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1, , Introductory:, , Meaning, Functions and, Classification of, , Economic Systems, Al economic systems are built with the same bricks., , C. Landauer, meom, , 1. THE MEANING OF ECONOMIC SYSTEM, insatiaeconomic society people work to satisfy their numerous, , In an, satisfied, blewants. The wants are many,_interdependent and are being, social activity in any, , through production and exchangel Production is a, in, economy. Uhe resources required for production are relatively scarce, very, relation to the numerous wants and resources therefore becomes, , pro, essential. The crux uÍ the_problem_i__matching limited andeScarce, isive, poi, e, ductive resources with_unlimited wants or human needs., "In all, Economic system emerged because of economic problems. means, economic Systems the basic problem is the allocation of scarce, results," says, among competing ends for the achievement of maximum, , Prof. Halmn, , accompInfact, an economic_system is an elaborate mechanism forthe, satis, lishing the complicated task of production_and distribution for, faction of people's wants, , Different societies or economies (economic systems) follow diferent, ways to solye their economic problems.Some may resort to custom and, tradition. Some are guided by the market (or price) mechanism. Some are, issued by the central, Subject to entire state control and to the dicates, , authority. Some may have a combination of price mechanism and, directions of central authority., , Definition of an Economic System, Economic system essentially refers to some definite arrangement, involved to match multiple wants with scarce resources. It is a well-knit,, the, organised and co-ordinated form of economic activity outlined for, , satisfaction of the people's wants.with the available resources. According, , to Carl Landauer, an econamic system is "the sum total of deyices by, , which the preferences among alternative purposes of economic activity are, 1/Eco.Sys.-B.Com.
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2, , Economic Systems, , determined and by which individual activities are co-ordinated for the, achievementof these purposes. Prof. Loucks and Whitney state: "An, economic System consists of those institutions which a given people or, , n short,, , nation or group of nations has chosen or accepted through whichtheir, resources are utilised for the satisfaction of human wants.", in an elaborated sense,, it refers to the orderly arrangement or the, , resourcesS, A set of rules;, Co-ordination between production and consumption for the satis, faction of wants;, A Practical shape given to certain philosophical ideas, such as, capitalism or socialism., , A, , great diversity, however, exists among the different, systems. But command, exchange, solidarity and tradition are theeconomic, common, building blocks of every economic activity., According to, , An economic system is a man-made phenomenon. It is largely, , influenced by the political ideology., An economic system can be just an ideally conceived phenomenon, , Grossman tis the set of institytions that characterizes Gregary, a given, economy, , without actually being in operation. For example, Islamic economic system, is such an ideal., , An, , economic system comprises the, totalling of an economic community, nation's ways of choosing wants and, exploiting its resources forthe satisfaction of these wants. It, has, therefore, a set of rules, laws and, order justifed by some, ideology for achieving the end result of, economic, pursuits. Economic systems, or a, , p. 2., , Comparative Economic Systoms,, , Gregory Grossman, Economic Systems,, , p. 3, , interrelationship, , An orderly long-term arrangement;, Devices and measures to effectuate choice towards allocation of, , shape, economic activities, economic, structure and policies of, country depend upon the type of economic system, (Such as capitalism or socialism), prevalent in the country., , Carl landauer, Contemporary Economic Systems,, Louks and Whiteny W.G.,, , :, , A set of socially recognised institutions with, functioning as an organism;, , wants., , 2., , economic system implies, , An economic society A group of people in the political boundaries, of a nation;, , organisational pattern formed by a set of various institutions and bodies, governing the economic activities, viz., production, consumption, distribution and exchange, and thereby achieving growth. It can be expDressed, bysaying that it is a form of economic organisation constituted by the, mode and methods of production, kinds of economic entities andinstitutions, the obectives and functions of the econgmy being, directed towards, The, satistying human, of, , are, therefore, composed of economic, deaism, Concepts and institutions together with non-economic, factors and, forces mOulding their shape and functioning. As such,, Prof. Jan Prybla, detines economic System as the sum total of devices which, through their, interaction gve effect to economic, i.e., which tYanslate choice, irom an dea into action. Action in thischoices,, context means the actual movement, of resources towards, fhe intended uses., ToSum up, economic systemn refers to the, institutional structure of, an economy cesigned to see how best, people's wants can be satisfied by, exploiting the given meanst refers to an, orderly arrangement of rational, Choice-making and resourceallocation for the, satistaction of human wants, througn accepted institutions., In fact, an economic, pattern of complex human relations meant for the system is an evolving, exploitation of scarce, means directed towards, the satisfaction of, wants. It is built on, philosophical ideas and dogmas, institutionalvarious, setup and technological, organisations., , 3, , Introductory: Meaning Functions and Classification of Economic Systems, , In short, economic system is a part of social system functioning as an, orderly arrangement for the allocation of resources and its distribution, under the framework of a political system-democracy, monarchy, dictator, ship or totalitariang overnment., , 2.FEATURES OF AN ECONOMIC SYSTEM I t, The following are the broad features of an economic system, , Orderly, , Institutional Arrangement, , Man Made Phenomenon, Evolutionary, Dynamic and Flexible, Diversity and Uniformity, , 1, , Orderly Institutional Arrangement, Every economic society, whether primitive or modern, consists of an, , orderly arrangement of several individuals and their economic institutions,, e.g., households, farms, firms, trade unions, producers' guilds, to carry on, , economic activities for satisfying human wants. An economic system is, thus, a fabrication of economic institutions evolved or chosen by the, people for the exploitation of community's resources for achieving various, economic and social ends, basically the satisfaction of human wants., , p. 5., , In other words, an economic system is an embodiment of the rel, , tions, , between various basic entities-consumers,, , producers,, , government, , etc., meant for productive purposes and functional uses in a set order
