Economic System An economic system is the system of production, distribution and consumption of goods and services of an economy. It can be defined as a "set of methods and standards by which a society decides and organizes the allocation of limited economic resources to satisfy unlimited human wants. Various types of economic system are as follows:1)
Capitalism
2)
Socialism
3)
Mixed
Capitalism Capitalism refers to an economic system where the means of production are privately are privately owned and operated by commercial entities. Features of capitalist economy are as follows: •
It is the world’s dominant economic system.
•
The means of production and distribution are owned by individuals rather than state.
•
Prices are set by market forces of demand and supply rather than economic planning.
•
Profit is distributed to owners who invest in commercial business ventures.
Private ownership and free enterprise are believed to lead to more efficiency, lower prices, better better products products and rising rising prosperit prosperity y because of the direct direct relation relation between between efficiency efficiency and and profits. •
Socialism Socialism is an economic system that advocates the vesting of ownership and control of the means of production and distribution in the community as a whole. The community is believed to be both more just and more efficient through central planning, or participatory planning. In Marxist theory Socialism represents the stage following capitalism in a state transforming to communism; for many, however, it is a goal in itself. Main features of socialism are as follows: The means of production and distribution are owned and controlled by state and not by individuals. •
Prices are set by state in the interest of general public and not by the market forces of demand and supply. •
•
Social welfare, not the capital accumulation, is the motive of economic system.
•
Socialism is based upon principal of justice and equity.
Mixed Economy Mixed Economy can be defined as a form of organization where the elements of both capitalist economy and socialist economy are found. Simply in such type of economy there is the presence of private economic freedom with centralized planning. It avoids the problems associated with both capitalism as well as socialism. In this system the freedom in the economic activities are influenced by the Government's regulation and licensing policies. The mixed economy allows private participation in the field of production in an environment of competition with an objective of attaining profit. On the contrary following to the socialism features it includes public ownership in production for maximizing social welfare. Elements of Mixed Economy are as follows: It includes variety of freedoms such as the freedom to posseess the means of production, to buy, to sell, to hire, to fire, to organize, to communicate, to protest. •
State-owned factors of production, infrastructure, and services such as libraries, roads, schools, colleges, hospital, banks, electricity and water supply etc. •
Autonomy over personal finances but including involuntary spending and investments such as transfer payments and other cash benefits such as social securities, government subsidies and mandatory insurance. •
Restricted by various laws, regulations such as environmental regulations, labour laws, consumer protection and antitrust laws. •
•
Taxes and fees written or enforced with manipulation of the economy in mind.
Capitalism vs Socialism Economic System
Capitalism
Socialism
Equity
Socialism is concerned with Capitalism is unconcerned about equity. It is redistributing resources from the rich to argued that inequality is essential to the poor. This is to ensure everyone has encourage innovation and economic both equal opportunities and equal development outcomes.
Ownership
The State will own and control the main Private businesses will be owned by private means of production. In some models of individuals socialism, ownership would not be by the government but worker cooperatives.
Efficiency
It is argued that the profit incentive It is argued that state ownership often encourages firms to be more efficient, cut leads to inefficiency because workers and costs and innovate new products that people managers lack any incentive to cut costs want
Unemployment
In capitalist economic systems, the state doesn't directly provide jobs. Therefore in times of recession, unemployment in capitalist economic systems can rise to very high levels
Price Controls
Prices are determined by market forces. In a state managed economy prices are Firms with monopoly power may be able to usually set by the government this can exploit their position and charge much higher lead to shortages and surpluses prices.
Employment is often directed by the state. therefore, the state can provide full employment even if workers are not doing anything particularly essential.
