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Pruthvi Sir
UNIT – 2 : Introduction Of Economic System :
Introduction
Economics - Economics is the soc social ial science science tha thatt anal analyze yzess the pro product duction ion,, distri distribut bution ion and an d co cons nsum umpt ptio ion n of go good odss & se serv rvic ices es.. Eco thee syst system em of pr prod oduc ucti tion on,, Econom nomic ic Sys System tem is th distribution and consumption An economic system is a mechanism (also defined as system or social institution) which deals with the production, distribution and consumption of goods and services in a particular society. he economic system is composed of people, institutions and their relationships. !t addresses the problems of economics li"e the allocation of the resources. Capitalist Economy Capitalism is an economic system in which the means of production are privately owned and operated for profit, usually in competitive mar"ets.
!n the capitalist economic system, all farms, factories and other means of production are the property of private individuals and firms. hey are free to use them with a view of ma"ing profit. Everybody is free to ta"e up one line of production he li"es and is free to enter into any contract with others for his profit. !n other words# An economic system in which investment in and ownership of the means of production, distribution, and e$change of wealth is made and maintained chiefly by private individuals or corporations. !n the words of %ouc"s, capitalism is a system of economic organisation featured by private ownership and use for private profit of man-made and nature-made capital.' Characteristics of Capitalism:
he following are the outstanding characteristics of capitalism# (1 !ri"ate !roperty #i$ht: he most important characteristics of capitalism is the e$istence of private property right. Every individual has a right to hold property and right to acuire private property. !ndividual has a right to transfer his property to his successors after death. (2 !rice %echanism:
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Pruthvi Sir
!t plays important role in the production of goods and services. !n a capitalist economic system, the price is determined by the demand and supply conditions and the prices are not charged discriminatively. (& Economic 'reedom: !n a capitalist economic system, people have freedom to invest or consume in a way they li"e. hey have freedom to invest the money in any "ind of industries and every person has the freedom to set up any business or industry. ( !resence of Competition: he competition may be bound in different forms of Economic systems. he labour category has competition among themselves for *obs# the employees compete to get suitable wor"ers and among the industrialists to subscribed sufficient capital. () !rofit %oti"e: he profit motive is the life blood of capitalist +ystem. his is the motive that initiate the entrepreneur to start any business. (* Commodity Economy: !n a capitalist economy, almost all the production is made for consumption. he goods produced for sale are called commodity and the goods produced for e$change are called ommodity Economy. (+ Unplanned Economy: o central economic planning is done in a capitalist economy. o central agency underta"es its regulation and direction. he productive function is the result of decision ta"en by a large number of entrepreneurs. (, -a.our !o/er is Commodity: he labour power can be bought or sold li"e a commodity. %abour power is considered as a factor of production and has a value or price. (0 Others: !n addition to the above important features of a capitalist economy there are other features also/
(a) 0ased on individualism. (b) !nterdependence of entrepreneurs. (c) 0irth of big business houses due to large profits and individual ownership.
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Pruthvi Sir
(d) E$istence of consumer sovereignty and upto certain e$tent the consumers decision may influence the economic activities. (e) !t provides occupational freedom and freedom to *udge. (f) apital has prime importance among the sources of production. (g) he 1overnment has very limited role. he state is considered means for providing better living for the people. (h) !t does not give any importance to economic uality and therefore, the community consists of different categories of people viz. rich, medium or poor. %erits of Capitalist System: (1 Indi"idual %oti"ation: he capitalist economic system motivates the businessmen to develop new items, produce in good uality and underta"es innovative activities because of the initiative of larger profits. (2 'lei.le and ynamic Economy: 2otivated by profits, individual initiatives and competition among the traders and businessmen, there is dynamism in the capitalist economy continuously goes ahead with changes and innovative activities. (& 3enefit of !erfect Competition: here e$ist perfect competition between different traders, and creditors who benefit from the capitalist economy. here is no change of monopolistic profits because of perfect competition. he e$istence of competition initiates more economic welfare.