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Economic Systems, 2., , Introductory : Meaning Functions and Classification of Economic Systems, , Man-made Phenomenon, , As, , Economic systems are man-made. An economic system consists of, economic institutions which are not the creation of nature or supernatural, power,but are what, man has made them or man has created them., Economic institutions are precisely what human beings make them.", People, in general, constantly mould and reshape economic institutions and, , arrangements to suit and meet their needs with the changing circumstances. But it is equally true that once there is a set order of institutional, arrangemets, they exist to perform functions assigned to them., 3. Evolutionary, Dynamic and Flexible, , Economic systems are not static. The gruwth of an economic system, s an evolutionary and ever changing dynamic process. It is infiluenced by, interactions of social, political and economic forces and actions of the, peopie from time to time. It is a universal truth that modern economies,, whether capitalist, sOcialist or any other type, are dynamic in nature., , country witnesses dynamic changes in its economic order and institutional, , arrangements from time to time with the changing circumstances caused, by the operation of dynamic factors and forces. These have a relative, , infiuence on the behaviour and actions of the people. For instance, when, the law of inheritance is modified by a, heavy estate duty, the older, generation may be discouraged from accumulating more wealth and the, , younger generation is inspired to stand on its own feet in the economic, political change desired by the people may, in turn, lead to a, Suitabie economic change in the institutional, arrangements and activities, in the country. There is thus always some interaction between people and, arena. A, , their economic institutions., , Economic institutions in an economic system, therefore, are flexible., are evolved and modified from, time to time. We may illustrate below a, few factors which bring about changes in the economic, , system., , Legisiative changes in the country, e.g., Zamindari systemis, abolished by law in India. Similarly, the Managing, Agency system, is also abolished., , Judicial verdicts, , on rmany socio-economic issues., Contractual arrangements among individuals in their economic, Dursuits., , Custorms, habits and preferences of consumers at, large. The influpolitical ideologies and social dogmas on the, , pattern., , replaced,, , matter of fact, "economic institutions are created, destroyed,, moulded and remoulded, times without end, by people acting as, , legislators, consumers, citizens, investors, judges,, ment administrators and so on."4, Economic institutions in, and evolutionary in nature., , 4., , an economic, , entrepreneurs, gover, , system, therefore,, , are flexible, , Diversity and Uniformity, , nature of the economic system. Different, different, have, types of institutional arrangements, systems, same. The world's major, though their basic problems are common and the, communism,, economic systems vary widely, from capítalism to totalitarian, pro, with great diversity in their patterns and institutional arangements of, and, consumption., duction, distribution, exchange, Each economic system has its own pattern of institutions and organiand incentives, sations, its own set-up of rules and regulations, ideology, is, a very significant, mechanism, price, free, in, a, economy,, For instance,, in a planned, incentive for allocation and distribution of resources, while, valuation. Similarly, in, for, comparative, meant, is, just, system, price, economy, while in, the capitalist economy, there is the institution of private property,, and all the, the socialist economy there is no right to private property, There runs,, means of production are totally controlled by the government., and, basic, in, their, problems, fundamental, parallel, a, uniformity, howèver,, the satisiaction, goals. All economic systems are basically concerned with, of people's wants, though their mechanism of satisfying human wants may, economic welfare, optimum utilisation of, different. Economic, , Diversity is the basic, , economic, , be, , growth,, , resources etc. are common., , They, , ence of, , a, , consumption, , Public opinion about rights and wrongs in, production activities., , Government's general economic policyincome, monetary policy, industrial policy, commercial policy,fiscal policy,, policy, etc., Basic planning and the stage of economic, , development., , of, Paradoxically, with great diversity in the nature and mechanism, bricks, the, much, is, there, among, similarity, economic, systems,, different, are, used in their structures. Command, exchange, solidarity and tradition, economic, different, of, structure, the, in, used, constructing, bricks, the, in, systems. But these four building blocks are used in different proportions, different economic systems. In a planned economy, the command element, is predominant. A, may be dominant; while in a free economy, exchange, a free, planned economy, however, can not do without exchange and, some extent. Likewise,, to, command, have, will, government's, economy,, traditions, solidarity, i.e., general interest and community feelings, and choices, have their place in every society in intluencing major decisions and, in its economic development., , 4. Loucks and Whitney W.G.,Comparative Economic Systems,p.5.
