ECONOMIC SYSTEM

An economic system, or economic order,is a system of production, resource allocation and distribution of
goods and services within a society or a given geographic area. It includes the combination of the various
institutions, agencies, entities, decision-making processes and patterns of consumption that comprise the
economic structure of a given community.
An economic system is a type of social system. The mode of production is a related concept. All
economic systems must confront and solve the four fundamental economic problems:

 What kinds and quantities of goods shall be produced?

 How goods shall be produced.
 How the output will be distributed.
 When to produce.
The study of economic systems includes how these various agencies and institutions are linked to one
another, how information flows between them, and the social relations within the system (including
property rights and the structure of management). The analysis of economic systems traditionally focused
on the dichotomies and comparisons between market economies and planned economies and on the
distinctions between capitalism and socialism.[4] Subsequently, the categorization of economic systems
expanded to include other topics and models that do not conform to the traditional dichotomy.
Today the dominant form of economic organization at the world level is based on market-oriented mixed
economies. An economic system can be considered a part of the social system and hierarchically equal to
the law system, political system, cultural and so on. There is often a strong correlation between certain
ideologies, political systems and certain economic systems (for example, consider the meanings of the
term "communism"). Many economic systems overlap each other in various areas (for example, the term
"mixed economy" can be argued to include elements from various systems). There are also various
mutually exclusive hierarchical categorizations.

MAIN TYPES
CAPITALISM
Capitalism generally features the private ownership of the means of production (capital) and a market
economy for coordination. Corporate capitalism refers to a capitalist marketplace characterized by the
dominance of hierarchical, bureaucratic corporations.
Mercantilism was the dominant model in Western Europe from the 16th to 18th century. This encouraged
imperialism and colonialism until economic and political changes resulted in global decolonization.
Modern capitalism has favored free trade to take advantage of increased efficiency due to national
comparative advantage and economies of scale in a larger, more universal market. Some critics [who?]
have applied the term neo-colonialism to the power imbalance between multi-national corporations
operating in a free market vs. seemingly impoverished people in developing countries.
 Merits of Capitalistic System:
The main merits of this system are:
(i) Economic Freedom:
The foremost advantage of this system is that everybody enjoys’ economic freedom as one can
spend one’s income according to one’s wishes. Producers have complete freedom to invest in
any business or trade.
(ii) Automatic Working:
Another advantage according to classical economists is an automatic system. Equilibrium point
is automatically come with the forces of demand and supply.
(iii) Variety of Goods and Services:
All the basic decisions of what to produce, how to produce and for whom to produce are taken
by producers. Every producer gives attention to consumers’ taste and preferences. Hence, there
are large variety of goods and services; produced in the economy.
(iv) Optimum Use of Resources:
All natural resources are used to their optimum level as production is undertaken with a sole
purpose: of earning profit and no scope for wastages at all.
(v) Efficient Producer:
There is very tough I competition among entrepreneurs. They always encouraged to produce best
quality of products. Thus, technical development will lead to increase in higher productivity as
well as efficiency.
(vi) Higher Standard of Living:
Varieties of goods at cheap rates make it easy to be within the; reach of poor and weaker sections
of society. This results in rise in their standard of living.
(vii) Incentive to efficient:
In this system, incentives are given to the efficient workers in cash or kind. This means every
worker should get reward according to his ability. Hence, workers will try to work more and
more, therefore, total output will also increase.
(viii) New Inventions:
In this type of economy, there is ample scope of new invention. To get more profit every
producer takes initiative to develop new techniques in production.

Demerits of Capitalistic System:

