FOE: Session 5

Economic Systems Capitalism Socialism Communism Mixed Economy

Business and Economic Systems: If business is viewed as an organized economic activity aiming at the production and sale of goods and services needed by the individuals in a society, the business system cannot be studied without reference to the economic system in which it has to function. An economic system consists of the institutions through which economic resources are utilized for satisfying needs of individuals in a society. The basic questions that have to be answered by any economic system are: (a) What commodities shall be produced and in what quantities? (b) How shall the goods be produced? In other words, by whom and with what resources and by what technology are these to be produced? (c) For whom shall goods be produced? In other words, whose needs are to be catered to by the production and distribution of goods and services? These questions are answered differently by various economic systems. Business activity and its organization will naturally depend upon the decision made by the society regarding what goods and services should receive priority, which types of consumers should receive greater attention and what means should be adopted for making goods and services available to these consumers. The basic economic systems fall under four categories. 1. Capitalism 2. Socialism 3. Communism 4. Mixed Economy Capitalism: Capitalism is an economic system in which individuals are relatively free to determine how goods and service shall be produced and allocated. In this system capital is owned and invested by individuals and private-owned institutions to earn profit. The fruit of the economic activity naturally goes to the individuals who invest their capital individually or correctively. The most fundamental feature of capitalism is the right of the individuals to own tangible and intangible private property. This right is expected to provide the incentive to initiate and continue the economic activity. The system is marked by little or no interference by the Government in business run by private individuals or institutions. This enables individuals to choose what goods to produce, in what quantity to produce and in which markets to sell. Individual consumers also enjoy the choice of the goods they want to consume from among the alternative varieties available. This generates competition among producers and sellers to secure maximum share of market and among buyers to secure the goods of their choice to satisfy their individual wants. Competition is also generated among workers, firms and companies. It is expected that competition and free enterprise would encourage business units to improve quality of goods and services and adjust their production to meet the needs of

consumers with almost efficiency. The profit motive is the basic incentive for work under this system. People are motivated to earn profit so that they can increase their capital and wealth. Since capitalism is based on economic individualism, it does not guarantee that each individual will share equally in the benefits arising out of the working of the economy. Individuals commanding more wealth will have the advantage over the less wealthy. Originally capitalism was based on the assumption that competition would automatically eliminate inefficiency in individuals and institution. In short, capitalism is a system in which individuals are free to own property and business enterprises to compete freely in the market and determine their own future. In the modern capitalist economy, the restraints on these freedoms have come to be imposed to ensure that the society is not held to ransom by a few powerful capitalists. Socialism: Socialism is the philosophy of the Government and economic system based on the belief in the worth of each individual. The basic philosophy of socialism is the provision of certain goods and services to all individuals in the nation. As a movement, socialism seeks to create more opportunity for the underprivileged classes and to end inequality based on birth so that society can be rebuilt on the foundation of co-operation instead of competition, incentive or profit. Under this economic system, the Government representing the society determines what goods shall be produced and how they shall be produced. The ultimate goal of socialist economy is to replace the private ownership of means of production by social ownership and control. In a democratically-managed socialist economy individuals are free to choose their own occupations though it encourages them to choose certain types of work and discourages them from pursuing others. Communism: As an economic system, communism has emerged in the Twentieth century in countries like Russia and China, under communism all control of economic poser vests in The State. Means of production are socialized and private property is abolished with the object of ending the exploitation of the poor by the rich. The Government owns the economic resources and decides what is to be produced, how much is to be produced, for home the goods and services are to be produced and how are these to be distributed. Individuals in such an economy work not for private gain but for the good of the society. In such an economy, the State is the only employer and the role of the individual is subordinate to that of the total population. It is expected that by eliminating the private freedom of choice and action and establishing the society based on the form of each according to this ability, to each according to this need, the communist economic system would achieve the most desirable allocation of resources and would bring about equality of wealth and opportunity. While the capitalists economic system emphasises individual freedom, the communist system emphasizes the achievement of social good even if it means curbing of individual freedom. It

must be admitted that the communist economic system has yet to achieve its declared objectives completely in the world. While it has succeeded in curbing private monopolies, their place seems to have been taken by State monopolies. Mixed Economy: Since both purely capitalist an communist economies have been found wanting in many respects, may countries have tried out a combination of State ownership and control of business and private enterprise. This combination has come to be known as a Mixed Economy. In a mixed economy, private enterprise is permitted to function and flourish subject to control and restrictions by the Government. The extent of Government control over business and its interference in economic activity varies from country to country. But a mixed economy aims at blending together the best control socialist or communist economy with the best of free enterprise in a capitalist economy. India has adopted the mixed economy system. The overall planning and allocation of resources is decided by the Central Government and the planning Commission. Private enterprises and public enterprises are allowed to function so as to contribute towards the development of the economy. The overall objective of the economic system in India is to achieve economic growth with distributed justice. Certain areas of economic activity are left open to private enterprise, certain others are reserved for the public enterprise while in some areas both the sectors may compete or collaborate. Thus, there is a combination of the features of capitalism and socialism. From the point of view of the business system in India the adoption of the mixed economic system means that business firms whether in the private sector or in the public sector must work towards the improvement of the economic lot of the people, and narrowing down of inequalities of income and wealth. It also places heavy responsibility on private business to serve the society by meeting its needs without any exploitation. Thus, the social responsibilities acquire particular significance for the business system in the context of a mixed economy in India. Advantage: Producers and consumer have sovereignty to choose what to produce and what to consume but production and consumption of harmful goods and services may be stopped by the government. Social cost of business activities may be reduced by carrying out cost-benefit analysis by the government. As compared to Market economy, a mixed economy may have less income inequality due to the role played by the government. Monopolies may be existing but under close supervision of the government.