Socialism is an economic system in which the economic means of production are owned and controlled collectively by the people. Many socialist ideas come from Marxism (more commonly, "communism"), which essentially calls for a reversal of what we know as the structure of society. In The Communist Manifesto, Karl Marx predicts that the proletariats will overthrow the bourgeoisie (which seems to be happening to some degree). The bourgeoisie are upper management and upper class, the white collar workers, while the proletariats are the working class, the blue collar workers. Since the proletariats "do all the work", Marx and other socialists suggest that they should get an equal share of the wealth. A Marxist society would have no private property rights and goods produced in it would be distributed among the citizens--"from each according to his ability, to each according to his need." The idea of a Marxist society is very alluring. In today's world of freedom and fairness, the notion of everyone being completely equal, even if this means taking from the rich and giving to the poor, seems just; however, the defect in Marxism is obvious. It is dependent on a type of human nature that is hard to come by. For Marxism to work, very little greed and jealosy can exist and people must have a general feeling of charity and a willingness to work their hardest
for the good of everyone. These are obviously not common traits. Marxism could also work if those who have the greatest abilities and those who work the hardest are satisfied with rewards equivalent to those with lesser abilities and those who don't work hard at all. This is also very unlikely. Marxism undoubtedly leads to free riding and slacking. On the other hand, capitalism utilizes the willpower of individuals, especially entrepreneurs, to foment economic activity. Capitalism is based on the assumption that individuals operate based on self interest; however, by doing so they not only help themselves, but also propel others towards economic success. As Adam Smith put it, "by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it." The communist societies that have been or are being attempted are really not communist societies at all, although they try to be. The USSR, for example, attempted communism but ended up being way to totaliarianistic--in stead of everyone working for the benefit of the society, there was a group of individuals with total power (Joseph Stalin took this role for a quarter century). Today's China is the same way--there is a centralized bureaucracy that calls all the shots. In both of these cases many people are forced to take part in the society against their own will. The Soviet Union obviously didn't work and China is becoming more prosperous only as they allow their economy to be more capitalistic. Taiwan, China's capitalistic counterpart, is years ahead of China on almost any measure of prosperity. The fact is that people can't be forced to take part in communism. It simply won't work unless everyone is willing, and even then greed can easily lead to its demise. On the other hand, capitalism can work even if there are some who don't want to pull their weight--the difference is that those that don't pull their weight will suffer the consequences. Just like in communism, capitalism will work better if everyone works hard to produce valuable products. Also just like in communism, a capitalist society where there exists charity and good-will will eliminate preventable suffering of all individuals. So why has France passed a socialistic labor law which makes it very hard to lay off workers? Why does Canada have government sponsered, free health care? Why do some American workers pay over a third of their income in taxes? Why do so many nations tax and then dole out excessive welfare checks? It seems as though we are doing the very thing that history has proven doesn't work: forcing socialism. How can France expect its workers to work hard if it's nearly impossible to fire them? How can we expect welfare recipients to find jobs if it's easy for them to sit at home and get welfare?
What are the merits and demerits of socialism, capitalism and mixed economy? The merits of Socialism are theoretical, the idea is that people will excel because of their desire to make the community as a whole better without any specific benefit to themselves other than the "better community". The demerits of Socialism are that in practice people won't work to do their best because their specific personal results are the same whether they do well or whether they barely do enough to get by. All end up suffering from the community gravitating towards the lowest common denominator of commitment and performance. The merits of Capitalism are not theoretical, Capitalism give each individual the ability to be rewarded for their effort to whatever degree they can rise to. The only limits are on the individual's desire and commitment. This utilizes the inherent selfish motive in man to preserve himself and turns it into something that benefits the entire community. I want a well kept house because the value is greater for me, but my neighbor benefits from my well kept house as well in his property values. If I provide a product or service for less that a competitor I will have more customers and prosper more than I would with a very high price and few customers. The customer benefits from a low price and I benefit from a prosperous business. The demerits of Capitalism would be the ability to become so successful in a given area of commerce that you have no competition to act as a check and balance to how the business conducts itself. This is known as a monopoly, Capitalist countries pass laws to prevent monopoly's from controlling market sectors because competition is a necessary component in making Capitalism work for the people. Capitalism is actually not a "system" it is what happens in the absence of a "system". The "mixed" system of allowing some to Capitalize but then punishing their success to transfer the fruit of their labor to those who do not contribute to the community is damaging because it takes away the personal motivation of both the earner and the receiver to do their best. The earner try's to hide his wealth to protect it instead of investing it to grow it, the receiver has no incentive to work for his own benefit because others provide for his needs whether he participates or not. This is why charity has always been more effective when handled by private community organizations like churches. By keeping them acts of grace as opposed to "entitlements" the "help" spurs gratitude in the mind of the one "helped" and becomes a motivator to the one being helped to rise as quickly as possible out of their economic dependence. An entitlement causes them to believe that they are entitled to the support they receive and therefore have no reason to feel any urgency to do any better. Some elements of Socialization are always going to be necessary even in a Capitalist society, like requiring that health care givers not refuse emergency treatment to anyone based on their ability to pay. Another example would be the right to an attorney when accused of a crime. The profit motive in these cases could be detrimental to individuals and the community.