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Economic Systems, , 6, , 1, , Introductory: Meaning, Functions and Classification of Economic Systems, , BASES, V3., , OF ECONOMIC SYSTEMS, , (Forces Creating and Moulding An Economic System), An economic system, being an evolving pattern of complex human, , relations, is the outcome of the interaction of a number of factors and, , forces:natural, economic, social, political as well as historic., , Professors Loucks and Whitney5 mention that the concrete shape of, COuntry's economic system is moulded bythe following factors, , The historical, , culture, , attitudes, , of the people,, , their ideals, desires and, , The country's natural resources and factor endowments., The philosophical ideas propounded and accepted by most of the, people in the country., , Socio-economic and political approach of the people in achieving, selected objectives for the nation as a whole., The trials and errors and experiences of success and set backs of, the people in seeking economic ends., Chart 1.1 pin-points the various bases of economic, systems., Chart 1.1, Bases of Economic, , Historical Development, , NaturalEnvironment, , Social Environment, , Institutional Functioning, , Systems, , ldeologies, , of soil, river flows, mineral deposits, coastal areas, plains and mountains, etc. have a great influence in determining the nature and goal, economic system. Natural factor endowments are primarily responsible for, making India basically an agrarian economy, Britain an industrial economy, and Middle East countries oil exporting economies. In short, a country, adopts and develops its economic institutions and organisations in relation, to its natural environments., , of its, , 3., , Social Environment, , Social customs and traditions, social dogmas and institutions, culture, and civilization also exert a deep influence on the set-up of an economic, system and its problems. For instance, the joint family system prevalent in, India gives rise to the problem of disguised unemployment and surplus, labour. People's tastes, habits and preferences are guided by social, environment. The consumers' specific choices in turn affect the pattern of, production and exchange in the economy and so on., , 4, , ldeologies, , Every economic system has an ideological basis. General psychology,, a philosophical approach to the values of life and basic ideology underlying, people's behaviour and human relations have great influence in moulding, the economic system of a country. It changes with ideological changes. An, ideology is a systematic set of beliefs, notions, opinions, dogmas, and, , doctrines pertaining to various social, economic and political phenomena, held by the people at large as individuals, classes and nations. ldeologies, are complx ideas which provide guidelines to the people in making a, rational choice and in arriving at correct decisions with the right value, , Technological Revolution, influencing the evolution of economic, , judgements on the basis of selected norms. A common ideology on a particular issue possessed by the people becomes an active force which gives, , The Historical Development, The historical traditions and cultural, development of the people play a, significant role in giving shape to the economic, system of a country. For, instance, indigenous banking in the Indian, market is an age-old, tradition since 500 B.C. Hundis came into money, use from the 12th, century., the, Zamindari system, the, Similarly,, managing agency systëm, the railway, system, the pattern of foreign trade etc. were the, legacy of British rule to, the Indian economy on the eve of, independence., nations, before their independence, had the colonial Likewise, many African, economies of England,, Holland or France., , system. For example, the capitalist ideology strongly favours free enter, prise, the right to private property, a free trade policy etc. On the other, hand, a socialist ideology opposes the predominance of the private sector, and favours a comprehensive planning by the government., , The important bases or factors, system may be, thus, explained as under, , 1., , 2., , Natural Environment, A country's, , natural resources, , and, , factor endowments,, including its, geographical environment, cimate and weather conditions,, and fertility, type, 5., 5. bid, p., , rise to a certain economic and political action moulding an economic, , An economic system is, thus, shaped according to what and how, , people think. In India, for instance, under the religious dogma of the karma, theory, orthodox people accept poverty as god-destined and make no organised efforts to remove it. Similarly, most of the Indian farmers have taken, to agriculture as a way of life rather than an industry or commercial propo, sition. Thus, Indian economic culture remained a depressed agriculture for, decades. A backward economic system prevails in under-developed coun, , tries basicaly due to age-old ideology and lack of desire for development., , Further, ideologies change with changing times. Today's ideology of, controlled capitalism is different from that of 19th century's laissez faire, capitalism. Classical economists condemned any sort of government
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price stability and economic growth with social justice., , Economic Systems, , intervention. Modern economists consider the desirability of government, interferenceto achieve certain macro-economic goals like full employment,, Ideologies exert a deep influence on the development of economic, systems. Economic systems can be distinguished on the basis of their, ideological differences. For instance, the United States and the Soviet, Union have a similar technological ba_e of large-scale, capital intensive, , solely owned by the government., , industrial enterprises. But they are distinct on ideological grounds. In the, former the enterprises are privately-owned while in the other, these are, In the U.S.S.R., for example, private goals become subordinate to, public goals. In the U.S.A. private economic goals get due recognition., Likewise, under Ayatullah Khomeini's regime in Iran, Islamic goals were, more important than any other goals. Hence, religious aims and dogmas, , also have their influence on a country. Perhaps, Iran's economy may fuly, develop as an lslamic economic system if the clergy rule persists in that, country. So, also, the concept of interest-free banking is the outcome of, , Institutional Functioning, , Islamic ideology in Saudi Arabia and Pakistan. Often there are inherent and, implied ideologies which give rise to a particular order of economic system., Again out of different ideologies, a dominant and popular one may tend to, bring its distinctive influence to bear on the economic system. Equally the, role of eminent leadership, attitude, zeal and actions of the leaders are, important. For