What is Capitalism?

Capitalism is an economic order in which the resources are owned

by a few rich and private people, and production will be done for
profit. There will be complete free trade and competition. There will
be no restriction or interference by the government. Everything is
left to private enterprise.

Capitalistic system is also called free and private enterprise. In this

system, the factors of production (resources) are owned by a few
rich people called capitalists. The rest will sell their services for
wages. Capitalism emerged as a result of Industrial Revolution and
the factory system.

This type of pure capitalistic system prevailed only in the 18th and
19th centuries. Now-a-days, with the increasing role of the
government, the State regulates the working of the capitalistic
system.

Features of Capitalism
1. Private property
Capitalistic system allows and recognizes the institution of private
property. Anyone can earn, acquire or sell property. The property
can be passed on to the heirs in inheritance. Thus private
individuals come to have lands, houses, buildings, sites, factories
and business establishments.

2. Profit motive
This is the essence of capitalism. The motive of every economic
activity will be profit. Profit motive is the driving force in an
individual, partnership and joint-stock companies. Utilization of
resources d production will be done for profit. Business people will
take huge risks to earn large profits.

3. Personal freedom
People enjoy personal freedom in economic activities. This implies:
 1. Freedom of enterprise;
2. Freedom of contract;
3. Freedom in production and
4. Freedom in consumption.
4. Perfect competition:
This is the corollary from the above three features. Since everyone
is free in economic field, many people would compete in production
and distribution. Sellers and producers freely compete among
themselves. Buyers will compete to buy their goods. Workers will
compete for getting employment. Due to competition, the fittest will
survive.

5. Price mechanism
Under capitalism, the price mechanism makes an automatic
adjustment in production, distribution and consumption. All activities
revolve round price mechanism.

How does Capitalistic system solve the three

fundamental problems of the economy?
The three basic problems of an economy are.,

1. What to produce?
2. How to produce?
3. For whom to produce?
In Capitalism, nobody decides these three problems and these
questions are solved automatically by means of competition and
price system. There is no authority to coordinate the activities of the
producers and yet there will be constant flow of goods and services
and the consumers are satisfied.

We shall see how the price system or the price mechanism solves
the three basic problems of the economy.

1. What to produce?
Producers do not produce goods and services as they like. They
produce for profit. To make profit they have to produce those goods
which are in demand. Producers study the market conditions and
produce those goods which are demanded by consumers. The
prices of goods serve as guide for the producer and consumer.

Whenever the price of the commodity exceeds its cost, the

producer can make profit by increasing production. When more of a
particular commodity is demanded, new orders will be received by
producers. This will make the price to rise. More is therefore
produced for profit.

If more of a commodity is available than demanded by the people,

the price will come down. At lower prices, the producers will not
produce that much. Thus, the price mechanism equates the
demand and supply of goods automatically.

2. How to produce?
This is determined by competition of different producers. They will
try to produce at the cheapest possible rate with the available
technology. By reducing the cost of production, they can maximize
profit.

3. For whom to produce?

In Capitalism, goods will be produced for those who pay the market
price. This is determined by supply and demand factors. In order to
pay the market price, the consumers should have enough income.
Consumers’ income is determined by rents, wages and salaries,
interest and profit.

Those who cannot pay the market price cannot have the
commodity. Thus, the price mechanism will decide everything in a
capitalistic economy and the object of the system is to satisfy
people’ s wants.

Merits of Capitalism
The following merits or advantages are attributed to capitalism.

1. Encourages production
Capitalism enables the economy to reach a high level of production,
as production is guided by profit. The wealth of the community
would increase. It is said that the standard of living of people had
increased remarkably in western countries due to capitalistic
system.

2. Best resource utilization

Best utilization of resources is possible only in capitalism. There will
be no wastage of scarce resources. This is because of the working
of the system on profit and loss basis. Due to self interest, the
producers will use minimum resource for producing maximum
goods in order to get good profit.

3. Availability of goods at cheaper price

Due to free competition, the consumers will get the goods at the
cheapest price. They also get the goods they want. Goods will be
produced according to the wishes of the consumer. The consumer
will be a king in capitalism.