According to 1eorge +teiner, from the point of view of public welfare, competition serves as a regulator and reducer of prices as an incentive to improved production efficiency. 3ithout competition, the capitalist economy would become stagnant, unproductive and e$ploitative. ( Capital 'ormation: he capitalist economy encourages for formation of capital, wealth and assets in the society. ew industrial and commercial institutions are set up with the ob*ectives of profits and also encourages of creation of additional employment, income and savings. emerits of Capitalist System:
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Pruthvi Sir
he countries which have become independent after 4567s, adopted mostly the socialistic economic system because of the demerits of the capitalist economic system. 8uman welfare aspect has completely disappeared in the capitalist system and it has created disparity in income and wealth. 8.9. :ic"inson writes, apitalism. ;is fundamentally blind, purposeless, and irrational and is incapable of satisfying many of the u rgent human needs. +ome of the important demerits of capitalism are/ (1 Increase Ine4ualities: !t increases ineualities in wealth, income and opportunities. !ncrease in the economic ineualities creates economic and social problems. (2 Economic Insta.ility: !t is difficult to establish a balance between the demand and supply. here will be trade boom or recession or the freuent fluctuations in prices. All the decisions relating to production are ta"en by the capitalist and due to wrong estimates of future reuirements# imbalance in production is generally found. 9ue to fluctuations in prices industrial and other economic activities become unstable and this will have adverse impact on the economic development and e$pansion. (& Inefficient !roduction: he capitalist always produces with motive of profit only. 8e always produces goods for use by higher income class of the community so that ma$imum profits can be obtained. here is no place in the mind of capitalist to produce for consumption by common people. 1oods and service are not produced by "eeping in view the interest and wants of the common man, but with motive of capitalists profits. ( Class Conflicts: he capitalist economy divides the community into two parts# on the first side the top capitalists and on the other side labour class which depends on the capitalists to fill their stomach. +ince the production resources are controlled by the capitalists they e$ploit the labour from their reasonable reward. () Unemployment: !n a capitalist economy full employment situation cannot be brought due to lac" of central economic planning. 3ith the result, optimum use of resources cannot b e possible. his brings the situation of unemployment. (* %onopoly and Eploitation: he establishment of large-scale business, improvement in technology, motive of ma$imization of profits, formation of combinations and acute competition are the reasons for creation of monopoly and e$ploitation of customers.
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(+ Ne$lect of National Interest: hey are mainly oriented towards self-interest of ma$imization of profits for which they compete with each other. hey neglect the social interests. hey do not underta"e their activities "eeping in view the national interest. Socialism
A socialist economy is an economic organisation in which the means of production are owned and regulated by the state. he production and distribution of goods and factors of production are done by the state under the direction of the planning commission. Socialism is a term applied to an economic system in which property is held in common and not individually, and relationships are governed by a political hierarchy. ommon ownership doesn
A primary goal of socialism is social e4uality and a distri.ution of 5ealth based on ones contribution to society and an economic arrangement that would serve the interests of society as a whole. +ocialism as we "now it today, most commonly refers to 6mar7et socialism86 which involves individual mar"et e$changes organized by collective planning. 9ifference between socialism and communism is that communists directly oppose the concept of capitalism, an economic system in which production is controlled by private interests. +ocialists, on the other hand, believe socialism can e$ist within a capitalist society. he decisions as to how much to produce, which methods of production to employ and for whom to produce are ta"en by the planning authority. hat is why a socialist economy is also called a planned economy. +uch economies are hina, uba, =ietnam, and orth :orea. •
'eatures of Socialism:
he 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. here is collective ownership whereby all mines, farms, factories, financial institutions, distributing agencies (internal and e$ternal trade, shops, stores, etc.), means of transport and communications, etc. are owned, controlled, and regulated by government