instance, it was Marx's ideas and Lenin's action which, evoved socialism by destroying capitalism in the Russian, economy., Recently, Iran witnessed an Islamic Revolution under the spiritual leadership, of Ayatullah Khomeini. Likewise Pandit Jawaharlal Nehru is, regarded as the, Father of Mixed Economy in India., , 5., , in the, , private, , and, , public sectors, cartels, trusts,, , etc., , Different, , An economic system operates through many kinds of, institutions. All, economic systems have an institutional base. The functioning of economic, organisation rests on the various economic institutions like the financial, system, private and public property, production units in the private and, public sectors, banking in, and, co-operative, public, sectors,, governmental, bodies and agencies, trade unions, business combines,, joint-stock com-, , panies, , unit banking on account of the, , unitary, , nature of Britain's, , sets, of institutions,their norms,objectives, rules and, pattern, make, obviously, different economic systems. The capitalist economic, institutions, are, funda, mentally different from the sOcialist economic institutions. The, capitalist, complex of institutions private property, free, and, enterprise, sectorprivate, has a unique importance, while public property and state, have, maior role to play in a socialist state. Again, the British monopoly, banking system, , has, , adopted, , Introductory: Meaning,, , Functions and Classification of Economic Systems, , 9, , branch, , has adopted, political complex while the American banking system, banking in view of federalism in America's political setup., A country's form of economic institutions reflects two fundamental, , Technological Revolution, , nature and levels, , The organisational, forces, viZ. : (i) technological and (i) ideological.b, the nature of, structure of an economiç system is largely determined by, with it. For, industrial technology and the method of production associated, and the capitalist, example, a country which adopts advanced technology, while a, method of production tends to have large-scale industrial units,, intensive method of, country Using primitive technology and labour, units., production tends to establish small-scale industrial, 6., , interrelations, revolution brings about total changes in the mode and, , Economic Systems are very much influenced by the, of scientific and technological advances. Structural and institutional differ, be explained in terms, ences in different economic systems can, therefore,, advancement. A techno, of differences in the degree of their technological, , logical, ology will determine, of various economic organisations. The state of tech, , of society. As Allen, the optimal use of resources and economic activity, to the extent, Gruchy puts it, "Today economic systems make progress, efficiencies made, that they are in a position to take advantages of the new, possible by scientific and technological progress.7, of the worldIn the present time, the major economic systems, foundations., capitalist, socialist or mixed-tend to have identical technological, and with its, are bent upon going with changing technology, , application, , on, , a large scale., , These systems, , 4.FUNCTIONS OF AN ECONOMIC SYSTEM, The economic system exists for the satisfaction of human wantsindividual and collective- with the help of available resources. It has to_, , accomplish certain basic tasks relating to production, distribution,, exchange, consumption, growth and welfare of its people., , Chart 1.2, Functions of An Economic System, , Process, , Determination of Production& Alocation of Resources, , Organisation of Production, , Income Distribution, , Provision for The Future &Prosperity, , Economic, , Systems,.p., , 12., , Economic Growth & Dynamism_, , Ibid, Gruchy A.C., Comparative
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10, , 1., , Let us analyse each of the functions in detail., , Economic Systems, , Determination of Production and Allocation of Resources, This is one of the foremost fundamental functions of an economic, , and consumption, , system, viz., to determine the production of capital, goods. What commodities to produce and in what quantity are the main, problems of an economic system. This is mainly because human wants are, unimited and insatiable while the productive resources are limited, though, , capable of being put to alternative uses. It is the problem of economic use, of resources. A rational choice of wants and resources become necessary, , for the optimum adjustment, , other, the pattern of production, or, , product, , between wants and resources. Individual and, SOCial priorities and preference functions are the important factors in this, regard. On the basis of priorities and preferences, on the one hand, and, the limited resources on the, mix are to be determined., , Different economic, have different sets of mechanism to, systems, determine their product-mix. In a free enterprise, economy, for instance,, market mechanism and the price, system play a unique role in determining, production vis-a-vis, In, a, consumption., socialist, economy, on the other hand,, the central planning authority takes, decisions about production and, allocation of resources in relation to, consumption., 2., of the Production Process, , Organisation, , satisfy, , product-mix,, , After having decided about the, next question arises, the, as to by whom, with what, means, in what manner the, techniques and, methods are to be followed in, and, producing, services., There are, alternative methods of production and formsgoods, of, economic, such, organisation, as capital-intensive and, labour-intensive, of, techniques, production,, largescale and small-scale producing, units, sole proprietorships,, joint-stock, companies, private and public enterprises, co-operative, An, organisations., economic system has to make an, choice as to the, of, type, organisation and technology to beappropriate, Used to make optimal use of, the, its wants. In a, , resources to, , production., , capitalist, economy,, decide about the scale of, private firms, production and the use of, technology under the, incentives of profit earnings, indicated by the market forces. a, In, planned economy, public monopolies, undertake production of centrally, services. Apparently, a labour-abundant, goods and, intensive technique of production, while a country will opt for labourcapital-abundant country will, adopt capitaintensive techniques of, There is alco another related, , is, , ikely, , to be, , organisation of, lop-sided regional, development, , question about where to, the, of, problem, location,, produce. It is, and dispersal of, capitalist economy, market concentration, industries. In a, natural, torces,, endowments,historical incidence,, individual's psychological attachment,, etc. influence the, There, , productive activity., , a, , Introductory: