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Note : These questions will help you in understanding the unit bettkr. Try to write
answers for them. But do not send your answers to the University. They are 1
L
for your practice only.
I
ECONOMIC SYSTEMS
I
I Structure
3.0 Objectives
3.1 Introduction
3.2 Economic System
3.3 Various Economic Systems
3.4 Capitalism
3.4.1 Emergence of Capitalism
3.4.2 Features of Capitalism
3,4.3 Price Mechanism and the Working of a Capitalist Economy
3.4.4 Modem Corporation in a Capitalist Economy
3.5 Socialism
3.5.1 Building of Socialism
3.5.2 Features of Socialism
3.5.3 Role of Planning in a Socialist Economy
3.6 Mixed Economy
3.6.1 Features of a Mixed Economy
3.6.2 A Case for a Mixed Economy
3.6.3 Limitations of a Mixed Economy
3.7 Let Us Sum Up
3.8 Key Words
3.9 Answers to Check Your Progress
3.10 Terminal Questions
3.0 OBJECTIVES
V
t After studying this unit, you should be able to:
1 0 identify various forms of econdmic systems
outline the features of capitalism, socialism and mixed economy
0 explain the working of capitalism, socialism and mixed economy
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3.1 INTRODUCTION
In our day-to-day life we often talk of capitalism, socialism and mixed economy,
These are the economic systems presently found in different countries. In this unit,
you will learn what exactly these systems mean. You will further learn as to how these
systems emerged or are built and what are generally the modes of their functioning.
You will also learn how the,roles of market and the state planning differ from one
economic system to the other.
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3.2 ECONOMIC SYSTEM
In the earlier section we have referred to 'certain economic systems which will be the
subject of major discussion in this unit, But prior to this discussion it is necessary to
learn the precise meaning of economic system and the sequential order in which the
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various econprnic systems have evolved or have been set up, We h a v ~already
discussed (Unit 1) that every society creates an economic system or an economy to
solve the basic problem of the imbalance between means and wants. Thus,the word
'econbmic system (economy)' represents the sum total of all institutions, methods and
arrangements to deal with the problem of scarcity of means (resources) in relation to
unlimited wants and the choice of wants to be satisfied. In other words, the
mechanism that decides in a society as to what to produce, how to produce , how
much to produce and for whom to produce, is to be known as the eqonomic system,
~ ~ W ~ ~ ~ ~ F m m oThis
r nway of
l c looking at the csncept of economic system is sorncwhtat sirn~slistic.In a
Sysiena d W Calm*
more scientific sense, the term econc~lirricsystem can be defined as ,the "productive
forces' togetlrer wit& the 'relations of pr6ciuetiun1brrscd on a certain pattern of
ownership of 'means of production'. 'Tlncreforc, to understand the nature of the
economic systern in any society, we shall hove to eollsidar its productive forces
together with the relations of prodllctionq~evailingin that society. Now let us discuss
about these aspects in details.
Production Forces : In order to survive., man needs food, clothirlg, house and many
other goocls and serviscs. I.Ie has to arsr his labo~rsto produce, all thesc tl~ings.Wc
a11 know thiit labour cannot be r~seilalone to pf.od!ice anything. It has to use mnter'ials
like sugarcane, oilseedu, iron ore, coal, tools, mi~cl~ines, br~ildingsetc,, to produce
something havirig rrtility for human beinfis, All thesc thingswith wlnicil man works to
produce uscful gac~clsand scrvicp are known as means of production. Means af
productio~lcan be classified into two brsacl catcgorics. In the first catcgnry we mRy
include those means of production on which labour is directly applied. Co~nrnodities
like cotton, oilseeds, chcmict~lsand aiinersls which arc in the nature of raw materials
fall in this category. TI~cseare kriawn as objectfi ( I ~ ~ B ~ O I,Machines,
IP. tools and such
other capital equip~nentarc known as ismet~unnerrhollabcstsr. Apnr't from i~rstrutnents
of labour certain other tJiirips, like ronds, factory buildings, ports and warc!housc?sare
,included in what,is known] as mcrans of labour,
In till societies, primitive or modertr, ccmti~iunusintcrnciion takes placc l~etwcenthe
llrenns of protluctioa and iabouw which detern~inesthc productive forces Eoil thcsc
societies. With the progress in the field of science and technology, thcre has been
considerablc improvement in machines and tools. In fact, today thc instruments of
labour arc far inore diversified, and require greater sklll. The substance of the whole
argument is that over time productive forces lluvc grown and the indications at present
are that they will continue to grow in futurc.