According to Karl Marx, “Capitalism contains the seeds of its own destruction.”
The main demerits of this system are given below:
(i) Labour Exploitation:
The main defect of capitalism is the exploitation of labour. Labourers get less wages in
comparison to their working hours. The wages less than their marginal productivity are not
sufficient for their livelihood.
(ii) Class Struggle:
A lion’s share of income and resources is controlled by the upper sections of the society, while
others remain deprived of the basic amenities of life. Thus, the entire society is divided between
‘haves and ‘have not’s. Hence, the continuous class struggle spoils the health environment of the
economy.
(iii) Wasteful Competition:
Capitalism is a wasteful competition. A lot of money is spent on advertisement and publicity for
pushing the sale of the commodity. Its burden ultimately is borne by the poor consumers in the
form of increased price.
(iv) Threat of Over-Production:
The production is made on a large scale which cannot be changed in a short period. Therefore,
under capitalism, fear of over-production always exists. The Great Depression of 1930s in USA
is an example of it.
(v) Economic Fluctuations:
Being automatic in nature, capitalist economy always faces the problem of economic fluctuations
and unemployment. This means the state of instability and uncertainty,
(vi) Unbalanced Growth:
All the resources are put only to those channels where there is maximum profit. Other sectors of
the economy are neglected. As there is no check on the economic system, the growth is
unbalanced in nature.
(vii) No Welfare Activities:
In capitalism, the sole motive is maximum profit, but not the public welfare. Variety of goods are
produced according to market demand, not for any welfare activity.
(viii) Monopoly Practices:
This economic system has been criticized on the fact that it develops monopoly activities within
the country.
 SOCIALIST ECONOMY
Socialist economic systems (all of which feature social ownership of the means of production) can be
subdivided by their coordinating mechanism (planning and markets) into planned socialist and market
socialist systems. Additionally, socialism can be divided based on their property structures between those
that are based on public ownership, worker or consumer cooperatives and common ownership (i.e. non-
ownership). Communism is a hypothetical stage of socialist development articulated by Karl Marx as
"second stage socialism" in Critique of the Gotha Program, whereby the economic output is distributed
based on need and not simply on the basis of labor contribution.
The original conception of socialism involved the substitution of money as a unit of calculation and
monetary prices as a whole with calculation in kind (or a valuation based on natural units), with business
and financial decisions replaced by engineering and technical criteria for managing the economy.
Fundamentally, this meant that socialism would operate under different economic dynamics than those of
capitalism and the price system. Later models of socialism developed by neoclassical economists (most
notably Oskar Lange and Abba Lerner) were based on the use of notional prices derived from a trial-and-
error approach to achieve market clearing prices on the part of a planning agency. These models of
socialism were called "market socialism" because they included a role for markets, money, and prices.
The primary emphasis of socialist planned economies is to coordinate production to produce economic
output to directly satisfy economic demand as opposed to the indirect mechanism of the profit system
where satisfying needs is subordinate to the pursuit of profit; and to advance the productive forces of the
economy in a more efficient manner while being immune to the perceived systemic inefficiencies
(cyclical processes) and crisis of overproduction so that production would be subject to the needs of
society as opposed to being ordered around capital accumulation.
Features of Socialism:
The main features of this system are detailed below.
(1) Public Ownership:
A socialist economy is characterised by public ownership of the means of production and distribution.
There is collective ownership whereby all mines, farms, factories, financial institutions, distributing
agencies (internal and external trade, shops, stores, etc.), means of transport and communications, etc. are
owned, controlled, and regulated by government departments and state corporations. A small private
sector also exists in the form of small business units which are carried on in the villages by local artisans
for local consumption.
(2) Central Planning:
A socialist economy is centrally planned which functions under the direction of a central planning
authority. It lays down the various objectives and targets to be achieved during the plan period. Central
economic planning means “the making of major economic decisions—what and how much is to be
produced, how, when and where it is to be produced, and to whom it is to be allocated—by the conscious
decision of a determinate authority, on the basis of a comprehensive survey of the economic system as a
whole.”
And the central planning authority organises and utilises the economic resources by deliberate direction
and control of the economy for the purpose of achieving definite objectives and targets laid down in the
plan during a specified period of time.
(3) Definite Objectives:
A socialist economy operates within definite socio-economic objectives. These objectives “may concern
aggregate demand, full employment, satisfaction of communal demand, allocation of factors of
production, distribution of the national income, the amount of capital accumulation, economic