Meaning,, , Functions and CIassification of Economic, , Systcms, , is, , 11, , adop, a definite policy, due to over-concentration. In a planned economy,, upliftments of, ted as to the priorities, balanced rational development,, backward areas, etc., , 3. Income Distribution, another important, Distribution of income or national product is, and senvices are produfunction of the economic system. Once the goods, will enjoy them and in what, ced, the economic system has to decide who, decide how to distribute, proportions. The economic system has definitely to, the total national product among different sections of society. Primarily,, income is shared, income is distributed on a functional basis. The national, and, , dividends,, interest, by the people in the form of salary and wages, rent, national, output., profits, being a reward for their contribution towards, Different economic systems adopt different approaches in the distribution of incomes. In a capitalist economy, the forces of demand and supply, determine the share of each factor. Those factors, specially capitalists,, share in a free, having a strong bargaining position claim a larger, weaker, enterprise economy, whereas those like working people having a, bargaining strength are always at a disadvantage in receiving their share., It is also based on the criteria of efficiency and availability of opportunities., Besides causing social injustice, growing inequality in the distribution of, income and wealth cause deterioration of the general economic welfare, despite economic progress and increasing national product. In a socialist, , distribution is need-based, , economy, however, the process of distribution and consumption is chalked, by the state in a planned manner. Socialist, ethical considerations. It plays no importance to individual incentives and, , on, , out, , private profit motive. it is meant to sustain the egalitarian goal of equality, in distribution and promotion of common welfare. In short, different, , An economic system has not to work just to satisfy the current, , Provision for the Future and Prosperity, , principles govern different economic systems in the matter of distribution, of production and national income., 4., , wants of the people but also to provide for their future needs and welfare, of posterity-subsequent generations-in a perspective sense. Decision has,, therefore, to be made regarding allocation and diversification of resources, to meet present as well as future needs of the economy. The rate of, savings from the current income is to be determined. The pattern, , Economic Growth and Dynamism, , production of capital and consumption goods., , investment is to be decided with regard to current and future needs. Thus, in turn determines the priority of allocation of resources and pattern of, , 5., , An economic system has to be dynamic and growth oriented,, whatever its nature-capitalist or socialist. It has to provide for innovations,
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.., , 12, , Economic Systems, markets etc. to satisfy, of organisation, new, new products, new methods, wants of people in this dynamic, and meet the changing and multiplying, resources through technological, has to augment its productive, , and requirements.It, , age. t, scope to improve its, advancement. The system must provide enough, developing technology., production front with the existing and newly, and flexible, The system will become stagnant if it is not dynamic, , its own course and methods to accelerate economic progress in a dynamic, , circumstances, enough to adjust to the changing, and provide the neceshould receive and accept technological progress, new mechanism for growth. Growth, Ssary incentive for new processes and, economies. Today, no, with economic stability is the major goal of modern, economic system likes to remain stagnant. Each economy has, however,, , way to meet its challenging needs., in short, every economic system has to determine as to what, where,, , Gregory Grossman, , similarly puts, , it, , "Every economy has, , to, , how, by whom and how much to produce and how to allocate the resources, for consumption and investment for prom ting the welfare of its members, through appropriate distribution of goods and services., As, , accomplish certain public basic tasks; determine what, where, how and, how much is to be produced; allocate the aggregate amount of goods and, , services produced (the 'gross national product') between private consumpital stock used up in the, tion, colective consumption, replacement, course of production, and further growth of the economy, distribute its, material benefits (the "national income) among the members of the, society, and maintain economic reations with the outside world"., , However, to conclude, these functions are common to all economic, systerns. Different economic systems, however, tend to solve their prob, lems and carry on their functions in different ways with their own patterns, of institutional setup and arrangements. When their ideologies differ, so do, ther operational prociples and methods differ in functioning of the systern., 5. CLASSIFKCATION OF ECONOMIC SYSTEMS, Econom systems may be variously classified on different bases. We, , a, , two, , under:, , has mentioned, as, , fold, , shall, however, discuSs the following major classifications of economicC, systcms, Prybla's Two Fold Classification;, , Traditional Classification., , Heillroner s Ihreefod Classification;, , theoretical considerations J.S.Prybla, , Prybla's Two-Fold Classification, On, , dsfication of two extreme types of economic systems, Perfectly Competitive Market Model, and, , Introductory: Mcaning,, , Economic, Functions and Classification of, , An economic system based, , on, , an, , unplanned free enterprise, , Systcms, , economy. There, , is, , 13, , no, , market, the perfectly competitive, , Model, Perfectly Competitive Market, , Absolute, Command Model., economic system of, In between these two extremes, the operatiónal, different countries tends to operate., The, , as, , the exchange, , nexus., , services, The relative prices of different goods and, of demand and supply., of production are determined-by the interaction, characteristics., Goods and factor units are of homogeneous, , and sellers in the, There is a perfect competition among buyers, markets., commodity as well as factor, in the commodity and facThere are a large number of economic units, affect the ruling market prices., tor markets, so that no single unit can, as well as factors, , serves as, , dity markets, , economic field., government intervention in the, owned and operated by the private, All the means of production are, firms., economic units like households and, sector comprising individual, among these units (firms, The circular flow of exchange relationships, market induced. There are comm0, and