MCom I Semester Business Environment Economic System Study Material Notes

MERITS OR ADVANTAGES OF SOCIALISM

Socialists claim the following merits over the other systems:

1 Elimination of class-struggle : The prime aim of a socialistic State is… that the society is not divided into two classes of labour and capitalists. Severe restrictions are imposed on the control and ownership of private wealth. Every individual gets a reward according to his work and ability. It is in this way that class-conflict which prevails under capitalism, is put to an end and a classless society is created.

1. Elimination of exploitation : A socialist State carl allocate the resources of the community for the various uses with the sole consideration of social security and welfare. Every individual gets a reward according to his work and ability. In this way, class conflict and exploitation is put to an end.
2. Economic equality : Under socialism, all possible steps are taken to reduce economic inequalities of income and wealth. As individual and business enterprises belong to the State, there is little possibility of amassing wealth by private individuals. It aims at social justice in the distribution of national income. Those factors of production, e.g., land, capital which can yield unearned incomes are nationalised
3. Elimination of unemployment: Socialism, aims at providing equality of opportunity. Every individual whether, he belongs to a rich or a poor family has an equal opportunity to rise in life under socialism.
4. Elimination of monopoly powers : Under socialism, State control extends over all means of production and the entire economic conditions to make sure that economy functions to promote the interests of society as a whole. It prevents the concentration of economic power in a few hands.
5. Elimination of competition : In socialistic economic system, the production and distribution channels are under the control of central planning ? authority which eliminates wasteful competition. It is possible for the State to direct the production of commodities and utilisation of resources in desired channels.
6. Elimination of trade cycle : Socialism bans trade depression and removes unemployment which, under capitalism, always hangs over the worker’s head. A socialist State provides permanent and pensionable job for every body according to their ability. A socialistic State can prevent the imbalance between aggregate demand and aggregate supply and thus ensures economic stability.
7. Elimination of social practism : In capitalistic economic system, rich and wealthy persons become richer due to the right to own private property and by law of inheritance. The masses are exploited and do not get a fair return on their labour. Under socialistic system of inheritance which leads to unearned incomes is not allowed. Earnings will vary according to ability. In this way, socialism eliminates capitalism.
8. Optimum Utilisation of factors of production : Under socialism, the productive resources of the nation are more economically and optimally allocated for various uses of production. A central planning authority determines the allocation of resources among the various uses whose sole aim is to promote social welfare and social security. In the allocation of resources due consideration is given to human wants, consumers’ preferences and social costs.
   

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DISADVANTAGES OR DEMERITS OF SOCIALIST ECONOMY

Following are the main disadvantages or demerits of socialist economy :

1. Lack in efficiency and productivity : It is feared that incentive to hard work and stimulus to self-improvement will disappear altogether where personal gain or self interest is eliminated. People will not give their best. Inventive ability and go ahead attitude will languish and creative work will become impossible.
2. Way to Freedom: Under socialism individual freedom, business freedom and consumers sovereignty disappear. The State is not merely a political authority but it also exercises unlimited authority in economic sphere. To the extent that all power is concentrated in the State; the resultant danger is that the State is everything and individual is nothing. He may not count at all. He is reduced to a cypher.
3. Disincentive to process of capital formation : Under socialism, the process of capital formation is adversely affected. Government can not raise the huge amounts of capital which are necessary for the efficient running and expanding of all industries and trades.
4. Lack of individual freedom : There will be loss of individual freedom under socialism. A serious charge against socialism is that when freedom of enterprise disappears, even the free choice of occupation will also go, workers will be assigned certain jobs and they cannot change them without the consent of the planning authority. Every worker is dovetailed in the scheme, and he must remain there. This loss of freedom may be really regaling.
5. Lack of incentive : It is also feared that incentive to hard work and stimulus to self-improvement will disappear altogether when personal gain or self-interest is eliminated, people will not give their best. The government can attract able men but conditions in government service are not congenial for the display of extra ordinary ability. The reward is not considered worth the trouble.
6. Red tapism and bureaucracy : The most important set of arguments advanced against socialism is the one against the bureaucratic running of the economic machinery. Bureaucracy is considered to be inefficient in running a business. The civil servant does not take the same keen self interest as the employee of a private corporation, where his tenure is not so secure. The civil servant knows that he will get promotion by seniority, no amount of alterness or extra work is going to push him up in the graded list. His main aim is to let things go on some how without a positive breakdown. He will take no bold risks and will be content with a moderate measure of success, being merely guided by rule and precedent. Initiative and resourcefulness are at a discount. The business policy will be timid and unenterprising. There is routine and red-tape, a place safe for men of mediocre calibre and no room for extra ordinary and dashing spirits. Bureaucracy will further mean bossism, loss of individual liberty, gestapo etc.
7. Elimination of consumers’ sovereignty : Under capitalism, the consumer enjoys sovereignty. But under socialism, he will lose this sovereignty altogether. Consumption will have to adjust itself to production. This loss to the consumer is a real loss. He will not be able to maximise his satisfaction.

