Economic System

An economic system is a process that involves the production, distribution and

consumption of goods and services by organizing labor, capital and natural
resources between the entities in a particular society. It is the method used by
society to produce and distribute goods and services.
In general, there are three major types of economic systems prevailing
around the world.

1. Planned Economy
2. Capitalism
3. Mixed Economy

Planned Economy
A planned economy is also sometimes called a command economy. The most
important aspect of this type of economy is that all major decisions
related to the production, distribution, commodity and service prices, are
all made by the government.

The planned economy is government directed, and market forces have very little
say in such an economy. The government is the final authority to take
decisions regarding production, utilization of the finished industrial
products and the allocation of the revenues earned from their
distribution.

A planned economy aims at using all available resources for developing

production instead of allotting the resources for advertising or marketing.

Characteristics of Planned Economy:

• By nature, a Planned Economy is more stable, guaranteeing constant

exploitation of the existing resources. It is least affected by financial
downturns and inflations.

• In a carefully structured Planned Economic system, both surplus production

and unemployment rates remain at a reasonable level
 • The steady nature of Planned Economy encourages investments in long-
standing project-related infrastructures without any possibility of financial
recessions.

• The vision of Planned Economy is not making profit. This system prefers
deliberate planning of the entire money making process for better results. In
fact, such sincere economic planning in the long run proves beneficial to
improve the economic conditions of a country.

Advantages of Planned Economy

Stability: Long-term infrastructure investment can be made without fear.

Equity: In this system equality is focused on. The government tries to eliminate all
private property and distribute its good equally. The government will
provide equal health care, education opportunities, and make sure all people
are fed.

Assurance of the use of resources: A planned economy can maximize the

continuous utilization of all available resources.

Efficiency of managing: This system is organized in such a way that helps to

satisfy the majority of the population.

Quick problem solving: It is capable of rapid change for major problems. The
government owns the companies, so if production needs need to be shifted
into a different area, the government is capable of doing it rather quickly.

Reduction of unemployment: This system helps to reduce unemployment.

Government provides services to all.

Disadvantages of Planned Economy

Inefficient resource distribution: Some times it cannot detect consumer

preferences accurately.

Lack of freedom: People cannot decide about the production of their desired
products. They have less opportunity to decide what they want to do for a career.
Lack of incentive for innovation: Planned Economy dose not encourage taking
innovations.

Individual’s initiative goes unrewarded: Hard work is not rewarded here.

Everybody is equal here.

Overstaffing problems: Sometimes organizations are filled with over staffs.

Waste of resources: Resources owned by the government are sometimes.

Production standards problem: The absence of profit motives acts as a deterrent

to individual contribution. For that sometimes products are not maintained
standard.

Corruption: A planned economy creates social conditions favoring political

corruption.

Two concept of Planned Economy:

Socialism
Perestroika

A) Socialism

The Union of Soviet Socialist Republic (USSR) was born wit the Bolshevik
Revolution of 1917. Marx’s ideas helped shape the economic system
adopted by the new nation. The communist leadership set up a centrally
planned system that, until 1985, without the profit motive. It was a
classic example of a Planned Economy.

The government owned productive resources, financial enterprises, retail stores

and banks. In a planned economy, the government is the owner because
it speaks for the people. Privet citizens own personal property, such as
autos, clothing and furniture.

B) Perestroika

Mikhail Gorbachev, general secretary of the Communist party, began a new

program called Perestroika in 1985. Perestroika means economic
restructuring. Under this program on January 1, 1988, about 60% of
Soviet enterprises were put on self-financing basis. Gorbachev promoted
 reduced government control, less direction and fewer rules. The
managers of the business were asked to decide how much and what to
produce. Workers’ wages were tied to profits. Under Perestroika, those
firms not making a profit risk being shutdown. This was a new pressure
on enterprise managers in the Soviet Union.

Capitalism
Capitalism is a social system based on the principle of individual rights. An
economic system based on the private ownership of the means of production,
distribution, and exchange, characterized by the freedom of capitalists to operate
or manage their property for profit in competitive conditions. In capitalism
governments play a minor role.

In this type of economic system private enterprise can produce almost every thing
and they have freedom to produce and distribute goods and services according to
public demands.

The absence of central planning is one of the major features of this economic
system. Market decisions are mainly dominated by supply and demand. The role
of the government in a market economy is to simply make sure that the market is
stable enough to carry out its economic activities properly.

Characteristics of Capitalism:

• Individual is free to make his own economic decisions. Consumers,

workers, savers, producers, etc., all are free to make the economic choices
that will impact their lives.

• Everybody has the right to own resources and bequeath property.

• Freedom of owning a business.

