Economic Systems:
There are 3 major mainstream economic systems, and they are:
1) Market economy
2) Mixed economy
3) Command economy.
The distinction between them stems from their approach to
answering the 3 basic economic questions:
1) What to produce?
2) How to produce it?
3) How to distribute it?
-
1) Market economy:
- All economic resources are owned by the people.
- They decide how and where to channelize those resources.
- The market forces of demand and supply determine the
equilibrium market price, which in turn determines profits.
- This profit motive is the driving force behind the whole
economy.
- The government plays only a peripheral role in setting up the
basic structure and rules controlling the markets.
- The political counterpart of this system is called
"capitalism."
- Market economy believes in Laissez-faire meaning
non-intervention by the government in the functioning of the
economy.
- The basic logic is that the scarce economic resources would
automatically go into the most desirable channels, because they
would be the most profitable ones based on consumer demand for
those goods and services.
- Consumers reign supreme in a market economy.
- They act by demanding (or not demanding a good) and the
producers react by producing (or not producing) that
commodity.
-
2) Command economy:
- It is also called a planned economy.
- Here the government owns all the economic resources and all the
factors of production.
- The government decides the answers to the 3 fundamental
economic questions.
- The government decides the allocation and channelization of
scarce economic resources.
- There is no interplay of the market forces of demand and supply
and the pricing mechanism in deciding this allocation.
- There is government regulation controlling almost every aspect
of people's lives.
- Since people do not own the economic resources, there is no
place for private initiative and no incentives at work.
- The political system which goes with this economic style is
called a socialist / communist system.
-
3) Mixed economy:
- It is a mixture of the features of both the market and command
economies.
- They have a private (market) as well as a public (government)
sector.
- In the private sector the 3 economic questions are answered by
the market forces of demand and supply and the resulting
prices.
- The government only sets up the basic regulations within which
the private businesses can play.
- There is generally no more government intervention in this
sector.
- People own the economic resources and use it based on their own
choice and preferences, motivated by profit.
- The allocation and channelization of economic resources are
done based on market prices and market returns.
- There is little (to none) role of the government in this
sector, except laying down the broad rules of the game.
- The government outlines the demarcation between legal and
illegal, (right and wrong) aspects of how the market can work.
- The government does not intervene in the day to day
operation/administration of this sector.
- Then there is a parallel public sector, totally under
government control.
- Here the economic resources are owned by the government.
- This sector generally operates in those economic areas where
there is a high social need little to no profit margin.
- Thus private investment will not be channelized into
sectors.
- These are generally social infrastructure projects like roads,
highways, dams, police, defense etc.
- The idea of a mixed economic system was to integrate the best
of both the market economy (private initiative) and the command
economy (government allocation of resources) which would nullify
the ills of the other system.
- This way the country gets the best of both worlds.