Economics System - Market, Socialist, and Mixed

Economic system

An economy is a system of interrelated production, consumption, and exchange of goods and services. In other words, it is an integrated activity or organization for production, distribution, and consumption. In carrying out these activities, people are involved in making transactions, i.e. buying and selling of goods and services. It provides people with the means to work and earn a living. It consists of all the sources of income and employment, such as farms, factories, businesses, etc.

An economic system is a system of production, resource allocation, and distribution of goods and services within a society or a given geographic area. It includes the combination of the various institutions, agencies, organizations, decision-making processes, and patterns of consumption that comprise the economic structure of a given community.

Types of economic System

There are three types of economic system or economy, which are as follows:

• Market Economic System
• Socialist Economic System
• Mixed Economic system

1. Market economy

The economic system in which all the main economic decisions are taken by the people keeping in view their own self-interest without any state interference or control is called a market economic system. It is also known as the capitalist economy or free-market economy or laissez-faire economy. In such an economic system, price or market mechanism is the main working mechanism of economic activities.

Features of Market Economic System

The main features of market economic system are as follows:

a. Private property and ownership: A market economic system always has the institution of private property. An individual can accumulate property and use it according to her/his will. The government protects the right to property. After the death of every person, her/ his property goes to her/ his successors. However, people have to use their private property under government laws and regulations. There is some public property also which is built by the government such as roads, railways, parks, etc.

b. Price mechanism: This type of economy has a freely working price mechanism to guide consumers. Price mechanism means the free working of the supply and demand forces without any intervention.

    Producers are also helped by the price mechanism in deciding what to produce, how to produce, and for whom to produce. Price mechanism brings about the adjustment of supply to demand. All economic processes of consumption, production, exchange, distribution, saving, and investment work according to its directions. Therefore, Adam Smith had called the price mechanism as the Invisible Hand which operates the market economic system.

c. Profit motive: In this economy, the desire to earn a profit is the most important inducement for any economic activity. All entrepreneurs try to start those industries or occupations in which they hope to earn the highest profit. Such industries that are expected to go under a loss are abandoned. Profit is such an inducement that the entrepreneurs are prepared to undertake high risks. We can say that the profit motive is the soul of a market economic system.

d. Competition and co-operation: A market economic system is characterized by free competition because entrepreneurs compete for getting the highest profit. On the other side, buyers also compete for purchasing goods and services. Workers compete among themselves as well as with machines for taking up a particular work. To produce goods of the required type and quality, workers and machines are made to co-operate so that the production line runs according to schedule. In this way, competition and cooperation go side by side.

e. Freedom of enterprise, occupation, and contract: Every person is free to start any enterprise of her\ his choice. People can follow occupations of their ability and taste. Moreover, there is the freedom of entering into a contract. Employers may contract with trade unions, suppliers with a firm, and one firm with another.

f. Consumers' sovereignty: In a market economic system a consumer is compared to a sovereign king. The whole production framework is according to their directions. Consumers' taste governs the whole production line because entrepreneurs have to sell their products. If a particular type of product is produced according to the preference of consumers, the producer gets a higher profit.

g. An important role of the entrepreneur: The entrepreneurial class is the foundation of a market economic system. The whole economic structure of the market economic system is based on this class. Entrepreneurs play the role of leaders in different fields of production.

    The presence of good entrepreneurs is a must for healthy competition. Entrepreneurs are the main source of dynamism of the market economic system.

h. Limited role of the government: Since the market economic system functions through a price mechanism, there is obviously little role for the government to play. Thus, the role of government is to maintain law and order and create infrastructures that help to increase production and overall economic development.

2. Socialist economy

A Socialist economic system is defined as the economic system in which production and distribution activities are owned and controlled by the state in the interest of the society. It ensures welfare, equality of opportunity, and social justice to people. It is also known as the command or planned economy. The prices of goods and services are determined by the government. 

The communist regime of Cuba and North Korea can be described as socialist economies. China is also regarded as a socialist economy but now it has been encouraging liberal economic policies in order to achieve rapid economic growth.

