Economic Systems – 06 Main Economic Systems

Economic systems

Economic systems are a complex network of individuals, organizations, and institutions and their social and legal interrelationships. The function economic system is to solve the basic economic problems. Based on the relative scarcity of economic resources all the economies face a common issue “Choice”. The choice is an issue of allocating available limited resources in a way that the maximum number of human needs and wants are fulfilled. Every economy has to find the answers to the following basic economic problems.

  1. What are the goods to be produced?
  2. How are the goods to be produced?  – This is an issue of selecting the most suitable method of production.
  3. For whom are the goods produced?  –  This is an issue of identifying the sector that has the ability to purchase the goods produced  ( section of consumers with purchasing power.)

Though the economic problems are common, the ways the solutions are sought are different. It depends on the political, social, or cultural ideologies of the societies. Based on that, the following economic systems can be identified.

  1. Free Market economic system – Capitalism
  2. Command economic system – Socialism
  3. Mixed economic system
  4. Communism
  5. Marxism
  6. Fascism

Free Market economic system – Capitalism

Free market or the Capitalism is an economic system in which the basic economic decisions are taken based on the market mechanism. Following are some of the basic features of Capitalism.

  1. There is no government intervention in economic activities.
  2. Price mechanism
  3. Private ownership of properties
  4. Free enterprise
  5. Competition
  6. Self-interest

In a free-market government has no role in economic matters. The decisions of resource allocation or what goods are to be produced are taken by the producers by looking at the consumer market and the factor market. Government plays the role of only general administration such as issuing money, maintaining the legal framework, etc.

The price mechanism is another important feature of capitalism. The prices of goods and services are determined in the free market through demand and supply forces. The price so determined acts as an invisible hand determining economic behavior by providing signals both to the producers and consumers. When the market price increases it is a signal to the producers to produce more of the product and the possibility of gaining higher profit.

Fall in market price gives a hint to the producer to shift the resources to produce another product that can be sold at a higher price. But in practice, there are certain limitations to this such as factor mobility. Consumers too are motivated by the market price. When the price is high, it signals them to shift their consumption to substitutes that are available at lower prices.

There are no restrictions on private property ownership or accumulating wealth in a capitalist economy. Those who are capable can own the resources without restriction. The government legally upholds the people’s right to property ownership. In a market economy, the private sector is encouraged in actively involving in economic activities.

Free enterprise and competition are common in the free-market economy. Those who are interested are free to involve in entrepreneurship. In addition, competition is a factor that maintains the dynamic functioning of the economy. Producer competes with each other in order to secure a major share of the market. At the same time, consumers too are in a competition to maximize their satisfaction by having more units of a product at a lesser price. 

Command Economic system – Socialism

These are the economic systems with the total opposite of the free market system. This is considered as a welfare economic system because overall social wellbeing is the main objective of economic activities. Some of the features of the Command economy can be listed below.

  1. Government control over the economy
  2. Resources are allocated according to the government plans.
  3. Restricted private property ownership.
  4. Social welfare is the main objective, not the profit.

The total control of the economy is in the hand of the government. Though there is a price for the product, it does not have any controlling ability. On behalf of the government, the Central Planning Authority decides upon the allocation of resources in a way that maximizes social welfare. Through the researches conducted by them, pressing needs of the economy are identified and the resources are allocated to produce goods and services to satisfy them.

In addition, the planning aims at a maximum efficiency of resources and their sustainability. Consumer goods are distributed through the network of Co-operatives. The workers are employed in different jobs according to the requirement of the planning body and they are organized as groups called Communes

There is no private ownership of property. All the factors of production except labor are owned by the government. Therefore, in a command economy, there is no competition.

Mixed economic System

Though there are theoretical systems such as capitalism, Socialism, etc. they cannot be found in their pure form. Mixed economic systems are a practical situation that can be found in all the countries. Even in the USA, pure capitalism is not existing.

Mixed economic systems are a situation in which both socialist and capitalist economic features are present. Some of the features of this system are as follows.

  1. Both market and command economic features are present.
  2. Strategic economic sectors are in government control
  3. Economic planning is in government control
  4. Social welfare is the responsibility of the government.

In most of the economies, social welfare sectors such as Health, Education, etc. and strategically important sectors such as Food supply, National Defense, etc. are under State control. The private sector too is active in other sectors. The modern trend is that most governments rely more on the public sector to achieve higher efficiency and reduce public expenditure.

Marxism, Communism and Fascism

Communism and Marxism are based on the philosophical, social, political, and economic ideology that totally disapproves of the Capitalist economic order at the beginning of the 20th century in the Soviet Union. Their ultimate goal is to establish a socioeconomic structure based on the following features.

  • Common ownership of the means of production.
  • Do away with the society based on money, class, and State.

Both Marxian and communists share the same idea that the current social order stems from capitalism and the conflict between the working class and the capitalists is the root cause of all the problems. They are totally against the capitalists making a profit by employing the working class.

As far as Fascism is concerned, from time to time they supported different economic policies. The main objective was to concentrate the economic wellbeing towards the elite group.

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