Type of Economic Systems
This article deals with ‘Type of Economic Systems.’ This is part of our series on ‘Economics’ which is important pillar of GS-3 syllabus . For more articles , you can click here .
- Economic System refers to the manner in which individuals and institutions are connected together to carry out economic activities in a particular area.
- There are three major types of economic systems. They are:
- Capitalistic Economy (Capitalism)
- Socialistic Economy (Socialism)
- Mixed Economy (Mixedism)
1 . Capitalistic Economy
- Capitalistic Economy is also termed as a free economy (Laissez faire, in Latin) or market economy where the role of the government is minimum and market determines the economic activities.
- Adam Smith is the ‘Father of Capitalism’.
Main features of Capitalistic economy are
- The means of production are privately owned.
- Golden rule for a producer under capitalism is ‘to maximize profit.’
- There is free competition as government or any authority cannot prevent firms from buying or selling in the market.
- Freedom of Choice and Enterprise i.e. each individual is free to carry out any occupation or trade and produce any commodity. Similarly, consumers are free to buy any commodity as per their choice.
- Capitalist society is divided into two classes – ‘haves’ that is those who own property and ‘have-nots’ who do not own property and work for their living. The outcome of this situation is that the rich become richer and poor become poorer.
Merits of Capitalistic Economy
- Automatic Working: Without any government intervention, the economy works automatically.
- Efficient Use of Resources: All resources are put into optimum use.
- Incentives for Hard work: Hard work is encouraged and entrepreneurs get more profit for more efficiency.
- Production and productivity levels are very high .
- Consumers Sovereignty: All production activities are aimed at satisfying the consumers.
- Development of New Technology: As profit is the main motive, producers invest on new and efficient technology
Demerits of Capitalistic Economy
- Concentration of Wealth and Income in a few hands and thereby increases inequalities of income.
- Frequent recessions after certain period of time leading to hardship for the people.
- Wastage of Resources: Large amount of resources are wasted on competitive advertising and duplication of products .
- Class Struggle: Capitalism leads to class struggle as it divides the society into capitalists and workers .
- Even the harmful goods are produced if there is possibility to make profit.
2 . Socialistic Economy
- Socialistic economy is also known as ‘Planned Economy’ or ‘Command Economy’.
- Karl Marx is known as the ‘Father of Socialism’.
Main features of Capitalistic economy are
- The Means of Production are owned by the government.
- Planning is an integral part of a socialistic economy and all decisions are undertaken by the central planning authority.
- Social welfare is the guiding principle behind all economic activities.
- There is absence of competition in the market. The state has full control over production and distribution of goods and services.
- Equality of Income as under socialism private property and the law of inheritance do not exist.
- Socialism provides equal opportunity for all through free health, education and professional training.
- There is a classless society and so no class conflicts.
Merits of Socialistic Economy
- Reduction in Inequalities: No one is allowed to own and use private property to exploit others.
- Allocation of Resources as central planning authority decides allocation of resources.
- Absence of Class Conflicts.
- Economic fluctuations can be avoided in Socialistic Economy.
Demerits of Socialist Economy
- Red Tapism and Bureaucratic lethargy impacts the output of economy.
- System does not provide any incentive for efficiency.
- Consumers do not enjoy freedom of choice over the consumption of goods and services.
- Concentration of Power in the hands of State.
3 . Mixed Economy
- In a mixed economy system both private and public sectors co-exist and work together towards economic development.
- It is a combination of both capitalism and socialism and tends to eliminate the evils of both capitalism and socialism.
- Examples of Mixed Economy includes India, England, France and Brazil.
Features of Mixed Economy
- Means of production and properties are owned by both private and public.
- In mixed economies, both private and public sectors coexist. Private industries undertake activities primarily for profit. Public sector firms are owned by the government with a view to maximize social welfare
- Basic problems of what to produce, how to produce, for whom to produce and how to distribute are solved through the price mechanism as well as state intervention .
- Though private has freedom to own resources, produce goods and services and distribute the same, the overall control on the economic activities rests with the government.
Merits of Mixed Economy
- It promotes rapid economic growth as public requirements and private needs are taken care of.
- Economic Equality: The government uses progressive rates of taxation for levying income tax to bring about economic equality.
- Government safeguards the interest of the workers and weaker sections by legislating on minimum wages, and rationing, establishing fair price shops and formulating social welfare measures.
Demerits of Mixed Economy
- Lack of coordination between public sector and private sector as both work with divergent motives.
- Most of the public sector enterprises in Mixed Economy remain inefficient due to lethargic bureaucracy and red-tapism .
- The fear of nationalization discourages the private entrepreneurs in their business operations and innovative initiatives.
- Inequalities are present as Ownership of resources, laws of inheritance and profit motive of people widens the gap between rich and poor.
Hence, inequality of capitalism and inefficiency of socialism are found in mixed economies.