An economy refers to an organisation through which people earn their living. An economic system refers to those norms and rules or institutions which direct an economy. Syllabus of UPSC GS paper 3 has economics in it. And students should be clear with the concepts of economics. It is also very essential for the students to keep a track of current affairs related to economics. To read more articles on Economics click here.
- Capitalism or Market Economy
- Mixed Economies
Capitalism is a system in which economic relations are directed through the principle of free play of market forces. Which is why capitalism is often characterised as ‘market economy’. Producers and consumers are free to exercise their choices. There is no central authority to direct the economy. Instead, the economy is self-driven through an invisible hand or through the free play of the forces of market demand and market supply.
Characteristic Features of Capitalism
- Private Property: In market economies people have the right to hold and use private property in any manner they like. This right of the people is protected by the All means of production, namely, machines, tool, land, mines, etc., are owned privately. Capitalists are free to hold and expand their capital to any extent. They also enjoy the freedom to buy or sell any property. They can enter into any contract in respect of their property. On the death of a person, his property passes on to his successors. Freedom of the people to use their private property is subject to the law of the land.
- Price Mechanism: Price mechanism is the principal guiding mechanism that guides the producers and consumers in their decision-making. Price mechanismrefers to relative price structure determined by the interaction of the forces of demand and supply without any external interference. Price mechanism helps producers to decide what to produce and how much to produce, how to produce and for whom to produce.
- Freedom of Enterprise: Every individual is free to use his means of production in any manner he He may set up any business or industry of any size at any time and place. In other words, an entrepreneur can take independent decisions with regard to what, where and how much to produce.
- Competition and Cooperation: Because of freedom of enterprise there are a large number of producers of almost every These producers compete with one another. Buyers compete with one another in order to buy a given product. In the factor market, workers compete for jobs. On the other hand, there is cooperation. It is through the cooperation of workers (or through their cooperative efforts) that inputs are converted into outputs, resulting in value addition.
- Profit Motive: The desire to earn profit is the chief motive of undertaking production Every value-addition activity is prompted by profit. Entrepreneurs engage themselves in those enterprises which are likely to yield maximum profits.
- Sovereignty of the Consumer: Under market economies, consumer is a The entire production structure is oriented to fulfil consumers’ demands.
- Labour as a Commodity: Like any other commodity, labour is bought and sold in the factor market. Labour becomes a commodity because people, deprived of the means of production, are unable to make use of their own labour; they are compelled to sell their labour to earn their
- Self-interest: In market economies, self-interest is the principal guiding By self-interest we mean the urge to maximise personal welfare.
These are economies in which resources (or means of production) are collectively owned by the society as a whole, and there is a central authority to decide about the allocation of resources with a view to achieving maximum social welfare along with equitable distribution of income. In such economies, the state plays the central role in directing all economic activities in a manner such that all members of the community get equal opportunities of participating in the process of growth and enjoying the fruits thereof.
Characteristic Features of Command Economies
- Social or Collective Ownership: All means of production are socially No individual can keep capital at will in the form of machines, factory premises, etc. Government represents the society under this system and uses the means of production as it deems fit.
- Central Planning Authority: Under this economic system, government appoints a central planning authority to decide about what to produce, how much to produce, how to produce and for whom to produce. It undertakes detailed survey of the country’s available physical and human resources and formulates an exhaustive plan for achieving the set
- Set Objectives: It is not a purposeless economy; rather it has set objectives before These objectives are fully endorsed by the society and efforts are made to achieve them according to plans. The social and economic objectives relate to rapid industrialisation, high standard of living, full employment and social equity.
- Economic Planning: Economic planning is of central significance in command economies. Objectives are comprehensively considered and specified in the light of the given resource power of the nation. Efficient allocation of the scarce means to alternative uses is taken as the supreme goal, and efficiency is defined not in terms of maximisation of profits but in terms of maximisation of social
- Government Control: Plans are formulated and enforced strictly under government The central planning authority formulates the plan and forwards it to the government for implementation. Every economic activity, i.e., exchange, distribution, consumption, investment, prices, and foreign trade is fully controlled by the government.
- Lack of Competition: State being the chief entrepreneur, there is lack of In this respect, command economies are just opposite of the free economies. State assumes the role of a monopolist. Prices of goods and services are determined through government’s discretion.
- Limited Private Sector: Public sector dominates the Private sector has a very limited role to play. Large industries and public utility services like railways, post and telegraph, etc. are directly controlled by the government. Very few opportunities are available to the people in general to produce goods and services for private profit.
These are economies where market forces (or the forces of supply and demand) are free to operate but not without ‘watch and ward’ by the state or some central authorities. Unlike communism, it is not a consciously created system focusing on equality and social justice. Also, unlike free economies, it is not a spontaneous economic order where all economic decisions are taken in pursuit of self-interest. Instead, a mixed economy is a midway between command economies and free economies. It is an economy in which the choice is not between self-interest or social interest but between ‘how much of self-interest’ and ‘how much of social interest’. Both self- interest and social interest are simultaneously pursued.
Characteristic Features of Mixed Economies
- Co-existence of the Private and the Public Sectors: The most important feature of a mixed economy is that under it both public and private sectors work hand in hand. Industries of national importance like basic industries, arms and ammunition industries, power generation, are set up in the public sector. Consumer goods industries, small industries, agriculture, etc., are left in the domain of the private sector. It is like a PPC model (Private Public Co-operation model) which serves as the undercurrent of growth and development.
- Directive Planning and Government Control: It is the endeavour of the government to launch democratic plans with a view to giving the desired direction to the process of growth and These plans aim at progressive development of both public and private sectors.
- Private Property and Economic Equality: Under mixed economy, people are free to acquire private But, in the interest of equitable distribution of wealth and income in the country, the government adopts suitable measures to combat concentration of wealth in the hands of a few people. Government imposes various taxes on richer sections of the society (of course, on progressive basis) and offers subsidy to poorer sections of the society with a view to promoting equity and social justice.
- Regulated Price Mechanism: Under mixed economy, one finds free-play price mechanism but not without government intervention. Prices of goods are by and large determined by market forces, but prices of social goods are fixed by the government. It is a situation of regulated price
- Profit Motive and Social Welfare: Production is undertaken not exclusively to maximise profits or to maximise social Rather, it is a critical mix of both profit maximisation and welfare maximisation, which govern production decisions. Competition is promoted, but concentration (of economic power) is not allowed.
Economics is one of the most important part of UPSC syllabus. To read more articles on Economics click here