4. Stimulates invention
Competition in production stimulates invention. This promotes
development and progress in the economy.

5. Simple and Automatic

This system is simple and automatic in its working. The price
mechanism adjusts production and consumption. The utilization of
resources is done without any external direction.

Demerits or Defects of Capitalism

The following are some of the major disadvantage or defects of
capitalism

1. Inequality in the Society

The main defect of capitalism is its gross inequality in the society.
Private property, profit motive and inheritance of property have
created a separate class of people called capitalists who are
wealthy and rich. As they own the factors of production, they
become richer and richer and they exploit the poorer classes.

Though the capitalistic system affords equal opportunity for all, this
will be only in theory. In practice, only the richer class will have
more opportunities. Further, to become rich only by means of hard
work is very rare.

Capitalistic system will make a big gap between the rich and the
poor. The inequalities of income and wealth is the worst feature of
capitalism.

2. Nonavailability of essential commodity for

poor
Because of inequalities, only the rich can demand the commodities
and services and that too luxury commodities. Hence, the
producers will produce only for the richer class for profit and
essential commodities needed for the poorer classes will not be
produced. The consumer will not be a king. Only a rich man will be
a king in capitalism.

3. Waste of resources
The competition in the economy will lead to wastage of resources.
Advertisement by competing firms will be a wastage of resource.
Different firms will be producing. the same basic commodity with
product differentiation. This will result in unnecessary transport of
goods from one place to another (Example: Toilet soaps,
Toothpastes, Silk sarees, etc.).

4. Monopoly in competition
Competition in the long run will eliminate inefficient producers and
finally only a few producers will be producing. These producers
(firms) will combine and production will be done as monopoly. In
capitalism, there will be many monopolistic firms exploiting the
consumers and making huge profit. The benefits of competition will
be lost. When there is monopoly, there is no freedom of choice.

5. Economic Instability
Another bad feature of capitalism is its economic instability. The
competitive system will result in periodic cycles of depression and
prosperity called Trade Cycles. During the period of depression,
there will be mass unemployment and the poorer classes and the
working classes will be suffering.
The root-cause for this trade cycle is the unplanned nature of the
system and the failure of price mechanism. In the period of
depression, the governments have to come to the rescue of the
economy.

6. Frequent labour unrest

In capitalism, there will be poverty in the midst of plenty. There will
be no security for labour and the poorer classes. There will be
frequent labour unrest. In this economy, only the fittest will survive.

Modern Capitalism
The features, merits and defects studied above are related to pure
capitalism. In modern days, particularly after the second world war,
no country has adopted the free capitalism. Considering some of
the defects of capitalism, the governments of modern days have
controlled to some extent the working of the capitalistic system.

In order to reduce the inequalities of income, unemployment,

monopolistic tendencies and labour unrest, the governments of
modern capitalism have introduced many measures and laws to
work the system smoothly.

These measures are:

1. Anti-monopoly legislation;

2. Ceiling on private property;

3. Regulation of production of essential commodities;

4. Minimum Wages Act;

5. Social security Acts to protect the interest of labour;

6. Payment of compulsory bonus;

7. Laws relating to trade and commerce and

8. Credit control operations, etc.

Modern capitalism may be called controlled capitalism.

Socialism
“Socialism refers to the government ownership of the means of
production, planning by the government and income distribution”-
Samuelson.

Meaning:
Socialist 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.

The idea of socialism is first introduced by Karl Marx and Fredric

Engles in their book, ‘The Communist Manifesto’.

The word socialism means ‘all things to all men’. According to

Samuelson, “Socialism refers to the government ownership of the
means of production, planning by the government and income
distribution”.

Definition:
1. The word socialism has been defined as “such type of socialist
economy under which economic system is not only regulated by the
government to ensure, welfare equity of opportunity and social
justice to the people.”
2. According to Mr. Webb:
“A socialised 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.”

This definition does not correspond to the present notion of

socialism, because it does not imply any idea of planning.

