Forms of Government: An Economic System

By
Dr. Mahendra Parihar
Associate Professor,
Department of Economics
Manipal University Jaipur

Economic System
Economics - Economicsis thesocial sciencethat

analyzes theproduction, distribution andconsumption

ofgoods & services.

Economic Systemis the system of production,

distribution and consumption

An economic system is a mechanism (also defined as

system or social institution) which deals with the

production, distribution and consumption of goods and
services in a particular society.

The economic system is composed of people, institutions

and their relationships. It addresses the problems of
economics like the allocation of the resources.

Aneconomic systemis the combination of the various agencies, entities

that provide the economic structure that guides the social community.

Forms ofGovernment:
Types/Forms:

Capitalism (Market Economy)

Socialism (Planned economy)

Mixed (Capitalism + Socialism)

 Capitalism is an economic system in which the means of

production are privately owned and operated for profit, usually

in competitive markets.

In other words; An economic system in which investment in and

ownership of the means of production, distribution, and
exchange of wealth is made and maintained chiefly by private
individuals or corporations.
OR

Capitalism is the social system which now exists in most

countries of the world. Under this system, the means for

producing and distributing goods (the land, factories,
technology, transport system etc) are owned by a small minority
of people. We refer to this group of people as the capitalist class.
The majority of people must sell their ability to work in return for
a wage or salary (who we refer to as the working class.)

 ADAM SMITH called the

obvious and simple system

of natural liberty (Book:
Wealth of Nations).

Subject to certain restrictions,

individuals (alone or with others) are
free to decide where to invest, what
to produce or sell, and what prices to
charge. There is no natural limit to
the range of their efforts in terms of
assets, sales, and profits; or the
number of customers, employees,
and investors; or whether they
operate in local, regional, national, or
international markets.

Capitalist System
(Adam Smith)
Centralized to Decentralized system
Authoritarianism to representative
democracy
Free flow of resources
People strive for self interest in free market
Beneficial for society
Based on Demand & Supply Forces
Monopoly to Competitiveness
Self sufficiency to International
interdependence
Producer interest to customer power

 Benefits of Capitalism

In years 10001820 world

economy grew six-fold,in years
18201998 world economy grew
50-fold

Provides Choice to customers

Capitalism actively rewards

positive traits like hard work

Similarly, it punishes negative

traits such as laziness and theft

Narrows the gap between common

person and wealthy

Provides opportunity to realize

dreams and desires

Capitalist societies usually do not

have largeblack markets

Build on democracy

Provides valuable goods and

services

Social Good

 Major limitations/ Criticism:

Downfall of work ethics

Business lobbying with

government

Monopolistic tendency

Free Market + Self Interest

Accumulation of wealth
Encourages inequality in a
society

Human resource exploitation

Results in great disparities
between income of people
owning the capital resources and
others

Socialism

Collective ownership and democratic control of the

material means of production by the workers and the people

Socialism is a term applied to an economic system in which

property is held in common and not individually, and relationships
are governed by a political hierarchy. Common ownership doesn't
mean decisions are made collectively, however. Instead, individuals
in positions of authority make decisions in the name of the
collective group.

Socialists argue that socialism would allow for wealth to be

distributed based on how much one contributes to society, as
opposed to how much capital one holds.

A primary goal of socialism issocial equalityand adistribution

of Wealth based onones contribution to society and an economic
arrangement that would serve the interests of society as a whole.

 Features of Socialism;

Social Ownership of means of production

Existance of public sector
Decisive role of Economic Planning
Production guided by Social Benefits
Abolition of exploitation of labour

 Benefits of Socialism
i.
ii.
iii.
iv.
v.
vi.

Better salaries
Stable Environment
Eliminates poverty
Better Products
Fulfills survival need
Opportunity for citizens to explore non-economically-productive pursuits

 Criticism of Socialism

Distorted price signals

Suppression of economic democracy
Slow Technological advancements
Minimize self management
Reduced incentives

BASIS OF
DIFFERENCE

CAPITALIST ECONOMY

SOCIALIST ECONOMY

Resources
Ownership

Privately owned

State owned

Foundation belief

competition brings out the

best in people

cooperation is the best

way for people to
coexist

Earning of wealth

everyone works for his own

wealth

everyone works for

wealth which is
distributed equally to
everyone

Market Scenario

Level playing field

Protection to PSUs,
Private enterprises are
permitted in few
businesses only

Govt. interference

Only in situations where laws Fully involved

have been broken

Employees
motivation

Highly motivated on account

of proportional benefits

Rarely motivated as
performance is not
rewarded

Merit

Perception of better
economic growth because of
competition

Equal distribution of
income results in
welfare of all

Mixed Economy
Any economy in which private corporate enterprises and

public sector enterprises exist side-by-side, and decisions

taken through market mechanism are supplemented by some
form of partial planning, is to be described as a mixed
economy.

This system overcomes the disadvantages of

both the market and planned economic systems.

 Provides a clear demarcation of the boundaries of

public sector and private sector so that the core
sector and strategic sectors are invariably in the
public sector.

The government intervenes to prevent undue

concentration of economic power, and
monopolistic and restrictive trade practices

The rights of the individual are respected and

protected subject only to the requirements of

public law and order and morality

 Features

Resources are owned both by the government as well as

private individuals. i.e. co-existence of both public sector
and private sector.

Market forces prevail but are closely monitored by the

government.

Monopoliesmay be existing butunder close

supervisionof the government.

 Advantages

Producers and consumer have sovereigntyto choose what to produce

and what to consume but production and consumption of harmful goods and
services may be stopped by the government.

As compared to Market economy, a mixed economymay have less income

inequalitydue to the role played by the government.

A mixed economy represents an achievable balance between individual

initiative and social goals.