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 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 products and rising prosperity because of the direct relation between efficiency 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
Capitalism Socialism
System
 Socialism is concerned with
Capitalism is unconcerned about equity. It is
redistributing resources from the rich to
argued that inequality is essential to
Equity the poor. This is to ensure everyone has
encourage innovation and economic
both equal opportunities and equal
development
outcomes.

The State will own and control the main

Private businesses will be owned by private means of production. In some models of
Ownership
individuals socialism, ownership would not be by the
government but worker cooperatives.

It is argued that the profit incentive

It is argued that state ownership often
encourages firms to be more efficient, cut
Efficiency leads to inefficiency because workers and
costs and innovate new products that people
managers lack any incentive to cut costs
want

In capitalist economic systems, the state

Employment is often directed by the
doesn't directly provide jobs. Therefore in
state. therefore, the state can provide full
Unemployment times of recession, unemployment in
employment even if workers are not
capitalist economic systems can rise to very
doing anything particularly essential.
high levels

Prices are determined by market forces.

In a state managed economy prices are
Firms with monopoly power may be able to
Price Controls usually set by the government this can
exploit their position and charge much higher
lead to shortages and surpluses
prices.

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 Mixed

Production and Businesses and Individuals produce goods Businesses , Individual

distribution of ____________________
goods and services entrepreneurs produce goods
– Who produces and services. Individuals,
what, who gets other businesses, and the
what, how do they government purchase the
get it? goods and services with
money. The price of the
goods and services is
determined by the demand
for the good versus its
supply. Example: the black
market, stock market
and services for the
government. The
government then distributes
those goods and services to
the population. Example:
the Soviet Union, Cuba,
North Korea, Iraq
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 Consumer usually has There is Consumer usually has

– How many _____________options
choices does a when purchasing a good or
consumer have if service. There are usually
they want a good several businesses offering
or service? To the same product. This
what degree does ensures competition and fair
competition exist? prices, as businesses
compete for the consumer’s
money. Example: Many
types of soda
______________choice.
The government distributes
only one type of product for
a given good or service
Example: There is only
gov’t-issued soda. No other
brands.
multiple options when
purchasing a good or service.
However, the government
may own basic utilities like
water, and electricity.
Example: Washington
Suburban Sanitary
Commission, Public
Education (you can not
choose the school you attend)

Profit – What is The main incentive of
the role of profit businesses. Forces them to
in the economic set fair prices. Example:
system? 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

Productivity – _________________
How productive productive workers. If
are the workers in workers are not productive,
the economic then profit goes down.
system? Is there Example: If farmers don’t
an incentive to be harvest food quickly, they
productive? will have less food to sell.
Property Rights – ____________________own
Who owns the natural and human capital.
natural, physical, They sell the use of these to
and human capital businesses, who own
in the economic physical capital. Example:
system? A Giant employee sells
his/her labor (human capital)
to the store. The farmer sells
the produce (natural capital)
to Giant. Giant uses its
refrigerators (physical
capital ) to sell the goods.
Standard of Living Very high for some. Very
– What is life like low for more. Pretty good
in the economic for most. Characterized by
system? Are there wide disparity: very rich
differences in and very poor.
education, health
care, material
possession, crime,
etc
labor of the farmers, and
distributes their work
(crops) to the rest of the
people.
______________________
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.
______________________
_ owns all capital.
Example: Cuban farmer
gives away his labor (human
capital). Gov’t owns the
farm he/she works on
(natural capital). Gov’t
owns the tractor (physical
capital) used to harvest the
goods.
Low for most. Lack of
incentive to produce good
products.
French gov’t spends on
improved health care.
___________________
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
____________________,
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.
Good for most. Balanced.
Less disparity.