ECONOMIC

SYSTEMS
ECONOMIC SYSTEMS ARE THE MEANS BY
WHICH COUNTRIES AND GOVERNMENTS
DISTRIBUTE RESOURCES AND TRADE
GOODS AND SERVICES. THEY ARE USED
TO CONTROL THE FIVE FACTORS OF
PRODUCTION, INCLUDING: LABOR,
CAPITAL, ENTREPRENEURS, PHYSICAL
RESOURCES AND INFORMATION
RESOURCES.
 DEFINITION OF ECONOMIC
SYSTEMS
 According to Loucks:

economic system it consist of those institutions which a given people,

nation or group of nations has chosen or accepted as the means through
which resources are utilized for the satisfaction of human wants.

 According to Gruchy:

It is an evolving pattern or complex of human relations which is

concerned with the disposal of scarce resources for the purchase of satisfying
various private and public needs for goods and services.
 Economic
System

Capitalis Mixed
Socialism
m Economy
CAPITAL
ISM
 CAPITALISM

A capitalist economic system is one

characterized by free markets and the
absence of government intervention in the
economy.
 CAPITALISM
Under capitalism, all farms, factories and other means of
production are the property of private individuals and firms.
They are free to use them with a view to making profit. The
desire to earn profit is the sole consideration with the
property-owners in the use of their property. Under capitalism
everybody is free to take up any line of production he wishes
and is free to enter into any contract with a view to earn
profit.
 DEFINITION
 Prof. R. T. Bye has defined capitalism as

“that system of economic organization in which free enterprise, competition and

private ownership of property generally prevail.” Thus, the definition hints at the
major features of capitalism.

 In the words of Prof. LOUCKS:

“Capitalism is a system of economic organization featured by the private

ownership and the use for private profit of man-made and nature-made capital.”
 DEFINITION
 Ferguson and Kreps

“in its own pure form, free enterprise capitalism is a system in which privately owned and
economic decision are privately made”.

 Mc Connell:

“A free market” or capitalist economy may be characterised as an automatic self-regulating

system motivated by the self-interest of individuals and regulated by competition.”
 FEATURES
1. Private Property and Freedom of 6. Freedom of Enterprise, Occupation and
ownership
Control
2. Right of Private Property
7. Consumer’s Sovereignty
3. Price Mechanism
8. It arises Class Conflict
4. Profit Motive
9. Leading Role of Joint Stock Companies
5. Competition and Co-operation Goes
Side 10. Important Role of the Entrepreneur
by Side
 MERITS
1. Production According to the Needs and Wishes of Consumers:

In a free market economy consumer needs and wishes are the upper most in the minds of the producers. They try
to produce goods according to the tastes and liking of the consumers. This leads to maximum satisfaction of the
consumers as obtained from his expenditure on the needed goods.

2. Higher Rate of Capital Formation and More Economic Growth:

People under capitalism have the right to hold property and pass it on in inheritance to their heirs and successors.
Owing to this right, people save a part of their income so that it can be invested to earn more income and leave
larger property for their heirs. The rate of capital formation increases when savings are invested. This accelerates
economic growth.

3. There is Complete Freedom of Choice in a Capitalist Economy:

Economic freedom means the right to earn and retain property. It also means the freedom of enterprise and choice
of occupation. This leads to the automatic channelization of the country’s man power resources in different
vocations. There is no need to direct people or force them. Further, there is the freedom of contract which ensures
smooth and flexible functioning of different production units.
 MERITS
4. Optimum Utilization of Resources Available:

The limited resources of the community are put to the most economical uses with as little waste as possible. There is keen
competition among producers and entrepreneurs to produce and sell goods. Every producer and entrepreneur tries to use the
productive resources at his disposal in the most economical manner in order to make maximum profit.

5. Efficient Production of Goods and Services:

Due to competition every entrepreneur tries to produce goods at the lowest cost and of a durable nature. Entrepreneurs also try to
find out superior techniques of producing the goods consumers get the highest quality goods at the least possible cost because
the producers are always busy in making their production methods more and more efficient.