3. Prof. Dickinson has defined socialism as such:

:
“Socialism is an economic organisation of society in which the
material means of production are owned by the whole community
and operated by representatives of the people, who are responsible
to the community according to a general plan, all the members of
community being entitled to the benefits from results of such
socialised, planned production, on the basis of equal rights.”

There is no complete agreement as to what exactly socialism is. But

the definition given by Prof. Dikinson seems to be better. Economist
have compared socialism as a hat which has lost its shape because
everybody wears it. It has been aptly remarked that “socialism has
been called many things and many things have been called
socialism”.

Main Features of Socialism:

A socialist economy has the following features:
1. Socialism is Social or Collective Ownership of Resources:
In such an economy, all the means of production are owned and
operated by the state in the interest of society as a whole. This is to
ensure equality of opportunity to all the citizens with regard to
earning of income. This is also aimed at full and efficient utilisation
of the country’s resources.

2. It is a Fully Planned Economy:

A socialist economy is necessarily a fully planned economy
otherwise the economic system cannot run. There is a choice
between centralised and decentralised planning. All socialist
economics were fully planned economics.

3. It is the Responsibility of the Central Planning Authority:

Planning is the responsibility of an authority at the centre. It may be
known as the Planning Commission in India or the Gos plan in the
U.S.S.R. The main task given to this body is to formulate long-term
and short-term plans for the economy.

4. It has Definite Aims and Objectives:

Socialist economy has specified aims or objectives. Generally, they
are included in the constitution itself but these are given specific
shape by the planners. As far as possible the objectives are clearly
and quantitatively defined. The competitiveness on complementary
among these objectives is explicitly noted. This is meant to bring
planning nearer to reality.

5. Specific Long-Term Plans:

The Central Planning authority is given the responsibility to chalk
out specific long-term plans for the country. These long-term plans
are called “Perspective Plans”. These may range from twenty to
thirty years. These are in the nature of a blue-print of the path the
economies have to follow in the near future. These perspective plans
may be modified with changes in basic structure and objectives of
the economy. This requires the use of input and output and activity
analysis.

6. Central Control and Ownership:

A fully planned economy is by implication a controlled economy.
Government controls the main aspects of all economic activity.
There are controls on production through licensing. Consumption is
also controlled indirectly through controlled production. There are
existing controls generally operated through the Central Bank of the
economy.

Then there are controls on distribution. Government may have a

public distribution system. It may have direct procurement and sale
of essential commodities through fair price shops. However, the
nature of controls and their intensity shall depend upon the
economic conditions in the economy.

7. Much Less Importance of Price Mechanism:

A socialist economy gives much less importance to market forces
and therefore, the price mechanism is given a minor role in resource
allocation. A specific plan based on social needs guides the process
of resource allocation. Private profit is not allowed. Public interest is
given more importance. The means of production are directed by
the Government and are used in promoting the general welfare of
the people.

8. People’s Co-operation is Essential:

A socialist economy is run with the active co-operation of the people
in the fulfillment of plan targets. No plan can possibly succeed
without people’s participation. The plan is prepared and
implemented by the Government but the main target’s of the
different activities in the plan are fixed by taking into account the
resources which people will be able to mobilise. To encourage the
people to participate in plan implementation, the Government may
provide special incentives.

In short, a socialist economy is not run by the impersonal forces of

supply and demand. It is a scientifically planned economy. As such
its main features are quite different from those of capitalistic
economy.

Merits of Socialism:
A socialist economy has many alternative features. These have made
socialism more and more popular.

The main merits of the socialist economy are as under:

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.

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.

7. Conservation of Natural Resources:

A socialist economy has a great advantage of planning for the
future. Wasteful use of the country’s natural resources is a common
problem in all the capitalistic economies. Private enterprise does
not care for the future. A planning authority can take the interest of
future generations into account by preparing plans for conservation
of the country’s non-renewable resources like coal, petroleum,
forests and soil.