3 Fend~lism: With the decli~ieof the slavcry anti rhe cmergencc of fclrdalism, an
opportunity was creatcd for the ~leveldpnlentof prod~~ctivc forces. Under fendalism
lancl was the pri~lciptllmcans of pro~iuctionant! it bclongcd to iltc king, feudel lords
:lnd thc nobility, The people who actually particijvilcil in flu m :,periitions did not own
any land and were know; as scrfs,They worked on the land ow~lcdby feudal lords
and in return received only that much as was essential for their subsistence.
Production of other goods was done by artisans and handicraft workers largely to
cater to local demand. In the course of time when market for suchco~nmodities
expanded and the industrial technology advanced, tlne need for setting up factories
arose. From this an incompatibility developed between the relations of production
and the productive forces under feudalism. Workers were needed to be employed
in the factories and their supply would not be forthcoming unless serfs were freed
from bonds with the feudal lords. Therefore, the capitalists in their own interest
encouraged serfs to fight for their freedom which ultimately resulted in the downhll
of feud:ilism. The new economic system emerged was capitalism.
4 Capitalism : Like the slave system and feudalism, capitalism also rests on the
private ownerslnip of means of production and the exploitation of one man by
another man, LJndcr capitalism the productive forces have registered a spectacular
growth and as a result there has been a tremendous increase in the productivity of
labour. In this economic system tho production i s largely clone for the market. In
the earlier phavc capitalism was competitive hut in the course of time, big
corporations havc succeeded in eliminating thc s m ~ lproducer.
l It is this reason why
in the present day capitalist system a small number af big prodllcers have control
FuM*mental Mariad Ecmomlc over the major portion of the supply in each line of production. Interestingly, the
Spdfimaud W c Conce@
labour power of workers has become a commodity and this enables the owners of
the means of production to exploit labour. In fact, the capitalist system is based on
class distinctions. On the one side there are capitalists owning machines, buildings,
raw materials and all other means of production, and on the other side there are
workers having nothing except their labour power. The interests of these two classes
are incompatible and result in what is known as class conflict. The class conflict,
once it gets sharpened, is expected to result in the downfall of capitalism and the
new system which is built thereafter is socialism. You will learn more about
capitalism later in this unit.
5' Socialism : Socialism is considered the next stage after the decline of capitalism.
One does not find conflicting classes existing together under socialism. This system
does not emerge from capitalism. In fact it has to be built in a planned manner.
Under socialism all means of production generally belong to the state and, thus,
there is sociatownership of means of production. Labour power in a socialist society
is not a commodity and, therefore, exploitation of workers comes to an end.
Production is carried out with a view to further the well-being of the people rather
than maximising private profit of a few individuals. In a socialist economy, role of
market is limited and great reliance is placed on economic planning which
sometimes gives rise to bureaucratisation and corruption. You will learn more
about socialism later in this unit.
ii) .....................................................................................................
iv) .................... .
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2 What is capitalism'?
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3 What is socialism'?
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By now you must be familiar with thc term capitalism. Now we shall take u p a more
detailed discussion of the capitalist economic system. A large number of countries in
the world today are capitalist in their nature. Some well known capitalist countries
are the USA, the U K , France, West Germany and Japan. Though there is a consensus
on the existence of capitalism in the various countries, views differ in defining it.
Gromwell and Czerwonky identified capitalism with a system of laissez faire o r free
private enterprise. According to Sombart and Weber, capitalism can be said to prevail
in a country when its people are infused with the spirit of enterprise, economic
calculation and rationality. In the opinion of historians like Hamilton and Nussbaum,
capitalism involves production for a distant market with the objective of maximising
profit. T h e most scientific and widely accepted definition is the one given by Karl
Marx. According to the Marxian approach, capitalism is dcfined in terms of mode of
production. It requircs tlie existence of two classes i) the capitalists who own the
means of production, and ii) the workers who are deprived of the ownership of the
means of production. Unlike slavery and feudalism where force and custom
determined the relationship between classes, under capitalism the relationship
between the two classes is free and contractual. A mere presence of commodity
production, i.e., production for the market, was not regarded by Marx to be
capitalism. For capitalism to prevail, labour power has itself to become a commodity
and thus t o bc bought and sold in thc market just like other objects of exchange.
