MCom I Semester Business Environment Economic System Study Material Notes

MCom I Semester Business Environment Economic System Study Material Notes : Meaning and Definition of Economic System Capitalistic Economy Characteristics of Capitalism Advantages or Merits of Capitalism System Socialistic Economic System Demerits of Capitalism Characteristics of Socialism Merits or Advantages of Socialism Mixed Economy Characteristics of Mixed Economy Demerits of Mixed Economy Long Answer Questions Short Answer Questions Objectives Questions :

CTET Paper Level 2 Previous Year Science Model paper II in Hindi

Economic System

Economic System is a social organism through which people make their living. Economic institutions are man-made. The pivot point of an economy is the process of exchange. What are the nature of the economic system? All types of economies face certain economic problems. To solve these problems, different policies are formulated.

MEANING AND DEFINITION OF ECONOMIC SYSTEM

Economic System is that basic structure under which all economic activities are regulated to achieve predetermined objectives. In an economic system, all economic activities are planned, regulated and controlled by an authority. Economic system is related to the method under which all decisions regarding production, resource allocation, consumption, exchange, and finance are taken. Definition

Various economists have defined economic system in different ways. Some of these definitions are as follows:

(1) Grossman opined that aggregate of economic institutions which is the feature of an economy, make it economic system.

(2) Prof. Brown has defined economic system as a process or an order under which man tries to earn his income.

It is clear from the above definitions that economic system is a system under which all decisions regarding consumption, production, exchange and distribution are taken.

Economic system is the structure of those institutions whose organisation regulates all economic activitis of society. The functioning of various countries are based on one or another economic system. The economic development of U.S.A. and U. K. and the Western European Union took place under capitalism. The economies of China and Russia are socialistic and Indian economy is the mixed economy.

Economic System Study Material

CAPITALISTIC ECONOMY

Under Capitalistic economy, all means of production are the property of private individuals and firms. They are free to use them with a view to make profit. The desire for profit is the sole consideration for property owners in the use of their property. Besides free and unfettered use of their property, everybody is free to take up any line of production he likes and free to enter into any contract with other fellow citizens for his profits. This economic system works on the principle of laissezfaire system, i.e., least interference by the government or any external force. The primary role of the government is to ensure free working of the economy by removing restrictions.

Meaning of Capitalism : Capitalism is that type of economic system in which all the means of production and distribution are owned by the private organisations and gains are the main motivating and guiding factor for carrying out economic activities.

Definition of Capitalism : Various scholars have defined capitalism in the following ways:

(1) In the words of Loucks and Hoot, “Capitalism is a system of economic organisation featured by the private ownership and the use for private profit of man-made and nature-made capital.”

(2) According to Webbs, “By the term ‘Capitalism’ we mean the particular stage in the development of industry and legal institutions in which bulk of the workers find themselves divorced from the ownership of the instruments of production in such a way as to pass into the position of wage-earners whose subsistance, security and personal freedom, seem dependent on the will of a relatively small proportion of the nation, namely who own land, machinery and labour force of the community and do so for individual and private gains.”

Economic System Study Material

CHARACTERISTICS OF CAPITALISM

A study of capitalism reveals several outstanding features of this system:

1. Right of private property: The most important feature of capitalism is the existence of private property and the system of inheritance. Every body has a right to acquire private property, to keep it, and after his death, to pass it on to his heirs. The result of this system is that inequalities of wealth distribution are perpetuated. The rich people become richer and the poor become poorer.
2. Freedom to choose one’s own occupation : A very outstanding feature of the capitalistic order of the society is economic freedom. Everybody is free to take up any occupation that he likes or start any business he likes and to enter into any contracts with the fellow-citizens in a manner most profitable to him.
3. Important role of entrepreneur prominent feature of this economic order is the vital role which the entrepreneur plays under this system. The entire productive machinery of the country is under his direction. It is he who hires the other factors of production and undertakes to pay them. He is the sole agent of the community in the matter of production. Everything hinges on him.
4. Lack of co-ordination : There is no conscious regulation or central direction of economic activity. Everything seems to go on automatically. Production is conducted as a result of the decisions of numerous isolated entrepreneurs. The consumer is the king. It is his preference which finally decides what should be produced. Somehow the demand and supply adjust themselves to each other. Price influences the consumers as well as the producers.
5. Wastage of resources : Competition which is the cardinal feature of mitalist economy is a sheer waste. Competition results in the production of a varieties. Colossal expenditure is incurred on advertisement simply a rival. Resources employed by those who are defeated in the race, go Cut-throat competition does not confer any corresponding social benefit
6. Existence of trade cycle : The reoccurence of the trade cycles due to over competition and over saving results into overproduction and must be considered one of the bitterest fruits of capitalism. Production is unplanned and is being augmented by ever increasing accumulation of capital, while the consumers are being impoverished more and more. The result is economic instability. Booms are followed by slumps and when there is depression there is large-scale unemployment.
7. Absence of social welfare : The economic decision made by individual enterpreneurs and producers under capitalism are based on their self interest and not from the point of view of good of the society. The producers produce those commodities and in such quantities that the difference between price and cost is the maximum so that their profit is maximised. However necessary and useful the commodity may be, the producer will not produce if its price does not exceed the cost, because it is only the profit motive which drives them. Social welfare is ignored altogether.
8. Lack of central plan : A free enterprise lacks in central economic plan. In this kind of system, there is least interference by the government in the economic activities of the people. It is the inherent tendency of the capitalist economy that utilitisation of instrument of production and human and physical resources what they want are unplanned. Both consumers and producers enjoy the freedom of choice. Consumers have the freedom to consume and producers have the choice to produce what they want. Private enterprises are the main motivating and guiding force for carrying out economic activities. It does not require any central directing authority for its functioning. It functions automatically through price mechamism.
   