8. Equitable Distribution of Wealth and Income:

A socialist economy is operated with the aim of providing equal
opportunity for all citizens in earning incomes. Generally, private
property is restricted to some basic needs. There is no amassing of
wealth by a few. Wealth is also equitably distributed because private
enterprise is given a limited role.

9. No Exploitation and Class Struggle:

A socialist economy can also get rid of the basic maladies of the
capitalist economy. There is no question of exploitation in as much
as the state determines the distribution pattern of country’s income.
Further the whole society is the common aim of all planning. No
sections are discriminated against. There is not special favour at any
class. Therefore, there is no scope for anything like the class
struggle which is a characteristic of the capitalist economy.

10. Social Welfare Activities:

A Socialist Economy is oriented to the social needs. The government
provides for full security. There is automatic care for the children of
those who meet accidents while performing their duties. There is
provision for old age pension for all. The slogan is “to each
according to his needs, from each according to his
capacity.”
Therefore, the employees in state enterprises can work without
much worry. Their productivity is higher. There are no labour
disputes and no wastage of resources resulting there from as is the
case in a capitalist economy.

11. There is no Wastage of Competitive Advertisement:

A capitalist economy is not always able to achieve productive
efficiency through competition. There is a good deal of wastage
through competitive advertisement of different varieties. The
consumer has to pay the price of the useless advertising. Prof.
Chamberlin has tried “to show that capitalism leads to excess
capacity when there is differentiation of the products.”

In a socialist economy, there is no such wastage. In the first place

only those goods and services are produced which are preferred by
the consumers. Secondly, if at all there is any advertising, it is only
meant for information about different products to consumers.

12. Foresightedness:
A socialist economy can prepare for the future much better than a
capitalist economy. Future is always uncertain. The planners take
full note of the uncertainties while formulating the plan. Flexibility
in planning is meant to provide for immediate changes in the plan
as conditions change. Planners can anticipate some of the future
changes and prepare for them so that the nation is not suddenly
caught unawareness.

Demerits of Socialism:
The merits of socialism given above should not lead us to the
conclusion that socialist economy is all virtue.

There are certain demerits of this system which are as

follows:
1. No Suitable Basis of Cost Calculation:
Von Hayek and Bobbins have pointed out that there is not proper
basis of cost calculation in a socialist economy. They say that the
means of production being owned by the government, there is no
market price for the factors of production. In the absence of market
mechanism there is no standard way of calculating costs of
production for different goods and services.

2. Choice of Working Incentives:

The most difficult problem in this system is the choice and working
of incentives in the absence of profit motive. The Russian
Government has been using the policy of “Carrot and the Stick”.
Some national honours are given to those showing outstanding
results. Those shirking work or proving irresponsible are punished.
There is decentralisation of authority along-with responsibility. This
ensures freedom at the lower level and scope for initiatives.
However, there is no comparable system of incentives and dis-
incentives to the profit motive in a capitalist economy.

3. 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.”

4. 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.

5. 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.

6. 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.

7. 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.

Mistakes made by individuals harm them only. National mistakes

are costly for the common man. In fact, this has been the cause of
dis-integration of the U.S.S.R., when the other economics of Europe
were booming the U.S.S.R. could not provide the minimum
comforts of life.

8. Too Much Power is Concentrated in the State:

Under socialism the state is not merely a political authority but it
also exercises unlimited authority in the economic sphere. In this,
all power is concentrated in the state. It means the state is
everything and individual nothing. He is reduced to a cypher. After
all the human institutions are for man and not man for these
institutions.

9. 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.

10. Bureaucracy and Red-Tapism:

A socialist economy is a state enterprise economy. Every bit of the
plan is to be cleared by bureaucrats. This often leads to red-tapism.
Even simple state forward jobs may take unduly long-time to be
done. The work of Government departments or even autonomous
bodies is slow moving. As a result inefficiency creeps in through
bureaucracy. In many countries where socialism had been brought
about hastily, work came to a stand-still leaders had to revert to
liberal policies containing elements of the capitalist economy.