6 Class contradiction : The source of conflict betwccn thc workers anti capitalists is
the division of the vallle of a commodity betwecn tliem. The total valuc of any
calnmodity can be expressed as
TV = NV t SV
where TV = Total Value
NV = Necessary Value
SV = Surplus Value
Necessary value is tlie villue of It~bourpower given in tllc lonn of wagc to ~ h c
worker, Siirplu~~ by tlic: worker ovcr and nbovl: whi~l
value is excess value p~*oduccrl
he receives tls wages and goes to thc ckiljiliilist, 'r'l~ercf~rc t l ~ cworkers w;lnt to
incl.ease NV whcrcas thc capitalists nttcmpt to inwca~oSV, 'l'his class contrudiction
resillrs in conflict anc! when it nssutnqs itn ;~cl.itcl'or~n,it Ciln I~ccomoviolcnt irntl
t i ~ ktlkc~ ~ c ) I ' Hof
~ po1ificaI uphctlv~il,
I
FunbuMnW ~ d ~ ~ d E E D n o m l c 3 Large scale and diversllied production : The scale of production of a modern
Sy&mand Bpric Concepts
corporation is many times larger than that of a household enterprise o r a
partnership firm. Moreover, a corporation carries on diversified activities in
different lines of production. Since a corporation will not suffer losses in all the
lines of production simultaneously, it can minimise the risk of bankruptcy by
diversifying production.
4 Producers sovereignty : You bave learnf in the previous section that under
capitalism the producers produce those commodities for w!lich a market demand
exists. In such a situation the market preferences of consumers determine the
structure of output. Then we say that consumers sovereignty is prevailing. A '
modern corporation, however, creates its own demand pateern in the market, By
advertising, a modern corporation can generate demand for the commodities
produced by it. This is referred.to as producers' sovereignty.
iv) The state planning rather than the price mechanism determine the size and
pattern of production in ti capitalist cconftmy.
As-you know socialism is generally defined as an economic system in which the means,
of production are jointly owned. Some well-known socialist countries in the world
today are Soviet Union, China and the countries of Eastern Europe like Poland,
Hungary, Czechoslovakia. Joint ownership of resources which is the basic feature of
socialism helps in promoting social benefit rather than the personal benefit of a few
individuals. This feature provides for a greater scope for state planning under
socialism.
I within the socialist sector for its further expansion. Primitive socialist accumulation
on+theother hand refers to the accumulation in the non-socialist sector of the economy
in order to furtlicr cxpand the socialist scctor. Because of thc backwardness of the
economy, prirnitive socialist accumulation is of much greater importance than socialist
eccurnulation for the generation of funds for developn~entin a socialist economy.
socinlist countries. 'The state decides un the ceiling on the size of the plot which
can be owned by a household. Over a period of time it is possible that tlie state
may alter thc jurisdiction of private qrxncrship. I t , however, needs to be added that
though some amount of private ownersilip is allowed even under socialism, the use
to which such resources can be put to is subject t? much restrictions than
under cupitnlism. For example. in a capitalia,t economy, a person is allowed to hire
labour to work on his piece of land. This is prohibited in a socialist economy so
' that only fanlily labour is engaged ow the privately owned land. The reason is that
the socialist economies eliminate the scope: for exploitation of one person by
another.
Fwtdomntal Robkmsof E c w d c 2 Non-antagonistic system -absence of class conflict : The socialist system call uc
System and Bask Concept8
termed as a non-antagonistic system. A non-antagonistic system is one where there
is no conflict among different groups of people in the society. As you have learnt
in slavery, feudatism and capitalism, some people own the resources and other
people have no command over the resources. Thus, these systems can be
characterised as having two classes : (1) the class of people who own resources,
and (2) the class of people who do nof own resources. Therefore, in these systems
ther'e.is a continuous conflict of interest between these two classes. But under
socialism, the crucial resources like factories, railways, mines, etc., are collectively
owned. Thus it is not possible to classify the people in a socialist economy into two
classes on the basis of ownership of the means of production. As a result a sociqlist
economy is free from class conflict.