It is clear from the above discussion that the socialism is also not free from De defects. There will be loss of economic and individual freedom under socialism.

Some degree of skepticism in the efficacy of socialism as a panacea for all social conills has grown and damped the ardour of some enthusiastic socialists.

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MIXED ECONOMY

It has been realized that free functioning of private enterprises results in several types of evils. For instance, free functioning of private enterprises produces trade cycles, e.g., sometimes depression and unemployment and at other times booms and inflationary situation. Besides, free functioning of private enterprise results in extreme inequalities of income and wealth. Under capitalism, the weaker and vulnerable sections of society as well as indigeneous industries do not get protection, on the other hand some economists are of opinion that rational accounting is impossible under a socialist regime and that it is all grouping in the dark. Mas madi onal Profit with social nulla

Meaning of Mixed Economy: The mixed economy is the economic system which combines the features of both free enterprise and socialist economic systems. Mixed economy is operated both by private enterprise and public enterprise. That is, private enterprise is not permitted to function freely and uncontrolled through price-mechanism. On the other hand, the government intervenes to control and regulate private enterprise in several ways. It has been realised that a free functioning of private enterprise results into several types of evils. In mixed economy, major part of the economy, is in the hands of the private sector, which is allowed to function within a broad political and economic policy framework. The other part of the economy, the public sector, is organised and managed along the socialist pattern.

Definitions of Mixed Economy : The mixed economy is defined in the following ways:

1. According to Indian Planning Commission, “In a mixed economy private and public sectors are closely related and they function as the two factors of one unit.”
2. According to Samuelson, “Almost unconsciously, undiluted capitalism has been evolving into a mixed economy with both private and public initiative and control.”

It is clear from the above definitions that in a mixed economy private and public sectors operate as complementary to each other. In such economic system, the government does not merely control and regulates the private sector but it also plays a vital role in the actual production of commodity. That is why Prof. A.P. Lerner called mixed economy as controlled economy.

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CHARACTERISTICS OF MIXED ECONOMY

The following are the main characteristics of a mixed economy :

1. Social security : In mixed economy, the governments try to reduce economic inequalities for promoting social justice, social security and social welfare, free education, free medical aid, old-age pension are some of the remedies adopted for distributing the extra income of the rich among the poor.
2. Economic planning: In a mixed economy, the allocation of resources of the economy are determined by the direction of planning authority. Mixed economies have adopted economic planning as the means of growth and social justice. The government of these countries take upon themselves to control and regulate private sector activities in accordance with the plan objectives. The government controls the private sector through its industrial, monetary and fiscal policies. (Das
3. Advantage, aims and price mechanism : So far as the public sector is concerned desision relating to production, prices and investment are made by the government. But the private sector is operated by the price mechanism. Both the sectors are so regulated that it helps in the rapid economic growth and a maximum social welfare.
4. Economic equality and social justice : The governments of mixed economy take necessary steps for the reduction of inequalities of income and wealth. For reducing economic inequalities and promoting social justice, the government controls and regulates the private sector through direct controls and appropriate monetary and fiscal policies. Cya
5. Democratic system : Mixed economy is based on the democratie principles. In such an economy all the economic decisions such as division of economic activities between public and private sectors, formulation of policies, determination of objectives, allocation of resources etc. are taken by the representatives of the people by the parliament and legislative assembly.
6. Economic freedom : Like socialism, the mixed economy does not put an end to the economic freedom. The private entrepreneurs enjoy the economic freedom but lesser in comparison to the capilatistic economy. But economic freedom is allowed only to an extent so that as social equality and social justice is not adversely affected
7. Co-existence of public and private sectors: The chief characteristics of a mixed economy is that in this economy both public and private sectors function together. They co-exist. The private sector is allowed to function on the basis of free enterprise system within a broad political framework. In a mixed economy, the government adopts necessary measures to regulate and influence the private sectors. The government helps and encourages the private sector by providing them several incentives and facilities so that the industries in the private sector are able to develop properly and make the country’s economy efficient and strong
   