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Pruthvi Sir
departments and state corporations. A small private sector also e$ists in the form of small business units which are carried on in the villages by local artisans for local consumption. (2) entr!l Pl!nnin":
A socialist economy is centrally planned which functions under the direction of a central planning authority. !t lays down the various ob*ectives and targets to be achieved during the plan period. entral economic planning means the ma"ing of ma*or 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.' (#) $e%nite Ob&ectives:
A socialist economy operates within definite socio-economic ob*ectives. hese ob*ectives may concern aggregate demand, full employment, satisfaction of communal demand, allocation of factors of production, distribution of the national income, the amount of capital accumulation, economic development;and so forth.' ?or achieving the various ob*ectives laid down in the plan, priorities and bold targets are fi$ed covering all aspects of the economy. (') reeom o* onsumption:
@nder 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 fi$ed prices through the state-run department stores. onsumers sovereignty under socialism is confined to the choice of socially useful commodities. (+) E,u!lit- o* .ncome $istribution:
!n a socialist economy, there is great euality of income distribution as compared with a free mar"et economy. he unearned incomes in the form of rent, interest and profit go to the state which utilises them in providing free education, public health facilities, and social security to the masses. (/) Pl!nnin" !n the Pricin" Process:
he pricing process under socialism does not operate freely but wor"s under the control and regulation of the central planning authority. here are administered prices which are fi$ed by the central planning authority. •
%erits of Socialism:
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rof. +chumpeter has advanced four arguments in favour of socialism/ one. greater economic efficiency# two, welfare due to less ineuality# three, absence of monopolistic practices# and four, absence of business fluctuations. 3e discuss these merits of socialism one b y one. (1) 0re!ter Economic Ecienc-:
Economic efficiency under socialism is greater than under capitalism. he means of production are controlled and regulated by the central planning authority towards chosen ends. he central planning authority ma"es an e$haustive survey of resources and utilises them in the most efficient manner. (2) 0re!ter el*!re ue to 3ess .ne,u!lit- o* .ncome:
!n a socialist economy there is less ineuality of income as compared with a capitalist economy because of the absence of private ownership of the means of production, private capital accumulation, and private profit. All citizens wor" for the welfare of the state and each is paid his remuneration according to his ability, education and training. (#) Absence o* 4onopolistic Pr!ctices:
Another advantage of socialism is that it is free from monopolistic practices to be found in a capitalist society. +ince under socialism all means of production are owned by the state, both competition and monopoly are eliminated. (') Absence o* Business luctu!tions:
A socialist economy is free from business fluctuations. here is economic stability because production and consumption of goods and services are regulated by the central planning authority in accordance with the ob*ectives, targets and priorities of the plan. hus there is neither overproduction nor unemployment. •
emerits of Socialism:
A socialist economy has also certain disadvantages/ 15 3oss o* onsumers6 Soverei"nt-:
here is loss of consumers sovereignty in a socialist economy. onsumers do not have the freedom to buy whatever commodities they want. hey can consume only those commodities which are available in department stores. Bften the uantities which they can buy are fi$ed by the state.
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Pruthvi Sir
25 7o reeom o* Occup!tion:
here is also no freedom of occupation in such a society. Every person is provided *ob by the state. 0ut he cannot leave or change it. Even the place of wor" is allotted by the state. All occupational movements are sanctioned by the state. #5 4!l!lloc!tion o* 8esources:
@nder socialism, there is arbitrary allocation of resources. he central planning authority often commits mista"es in resource allocation because the entire wor" is done on trial and error basis. '5 Bure!ucr!tic:
A socialist economy is said to be a bureaucratic economy. !t is operated li"e a machine. +o it does not provide the necessary initiative to the people to wor" hard. eople wor" due to the fear of higher authorities and not for any personal gain or self-interest.