As a result, restrictions are placed on the people who work in these industries so the pursuit of profit will not be the only consideration as they decide who they will provide service to. The conclusions we have offered here are easily verified by examining the history of nations who have embraced these philosophies, it was never seen that Socialism fails to benefit any group of people over time or Capitalism fail to prosper any group of people over time when the few exceptions are regulated.
Captalism
Socialism
Production and Businesses and Individuals produce goods distribution of ____________________ and services for the goods and services entrepreneurs produce goods government. The – Who produces and services. Individuals, government then distributes what, who gets other businesses, and the those goods and services to what, how do they government purchase the the population. Example: get it? goods and services with the Soviet Union, Cuba, money. The price of the North Korea, Iraq goods and services is determined by the demand for the good versus its supply. Example: the black market, stock market
Mixed
Businesses , Individual entrepreneurs and the Government produce goods and services. Individuals, other businesses, and the government purchase the goods and services with money. The government helps insure distribution of goods and services is fair, by regulating prices providing health care, etc Example: Great Britain
Consumer Choice – How many choices does a consumer have if they want a good or service? To what degree does competition exist?
Consumer usually has _____________options when purchasing a good or service. There are usually several businesses offering the same product. This ensures competition and fair prices, as businesses compete for the consumer’s money. Example: Many types of soda
There is Consumer usually has ______________choice. multiple options when The government distributes purchasing a good or service. only one type of product for However, the government a given good or service may own basic utilities like Example: There is only water, and electricity. gov’t-issued soda. No other Example: Washington brands. Suburban Sanitary Commission, Public Education (you can not choose the school you attend)
Profit – What is the role of profit in the economic system?
The main incentive of businesses. Forces them to set fair prices. Example: Taco Bell would not be profitable if no one could afford it’s food.
Not a factor. The government collects all profit and distributes it amongst the population. Example: Cuban government takes all the
The main factor of business. However, the government takes a large percentage of profit and distributes it among the people. Example: A successful business in France pays high taxes, which the
labor of the farmers, and distributes their work (crops) to the rest of the people.
French gov’t spends on improved health care.
______________________ productivity. Workers see little additional benefit in being more productive. Example: A Soviet farmer may harvest food quicker, but he/she will not eat much more because of it.
___________________ productive. Profit is still an incentive, but goods are still distributed by the government. Gov’t acts like a safety net. Example: A farmer harvests slow, may not profit much, but the gov’t will make sure he eats
Productivity – How productive are the workers in the economic system? Is there an incentive to be productive?
_________________ productive workers. If workers are not productive, then profit goes down. Example: If farmers don’t harvest food quickly, they will have less food to sell.
Property Rights – Who owns the natural, physical, and human capital in the economic system?
____________________own ______________________ natural and human capital. _ owns all capital. They sell the use of these to Example: Cuban farmer businesses, who own gives away his labor (human physical capital. Example: capital). Gov’t owns the A Giant employee sells farm he/she works on his/her labor (human capital) (natural capital). Gov’t to the store. The farmer sells owns the tractor (physical the produce (natural capital) capital) used to harvest the to Giant. Giant uses its goods. refrigerators (physical capital ) to sell the goods.
____________________, businesses, and _____________________own capital. Example: Tour guide sells labor (human capital) to Grand Canyon Expeditions company. Company owns the jeeps (physical capital) used on the tours. Federal Gov’t owns the land (natural resource) the tour takes place on.
Standard of Living – What is life like in the economic system? Are there differences in education, health care, material possession, crime, etc
Very high for some. Very low for more. Pretty good for most. Characterized by wide disparity: very rich and very poor.
Good for most. Balanced. Less disparity.
Low for most. Lack of incentive to produce good products.