households) is voluntary and, market mechanism, well as factor markets. Thus, the, , It is essentially, , characteristics, model has the following major, , 1., , 2., 3., , 4., 5., , 6., 7., , of production., 8. There is perfect mobility of the factors, conditions and of the economy is, 9. Perfect knowledge about market, possessed by all the economic units., in the system not only, 10. A free play of market or price mechanism, with the consumers, allocates productive resources in conformity, demand and price behaviour, preference functions, expressed through, In a, , utilisation uf resources., in the market, but also causes optimum, economic unit is motivated, perfectly competitive market model, each, to an optimal alloca, for the maximisation of its returns and this leads, a market-mechanism's, tion of the country's scarce resources. Thus,, , but, invisible hands are regarded as not only a co ordinating organ,, resources., also an optimising instrument in using the community's, model contains, 11. Among other features, a perfectly competitive market, through, the institution of private property, freedom of consumption, occupation and, the consumer's sovereignty.economic freedn of, , itentives and peronal, production, free (unrestricted) trade, private, pursuit uneor the, gains private profits and benefits from the ecouutc, nith, play of market-inechanism assuring internal consistenn., re'our"', ' i, efficiency in the exploitation of the potenua!, , maximum, , free, , the country.
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14, , Economic Systems, Introductory: Meaning, Functions and Cassification of Economic Systems, , The Absolute Command Model, command model posseAn economic system based on the absolute, the following major characteristics, T h e state or the central authority owns all the means of production., , Sses, , 2., , The government has an absolute command over the economy. It, makes all economic decisions as to what to produce, and in what, , quanties, where to produce and how to produce and to whom to be, , 3., 4., , 5., , distributed. Thus, the consumption pattern of the people is also fixed, by the government., National goals are determined by the government., The central planning authority prepares a minutely comprehensive, economic plan in physical terms to attain the determined goals., The central authority assigns different jobs to the workers. Workers, have no free access to occupation., , 6 Prices, 7., 8., , 9, , are suppressed and administered. So price-mechanism has no, role to play in the allocation of resources.,, Production is based on the social preference function and utilityoriented., Money has only a passive role. It serves only as a unit of account to, measure relative values in the system., and investment decisions are undertaken solely, , Consumption, saving, , by the government through a plan., , 10., , Along with political dictatorship, there is economic dictatorship of the, , government and all economic units are perfectly obedient to the plans, and directives issued by the government., short, under the absolute command model, there is complete abIn, , sence of the, and, private, there, sector,, exists, an, absolute public monopoly, with central responsibility to maintain internal, consistency. It is assumed, , that the central authority possesses all the, necessary, wisdom,, efficiency, and knowledge to judge what is good for the, people and, in general., society, In the real, there, is, world,, no, such, pure, economic, system based on, the absolute command model. Operational economic, systems are the imperfect-mix combining different elements of the two models: (the, competitive market and absolute command models) in different perfectly, degrees., Heilbroner's Three-Fold Classification, In view of the driving forces behind, the, economic, systems,, Professor, Heilbroner suggests their classification in the following three, categories, Economic Systems run by Traditions;, Economic Systems run by Market; and, Cconomic Systems run by Command., , 15, , Economic Systems Run by Traditions, An economy, , grouped in this category is the, , one, , whose, , functioning, , and institutional set up is influenced by the customs and traditions of its, , society. Such an economy moves statically so long as its traditions are, undisturbed. In this economy, things are produced like those which have, always been produced. Its present performance is based on the experiences, of the past. They use primitive techniques of production. Most of the less, developed countries Such as Latin America, African nations, Burma, etc., tend to have traditional economic systems. Similarly, primitive communism, and feudalism are also types of economic systems run by traditions. In, , primitive communism the economic activity is governed by traditions and, taboos of the group. In feudalism, the society is comprised of feudal lords, and serfs. Feudal lords controls the means of production and they have all, the powers. Serfs have to work for these lords. They have no civil or, , political rights., Traditional economic systems are not always static. They are prone, to flexibility when traditions change. Traditions may be changed with social, and political changes. So the economy too may change. For instance, India, , during the British period was static and underdeveloped but has becomea, rapidly developing economy after independence., Economic Systems Run by Market, , These refer to economies governed by market mechanism or, mechanism. These economic systems give a greater scope to the private, sector and assign a limited role to the public sector, There is no perfectly competitive market-oriented economic system in, the real world. In reality, their market economies are functional and struc, intervention and, also consider it desirable for corrective measures. The government policies, , price, , turally imperfect. These economies permit government, , may affect the course of production and distribution in these systems., However, some of these economies tend to be more biased towards the, private sector, while some try to seek a balanced role of the private and, public sectors. Capitalism, Liberal socialism and Mixed Economies are the, sub-groups of such types of economic systems. For example, in the U.S.A., there is capitalism, the U.K. pursues liberal socialism, while India clains to, , be a mixed economy, as a blend of capitalism and socialism., , Economic Systems Run by Command, , These are the economic systems completely governed by the state., In an economic system run by command all its functions are designed and, , administered by the government with a centralised economic planning. The, central planning authority assumes the responsibility of taking all the, economic decisions for the allocation and development, the tountry's, The entire economic life of the pec i s tuned by tie, , productive, , resources.