3 Equitable distribution of income : For an individual there are primarily two sources
of income : (1) ownership of resources like land and capital which yield income in
the form of rent, prafit and interest, and (2) sale of labour services in the market
which in return brings wage income. Private income under socialism takes only the
second form whereas under capitalism it takes both the forms. Since natural
resources like forests are collectively owned under socialism, the income from the
use of such resources is distributed among all the people. Such income is known
as the social dividend. It can be distributed on the basis of each individual's
contribution to the output. However, some other factors such as the number of
persons in a family or the number of dependants (i.e., ;he children and aged in a
family) may also be taken into consideration. Thus inequality in income distribution
in a socialist economy can be due to wage income, whereas in a capitalist economy,
it can beadditionally due to rent, profit and interest income. The experience of a
large number of countries shows that inequalities in the distribution of income are
generally much less in terms of wage income as compared ,to inequalities in rent,
profit and interest income. Thus it can be understood that the working of socialist
economy is more conducive to an equitable distribution c ~ incorne
f as cornparcd to
a capitalist economy.
4 Planned economy and the limited role of market : Since major resources are owned
by the state in a socialist economy, decisions pertaining to their utilization have to
be taken by the state. In contrast to a capitalist economy, a sbcialist economy is
Inore planned. Major economic decisions are takcn by a body which is commonly
known as the Central Planning Board. Therefore market in a socialist economy as
a coordinator of decisions is much less important than in a capitalist economy. You
will learn more about the role ofplanning in a socialist economy in the next section.
5 Freedom of choice in consumption and oceupatioll : Though major decisions in n
socialist economy are taken by the leadership, the decisions, withlrespect to
consumption and occupation are left to an individual's discretion. An individual is
, free to choose his pattern of consumption. This will, however, be subject to his
income and availability of goods in the economy. In other words, given the type
of goods and services, an individual is allowed to decide the type of goods hc would
like t o consume. Rationing a s a method of distribution of goods is not a ncccssery
characteristic of socialism. Also an individual is allowed to do the jo.b of his choice.
These are the major characteristics of a socialist economy. Howcvcr, it is necessary
for you to remember that they all are not found to the same extent in all the present
day socialist countries of the worJd:
I
In all socialist economies, macro level decisions are taken by the Central Planning
Board and individual level decisions are left to individuals concerned. Whether
i
i
planning is centralised or decentralised will depend on the fact as to who takes the
i enterprise level decisions. If these decisions are taken by the Central Planning Board,
the planning is considered'to be centralised one. On the other hand, if the enterprises
are allowed to take enterprise level decisions,'the planning is said to be docentralised.
Generally whkn a primitive capitalist eosnomy undergoes the socialist transition, it
follows a centralised planning system in the phase following the change-over from
capitalism to'socialism. Over time with the development of the socialist economy it
is expected that the economy will move towards greater decentralisatidn.
t
Whether economic planning is centralised or decentralised, its primary role is t o solve
the central problems of the, economy. In other words, just like the price mechanism
under capitalistn, planning under socialismis used to determine what to produce, how
to produce and for whom to produce. The Planning Commission which is entrusted
with this task makes on the one hand an estimate of the total availability of material
(natural and human resources), and on the other it tries to determine the
requirements of the economy for various goods and services. Since the economy, is
planned, the requirements are based o n a set of priorities, which may be decided by
the political leadership of the country. Once the two are calculated, an attempt is
made to strike a balahce between the requirements and the resource availability. The
balancc i s arrived at by keeping in mind social welfare rather than private welfaie as
it happens under capitalism. Ilowever, on siccount of the scale of caordination
required in decision making the balance at any point of time is not perfect. In other
words, there is a mismatch between demand and supply ofvarious cortlmodities, With
greater sophistication in techniques of plaoning such mismatch can be reduced.
Fundmental PmbYms of Eeonomic
Systems md pasic Crmcepls 3.6 MIXED ECONOMY
Socialist Accumulation : Accumulation of resources within the socialist sector for its
fuyther expansion.
Surplus Value : The excess value produced by the worker over and above what he
receives as wage and that goes to the capitalist.
Note : Thcsc quc!ititans will help you to understand the unit better. 'Fry to write
ilnswcrs far thcrn. But. do not send your answers to the lJniversj,ty. These are
t o r your pr;wtic~only.
Fundnmenlal Problem8 of Econ~mle
Syatems and Bnslc Concepts SOME USEFUL BOOMS