development…and so forth.” For achieving the various objectives laid down in the plan, priorities and
bold targets are fixed covering all aspects of the economy.
(4) Freedom of Consumption:
Under socialism, consumers’ sovereignty implies that production in state- owned industries is generally
governed by the preferences of consumers, and the available commodities are distributed to the
consumers at fixed prices through the state-run department stores. Consumers’ sovereignty under
socialism is confined to the choice of socially useful commodities.
(5) Equality of Income Distribution:
In a socialist economy, there is great equality of income distribution as compared with a free market
economy. The elimination of private ownership in the means of production, private capital accumulation,
and profit motive under socialism prevent the amassing of large wealth in the hands of a few rich persons.
The unearned incomes in the form of rent, interest and profit go to the state which utilises them in
providing free education, public health facilities, and social security to the masses. “As far as wages and
salaries are concerned, most modern socialists do not aim at complete and rigid equality. It is now
generally understood that the maintenance offered choice of occupation implies wage differentials.”
(6) Planning and the Pricing Process:
The pricing process under socialism does not operate freely but works under the control and regulation of
the central planning authority. There are administered prices which are fixed by the central planning
authority. There are also the market prices at which consumer goods are sold. There are also the
accountings prices on the basis of which the managers decide about the production of consumer goods
and investment goods, and also about the choice of production methods.
Merits of Socialism:
Prof. Schumpeter has advanced four arguments in favour of socialism: one. greater economic efficiency;
two, welfare due to less inequality; three, absence of monopolistic practices; and four, absence of
business fluctuations. We discuss these merits of socialism one by one.
(1) Greater Economic Efficiency:
Economic efficiency under socialism is greater than under capitalism. The means of production are
controlled and regulated by the central planning authority towards chosen ends. The central planning
authority makes an exhaustive survey of resources and utilises them in the most efficient manner
Increased productivity is secured by avoiding the wastes of competition and by undertaking expensive
research and production processes in a coordinated manner. Economic efficiency is also achieved by
utilising resources in producing socially useful goods and services which satisfy the basic wants of the
people, like cheap food, cloth, and housing.
(2) Greater Welfare due to Less Inequality of Income:
In a socialist economy there is less inequality of income as compared with a capitalist economy because
of the absence of private ownership of the means of production, private capital accumulation, and private
profit. All citizens work for the welfare of the state and each is paid his remuneration according to his
ability, education and training. All rents, interests and profits from various sources go to the state which
spends them for public welfare in providing free education, cheap and congenial housing, free public
health amenities, and social security to the people.
(3) Absence of Monopolistic Practices:
Another advantage of socialism is that it is free from monopolistic practices to be found in a capitalist
society. Since under socialism all means of production are owned by the state, both competition and
monopoly are eliminated. The exploitation by the monopolistic is absent. Instead of private monopoly,
there is the state monopoly of the productive system but this is operated for the welfare of the people. In
the state-owned factories, socially useful commodities are produced which are of high quality and are also
reasonably priced.
(4) Absence of Business Fluctuations:
A socialist economy is free from business fluctuations. There is economic stability because production
and consumption of goods and services are regulated by the central planning authority in accordance with
the objectives, targets and priorities of the plan. Thus there is neither overproduction nor unemployment.
Demerits of Socialism:
A socialist economy has also certain disadvantages:
1. Loss of Consumers’ Sovereignty:
There is loss of consumers’ sovereignty in a socialist economy. Consumers do not have the freedom to
buy whatever commodities they want. They can consume only those commodities which are available in
department stores. Often the quantities which they can buy are fixed by the state.
2. No Freedom of Occupation:
There is also no freedom of occupation in such a society. Every person is provided job by the state. But
he cannot leave or change it. Even the place of work is allotted by the state. All occupational movements
are sanctioned by the state.
3. Misallocation of Resources:
Under socialism, there is arbitrary allocation of resources. The central planning authority often commits
mistakes in resource allocation because the entire work is done on trial and error basis.
4. Bureaucratic:
A socialist economy is said to be a bureaucratic economy. It is operated like a machine. So it does not
provide the necessary initiative to the people to work hard. People work due to the fear of higher
authorities and not for any personal gain or self-interest.
There is no doubt that a socialist economy is better than a capitalist economy because of its overwhelming
merits. But it is disliked for the loss of political, economic and personal freedoms.

