An economic system is a medium through which the government allocates and distributes the available resources, goods & services across the country and geographical boundaries. Economic systems act as a regulatory system to manage the elements of production, labour, physical resources, and business people. Also, economic systems generally follow the specimen of use and consumption that formulates the structure of society & communities.
According to Loucks “Economic system consists of those institutions which a given people or nation or group of nations has chosen or accepted as the means through which resources are utilized for the satisfaction of human wants”.
Types of Economic Systems
The three types of economic systems are:
1. Capitalist Economy
Capitalism or Capitalist Economy is an economic system in which private individuals and businesses own and control property, especially in the industrial sector to fulfill their interests. The main aim of this economy is to make a profit. The production of goods & services depends on the demand and supply in the general market, which is known as the market economy. The purest form of a capitalist economy is the free market. Here all the private individuals and businesses are free to decide where to invest, what to trade(produce or sell), and at what prices.
Features of Capitalist Economy
1. Private Property: This is one of the important features of the capitalist economy, where private individuals and businesses own private properties like machines, factories, and equipment.
2. Profit Motive: The main aim of the capitalist economy is to earn maximum profit by selling goods & services at fixed prices.
3. Free Trade: The capitalist economic system consists of low tariff barriers, which promote international trade.
4. Government Interference: There is no government interference in the daily business activities of the capitalist economy.
5. Price Mechanism: In the capitalist economy, the demand and supply in the market determine the production level and the price of the products without any government interference.
6. Freedom of Enterprises: In the capitalist economy, both the producers and consumers has the right to make their own economic decisions.
7. Freedom of Ownership: In a capitalist economy, any individual can purchase any amount of property, and can use it according to his choice, and after his death, his property would be passed on to his successor according to the law of inheritance.
Advantages of Capitalist Economy
- The capitalist economy is more efficient as all the products are produced according to the customers’ demand.
- There is very less or no interference from the government.
- The companies aim to obtain a major part of the market through their offerings; therefore, there is a better scope for innovation.
Disadvantages of Capitalist Economy
- Capitalism results in income inequality.
- The high profit-earning motive of a capitalist economy leads to various environmental problems, as they use the resources in such a way that it disturbs the natural balance of the environment.
- A firm can get a monopoly over consumers & workers in a capitalist economy.
2. Socialist Economy
A Socialist Economy is the exact opposite of a capitalist economy. In this economy, all the factors of production are owned by the state government, therefore, all the factories, capital, plant & machinery are owned and controlled by the state government.
In a socialist economy, private individuals and businesses are not allowed to produce the goods & services of their own choice, but according to the needs of the society and at the command of the state government. Unlike a capitalist economy, the prices of goods & services are set by the government, not by market forces and the factors of supply and demand. All the citizens get equal rights and enjoy the benefits from the production of goods and services. Therefore, this economy is also known as a Command Economy.
The main aim of the socialist economy is to maximize the wealth of the whole country, and the equal distribution of wealth among its citizens, not just the welfare of rich individuals & companies.
Features of Socialist Economy
1. Ownership of Resources: In a socialist economy, all the major factors of production are owned by the state and only small trading firms & farms are kept under private ownership.
2. No Consumer Choice: In a socialist economy, every citizen gets necessities, like food, clothing, shelter, etc., but they do not have the absolute freedom to get the product they want. They have to choose from the products manufactured by the state.
3. Income Distribution: The main aim of the socialist economy is to provide every citizen equal opportunities and facilities, like health care, education, etc. It tries to narrow the gap between the rich and the poor so that one person cannot accumulate a lot of wealth. It promotes equality in income distribution.
4. Pricing Mechanism: In a socialist economy, the price of goods & services are set by the government so that every citizen can afford them. Therefore, market forces or demand and supply factors do not affect the prices of goods under a socialist economy.
Advantages of Socialist Economy
- It promotes social welfare and equal distribution of income.
- It ensures that all the citizens get basic necessities.
- It helps in minimizing unemployment.
Disadvantages of Socialist Economy
- A Socialist Economy is a ground for corruption, favoritism, and red-tapism, as most of the authority lies with the government.
- The prices are fixed by the administration; therefore, they are not efficient as they are not fixed by the market forces.
- In a Socialist Economy, consumers do not get the freedom to get the product they desire, and have to select from the products manufactured by the state.
3. Mixed Economy
A Mixed Economy system is a combination of both capitalist and socialist economic systems. It incorporates the benefits of both systems and avoids their drawbacks. In a mixed economy, both the public and private sector coexists, and the private & public sector collaborates to achieve social objectives within an economic framework. India is the biggest example of a mixed economy.
Different types of mixed economy systems are:
1. Partial State Control: In this type of economy, the factors of production like factories, plants & machinery are owned by private firms, but regulated by the government.
2. Total Government Control: The government directly affects the functioning of the firms, and invests its own money in the business and is solely responsible for its activities. It also bears the losses and owns the profits of the company.
3. Public-Private Control: There is a joint venture between the public and private sectors, and
they jointly carry out the business activities.
Features of Mixed Economy
1. Multiple Sectors: In a mixed economy, major sectors like public, private and mixed sectors work together in peace. The mixed sector is operated by both government and private companies where the government holds more than 50% of the rights.
2. Freedom of Choice: In a mixed economy, the public is free to choose the type of goods & services they want to produce, buy capital assets, select professions, etc. But the government maintains state control over the market just to check the monopolistic forces.
3. Social Welfare: Social welfare is one of the main aims of the mixed economy. It tries to reduce the gap between the rich and the poor by providing various job opportunities and reducing poverty.
4. Economic Administration: In a mixed economy, there is a central planning authority, and all sectors of the economy are required to work according to the economic plan to achieve the set targets.
5. Co-operative Sector: In a mixed economy, there is a cooperative sector whose responsibility is to provide financial support to the cooperative societies.
Advantages of Mixed Economy
- A mixed economy tries to reduce the income gap by providing equal opportunities for jobs and education.
- In a mixed economy, there is always a scope for research & development.
- A mixed economy provides fair distribution and pricing of goods & services as the government owned firms regulate the market.
- A mixed economy promotes consumer sovereignty, as the goods are produced according to the needs and wants of the consumers.
- A mixed economy promotes social welfare and also protects individual rights.
Disadvantages of Mixed Economy
- The market equilibrium is tough to maintain in a mixed economy because of public and private interests.
- There can be the problem of corruption, black market, and nepotism due to the interference of government.
- Due to excessive control of the government in a mixed economy, the growth of the private sector industries suffer.
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