   Economic System Study Material

ADVANTAGES OR MERITS OF CAPITALISM SYSTEM

Capitalistic system must have certain inherent merits like competition, right of private property and private gains which promote efficiency in production. We may note below its main merits:

1. Development of personality : Under capitalism workers and enterpreneurs are encouraged to improve their efficiency and put in hard work. The enterpreneurs are induced to work hard and work more efficiently to earn higher profits since the more efficient and hard working labour can earn higher wages, they have the incentives to improve efficiency. Entercben De
2. Remuneration is based on ability : The richest reward under capitalism goes to the ablest, the most daring as well as the most prudent enterpreneur. A man who takes the initiative and shows extraordinary resourcefulness and pluck makes the highest reward. Nothing to be more just then that the rewards should be appropriated according to merits.
3. Incentives in production : Under capitalism the entire manpower resources of the country work the hardest and most efficiently. It is the profit motive which induces people to undertake productive activity. It is the profit motive which induces businessmen to make the best use of factors of production. Thus object of individual gain is the mainspring of all economic activities under capitalism.
4. Flexibility : The limited resources of the community are put to the most economical uses with as little waste as possible. In this way, capitalism encourages the flexibility in factors of production and the most efficient use of the resources of the country.
5. Automatic: Capital functions in such a manner that the adjustment in the economic system takes place almost automatically without any direction or dictation from the central authority. In the capitalist economy, an attempt is made to adjust production to the consumer’s wishes. They consume what they like. Everybody has the right to perform economic activity according to his satisfaction.
6. Technical development: Under capitalism, enterpreneurs also make innovation in order to cut their costs and maximise their profit. These innovations result in the improvement of production techniques and lowering of the costs of production. Hence, Capitalism brings about a great technological progress in the country.
7. Incentive of capital formation : People under capitalism have the right to hold property and pass it on inheritance to their heirs and sucessors. Owing to this right, people save a part of their income so that it can be invested to earn more income and leave larger property for their heirs. The rate of capital formation increases when savings are increased. This accelerates economic growth.
8. Increase in the rate of economic development: Capitalism offers great incentive for saving and large opportunities for investment. It encourages innovation, division of labour, technological progress and the optimum use of resources. It is, thus, conducive to economic growth and prosperity.
   

   Economic System Study Material

DEMERITS OF CAPITALISM

Capitalism is now being assailed from all directions. The following are the grounds on which it is attacked :

