Question

Discuss the three different economic systems available to modern societies a. provide the goals and mechanisms of each. b. Offer several advantages and disadvantages of each system.

Answer 1

The three economic systems available to modern societies are Market Economic System, Command Economic System and Mixed economic System.

I. Market Economic System.

In a market economy all means of productions are owned and controlled by private individuals. These means are used to earn profit. The owners have full freedom to use or not to use the means of production. Profit is the driving forces behind the use the productive resources. In such economies the economic decisions like what to produce, how to produce and whom to produce are settled through the free working of the forces of demand and supply. In short a free market economy is an economic system featured by private ownership and the use of such ownership for profit. The goal of market economy is profit motive and private ownership. The underlining features of a market economy are.

1. Right to private property.

Everybody has the right to acquire private property, to keep it and pass it to his heirs after death.

2. Freedom of enterprise.

The very outstanding feature of market economy is economic freedom. Everybody is free to take up any occupation as he likes and start any business.

3. Freedom of choice to consumers.

Every consumer enjoys a freedom of choice of the commodities or services. He cannot be forced to consume any particular commodity or service.

4. Profit motive.

To make profit is the primary motive of every entrepreneurial activity.

5. Use of price mechanism.

It is the price mechanism which facilitates the function of a market economy. All economic decisions are settled through price mechanism in a market economy.

The market economy has certain inherent merits compared to other economic systems.

1. Automatic working.

The system does not require any central directing authority for its functioning. It functions automatically through price mechanism.

2. Higher efficiency an incentive to hard work.

In a market economy there is no ceiling on private property and profit. Thus in pursuit of increased profit and acquision of private properly the entrepreneurs and worker are induced to work hard.

3. Economic development and prosperity.

The market economy offers greater incentive for saving and investment. It encourages innovation and technological progress and thus the optimum use of resources.

4. Optimal utilization of resources.

The driving force of competition and profit motive leads to the optimum use of country’s resources.

The market economy has certain demerits also.

1. Wasteful competition.

Huge expenditure is incurred on advertisement and sales promotion to defeat the rival firms. This will leads to the waste of scarce resources.

2. Economic instability.

The market economy is usually characterized by business cycles. The absence of an authority to control the market mechanism results in overproduction and unemployment.

3. Economic inequality.

The self interest and profit motive and the private ownership of property will results in the concentration of economic power in the hands of a few. This cause economic inequality. In a market economy rich become richer and poor become poorer.

4. Emergence of monopoly.

In a market economy the big monopolies emerges with the concentration of economic power in their hands.

II. Command economy.

In a command economy is one where all means of production are under the use and control of the state. The goal of this system is increased social welfare and security to the citizens. The features of a command economy are the following.

1. Social ownership of means of production.

The means of production are the property of the state and not of private individuals. The state owns and uses this property for the common good.

2. Economic equality.

The absence of private property and profit motives gives no room for the concentration of economic power in the hand of a few. This ensures economic equality.

3. Equality of opportunity.

Every individual has an equal opportunity to the profession.

4. Economic planning.

The state is in charge of both production and distribution. All economic decisions are taken by the central planning authority.

The command economy is ensures the following merits.

1. Social Justice.

The system ensures social justice.

The inequality of income is reduced and the national income is more equitably and evenly distributed.

2. Better allocation of resource.

Since the planning authority controls all economic activities, there will be no chance of overproduction and economic instabilities in a command economic system.

3. Social security and welfare.

The people are provided with social security benefits and thus the command economy give social security and increased welfare for the citizens.

The command economy is not free from demerits. The following facts limit its success.

1. Loss of economic freedom.

There is no free enterprise and freedom of consumer choice.

2. Excessive power by the state.

In a command economic system there is excessive concentration of power in the hand of the state which leads to misuse of power and deprivation of personal freedom.

3. Lack of incentives.

The incentive to hard work and stimulus of self improvement disappears altogether when personal gain and self interest is eliminated.

III. Mixed economic system.

The mixed economic system is the combination of market economy and command economy. It is characterized by the co-existence of private property and control by the central planning authority. The basic features are:

1. Co-existence of public and private sectors.

The public and private sectors function together in a mixed economic system.

2. Role of price system and government directions.

The system is operating through price system and government directives. The private sector is operating on the basis of price mechanism while the public sector is operating by the government.

3. Government regulation and control over the private sector.

The government adopts necessary measures to control the private sector.

4. Consumers sovereignty.

Since the private sector is based on price mechanism the consumer’s sovereignty is protected.

The advantages of this system are:

It promotes quick economic development; It creates balanced development, lesser income inequality and freedom of choice and private property.

The basic disadvantages of this system are that excessive control by the government over the private sector hampers its growth potentials. Both sectors will be inefficient under this system. There will be delay in economic decision in the public sector which will reduce the potential of development. The threat of nationalization is higher in a mixed economy.