Types of Economic Systems
Every society has to answer three questions:
- What goods and services should be produced in the country?
- How should the goods and services be produced? Should producers use more human labour or more capital (machines) for producing things?
- How should the goods and services be distributed among people?
One answer to these questions is to depend on the market forces of supply and demand. In a market economy also called as capitalism, only those consumer goods will be produced that are in demand, i.e. goods that can sold profitably either in the domestic or in the foreign markets. If cars are in demand, cars will be produced and if bicycles are in demand, bicycles will be produced. If a labour is cheaper than capital, more labour-intensive methods of production will be used and vice-versa.
In a Capitalist society, the goods produced are distributed among people not on the basis of what people need but on the basis of Purchasing Power- the ability to buy goods and services. That is, one has to have the money in the pocket to buy it. Low cost housing for the poor is much needed but will not count as demand in the market sense because the poor do not have the purchasing power to back the demand. As a result, this commodity will not be produced and supplied as per market forces. Such a society did not appeal JawaharLal Nehru, our first Prime Minister, for it meant that the great majority of people of the country would be left behind without the chance to improve their quality of life.
A Socialist society answers the three questions in a totally different manner. In a socialist society, the government decided what goods are to be produced in accordance with the needs of society. It is assumed that the government knows what is good for the people of the country and so the desires of individual consumers are not given much importance. The government decides how goods are to be produced and how they should be distributed. In principle, distribution under socialism is supposed to be based on what people need and not on what they can afford to purchase. Unlike under capitalism, for example, a socialist nation provides free health care to all its citizens. Strictly, a socialist society has no private property since everything is owned by the state. In Cuba and China, for example, most of the economic activities are governed by the socialistic principles.
Most economies are mixed economies, i.e. the government and the market together answer the three questions of what to produce, how to produce and how to distribute what is produced. In a mixed economy, the market will provide whatever goods and services it can produce well, and the government will provide essential goods and services which the market fails to do.