in the economic and industrial development.
 Characteristics of Capitalism
1. Private ownership of property – refers to the right vested in the owner to own and
enjoy the property in the manner he likes. Individuals are free to own not only
consumer goods but also producers goods such as land, capital, equipment,
machinery etc.

2. The right of inheritance (legacy) – closely connected with the right of private
property is the right of inheritance which is another basic institution of capitalism.

3. Profit Motive – under capitalism profit motive act as a basic barometer. In a

capitalism economy, the person is free to select any occupation he is qualified for.

4. Freedom of Individual Initiative – An individual is free to engage in any business

activity that he desires, provided he complies with the law of the state. In
capitalism, the individual can utilize it in the way that beings him maximum return
on his investment.

5. Economic Inequality – A capitalist economy is marked by the existence of glaring

economic inequalities among the people.
 Characteristics of Capitalism
6. Division of society – As a result of vast economic inequalities the capitalist
economy becomes split up into class and groups – The most important division
being that of ‘masters’ and ‘men’ ‘capitalist’ and ‘laborers’ or ‘have’ or ‘have not’.

7. Freedom of contracts – People are free to make contracts and settle transaction.
So every person is free to sell his goods or services to anyone he feels like.

8. Consumers Sovereignty – Consumers have complete freedom of choice of

consumption in a capitalist economy consumer is the king of market capitalism.

9. Limited role of Government – In ‘Laissez Faire’ form of capitalist system, the

government does not interfere in the working of the economy.

10. Absence of a central plan- Freedom of enterprise, occupation and property rights
rule out the possibility of a central plan.
 Merits of Capitalism
1. Efficient utilization of resources – Every producer try to use the different factors of
production to the best possible use to minimize cost of production to stand the
competition.
2. Democratic – Producers consumers the workers all enjoy economic freedom and are
free to work as they like. Goods are produced according to the liking and demands of
the consumers.
3. Automatic balance in the system – The Capitalist work automatically through price
mechanism. The demand and supply i.e. price mechanism balances the imbalances in
economy.

4. Efficiency properly rewarded – Both producers and labors work hard and with more
efficiency as producers can make more profits and laborers get better wages.

5. Incentives for Risk and Uncertainties – Entrepreneurs are induced to invest more
money even in the projects involving high risk by providing them incentives.

6. Economic Growth – The capitalist countries have become rich and affluent and people
of that country enjoys high standard of living.

7. Encourages capital formation – The existence of capitalism is dependent upon the

right to inherit the property and profit motive.
 Demerits of Capitalism
1. Wastage and misallocation of resources – Under capitalism most of the resources are
wasted on advertisement and salesmanship and products are produced to satisfy
profit motive only and essential commodities are neglected for production.

2. Economic Instability – Business cycle affect consumer the most. They suffer in both
the period of inflation and deflation.

3. Consumer sovereignty is a myth – At that time producer enjoys monopoly in the

market and produce substandard product. So it is the producer who influence the
market and the consumer.

4. Class struggle – Rich are becoming richer and the poor poorer. The society gets divided
into two classes.

5. Unemployment and corruption – Unemployment and corruption has become a

chronic disease in the capitalist system.

6. Inequality of wealth – An unplanned capitalist economy can be make inequality in

wealth.
7. Inflation

8. No freedom.
 Socialism
Socialism means an institutional framework in which control over means of production is
vested with a central authority.

According to Webbs, “A socialized industry is one in which the national instruments of

production are owned by the public authority or voluntary association and operated not
with a view to profit by sale to other people but for the service of those whom the
authority or association represents.”

Variants of Socialism –
Authoritarian Socialism – Here state ownership covers all the means of production and
allocates them by planning for the production of various goods. Goods decide what to
produce, how to produce, how output is to be distributed etc. This type of socialism is also
called communism.