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IMPORTANCE, MERITS AND ADVANTAGES OF MIXED ECONOMY

“A mixed economy is a flexible one which utilises the merits of both capitalist and socialist economy for the proper functioning of economy. The main merits of mixed economy are as follows:

1. Optimum use of human resources : The basic feature of the mixed economic planning is in pursuance of human resources supply, production method is adopted. In mixed economy human resources are utilised to the optimum by human capital formation. par t abou
2. Presence of freedom and incentives : Due to the presence of individual gain and the right of ownership in the mixed economy, producers have the incentive to produce goods and services according to the demand of consumers. The consumers are free to buy commodities of their choice and the private entrepreneurs produce, commodities according to the preference of consumers, although the government can control their prices in public interest so that they can be prevented from charging unduly high prices.
3. Rapid economic growth: A mixed economy adopts economic planning as a means of promoting rapid economic growth. Economic planning makes it possible to use potential productive resources in the most effective and fruitful manner and in this way ensures rapid economic growth.
4. Increase in social welfare: In a mixed economy, government protects the weaker section of the society. It saves labour from exploitation as the government realised its responsibilites for protecting weaker section of the society from exploitation by capitalists and industrialists.
5. Centralisation of economic power : In a mixed economy, the Government controls both the public and private sectors. In a mixed economy the government tries to control and regulate centralisation of economic power in order to remove the evils of capitalism and make them function in public interest.
6. Elimination of economic disparities : In a mixed economy, the government tries to reduce economic disparities by promoting social justice and social stability, and social welfare and increasing production for providing equal opportunities to all. For this purpose, government levies progressive taxation, wealth tax and other taxes ete, some other remedies also are adopted for distributing the extra income of the rich amongst the poor.

DEMERITS OF MIXED ECONOMY

The mixed economy is the mixture of two extremes capitalism and socialism, when capitalistic factors are more dominant, some defects emerge in this system. Some demerits of mixed economy are as follows:

1 Instability : In mixed economy, government policies regulate and control the economy, government policies are not stable. The different industrial policies and other policies of government divide public and private sectors which creates instability in the economy. 4out Yoncien cho

2. Fear of nationalisation : In a mixed economy, public sector is expanded by the nationalisation of existing industries. It hampers the interest and inducement to the private entrepreneurs for investment in new ventures. Thus, it is against the economic growth and prosperity.

3. Increase in red-tapism : There is a lot of red-tapism in the functioning of mixed economy. Due to the red-tapism, most of the best policies and plans are not executed at the proper time. It promotes corruption.

4. Danger to democracy: The greatest danger of the mixed economy is that too much power is concentrated in the hands of the State. It is always a danger to democracy.

5. Weak in practice : The mixed economy which reflects the callous indifference of the omnipotent bureaucratic machine of the public sector on the one hand and massive profiteering with unutilised capacity and high prices of the private sector on the other hand, stands totally condemned in the eyes of people. The amorphous opportunism of the political elite and the greed of the private business stare us in the face everyday. As a result, the economy does not function properly.

