Economic System refers to the manner in which individuals and
institutions are connected together to carry out economic activities in a
particular area. It is the methodology of doing economic activities to meet the
needs of the society. There are three major types of economic systems. They
1. Capitalistic Economy (Capitalism),
2. Socialistic Economy (Socialism)and
3. Mixed Economy (Mixedism)
The term coined by Manfred D Steger (2002) to denote the new
market ideology of globalisation that connects nations together through
international trade and aiming at global development. This ideology is also
termed as ‘Extended Capitalism’.
Capitalism and socialism are two extreme and opposite approaches.
In capitalism, there is total freedom and private ownership of means of
production. In socialism, there is no freedom for private and there is public
ownership of means of production. Mixedism denotes the Co-existence of
capitalism and socialism. The features, merits and demerits of various economic
systems are discussed below.
Adam Smith is the ‘Father of Capitalism’. Capitalistic economy is
also termed as a free economy (Laissez faire, in Latin) or market economy where
the role of the government is minimum and market determines the economic
The means of production in a capitalistic economy are privately
Manufacturers produce goods and services with profit motive. The
private individual has the freedom to undertake any occupation and develop any
skill. The USA, West Germany, Australia and Japan are the best examples for
capitalistic economies. However, they do undertake large social welfare
measures to safeguard the downtrodden people from the market forces.
1. Private Ownership of Property and Law of Inheritance: The basic feature of capitalism
is that all resources namely, land, capital, machines, mines etc. are owned by
private individuals. The owner has the right to own, keep, sell or use these
resources according to his will. The property can be transferred to heirs after
2. Freedom of Choice and Enterprise: Each individual is free
to carry out any occupation or trade at any place and produce any commodity.
Similarly, consumers are free to buy any commodity as per their choice.
3. Profit Motive: Profit is the driving force behind all
economic activities in a capitalistic economy. Each individual and organization
produce only those goods which ensure high profit. Advance technology, division
of labour, and specialisation are followed. The golden rule for a producer
under capitalism is ‘to maximize profit.’
4. Free Competition: There is free competition in both product
and factor market. The government or any authority cannot prevent firms from
buying or selling in the market. There is competition between buyers and
5. Price Mechanism: Price mechanism is the heart of any
capitalistic economy. All economic activities are regulated through price
mechanism i.e, market forces of demand and supply.
6. Role of Government: As the price mechanism regulates economic
activity, the government has a limited role in a capitalistic economy. The
government provides basic services such as, defense, public health, education,
7. Inequalities of Income: A capitalist society is divided into two
classes – ‘haves’ that is those who own property and ‘have-nots’ who do not own
property and work for their living. The outcome of this situation is that the
rich become richer and poor become poorer. Here, economic inequality goes on
1. Automatic Working: Without any government intervention, the
economy works automatically.
2. Efficient Use of Resources: All resources are put into optimum use.
3. Incentives for Hard work: Hard work is encouraged and entrepreneurs
get more profit for more efficiency.
4. Economic Progress: Production and productivity levels are
very high in capitalistic economies.
5. ConsumersSovereignty:Allproduction activities are aimed at
satisfying the consumers.
6. Higher Rates of Capital Formation: Increase in saving and
investment leads to higher rates of capital formation.
7. Development of New Technology: As profit is
aimed at, producers invest on new technology and produce quality goods.
1. Concentration of Wealth and Income: Capitalism causes
concentration of wealth and income in a few hands and thereby increases
inequalities of income.
2. Wastage of Resources: Large amount of resources are wasted on
competitive advertising and duplication of products.
3. Class Struggle: Capitalism leads to class struggle as it
divides the society into capitalists and workers.
4. Business Cycle: Free market system leads to frequent
violent economic fluctuations and crises.
5. Production of non essential goods: Even the harmful goods
are produced if there is possibility to make profit.
The Father of Socialism is Karl Marx. Socialism refers to a
system of total planning, public ownership and state control on economic
activities. Socialism is defined as a way of organizing a society in which
major industries are owned and controlled by the government, A Socialistic
economy is also known as ‘Planned Economy’ or ‘Command Economy’.
In a socialistic economy, all the resources are owned and operated
by the government. Public welfare is the main motive behind all economic
activities. It aims at equality in the distribution of income and wealth and
equal opportunity for all. Russia, China, Vietnam, Poland and Cuba are the
examples of socialist economies. But, now there are no absolutely socialist
1. Public Ownership of Means of Production: All resources are owned
by the government. It means that all the factors of production are
nationalized and managed by the public authority.
2. Central Planning: Planning is an integral part of a
socialistic economy. In this system, all decisions are undertaken by the
central planning authority.
