ECONOMIC SYSTEMS

Economic systems recognize three distinct types of economic systems. There are command or planned
economies, free market economies and mixed economies.

Planned economy
A centrally planned economy is an economy where decisions on what to produce, how to produce and for
whom are taken by the government in a centrally managed bureaucracy. Central planning is also referred
to as a ‘Command economy’ or ‘Communist economy.’

WIth Central planning, the theory is that the government will take ownership of the means of production
and run the economy in the interest of workers. The theoretical basis of a planned economy stems from
the work of Karl Marx

Examples of Central Planning

 The Soviet Union 1917-1991 and Soviet Bloc

 China until the late 70s
 Cuba
Features of a Centrally planned economy

 Ownership by government
 Decisions on what to produce, how to produce and how to distribute goods taken at national
bureaucratic level
 Prices usually set by price controls rather than market forces.
 Distribution according to ration books.
 Production could be planned for five or ten years in advance
 Requires more levels of bureaucracy to manage and plan economic decisions
 Scope for inefficiency due to lack of incentive
 Scope for corruption due to power of bureaucrats
 Often required degree of political control and censorship.
Problems of Central Planning Economies

1. Governments are poor at predicting future trends.

2. Lack of incentives when income is guaranteed.
3. Inflexible. Difficult to respond to shortages and surpluses
4. Greater scope for corruption
5. Planned economies often associated with greater political repression
6. People achieve targets for the sake of it, rather than what is needed. There was a joke in the Soviet
Union made by workers “They pretend to pay us, and we pretend to work.” The goal was often to
achieve targets, rather than really meet needs, therefore as much effort went into massaging
figures and reports and producing socially useful goods.

Free market
A free market economy is one that is governed strictly by the forces of supply and demand with no
governmental influence. In practice, however, nearly all legal market economies must contend with some
form of regulation. Japan and the USA are examples of Free Market Economy.

A free market economy is advantageous because of the following reasons :

 firstly, there are efficiencies. Due to significant competition in the market, competitors lower prices
and reduce expenses to curb the competition. They attract buyers.
 Secondly, foreign investors are much attracted since they find a free market economy an
opportunity to invest and earn high profit. Furthermore, most individuals work hard so they do not
lose their jobs. The market economy, therefore, serves as an excellent motivator for many people.
 The system also allows for innovations and hence it is prominent among individuals. It gives a fair
chance to firms to research and to come up with new and better product to sell and to produce in a
more cost-effective way.

But there are some main disadvantages:

 It may lead to overproduction of goods since there are no regulations. This can also be attributed
to the fact that the workers have low wages and hence cannot afford to consume all the products
that are being manufactured.
 Secondly, there is over-exploitation of workers as the faster, harder and longer you work – the
more you are paid in the free market economy. Employers wanting to compete with their
competitors might be overworking the employed laborers leading to their exploitation.
  Unemployment is also prevalent in this economic system. Contrary to the traditional economic
system, the free market system is open to technology, so machines do most of the task of
individuals.
 Growing economic and social inequality are also noticeable in such an economy.

Mixed Economy
This type of economy combines elements of both free market and planned economy. Private companies
are free to compete for most goods and services but the government provides other services such as public
transport, education and health care. Italy, France, Germany and the UK are examples of mixed economies.

Advantages:

 it encourages lesser income inequality since the public sector tends to provide basic utility benefits
to the public. This leads to the reduction of difference in income.
 There is the provision of freedom to own a private sector – individuals are free to hold property
and start businesses that lead to the idea and encouragement to work even harder. This in return
will promote fast economic development, especially in industry and agriculture.
 There is the promotion of fast economic development where the private and public sector can
operate equally hence making economic growth quicker. The economic resources are utilized
efficiently, and there is a slow depression of resources.
 There is the creation of region balance developments in the country. This is facilitated by the
planning commission which creates a policy for improvement in every region of the country.

Disadvantages :

 The major disadvantage of the mixed economy system is that it can lead to high taxes.
 Secondly, in the mixed economic system, there is a fear of nationalization. Since private and public
sectors co-exist, the government can nationalize and own any industry; this, therefore, means that
the private areas have to be constantly alerted so that their business cannot be nationalized.
 Thirdly, mixed economy leads to low economic growth. This is because the government tries to
mobilize resources to produce goods and services that are beneficial to the society rather than the
betterment of the economy. This consequently can lead to economic decline.

Answer the following questions:

1- Explain the role of Governments in planned economies

2- Why is corruption one of the major negative aspects in planned economies?
3- Which forces govern the “free market” economy?
4- Are foreign investors attracted by a free market economy?
5- What has technology to do with the problem of unemployment in a “free market”
economy?
6- Which services are granted by the Governments in “mixed economies
7- Is competition e positive aspect in mixed economies?
8- Why is the fear of nationalization considered a problem in mixed economies?