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16, , Economlc Systems, , centralised, minutely detailed and, planner's decisions. The planning is, an economy. A Command, implemented by administrative command in such, citizens. Those who co-operate are, economy demands obedience from the, the government, rewarded and those who neglect their duties, or criticise, This system, policies, or disobey are punished in this economic system., insists on social preferences at the cost of individual preferences. Fascism, and authoritarian socialism are grouped in this category. The economy of, Soviet Russia is generally regarded as a command economic system., , to, , play its role, to some extent, , market-oriented. A market economy also has traditional values. A command, , Even these three categories cannot have perfect forms of economic, systems in real life. It is not easy to compartmentalise each economic, system in practice, as there are complex and overlapping characteristics, possessed by them. For instance, a traditional economic system is also, , price-mechanism, , Traditional Classification of Economic Systems, , economy may allow the, and so on., , l., , Traditionally, on the basis of the ownership of means of production,, economic systems have been classified into three broad categories:, , Capitalism;, Socialism; and, Mixed Economy., , Capitalism, Capitalism is a market-oriented economic system in which the means, of production are owned and operated by private individuals and institu-, , tions., ts working is regulated by the forces of market mechanism. It, provides full scope to express the consumer's sovereignty and freedom of, occupation. The U.S. economy is regarded as an ideal example of capitalist, , economy. In the present day capitalism, however, the government inter, venes by accepting the responsibility for the general direction and the, maintenance of the level of economic activity under the macro goal of, welfare capitalism. Thus, capitalism is not necessarily a laissez faire, , economic system., , Capitalism may be further classified into the following sub groups:, 1. Classical Capitalism It is a, system, market-mechanism, run, on, under the laissez-faire policy of the, A, government., free, enterprise, economy, under perfect competition, price-mechanism and the least, government, intervertion are its basic features. It was an ideal system conceived and, pleaded for practice, by the classical economists like Adam Smith in their, theoretical models. The 18th, U.S. economy to some extent may, Century, In modern, times, however, there exists no, be fitted into this model., classical capitalism., , Introductory: Meaning, Functions and aasslfication of Economic Systems, , 17, , Capitalism : This system recognises the private, 2.butTotalitarian, sector, does not give any political liberty to the people. The political, , rence., , in the case of, economy is controlled by a benevolent dictator, as happened, Germany under Hitler's rule. Similarhy, pan under the Meiji government, is no public, had totalitarian capitalism. In this system, though there, sector has, sector, there is no laissez faire policy either. Again, the private, to work as per the whims of the ruler., doctrine of, 3. Regulated Capitalism: In the present times,the, is regulated or, laissez-faire capitalism has no place. Today's capitalism, interfe, controlled capitalism with a considerable amount of government, , the activities, , The philosophy of controlled capitalism was propounded by Keynes., in order to, regulated capitalism, the government intervenes, of the, , Under, , help, improve and supplement but not to supplant, undertakes investment activities for, private sector. The government also, to influence as, , policies, exploiting resources for public purposes, and adopts, well the distribution of income and wealth., Socialism, , Thus,, , Yugoslavia provides, , resources are, , in which the means of, Socialism is a state-governed economic system, state or public authorities. Its, production are owned and operated by the, directions of the government. It, working is based on the decisions and, choice of occupation. It, restricts the consumer's sovereignty and people's, People have to work as per, suppresses the right to own private property., The economy of the, the decisions of the planners offthe socialist economy. socialist, economy., of a, Soviet Union of Russia serves as the best example, subgroups, Socialism may be further classified into the following, is a system of, Socialism t, 1. Totalitarian or Authoritarian, of production. In a totalitarian, complete collectivization of the means, as all the means of, socialist economy, there is absolute public monopoly,, and organised by the state., production are completely owned, operated, is rigorous control of the, There is absence of private enterprise. There, entities of the economy through central, government on all the sectors and, socialism existed in Russia in, administration. Rigid and strict authoritarian, version of totalitarian socialism is, the days of Stalin. Somewhat another, communism that existed in China during Mao's regime., control is, 2. Market Socialism : In market socialism government's, indicative in this system. The, relaxed. The planning is decentralised and, and allowed to function through, Consumer's sovereignty is appreciated, market, allocated by the guidance of, of market, an excellent example, market demand., , socialism., , and price-mechanism., , a democratic approach, 3. Democratic or Liberal Socialism: When, capitalist economy,, is adopted to bring in socialism gradually in a primarily