3. Maximum Social Benefit: Social welfare is the guiding principle
behind all economic activities. Investments are planned in such a way that the
benefits are distributed to the society at large.
4. Non-existence of Competition: Under the socialist
economic system there is absence of competition in the market. The state has
full control over production and distribution of goods and services. The
consumers will have a limited choice.
5. Absence of Price Mechanism: The pricing system works under the
control and regulation of the central planning authority.
6. Equality of Income: Another essential feature of socialism is
the removal and reduction of economic inequalities. Under socialism private
property and the law of inheritance do not exist.
7. Equality of Opportunity: Socialism provides equal opportunity for
all through free health, education and professional training.
8. Classless Society: Under socialism, there is a classless
society and so no class conflicts. In a true socialist society, everyone is
equal as far as economic status is concerned.
1. Reduction in Inequalities: No one is allowed to own and use private
property to exploit others.
2. Rational Allocation of Resources: The central planning
authority allocates the resources in a planned manner. Wastages are minimised
and investments are made in a pre planned manner.
3. Absence of Class Conflicts: As inequalities are minimum, there is no
conflict between rich and poor class. Society functions in a harmonious manner.
4. End of Trade Cycles: Planning authority takes control over
production and distribution of goods and services. Therefore, economic
fluctuations can be avoided.
5. Promotes Social Welfare: Absence of exploitation, reduction in
economic inequalities, avoidance of trade cycles and increase in productive
efficiency help to promote social welfare.
1. Red Tapism and Bureaucracy: As decision are taken by government agencies,
approval of many officials and movement of files from one table to other takes
time and leads to red tapism.
2. Absence of Incentive: The major limitation of socialism is that this
system does not provide any incentive for efficiency. Therefore, productivity
3. Limited Freedom of Choice: Consumers do not enjoy freedom of choice over
the consumption of goods and services.
4. Concentration of Power: The State takes all major decisions. The private
takes no initiative in making economic decisions. Hence, the State is more
powerful and misuse of power can also take place.
In a mixed economy system both private and public sectors co-exist
and work together towards economic development.
It is a combination of both capitalism and socialism. It tends to
eliminate the evils of both capitalism and socialism.
In these economies, resources are owned by individuals and the
government. India, England, France and Brazil are the examples of mixed
1. Ownership of Property and Means of Production: The means of production
and properties are owned by both private and public. Public and Private
have the right to purchase, use or transfer their resources.
2. Coexistence of Public and Private Sectors: In mixed economies, both
private and public sectors coexist. Private industries undertake activities
primarily for profit. Public sector firms are owned by the government with a
view to maximize social welfare.
3. Economic Planning: The central planning authority prepares
the economic plans. National plans are drawn up by the Government and both
private and public sectors abide. In general, all sectors of the economy
function according to the objectives, priorities and targets laid down in the plan.
4. Solution to Economic Problems: The basic
problems of what to produce, how to produce, for whom to produce and how to
distribute are solved through the price mechanism as well as state
6. Freedom and Control: Though private has freedom to own
resources, produce goods and services and distribute the same, the overall
control on the economic activities rests with the government.
1. Rapid Economic Growth: The best advantage of mixed economy is
that it promotes rapid economic growth. Thus, both public requirements and
private needs are taken care of.
2. Balanced Economic Growth: Mixedism promotes balanced growth of the
economy. It promotes balanced growth between agriculture and industry, consumer
goods and capital goods, rural and urban etc.
3. Proper Utilization of Resources: In a mixed
economy, the government can ensure proper utilization of resources. The
government controls most of the important activities directly and the private
4. Economic Equality: The government uses progressive rates of
taxation for levying income tax to bring about economic equality.
5. Special Advantages to the Society: The government
safeguards the interest of the workers and weaker sections by legislating on
minimum wages, and rationing, establishing fair price shops and formulating
social welfare measures.
1. Lack of Coordination: The greatest drawback of mixedism is lack
of coordination between public sector and private sector. As both work with
divergent motives, it creates many coordination related problems.
2. Competitive Attitude: It is expected that both government and private
should work with a complementary spirit towards the welfare of the society, but
in reality they are competitive in their activities.
3. Inefficiency: Most of the public sector enterprises
remain inefficient due to lethargic bureaucracy, red tapism and lack of motivation.
4. Fear of Nationalization: In a mixed economy, the fear of nationalization
discourages the private entrepreneurs in their business operations and
5. Widening Inequality: Ownership of resources, laws of
inheritance and profit motive of people widens the gap between rich and poor.
Ultimately the inequality of capitalism and inefficiency of
socialism are found in mixed economies.