MIXED ECONOMY

A mixed economy is an economic system that combines elements of a capitalist, market-based system,
with a socialist, command economy system. It mixes elements such as private property rights, free trade,
and privatization, with socialist elements such as regulation, the welfare state, and re-distribution.
Most nations across the world operate under some form of mixed economy system. This can come in the
form of a socialist economy which relies of private enterprise and ownership, but big government and
high taxes – as is the case in Scandinavia. By contrast, a mixed economy may lean towards more free
markets. For instance, Singapore relies largely on private enterprise, free trade, and low taxes. Yet its
government still has significant ownership of housing and land, and controls many aspects of its people’s
lives.
A mixed economy has three of the following characteristics of a market economy. First, it protects private
property. Second, it allows the free market and the laws of supply and demand to determine prices. Third,
it is driven by the motivation of the self-interest of individuals.
Characteristics of a Mixed Economy
1.Private and Public Ownership
In a mixed economy, there is a mixture of both public and private ownership. In most nations today, it is
largely skewed towards private ownership in the west – with small levels of public ownership. For
instance, the UK operates a socialist healthcare system under the NHS, whilst the US also offers public
medicine through Medicare and Medicaid, as well as its operation of the US postal service (USPS). Yet
the majority of its economies are controlled by private enterprises.
If we now contrast this with nations such as China and India – the majority of their institutions are largely
owned by the state. Yet there are a small number of private enterprises that operate independently –
although these are in the minority. This contrasts with the west that has a more private based system,
whilst China and India lean more towards a command economic system with public ownership.
2. Private Property
In a mixed economy, it will always have some element of private property and ownership – otherwise, it
would be classified as a pure command economy, where resources are centralized. This simply means that
individuals are able to claim ownership of their property – whether that is their house, car, or business.

Without the right to own private property, the economic system would be more representative of that of a
socialist command system.
3. Regulation
In a market-based system, goods and services are freely sold without intervention by the government.
That means there are no requirements to meet set quality standards dictated by the government. For
instance, cars are required to have a seatbelt and an airbag as standard. However, a market-based system
would not have such regulations.
A mixed economy allows for some markets to operate freely as they would do in a market-based system.
However, in other markets, it regulates more fiercely in a similar way we would see under a command
economy. For instance, the production of video games is largely unregulated, whilst the production of
motor vehicles faces a large number of restrictions.
4. Social Security
The presence of social security is somewhat of a hybrid between a market system, where no support is
provided, and a command economy, where income is solely provided by the government. By offering
social security for the disabled, unemployed, and the elderly, society is being supported, but not to the
same extent as a socialist system.
5. State Intervention
When firms fail, a market economy would allow them to go out of business. By contrast, a command
economy would fully support it through the government. Under a mixed economy, some businesses will
be allowed to go under, whilst others require some level of state intervention. This might come in the
form of tariffs to fight international competition, or subsidies to help them survive financially.
Mixed Economy Advantages
1. Free Markets
One of the advantages of a mixed economy is that it still relies on supply and demand to dictate prices. In
the main, markets are allowed to react when there is an increase in demand – by raising prices and
increasing supply. Or, when demand falls, prices and supply also fall. In turn, it allows the market to work
efficiently by catering to the consumer’s demand.
Whilst a mixed economy does not allow for the same free rein that a market-based economy would – it
still allows for free competition in a large number of markets, and significantly more than under a
command system.
2. Good Regulation
This is up for interpretation, but on occasion, a mixed economy can provide sensible regulation. For
instance, the US has the Federal Trade Commission’s Bureau of Competition that regulates anti-
competitive practices. Its aim is to ensure that there is sufficient and fair competition in the marketplace –
thereby maximizing choice for the customer and eliminating monopoly control.
There are also other antitrust laws that make certain forms of price discrimination illegal. For instance,
charging an individual a different price based on a protected characteristic such as sex or race. The aim of
which is to protect the customer from underhand tactics that business may use.
3. Public Goods
In a market-based system, it would be up to the free market to provide goods to consumers. However,
some goods are unprofitable to provide, so the public is unable to benefit from them. For instance, public
goods such as parks, libraries, and education all provide positive externalities. They may not provide a
profit to the firm providing them, but the benefits to society outweigh the costs.
In a mixed economy, these public goods would be supplied by the government, thereby generating the
positive externalities associated with them. For instance, education not only provides a benefit to the
student but also society. Society benefits by having a more educated workforce, which allows employees
to be more productive and efficient – thereby reducing the cost of goods and services.
4. Promote Equality
Mixed economy systems rely on the welfare state to maintain a balance between the rich and poor. This
usually requires some form of taxation whereby the well off in society pay more to help subsidize those
on low incomes. For instance, in the US, the top 1 percent of income earners pay roughly 35 percent of
the nation’s income taxes. In turn, this income is used to pay for services such as Medicare and Medicaid
– as well as housing benefits, unemployment benefits, and disability benefits.
5. Social Safety Net
Mixed economy systems offer some form of social safety net. This may come in the form of
unemployment benefits, disability benefits, or a pension in old age. This grants income protection for
those who may be unable to find work in unemployment, or, those who are unable to work due to old age
or disability. In turn, those who are cannot find work or are unable to, can remain members of society,
rather than go hungry and homeless.