%ied Economy :
A mi$ed economy is a golden mean between a capitalist economy and a socialist economy. !t is an economic system where the price mechanism and economic planning are used side by side. here is mi$ture of private and public ownership of the means of production and distribution. +ome decisions are ta"en by households and firms and some by the planning authority. All developing countries li"e !ndia are mi$ed economies. Any economy in which private corporate enterprises and public sector enterprises e$ist side-byside, and decisions ta"en through mar"et mechanism are supplemented by some form of partial planning, is to be described as a mi$ed economy. his system overcomes the disadvantages of both the mar"et and planned economic systems provides a clear demarcation of the boundaries of public sector and private sector so that the core sector and strategic sectors are invariably in the public sector. •
'eatures of %ied Economy:
A mi$ed economy possesses the following features/ 15 Public Sector:
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he public sector is under the control and direction of the state. All decisions regarding what, how and for whom to produce are ta"en by the state. ublic utilities, such as rail construction, road building, canals, power supply, means of communication, etc., are included in the public sector. hey are operated for public welfare and not for profit motive. 25 Priv!te Sector:
here is a private sector in which production and distribution of goods and services are done by private enterprises. his sector operates in farming, plantations, mines, internal and e$ternal trade, and in the manufacture of consumer goods and some capital goods. his sector operates under state regulations in the interest of public welfare. #5 9oint Sector:
A mi$ed economy also has a *oint sector which is run *ointly by the state and private enterprises. !t is organised on the basis of a *oint stoc" company where the ma*ority shares are held by the state. '5 ooper!tive Sector:
@nder a mi$ed economy, a sector is formed on cooperative principles. he state provides financial assistance to the people for organising cooperative societies, usually in dairying, storage, processing, farming, and purchase of consumer go ods. +5 reeom !n ontrol:
A mi$ed economy possesses the freedom to hold private property, to earn profit, to consume, produce and distribute, and to have any occupation. 0ut if these freedoms adversely affect public welfare, they are regulated and controlled by the state. /5 Economic Pl!nnin":
here is a central planning authority in a mi$ed economy. A mi$ed economy operates on the basis of some economic plan. All sectors of the economy function according to the ob*ectives, priorities and targets laid down in the plan. !n order to fulfill them, the state regulates the economy through various monetary, fiscal and direct control measures. he aim is to chec" the evils of the price mechanism. 5 Soci!l el*!re:
he principal aim of a mi$ed economy is to ma$imise social welfare. his feature incorporates the merits of socialism and avoids the demerits of capitalism. o remove ineualities of income
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Pruthvi Sir
and wealth, and unemployment and poverty, such socially useful measures as social security, public wor"s, etc. are adopted to help the poor. •
%erits of %ied Economy:
A mi$ed economy possesses certain merits which are as under/ (1) Best Alloc!tion o* 8esources:
+ince a mi$ed economy incorporates the good features of both capitalism and socialism, the resources of the economy are utilised in the best possible manner. he price mechanism, the profit motive, and the freedoms of consumption, production, and occupation lead to the efficient allocation of resources within the economy. hus shortages are avoided, productive efficiency increases, and cyclical fluctuations are eliminated. (2) 0ener!l B!l!nce:
A mi$ed economy maintains a general balance between the public sector and the private sector. here is competition as well as cooperation between the two sectors which are conducive for achieving a high rate of capital accumulation and economic growth. ?urther, an estimate of the successes and failures of the two sectors can be made by comparing their respective performances, and corrective measures are adopted accordingly. (#) el*!re St!te:
A mi$ed economy contains all the features of a welfare state. here is no e$ploitation either by the capitalists as under a free enterprise economy or by the state as under a socialist economy. he wor"ers are not forced to wor", 3or"ers are provided monetary incentives in the form of bonus and cash rewards for inventions. %abour laws are passed fi$ing minimum wages, hours of wor", and laying down the wor"ing conditions of wor"ers in factories and on farms. •
emerits of %ied Economy:
A mi$ed economy has also certain defects which are discussed below/ (1) 7on;ooper!tion between the Two Sectors:
he e$perience of the wor"ing of mi$ed economies reveals that the public sector and the private sector do not see eye to eye with one another. he private sector is treated li"e a step-child and groans under the various restrictions imposed upon it by the state. he private sector is ta$ed heavily, while the public sector is given subsidies and preference over the former in the supplies of inputs. hus a sense of bitterness and non-cooperation deve lops between the two sectors.
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Pruthvi Sir
(2) .necient Public Sector:
he public sector of a mi$ed economy is a big burden on the economy because it wor"s inefficiently. 0ureaucratic control brings in inefficiency. here is over-staffing of the personnel, red-tapism, corruption and nepotism. As a result, production falls and losses emerge. (#) Economic luctu!tions:
he e$perience of the wor"ing of the mi$ed economic system in the developed countries also reveals that they have not been able to remove economic fluctuations. his is because of the improper mi$ture of capitalism and socialism. he private sector is allowed to operate freely under a loose system of government regulations and controls. he public sector also does not operate under the rigid conditions which are laid down under a planned economy.