It is clear from the above discussion that the public sector and private sector are the two necessary limbs of the economy and both must be in good health and functioning properly. There should be complete co-operation between the two. In the mixed economy of a socialist pattern of society, the roles and responsibilities of the government are much wider than in case of the free enterprise system and much less in comparison to the socialist society. The government in this sytem has much less control than in the socialist society. The government in this system, undertakes to perform all the functions that State performs in a free enterprise economy. In addition, it assumes the responsibility of making and implementing the task of coordinating private sector activities with the public sector and controlling and regulating the former to bring it in tune with the public sector policies.

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EXERCISE QUESTIONS

Long Answer Questions

1. What is capitalism ? Explain characteristics, merits and demerits of capitalism

2. Define capitalism and throw light on its features.

3. “Capitalism should not be end but should be reformed.” Discuss this statement.

4. Define the main characteristics and explain its merits and demerits.

5. What do you understand by Socialism ? Is it superior to Capitalist Economy? Throw light in brief.

6. Give the definition of Socialism and explain its merits and demerits.

7. How does capitalism differ from socialism ? Throw light in detail.

8. What is Mixed Economy? Explain it with its characteristics.

9. Define the Mixed Economy and throw light on its merits and demerits.

10. Mixed Economy is a good economic sys

Economic System Study Material

tem in the present time. Throw light in detail.

Short Answer Questions

1 What do you understand by the economic system?

2. What is meant by capitalism ?

3. State two prominent merits of capitalism.

4. What are the demerits of capitalistic economy?

5. Write down two main features of capitalism.

6. What is the importance of price mechanism in capitalism?

7. What is meant by mixed economy?

8. Write down the features of the mixed economy.

9. Define economic system.

10. What do you mean by socialism?

11. State the merits of mixed economy.

12. Clarify the demerits of mixed economy.

13. Define socialism.

14. What are the merits of socialism?

15. State the demerits of socialism.

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Objective Questions

Select the Correct Alternatives :

1 Main function of economic system is:

(a) Distribution of Production

(b) Production of things and services

(c) Form of the organization of production

(d) All of above.

2. Central problem is originated by :

(a) Scarcity

(b) Limited necessaries

(c) Limited and optional utilization of resources

(d) Unlimited necessaries.

3. Main base of capitalistic economy:

(a) Lack of Competition

(b) Governmental limited contribution

(c) Price Mechanism

(d) All of above.

4. Main characteristic of Mixed economy is:

(a) Exploitation

(b) Price control

(c) Economic equality

(d) Economic planning.

5. Found in Socialism :

(a) Competition

(b) Class struggle

(c) Social right

(d) Economic disparities.

6. Found in Capitalistic Economy :

(a) Private right

(b) Governmental Interfere

(c) Lack of Exploitation

(d) Central Planning

7. The main characteristics of capitalism are:

(a) Exploitation and class struggle

(b) Personal Profit

(c) Right of personal property

(d) All of above

8. Totalitarianism Economic System is :

(a) Socialism

(b) Mixed Economy

(c) Feudalism

(d) Capitalism

9. Price Mechanism is effective:

(a) In Capitalism

(b) In Feudalism

(c) In Socialism

(d) All of above.

10. Right on the factors of production in socialism:

(a) of all society

(b) of Consumers

(c) Capitalist

(d) All of above

11. Main function of an economic system is to decide this:

(a) How to produce

(b) What to produce

(c) Produce for whom

(d) All of above.

12., Unearned Income is not found:

(a) In Capitalism

(b) In Miixed Economy

(c) In Socialism

(d) In Feudalism

13. Co-existence is found in Mixed Economy:

(a) of poor and rich

(b) of central and state government

(c) of private and public sector

(d) of rich labour and poor labour

14. Socialism is :

(a) Society without class

(b) Society of producers and consumers

(c) Divided society in class

(d) All of above

[Ans. 1. (d), 2.(c), 3. (c), 4. (d), 5. (c), 6. (a), 7. (d), 8. (a), 9. (a), 10.(a), 11. (d), 12. (c), 13. (c), 14. (a).]

Economic System Study Material