Conclusion:
Whatever the difficulties of running a socialist economy, the appeal
for socialism was great especially, in less developed countries. For
over populated countries having national problems, socialism
seemed to be the only hope of the masses. Free market economy in
its pure form is a thing of the past.

Mixed Capitalist Economy is already the order in all the western

countries. In the Less Developed Asian Countries Government has
not only to regulate economic activity but positively direct it by
active participation for the fast development of the country. As for
the difficulties, they exist and can be eliminated through co-
operation between the administration and the people. As the
country develops economic planning gets a stronghold and
difficulties wear away.

Mixed economy

A mixed economy is a golden mean between a capitalist economy

and a socialist economy. It is an economic system where the price
mechanism and economic planning are used side by side.

There is mixture of private and public ownership of the means of

production and distribution. Some decisions are taken by
households and firms and some by the planning authority. All
developing countries like India are mixed economies.

Features of Mixed Economy:

A mixed economy possesses the following features:
1. Public Sector:
The public sector is under the control and direction of the state. All
decisions regarding what, how and for whom to produce are taken
by the state. Public utilities, such as rail construction, road building,
canals, power supply, means of communication, etc., are included in
the public sector. They are operated for public welfare and not for
profit motive. The public sector also operates basic, heavy, strategic
and defence production industries which require large investment
and have long gestation period. But they earn profits like private
industries which are utilised for capital formation.

2. Private Sector:
There is a private sector in which production and distribution of
goods and services are done by private enterprises. This sector
operates in farming, plantations, mines, internal and external trade,
and in the manufacture of consumer goods and some capital goods.
This sector operates under state regulations in the interest of public
welfare. In certain fields of production, both public and private
sectors operate in a competitive spirit. This is again in the interest
of the society.

3. Joint Sector:
A mixed economy also has a joint sector which is run jointly by the
state and private enterprises. It is organised on the basis of a joint
stock company where the majority shares are held by the state.

4. Cooperative Sector:
Under a mixed economy, a sector is formed on cooperative
principles. The state provides financial assistance to the people for
organising cooperative societies, usually in dairying, storage,
processing, farming, and purchase of consumer goods.
5. Freedom and Control:
A mixed economy possesses the freedom to hold private property,
to earn profit, to consume, produce and distribute, and to have any
occupation. But if these freedoms adversely affect public welfare,
they are regulated and controlled by the state.

6. Economic Planning:
There is a central planning authority in a mixed economy. A mixed
economy operates on the basis of some economic plan. All sectors of
the economy function according to the objectives, priorities and
targets laid down in the plan. In order to fulfill them, the state
regulates the economy through various monetary, fiscal and direct
control measures. The aim is to check the evils of the price
mechanism.

7. Social Welfare:
The principal aim of a mixed economy is to maximise social welfare.
This feature incorporates the merits of socialism and avoids the
demerits of capitalism. To remove inequalities of income and
wealth, and unemployment and poverty, such socially useful
measures as social security, public works, etc. are adopted to help
the poor. On the other hand, restrictions are placed on the
concentration of monopoly and economic power in the hands of the
rich through various fiscal and direct control measures.

Merits of Mixed Economy:

A mixed economy possesses certain merits which are as under:

(1) Best Allocation of Resources:

Since a mixed economy incorporates the good features of both
capitalism and socialism, the resources of the economy are utilised
in the best possible manner. The price mechanism, the profit
motive, and the freedoms of consumption, production, and
occupation lead to the efficient allocation of resources within the
economy. But where the possibility of mal-allocation of resources
appears, the state regulation and control rectifies it. Thus shortages
are avoided, productive efficiency increases, and cyclical
fluctuations are eliminated.

(2) General Balance:

A mixed economy maintains a general balance between the public
sector and the private sector. There is competition as well as
cooperation between the two sectors which are conducive for
achieving a high rate of capital accumulation and economic growth.
Further, an estimate of the successes and failures of the two sectors
can be made by comparing their respective performances, and
corrective measures are adopted accordingly. Thus the
inconsistencies of the private enterprise economy and the ‘paper
guesses’ of the planned economy are avoided in a mixed economy.
By maintaining a higher level of production in the two sectors, the
state is able to achieve the targets laid down in the plan.