Features of Socialist Economic System

The main features of the socialist economic system are as follows:

a. State-owned resources: In such an economic system, all the means of production are owned and operated by the state in the interest of society as a whole. This is to ensure equality of opportunity for all citizens. This is also aimed at full and efficient utilization of the country's resources.

b. A planned economy: A socialist economy is a fully planned economy. There is a central planning authority in the countries which have adopted the socialist economic system. The main task of the central planning authority is to formulate short-term and long-term plans for the economy. 

    The specific aims and objectives of the socialist economy are considered while formulating these plans. In socialist economies like China, Cuba, and North Korea, the Central Planning Authority formulates the plan according to the objectives of the socialist economic system.

c. Government control: In a fully socialist economic system, the government controls the main aspects of all economic activities. There are controls on the production and price determination of goods and services. In a fully socialist economic system, market forces are given very little importance. The government plans and sets the price of goods and services itself. 

    Consumption is also controlled indirectly through controlled production. There is an exchange control generally operated through the central bank of the economy. Then there are controls on distribution. The government may have a public distribution system. The means of production are directed by the government and are used in promoting the general welfare of the people.

d. Social welfare: One of the most important features of a socialist economic system is social welfare. In this type of economic system, policies are made to protect and free the working class from oppression. The government ensures employment, formulates a minimum wage policy, and legalizes the establishment of worker's unions in order to look after the working class.

e. Absence of private enterprises: In the socialist economic system, private enterprises are not allowed to establish. Production is initiated and conducted by the state. The state makes investment itself and makes all arrangements for the production itself. There is no profit motive in the production.

f. Economic equality: There is economic equality in the socialist economic system. Since there is no private property, private enterprises, or businesses, there is no possibility of an individual to collect the wealth alone. Employment is ensured for everyone. There is also equality of opportunity. The government also makes sincere efforts to maintain economic equality.

3. Mixed economy

The mixed economic system is defined as the economic system where there is the coexistence of both the private sector and the public or government sector. In other words, in the mixed economic system, both public and private sectors decide about production and distribution activities. In this economic system, means of production are owned and controlled by both the government or state and private sector. 

In this economic system, the public sector actively operates to fulfill some clear-cut social objectives in cooperation with an actively functioning private sector. This economy consists of the merits of both the market and socialist economic system. In many countries like Nepal, India, etc ., there is an existence of a mixed economic system.

Features of Mixed Economic System

The main features of a mixed economic system are as follows:

a. Co-existence of the public and the private sectors: In mixed economic systems, the role of the public sector and the private sector is clearly defined. These two sectors cannot operate in the absence of another. The co-operation between these two sectors is considered important. 

    A mixed economic system encourages healthy competition between these two sectors of the economy. For example, in Nepal, the government operates the distribution of electricity throughout the country, while the private sector is also involved in the production of electricity.

b. Price mechanism and controlled price: In a mixed economic system, both price mechanism and price control are in operation. Generally, the price of consumer goods that are produced by private industries is left to be determined by the market itself. 

    But in the condition of a national crisis or huge shortage, price is controlled by the government, and the public distribution system is made effective. The government can arrange grants, levy taxes, implement rules and regulations as needed.

c. Profit motive and social welfare: Economic activities in mixed economic systems are conducted for both the purpose of profit and social welfare as in capitalist and socialist economic systems respectively.

d. Check on economic inequality: In a mixed economic system, the government takes various measures to reduce the gap between the rich and the poor. For example progressive tax on income and property, grants and allowances for the poor and needy, employment opportunities, different types of subsidies, old-age allowances, free health care, free education, etc. These policies help the lower class population to increase their living standards and decrease income inequality.

e. Control on monopoly power: In a mixed economic system, the government controls the monopoly practice of the private businesses by enforcing different rules and regulations. To reduce the monopoly power of private firms and businesses, the government itself produces different goods and services and provides them to the public at an affordable price.

f. Economic planning: Most of the mixed economic systems of the world have taken economic planning as an instrument for rapid economic development and growth. For example, in Nepal, the National Planning Commission has been set up by the government. Its main function is to formulate plans in order to allocate and effectively mobilize the resources of the nation.