Mixed Economy Disadvantages

1. Bad Regulation
Although a mixed economy may produce some good regulations such as the anti-trust regulations, it has
its fair share of bad ones. For instance, the US requires nearly one-third of workers to have an
occupational license. This ranges from the hairdressers, to dance teachers, to dog walkers. In some states,
to become a hairdresser, you must have a high school diploma, whilst you need a license to walk dogs.
2. Encourages Special Interest
When you have a mixture of government and private enterprise, it is inevitable that they will overlap. So
when laws are made, private enterprises have an incentive to shape legislation to benefit them. As a
result, we see a number of businesses lobbying the US congress in order to gain preferential treatment.
This is only intensified when campaign contributions are on the table. If big businesses don’t get their
way, then those contributions can easily move to the other party.
3. High Taxes
In a mixed economy, the size of government is much large than a market-based version. It has a greater
emphasis on welfare spending and influencing the wider economy. So to pay for it, it requires quite high
levels of taxation. These can range from relatively modest rates in Singapore to the very high rates in
Scandinavia.
4. Public Monopolies
A mixed economy involves government influence and on occasion, this can mean taking over or
controlling a sector of the market. For instance, in the US, the Federal government controls the postal
service (USPS). In turn, it has a monopoly on the delivery of letters. It is illegal for any other firm to
deliver letters – thereby granting it a monopoly.
In the same way as a private monopoly, a public monopoly has to compete and is not affected by the
normal laws of supply and demand. At the same time, because it is controlled by the government, it
doesn’t even need to make a profit – unlike a private monopoly. The result is a limited choice for
consumers and higher prices.
5. Reduces Competition
A mixed economy is characterized by regulation and government interference in economic activities. By
introducing regulatory requirements, additional costs are imposed on businesses. For instance, meeting
environmental standards costs manufacturers millions of dollars each year. For those who are not as
efficient, this can push them over into bankruptcy as they are unable to afford the cost of such regulations.

6. Tendency to lean towards Government control

Mixed economies are relatively new in the fact that most nations used to be either highly market-based or
highly socialist – there was little in between. Yet since the Great Depression and the Second World War,
the government has taken a forward step in its involvement in the economy. It is not only spending
significantly more than it did previously but also regulating and controlling markets more intensively.
Mixed Economy Examples
United States of America
The United States of America is known as the shining star of free-market capitalism. Yet it is definitively
a mixed economy. Its government spends close to 40 percent of GDP each year, whilst it operates a
relatively robust tax regime that taxes income, capital, sales, housing, and inheritance – among many
more. At the same time, it also has a large number of regulations. For instance, one in three jobs in the US
requires an occupational license, whilst there are over 454 Federal agencies.
China
Although China leans more towards the socialist side, it does have elements of a market-based system.
Since the death of its leader Mao Zedong in 1976, the nation turned towards a more market-based
approach to revive its struggling economy. A number of market reforms followed, allowing citizens to
start businesses, foreign direct investment, and its eventual incorporation into the World Trade
Organization (WTO). In the years following, we have seen China flourish into a global superpower and
continue to grow strongly.
Russia
Since the collapse of the Soviet Union in 1991, Russia went on to achieve high levels of sustained
economic growth through the 2000s. As with many other countries, it was significantly affected by the
2008 financial crisis but recovered strongly after. Yet its desire for war has led to a number of economic
sanctions against it.
Having previously opened its market up following the collapse of the Soviet Union, Russia benefited
from trading with the West – particularly its oil. At the same time, it opened its markets up to private
individuals to open their own businesses in a nod to a market-based system.
United Kingdom
Similarly to the US, the UK has been a proponent of free-markets throughout the years. It has a high
degree of economic freedom in the fact that it has strong property rights and individuals can freely set up
their own business. Those owners also face relatively little in the way of regulations – at least in
comparison to some other developed nations.
On the other side, it operates a number of socialist-style policies. For instance, the government controls
the National Health Service (NHS), its welfare state spends roughly 15 percent of GDP, and it controls
live television (you need a license to watch, even if it’s on a non-government owned channel).