(3) Welfare State:

A mixed economy contains all the features of a welfare state. There
is no exploitation either by the capitalists as under a free enterprise
economy or by the state as under a socialist economy. The workers
are not forced to work, Workers are provided monetary incentives
in the form of bonus and cash rewards for inventions. Labour laws
are passed fixing minimum wages, hours of work, and laying down
the working conditions of workers in factories and on farms.
Social security is also provided to workers in the event of
unemployment, disablement, death, illness, etc. The production and
sale of noxious articles are banned, while those of essentials are
increased for the benefit of the people at large. Legislative measures
are adopted to remove the concentration of economic power in the
hands of the few rich, and to lessen inequalities of income and
wealth.

4. Economic Development:
Under this system, both government and private sector join their
hands for the development of socio-economic infrastructures,
Moreover, government enacts many legislative measures to safe
guard the interests of the poor and weaker section of the society.
Hence, for any underdeveloped country, mixed economy is a right
choice.

5. Encouragement to Private Sector:

The most important advantage of mixed economy is that it provides
encouragement to private sector and it gets proper opportunity to
grow. It leads to increase in capital formation within the country.

6. Freedom:
In a mixed economy, there is both economic and occupational
freedom as found in capitalist system. Every individual has a liberty
to choose any occupation of his choice. Similarly, every producer
can take decisions regarding production and consumption.

Demerits of Mixed Economy:

A mixed economy has also certain defects which are discussed
below:

(1) Non-Cooperation between the Two Sectors:

The experience of the working of mixed economies reveals that the
public sector and the private sector do not see eye to eye with one
another. The private sector is treated like a step-child and groans
under the various restrictions imposed upon it by the state. The
private sector is taxed heavily, while the public sector is given
subsidies and preference over the former in the supplies of inputs.
Thus a sense of bitterness and non-cooperation develops between
the two sectors.

(2) Inefficient Public Sector:

The public sector of a mixed economy is a big burden on the
economy because it works inefficiently. Bureaucratic control brings
in inefficiency. There is over-staffing of the personnel, red-tapism,
corruption and nepotism. As a result, production falls and losses
emerge.

(3) Economic Fluctuations:

The experience of the working of the mixed economic system in the
developed countries also reveals that they have not been able to
remove economic fluctuations. This is because of the improper
mixture of capitalism and socialism. The private sector is allowed to
operate freely under a loose system of government regulations and
controls. The public sector also does not operate under the rigid
conditions which are laid down under a planned economy.

It has to depend for its supplies of raw materials, intermediate

products and factors on the vagaries of the market mechanism. If in
the market, the prices of inputs are increasing due to their
shortages, the public sector will be equally experiencing these
shortages and price increases. Hence economic fluctuations which
are a characteristic feature of a capitalist economy are equally
experienced in a mixed economy.
4. Delay in Economic Decisions:
In a mixed economy, there is always delay in making certain
decisions, especially in case of public sector. This type of delay
always leads to a great hindrance in the path of smooth functioning
of the economy.

5. More Wastages:
Another problem of the mixed economic system is the wastages of
resources. A part of funds allocated to different projects in public
sector goes into the pocket of intermediaries. Thus, resources are
misused.

6. Corruption and Black Marketing:

There is always corruption and black marketing in this system.
Political parties and self- interested people take undue advantages
from public sector. Hence, this leads to emergence of several evils
like black money, bribe, tax evasion and other illegal activities. All
these ultimately bring red-tapism within the system.

7. Threat of Nationalism:
Under mixed economy, there is a constant fear of nationalism of
private sector. For this reason, private sector does not put into use
their resources for the common benefits.

Conclusion:
But the defects of the mixed economy enumerated above are not so
acute that they cannot be overcome. Given efficient and honest
administrative machinery, the defects of the public sector can be
removed. The private sector can be made to work more efficiently
by proper control and direction. By adopting fiscal, monetary and
physical control measures, economic fluctuations can be eliminated.