• The desires of buyers and sellers are communicated in the market place
through a price system. Buyers communicate the quantities of a good,
service, or resource they are willing and able to purchase at various prices,
and suppliers communicate the quantities of those items they are willing
and able to sell at various prices.

• In capitalism governments play a minor role.

Advantages of Capitalism

Practice of democracy: Capitalism offers opportunity to everyone for making

profit.

Less government rules: Government tries to stay out of the way of businesses.

Scope of innovation: In a market economy, it is easier for someone with initiative

and virtue to create a better life for themselves and their family;
economic freedom makes it easier to transform hard work and
perseverance into material wealth.

Competitive market: Competition among business provides consumers lower

price, better service and improved products.

Competitive prices: In capitalism a unique price is determined by the demand and

supply in absence of any monopolistic influences.

Disadvantages of Capitalism

Instability: A private market economy may be quite unstable (unemployment,

inflation, growth)

Discrimination: It dose not always provide the basic needs to everyone in the
society. The weak, sick, disabled, and old sometimes have trouble. They
often slip into poverty.

Production of demerit goods: Because of competition and vision of maximizing

profit of business, some harmful products are produced.

Increase gaps between rich and poor: Rich people control the economy that’s
why they deprive the poor. And thus a gap between poor and rich is
increased.
Increase of unemployment: Rate of unemployed people increases. Business wants
to maximize profit by minimizing costs. They get minimum number of
staffs.

Mixed Economy
Mixed economy is a term used to describe an economic system, where some
important production is undertaken by the state, directly or through its nationalized
industries, and some is left for private enterprise. In a mixed type economy, both
the private ownership as well as the government takes part in the process of
production, distribution and other types of economic activities.

The mixed economy allows private participation in the field of production in an

environment of competition with an objective of attaining profit. On the contrary
following to the socialism features it includes public ownership in production for
maximizing social welfare.

In a mixed economy there is flexibility in some areas and government control in

others. Mixed economies include both capitalist and socialist economic policies
and often arise in societies that seek to balance a wide range of political and
economic views.

Characteristics of Mixed Economy:

• Consumers are given choices about the products they buy.

• Business owners can sell their products and keep the profits.

• Government provides services for people in remote areas.

• Individuals are free to use their money or resources as they choose.

• Government provides service of defense, roads, education, pension and

some medical care.
Advantages of Mixed Economy

Government support: In mixed economy government has the control of many of

the key aspects of the economy, such as public schools, police department, fire
department, military, museums, libraries, and streets, or sewers.

Highest possible use of resource: A mixed economy can maximize the continuous
utilization of all available resources.

Flexibility: This economic system is more flexible than Planned economy and
Capitalism.

Freedom of choice: In this type of economic system everybody has the right of
enterprise ownership, work for social welfare, profit earnings, political freedom.

Limited rules: The government has limited control, which is good for structure.

Disadvantages of Mixed Economy

Corruption: Mixed economic systems incentives corruption and political

bureaucracy capitalist nexus enjoying at the cost of the citizens.

Increase of unemployment: Rate of unemployed people increases. Business wants

to maximize profit by minimizing costs. They get minimum number of staffs.

Waste of resources: Resources owned by the government are sometimes.

Lacking of standard: The absence of profit motives acts as a deterrent to

individual contribution. For that sometimes products are not maintained standard.

Economic System followed by different countries

China
China once had a socialist, planned economy where the government controlled and
owned all the means and methods of production. It is now near a mixed
economy after privatization of most of the state owned enterprises and
opening up to western countries. For example, peasants now have their own
firms; foreign businesses are allowed to set up in China and so on.

U.S.A.
The USA economic system is “mixed capitalism”. It became mixed when
government established operating guideline and laws for business to follow. For
example, postal service is a government business that competes with private
business such as Federal Express.

Cuba
Cuba has a dual economy, with two distinct systems operating side by side. The
socialist peso economy applies to most Cubans, providing them with free
education, free health care, universal employment, unemployment compensation,
disability and retirement benefits and the basis necessities of life: food, housing,
utilities and some entertainment at very low cost. The market economy operates in
the tourist, international and exports sectors, and substantially sustains the socialist
economy.

Bangladesh
Bangladesh economic system is mixed economy. Both private and government is
producing and distributing goods and services. Defense, roads, education, pension
and some medical care are under the authorization of government. Private sectors
are also providing goods and services to the people.

Conclusion
Different countries follow different types of economic system. But now a days
most of the countries are adopting mixed economy system. Even capitalist country
U.S.A., socialist countries like China, Cuba are moving their economic system
towards mixed economy. Now pure capitalism and socialism are found in books
only. Because of flexibility, government support, international business policy
countries are being interested in mixed economy.