Liberal Socialism – In this type the Government takes up the ownership of the means of
production but the price system of market mechanism is retained. The consumers are
given choice of consumption and commodities are produced by the government
considering the consumer demand and choice.
 Characteristics of Socialism
1. Public Ownership – All the means of production are controlled by the state. The
role of private property is lessened as well as industries are nationalized.

2. Planning – Socialist economy is planned economy production for use rather than
profit is advocated. All the central problems of an economy are solved by central
authority.

3. Restriction on consumption – There is no consumer sovereignty. The state

decides what goods should be made available to consumers. The consumers are
not free to choose from the wide variety of goods.

4. Planning and pricing process – It does not operate freely but works under the
control and central regulation of central planning authority.

5. Equality of income and distribution – The absence of private ownership, private

capital accumulation and profits under socialism prevent the concentration of
wealth in few hands.

6. Social welfare – This is the main motive. The state aims at promoting the welfare
of the society at large.
 Merits of Socialism
1. Greater economic efficiency – All the means of production are controlled and
regulated by the central planning authority. The authority makes an exhaustive survey
of resources and utilizes them in the most efficient manner.

2. Elimination of social parasitism – There is no place for social parasitism under

socialism where everyone has to work to earn his own money.

3. Absence of monopolistic practices – Instead of private monopoly, there is state

monopoly of three productive systems. But this is operated for the welfare of people.

4. Absence of business fluctuations – There is an economic stability because production

and consumption of goods and services are regulated by the central business
authority.
5. It prevents unemployment – Socialism provides mass unemployment by assuring a job
to every citizen.

6. Co-coordinated Production – Under socialism all the important economic coordinated

decisions are productive resources are allocated.
7. It eliminates trade cycle.
8. It provides social security to the citizen.
 Demerits of Socialism
1. No consumers’ sovereignty - Under socialism the consumer loses his sovereignty. He
would have to consume what the state wishes to consume.

2. Bureaucratic – It is everywhere associated with red-tapism and official delays in the

execution of economic plans.

3. Lack of individual freedom – It kills freedom of enterprise, production and

consumption. One has to do what is asked by the government.

4. Concentration of Economic power – All the political and economic power is vested in
the hands of the government. All the important decision are taken by the government
itself.

5. No incentives to improvement of labour efficiency – There is no incentive under

socialism on the part of the workers to bring about improvements in their
performance.

The reason is that in a socialist society all the workers are state employees with fixed
grades of salary and other working conditions.
 Mixed Economy
The Mixed Economy shares features of both capitalism and socialism. It is characterized by
the co-existence of public and private sector and over all government regulations of an
economy.

According to Pickersgill, “The primary difference between the mixed economy and market
socialism is the relatively greater importance of individual decision making property and
the reliance on market determined prices to guide the allocation of resources. The mixed
economy differs from competitive capitalism with respect to the share of collective
decision making of policies.”

Characteristics of Mixed Economy –

1. Public sector
2. freedom and control
3. Private sector
4. Economic planning
5. social welfare
 Mixed Economy
Merits of Mixed Economy –

1. Best allocation of resources

2. General balance
3. Welfare state
4. Economic freedom
5. Control on monopolistic activities

Demerits of Mixed Economy –

1. Non-cooperation between the two sectors.

2. Inefficient public sector.
3. Fear of nationalization.
4. Bureaucratic inefficiency and corruption.
5. Concentration of economic power.
6. Denial of social justice.
7. Lack of practicability.
 Differentiation
S.No Capitalism Socialism Mixed
1 Private ownership of State ownership of Private and state
means of production. means of production. ownership of means of
Production.
2. Pre dominance of Pre dominance of Co-existence of pvt. &
pvt. Sector. public sector. public sector.
3. Decisive role of Decisive role of Decisive role of market
market planning and supporting role of
planning.
4. Profit induced Production guided by Profit induced pvt
business social benefit sector and production
induced social
benefits.
5 Exploitation of labor Abolition of The intervention role
exploitation of labor. of state.
6 Restricted role of Dominant role of state Production in the state
Govt. sector guided by social
benefit.