6. Varieties of Consumer Goods:

Competition is not only in price but also in the shape design, colours and packing of products. Consumers therefore get a good
deal of variety of the same product. They need not be given limited choice. It is said that variety is the spice of life. Free market
economy offers variety of consumer goods.
 DE-MERITS
1. Inequality of Distribution of Wealth and Income:

The system of private property acts as a means of increasing inequalities of income among different classes. Money begets
money. Those who have wealth can obtain resources and start big enterprises. The property less classes have only their labour to
offer. Profits and rents less classes have only their labour to offer. Profits and rents are high.

2. Class Struggle as Inevitable in Capitalist Economy:

Some critics of capitalism consider class struggle as inevitable in a capitalist economy. Marxists point out that there are two
main classes into which capitalist society is divided. The ‘haves’ which are the rich propertied class own the means of
production. The “have not’s” which constitute the wage earning people have no property.

3. Social Costs are Very High:

A capitalist economy industrialises and develops but the social costs of the same are very heavy. Factory owners running after
private profit do not care for the people affected by their production. The environment is polluted because factory wastes are not
properly disposed of. Housing for factory labour is very rarely provided with the result that slums grow around big cities.
 DE-MERITS
4. Unnecessary Multiplicity and too Much of Competition:

Consumers have to pay a high price for their freedom of choice and provision of variety. There is sometimes too much competition
leading to unnecessary high costs of production because competitors bid the prices of resources too high. There is wasteful
advertisement. Sometimes sub-standard goods are highly advertised and the consumer is deceived.

5. Unemployment and Under-employment:

A capitalist economy has always some unemployment because the market mechanism is slow to adjust to the changing conditions.
Business fluctuations also result in a large part of the labour force going unemployed during depressions. Not only this, workers are
not able to get full time employment except under boom conditions.

6. Working Class does not have Adequate Social Security:

In a capitalist economy, the working class does not have adequate social security, commodity, the factory owners do not provide for
any pension, accident benefits or relief to the families of those who die in employment. As a result, widows and children have to
undergo a good deal of suffering. Governments are not in a position to provide for adequate social security in over populated less
developed countries.
 CONCLUSIO
N
Economists now agree that there are certain imperfections in a free
enterprise economy which must be corrected. The Government must
come out to regulate the economic machine so that it does not run
down occasionally. Government has a positive role to play in
promoting unemployment, price stability and orderly growth. The
difference of opinion now is not on whether the government should
regulate or not, but is rather on how much control is appropriate
under different circumstances.
SOCIALIS
M
 SOCIALISM
Socialism means the system under which economic system is
controlled and regulated by the government so as to ensure
welfare and equal opportunity to the people in a society.
Socialism is an economic system where the ways of making
money (factories, offices, etc.) are owned by a society as a
whole, meaning the value made belongs to everyone in that
society, instead of a group of private owners. People who agree
with this type of system are called socialists.
 DEFINITION
 According to Mr. Webb:
“A socialized industry is one in which the national instruments of production are
owned by public authority or voluntary association and operated not with a view to
profiting by sale to other people but for the direct service of those whom the authority
or association represents.”

 According to Samuelson,
“Socialism refers to the government ownership of the means of production, planning
by the government and income distribution”.
 DEFINITION
 According to Albert Einstein:
Socialism is an economic system where the means of production are owned by
society and used for the benefit of all.

 According to Samuelson,
“Socialism refers to the government ownership of the means of production, planning
by the government and income distribution”.
 FEATURES
1. Socialism is Social or Collective 5. Specific Long-Term Plans
Ownership of Resources
6. Central Control and Ownership
2. It is a Fully Planned Economy
7. Much Less Importance of Price
3. It is the Responsibility of the Mechanism
Central Planning Authority
8. People’s Co-operation is Essential
4. It has Definite Aims and Objectives
 MERITS
1. Social Justice is Assured:
The chief merit of socialism is that it assures of social justice. Under socialism the inequalities of income are
reduced to the minimum and the national income is more equitably and evenly distributed. The socialist principle
provides for a fair share for all. No one is permitted to have unearned income. Exploitation of man by man to put
an end to. Every individual is assured of equal opportunities, irrespective of caste, creed and religion. Every child
whether he is born in a poor family or in a rich family is given an equal opportunity to develop his latent faculties
through proper education and training.

