Economic System• Economics - Economics is the social science that analyzes

the production, distribution and consumption of goods & services.

• Economic System is the system of production, 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.

• The economic system is composed of people, institutions and their relationships. It addresses the problems of economics like the allocation of the resources.

An economic system is the combination of the various agencies, entities that provide the economic structure that guides the social community.

• Economic System : An organized way in which a state or nation allocates its resources and distributes goods and services in the national community.

• Types:

– Capitalism (Market Economy)

– Socialism (Planned economy)

– Mixed (Capitalism + Socialism)

Capitalism

• Capitalism is an economic system in which the means of production are privately owned and operated for profit, usually in competitive markets.

• In other words; An economic system in which investment in and ownership of the means of production, distribution, and exchange of wealth is made and maintained chiefly by private individuals or corporations.

OR

• Capitalism is the social system which now exists in most countries of the world. Under this system, the means for producing and distributing goods (the land, factories, technology, transport system etc) are owned by a small minority of people. We refer to this group of people as the capitalist class. The majority of people must sell their ability to work in return for a wage or salary (who we refer to as the working class.)

• ADAM SMITH called “the obvious and simple system of natural liberty” (Book: Wealth of Nations). Subject to certain restrictions, individuals (alone or with others) are free to decide where to invest, what to produce or sell, and what prices to charge. There is no natural limit to the range of their efforts in terms of assets, sales, and profits; or the number of customers, employees, and investors; or whether they operate in local, regional, national, or international markets.

Mercantile System

•Production Factors in Government hands

•Export emphasis

Capitalist System(Adam Smith)

•Centralized to Decentralized system

•Authoritarianism to representative democracy

•Free flow of resources

•People strive for self interest in free market

•Beneficial for society

•Based on Demand & Supply Forces

•Monopoly to Competitiveness

•Self sufficiency to International interdependence

•Producer interest to customer power

• Benefits of Capitalism• In years 1000–1820 world economy

grew six-fold, in years 1820–1998 world economy grew 50-fold

• Provides Choice to customers• Provides valuable goods and services• Capitalism actively rewards positive

traits like hard work• Similarly, it punishes negative traits

such as laziness and theft • Narrows the gap between common

person and wealthy• Provides opportunity to realize dreams

and desires• Capitalist societies usually do not have

large black markets• Build on democracy• Social Good

• Major limitations/ Criticism:• Downfall of work ethics• Free Market + Self Interest• Accumulation of wealth• Encourages inequality in a

society• Business lobbying with

government• Monopolistic tendency• Human resource exploitation• Results in great disparities

between income of people owning the capital resources and others

Socialism

Collective ownership and democratic control of the material means of production by the workers and the people

•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. Common ownership doesn't mean decisions are made collectively, however. Instead, individuals in positions of authority make decisions in the name of the collective group.

•Socialists argue that socialism would allow for wealth to be distributed based on how much one contributes to society, as opposed to how much capital one holds.

•A primary goal of socialism is social equality and a distribution of Wealth based on one’s contribution to society and an economic arrangement that would serve the interests of society as a whole.

• Socialism as we know it today, most commonly refers to "market socialism," which involves individual market exchanges organized by collective planning.

• Difference between socialism and communism is that communists directly oppose the concept of capitalism, an economic system in which production is controlled by private interests. Socialists, on the other hand, believe socialism can exist within a capitalist society.

• Features of Socialism;• Social Ownership of means of production• Existance of public sector• Decisive role of Economic Planning• Production guided by Social Benefits• Abolition of exploitation of labour

• Benefits of Socialismi. Better salariesii. Stable Environmentiii. Eliminates povertyiv. Better Productsv. Fulfills survival needvi. Opportunity for citizens to explore non-economically-

productive pursuits

• Criticism of Socialism• Distorted price signals• Suppression of economic democracy• Slow Technological advancements• Minimize self management• Reduced incentives

COMPARISON

COMPARISON..

BASIS OF DIFFERENCE CAPITALIST ECONOMY SOCIALIST ECONOMY

Resources Ownership Privately owned State owned

Foundation belief competition brings out the best in people

cooperation is the best way for people to coexist

Earning of wealth everyone works for his own wealth everyone works for wealth which is distributed equally to everyone

Market Scenario Level playing field Protection to PSUs, Private enterprises are permitted in few businesses only

Govt. interference Only in situations where laws have been broken

Fully involved

Employees motivation Highly motivated on account of proportional benefits

Rarely motivated as performance is not rewarded

Merit Perception of better economic growth because of competition

Equal distribution of income results in welfare of all

Demerit Few individuals/groups attain powers, rest are exploited

Hard work is not rewarded, lazy employees also enjoy equal level of benefits

Mixed Economy

• Any economy in which private corporate enterprises and public sector enterprises exist side-by-side, and decisions taken through market mechanism are supplemented by some form of partial planning, is to be described as a mixed economy.

• This system overcomes the disadvantages of both the market 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.

• The government intervenes to prevent undue concentration of economic power, and monopolistic and restrictive trade practices

• The rights of the individual are respected and protected subject only to the requirements of public law and order and morality

• Features• Resources are owned both by the government as well

as private individuals. i.e. co-existence of both public sector and private sector.

• Market forces prevail but are closely monitored by the government.

• Monopolies may be existing but under close supervision of the government.

• Advantages

• Producers and consumer have sovereignty to choose what to produce and what to consume but production and consumption of harmful goods and services may be stopped by the government.

• As compared to Market economy, a mixed economy may have less income inequality due to the role played by the government.

• A mixed economy represents an achievable balance between individual initiative and social goals.