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18, , Economic Systems, , t is reterred to as Liberal or Democratic socialism. In this system, the, , means of production are socialised with the consent of the people. Paning, , also, , permitted demo-, , is, democratic. In this economy, political freedom is, cratically. Further, it puts stress on individual security as well as, , minimisation of economic inequalities. The U.K. in these days has aspired to, this system in her economy., In short, there is a phenomenon like democratic socialism it obviously, does not imply a totalitarian control plan., Mixed Economy, A mixed economy is a blend of some features of capitalism and some, , features of socialism. In this system, the private and public sectors go, hand in hand. A mixed economy has some part of a market-oriented, system, while in some spheres there is government control over the, means of production. A mixed, economy permits decisions of individual, preference functions as well as of social preference functions in the, respective fields cf the private and public sectors. India claims to be a, , mixed economy., From the above, it, discussion,, follows, that, there, are, evidently, various, types of economic systems with, characteristics., No system, inter-mingled, is pure in practice. As such, a clear-classification of, real life economic, systems is not possible., As a matter of fact, all economic, and, systems,, by, are mixed, economies in different degrees of composition. So, it islarge,, very difficult to, give a perfect classification of economic systems that exist, in practice., Again, there are some economies like that of, the, German, Republic with capitalistic names but socialistic behaviour. Democratic, Moreover, the, actual operation of an economic system, may grossly deviate from, ideological basis. India, for instance, is a mixed economy aiming atthea, socialist pattern of society but is far, from its, away, claims to have the ideals of socialism but she has goal. Similarly, Britain, not, away from, market-orientation. Pakistan, under the present regimepulled, claims to have, Islamic Socialism, but in reality is not a, Islamic, perfectly, despite, being an Islamic nation. For instance, Commercial Bankseconomy, in Pakistan are, interestfree banking as per the Islamic norm., , not, in, , Another difficulty classifying economic systems occurs, on account, of their dynamism and ever-changing nature. For, instance, modern U.S., capitalism is quite distinct from the 18th century U.S. capitalism., Likewise,, Indian socialism is least, Russian, thus,, , enumerate and examine, , ditfer in theory, , and practice, very widely. It, different types of economic, , comparable with, socialism. Again, many, economies have common basIC problems and similar, approaches to solve, them, yet ideologically they may be different., , to, , Economic systems,, is, therefore, better, , Introductory: Meaning Functions and Cassification of Economic Systems, , 19, , systems in practice on their operational basis rather than to attempt their, strict classification., 6. THE SIGNIFICANCE OF A COMPARATIVE STUDY OF ECONOMIC, , SYSTEMS, The Study of economic systems fundamentally comprises a compre, hension and comparative analysis of the institutional structures of different, types of economies and the working of economic principles and theories in, each system. We must know the characteristics and causeeffect relation, ships of differences in various institutional structures of different types of, , economic systems, their typical problems and various approaches to, , tackle them with relative success and failures., In a scientific way of economic study, we have to find out the, objective truth about economic systems, and their functioning., The following reasons and advantages may be mentioned for studying, , different economic systems, , 2. Sharp Thinking: A comparative study makes our thinking sharp, , 1. Better understanding, Through a comparative economic, analysis of different economic systems, we can have a better under, standing of our economic system., and broader., , 3. Better Appreciation We can have better appreciation and, appraisal of a number of theoretical and institutional problems confronting, , various economic systems in practice., 4. Improvement of the existing system; A comparative study of, different systems helps to create a new economic system. t teaches us, the art of preparing blueprints to effect the required socio-economic, changes in the operating system. In this study, one can efficiently learn, how to transform one system into another, or how to improve a given, economic system in practice., , 5. Better Policies It helps us in drawing up suitable policies for, , maintaining international economic relations. We should know that the, reactions of others to our foreign trade policies may be the result of an, economic philosophy that differs from ours., , 6. True Perspective : It is necessary that the differences between, different economic systems be ful recognised and compared in order to, , interpret history in its true perspective of the socio-political and economic, life of the people in different parts of the world., 7. Detecting short-comings : By a comparative economic analysis, us to, , of various systems, we can understand the short-comings of our own, find ways to remove these drawbacks., , system and it helps