2. Rapid Economic Development:

A socialist economy is likely to grow much faster than a capitalist economy. The experience of the U.S.S.R. and
other socialist countries amply proved this. The main factors making for the fast growth rate is the full use of
resources, scientific planning and quick decisions.

3. Production According to Basic Needs:

In this economy the production is directed to satisfy the basic needs of the people first. As far as possible, the
production of food, clothing or building materials is guided by the basic needs of the people and is not according
to the purchasing power of the rich section of the society. Therefore, the phenomenon of the poor going hungry
while the rich feast cannot be seen in the socialist economy.
 MERITS
4. Balanced Economic Development:
Economic planning is meant to carry out balanced development of the economy. All the regions of the country are
taken care of. Development of the backward areas is also given a priority. Similarly, agriculture and industry,
heavy and small industry develops side by side. As a result there is no lop-sided development of the economy.

5. It has Economic Stability:

Another important merit is the economic stability which a socialist economy has. A capitalist economy is often
suffering from economic fluctuations resulting in lot of unemployment and wastage of resources. There is a good
deal of misery among the working classes in periods of depression in a socialist economy. A socialist economy is
able to control economic instability due to the planned nature of the economy. Pure changes are taken care of
under a perspective plan. Private investment is given a minor role. Therefore, there are no economic fluctuations.

6. It has More Flexibility:

A socialist economy is much more flexible than a capitalist economy because of the control on market forces. The
socialist economy can be geared to war times as early as it is operated during peace-time. Rather the state having
ownership of means of production can meet the needed changes much better than the slow moving market
mechanism of the capitalist economy.
 DE-MERITS
1. It Becomes Lack of Incentives:
In this system, it has also been seen that incentive of hard work and inclination to self-improvement will dis-
appear together when personal gain or self-interest is eliminated. People will not give their best. Incentive, ability,
enterprising spirit and the go-ahead attitude will languish and creative work will become impossible. It is said that
“a Government could print a good edition of Shakespeare’s work but it could not get them written.”

2. There is Loss of Economic Freedom:

A very important charge against socialism is that, when freedom to enterprise dis-appears, even the free choice of
occupation will go. Workers will be assigned certain jobs and they cannot change them without the consent of the
planning authority. Every workers will have to do work what he will be asked to do.

3. Lack of Data, Experts and Administrators for Planning:

Operating a socialist economy as a planned economy requires huge data, a good number of experts and an equal
number of administrators at different levels for administering the plan. No doubt machine can help to process the
data and experts can advise but there has to be decision-making at different levels of government. It is difficult to
find out enough data with the result that decisions are delayed, mis-carried or wrongly implemented. Ultimately,
the common people have to pay the price for these mistakes.
 DE-MERITS
4. Loss of Economic Freedom and Consumer Sovereignty:
Under socialism all economic activity is directed by the central planning authority. There is no significant role
given to private investment and initiative. Consumers are compelled to accept whatever public enterprises produce
for them. Generally, there is limited variety of goods and restricted available choice. Prices are fixed by the
government and consumers just cannot do anything about them. Consumer’s preferences are just guessed by the
planners who have no compulsion to study the people’s preferences deeper.

5. There is Loss of Personal Liberty:

In socialism there is no unemployment. But the critics retort by saying that there is also no unemployment in a
jail. They regard a socialist state as one big prison-house and they do not think that employment is any
compensation for the loss of liberty.

6. Imperfections in Planning Lead to Dis-satisfaction on a Big Scale:

Imperfection may creep in the formulations of the plan, its assumptions, statistics or analysis. Further,
imperfection may enter at the stage of implementation of the plan. Further, there may be lack of adjustment
between prices and wages. As a result of these imperfections there is lot of wastages of resources, slowing down
of work, shortfalls in targets and the dis-satisfaction resulting there-from.
 CONCLUSIO
N
Socialism aims for economic equality and social welfare by
promoting collective ownership and resource distribution. While it
has helped reduce poverty and inequality, critics argue it can limit
incentives and efficiency. Many modern societies adopt a mixed
approach, blending socialism with capitalism for balance. Social
democracy ensures both economic growth and social justice.
Ultimately, socialism’s core values continue to shape policies
worldwide, striving for a fairer society.
MIXED
ECONOMY