Economic system is the relationship between the components of an economy, such as households, firms and government, and the institutional arrangements within which they operate. It governs the solving of economic problems of the society such as what to produce, how to produce, for whom to produce and resources to employ.

There are three basic economic systems in the world. These are capitalism, socialism and a mixed economy.

Economic System: Capitalism or free market economy

This is an economic system characterized by private ownership of means of production and distribution and their operation for profit under competitive conditions.

See Also:  Dangers of Cassava: The Way Forward

It can also be defined as the one in which the means of production and distribution are owned and controlled by private individuals. In this kind of economy the market is free from government control.

Features of capitalism

Consumer sovereignty: Consumer sovereignty means that consumers are the king. In a capitalist economy, the needs and wishes of the consumers determine what, how and for whom to produce.

Private ownership of means of production: The means of production and distribution are owned and controlled by private individuals.

Existence of competition: In a market economy there is competition among the various economic units.

Profit maximization motive: The major aim of owning means of production is to maximize profit.

Freedom of choice: Consumers in this economy are free to choose from a wide range of goods and services.

Operation of price system.

Economic individualism.

Efficient allocation of resources.

Self interest.

There is class conflict.

Minimum government influence.

Development of individuals’ initiative.

Advantages of capitalism

 

1) Efficient allocation of resources.

2) Increased efficiency of production.

3) Freedom of choice.

4) Self regulating.

5) profit maximization.

6) Encourages competition.

7) Freedom of private ownership of properties.

8) Technological advancement.

9) Economic growth and development.

10) High standard of living.

 

Disadvantages of capitalism

1) Exploitation of consumers.

2) Lead to wastage.

3) Unhealthy rivalry and competition.

4) It creates a disparity of income and wealth.

5) The price system may fail to allocate resources efficiently.

6) May lead to monopoly.

7) Problem of profit maximization.

8) High levels of unemployment.

9) May not be able to provide certain services.

Socialism

This is an economic system in which the means of production and distribution are owned and controlled by the government. It is a centrally planned system in which all productive resources are owned by the government.

Under this system, allocation of resources and distribution of goods and services are left in the hands of the central authority.The central authority ascertains the needs of the people in order to match it with the available resources.

Features of socialism

State ownership of means of production: Ownership and control of industries, resources and means of production and distribution are vested in the hands of the government.

Promotion of social welfare: It is a system characterized by maximization of social welfare .The major aim of production is to maximize public welfare.

Centrally planned economy: The economic system is under the control of central authority.

Absence of price mechanism: Prices and allocation of resources are not determined by supply and demand.

Read Also:  Water Pollution: Doubts You Should Clarify

Collective decision making: Decisions on what to produce, how to produce and for whom to produce are taken jointly by the people.

Absence of competition: In this type of economic system, economic rivalry associated with capitalism is non-existent.

There is a complete absence of economic rivalry and competition which is peculiar to free market economies.

Absence of profit motive.

Equitable distribution of income

Advantages of socialism

1)  Employment opportunities: There is full employment in the economy. A considerable size of the working population is employed by the central authority.

2) Consumers are not exploited: Here, consumers are not exploited by business people  who are after profit. Goods and services are produced and distributed by the central authority.

3) No economic rivalry: There is a lack of economic rivalry and competition in this system.

Means of production are not in the hands of private individuals who compete with each other.

4) Equitable distribution of income: Incomes are equitable or fairly distributed among the people based on their needs or wants. There is equality in income distribution.

5) Job security: The interest of labour is protected in this kind of system. Jobs are secured, therefore, unemployment is minimal.

6) Promotion of social welfare: Goods and services are provided purposely to promote the economic and social welfare of the citizens. Socialism caters for the welfare of the workers.

7) Growth of private monopoly is checked.

8) No overproduction  of goods.

9) Equitable allocation of resources.

10) Centrally planned economy.

Disadvantages of socialism

1) Growth of state monopoly: It has been ascertained that the means of production and distribution are in the hands of the central authorities. Organizations owned by the government may exhibit monopolist tendencies.

2) Absence of competition: Healthy competition breeds efficiency. Here, there are no private individuals engaging in production and distribution.

3) Loss of consumer sovereignty: In a socialist economy, consumers are not consulted before production.Their needs and preferences are not taken into consideration unlike in a capitalist economy.

4) Economy is not self-regulating and functioning: The price system which regulates the economy by the interplay of forces of demand and supply is not allowed to operate.

5) It suppresses individual initiatives: Individual initiatives are suppressed. The entire populace depends solely on the government for the totality of their needs and wants.

6) Lack of innovations and inventions.

7) Bureaucracy and red-tapism.

8) Slows down economic development.

9) Absence of consumer choice and satisfaction.

10) Reduces productivity.

Mixed economy

This is an economic system in which the means of production and distribution are in the hands of both private and public sectors. It is a combination of state and private enterprises.

Mixed economy is a complex system which combines the features of capitalism and socialism. Moreover, it can also be defined as a system in which questions about what to produce, how much to produce and for whom to produce are decided jointly by the free market and the states.

Features of mixed economy

1) Joint ownership of means of production.

2) Joint decision.

3) Freedom of choice.

4) Freedom and production, distribution and consumption.

5) Government intervenes to regulate prices.

6) Profit motive.                   

7) Presence of competition


Advantages of mixed economy

1) Distribution of wealth.

2) Encourages economic competition.

3) Encourages growth and development.

4) Freedom of choice.

5) Provision of welfare services.

6) Prevention of monopoly.

7) Encourages development of private initiative.

8) It combines capitalism and socialism.

Disadvantages of mixed economy

1) Lack of efficiency.

2) Corruption and mismanagement.

3) Inequality of wealth.

4) Leads to waste of resources.

5) Exploitation of labour.

6) Conflicts of interest.

7) Emphasis is on profit.

8) Existence of bureaucracy.

Please use the COMMENT section below to share your own view.