1. Fear of unemployment: In the capitalistic economic system, it is not possible to maintain the level of full employment for a long time. The aim of capitalists is to increase production for large gains. This results in the overproduction. In these circumstances, the workers who constitute the bulk of the nation, have to live under a perpetual dread of losing their jobs. They have no sense of security. As a result problems of unemployment and poverty arise.
2. Unplanned production : Since there is no conscious regulation or central direction of economic activity in capitalism, there is unplanned production, wasteful competition results in the overproduction and occurence of trade cycle. It results in economic instability.
3. Economic inequality : The exterme inequality of wealth distribution which is being accentuated as time goes on, is the most glaring outcome of capitalism on the one hand, there are a few rich people and, on the other hand, the vast masses fabulously steeped in abject poverty. Capitalism is full of frustrating anomalies, the few indulging in all conceivable luxuries and the majority under semi-starved condition, machines are lying idle inside the factories while unemployment is raging in all its fury outside.
4. Wastage of factors of production : Colossal expenditure is incurred on advertisement and salesmanship to defeat a rival. Resources employed by those who are defeated in the race, go to waste. Competition results in the production of too many varieties. The existence of friction-legal, social and economic, homnare free competition with the result that the factors of production often lie idle.
5. Class conflict : Capitalism has sown the seeds of eternal social unrest in the society into two hostile camps of ‘haves’ and ‘have nots’. The labour wants higher wages and capitalists want to fully exploit the labour. Strikes and lock-outs are inevitable.
6. Emergence of monopoly tendency : It also happens under capitalism that perfect competition ceases to prevail and instead big combinations of power producers and monopolies emerge against whom it becomes difficult for an ordinary enterpreneur to compete. These big monopolies come to control the market on account of the resources that they command and small producers are squeezed out. The monopolists produce small quantity but charge high price and thus exploit the consumers.
7. Poverty in midst of plenty : Capitalism is an orthodox of poverty in midst of plenty. When there is unemployment due to overproduction, purchasing power of labours decreases and they are unable to consume in lack of purchasing power.

8 Absence of social welfare : The economic decision made by individual enterpreneurs and producers under capitalism are based on their self-interest and not from the point of view of good of the society. Under capitalism, production is governed not by the wishes and needs of the general public but market prices. The productive resources and utilities are utilised for the production of luxuries for the rich without producing sufficient quantity of goods for mass consumption. Since there are great inequalities in income and wealth so demand depends on the purchasing power of the people, the rich people are able to exert greater pull in the product markets.

SOCIALISTIC ECONOMIC SYSTEM

The evils of capitalism have given birth to socialism. Capitalism failed to maintain economic stability. Periodically, the capital economy is engulfed in depression which is responsible for large-scale unemployment of, and hardship to millions of people, also capitalism has given rise to extreme inequalities of income and wealth. The poor were deprived of social justice owing to the domination of the individual profit motive, the capitalist economy witnessed a serious misallocation of resources.

Meaning of Socialism : Socialism implies social ownership of means of production. Socialism implies equality of income and equality of opportunities for all instead of special prerogatives and vested interests, socialism lays emphasis on work and ability and equal opportunities for all regardless of caste, class and inherited privileges.

Definitions of Socialism: The different scholars have defined ‘Socialism in different ways. Some of these are as follows

1. In Morrison’s words, “The important essentials of socialism are that all the great industries and the land should be publicly or collectively owned, and that they should be conducted in confirmity with an economic plan) for the common good instead of private profit.”
2. According to Dickenson, “Socialism is an economic organisation of society in which the material means of production are owned by the whole community and operated by organs representatives of the community according to a general plan, all members of the community being entitled to benefits from the result of such socialised planned production on the basis of equal right.”
3. According to Loucks and Hoots, “Socialism refers to that movement which aims at vesting in society as a whole, ownership and management of all nature-made and man-made producers goods in large-scale production to the end that on increased national income may be more equally distributed without materially destroying individual’s economic freedom or motivation of occupational and consumption choices.”

It is clear from the above definitions that under socialism the private ownership of factors of production is replaced by the State ownership. All economic activities are centrally planned, controlled and regulated by State. The individual freedom of choice and decision making in regard to a economic activities is drastically curtailed. The Soviet economic system was till 1990 the most prominent example of socialist system of economic management, other countries which had adopted socialist economic system were China, Poland, Slovakia.

Economic System Study Material

CHARACTERISTICS OF SOCIALISM

Although there is a great diversity of view among the socialists, yet it is possible to pick up a few general features of socialism.

1 Elimination of exploitation : Under socialism, the means of production are the property of State and not of private individuals. The profits of all enterprises go to the State exchequer to be utilised for the benefit of society rather than the benefit of a few private individuals. No one is permitted to have unearned income. Exploitation of man by man is put to an end.

2. Elimination of competition : In socialistic economic system, production and distribution are under the control of State, so there is no problem of competition. Since, under socialism, the State controls production, there is no need to waste resources on competitive advertisements. However, under socialism, some expenditure is incurred on information and educative programmes which is not wasteful.

3. Elimination of unearned income : Living on unearned income is to be discouraged. Remuneration for work is to be according to the nature of work ard is not to be equal. Earning will vary according to ability. System of inheritance which leads to unearned incomes is not permitted. Since industrial and business enterprises belong to the State, there is little possibility of amassing wealth by private individuals.

4. Role of price mechanism : The work which is performed by market mechanism under capitalism is performed by central economic authority under socialism which determines and guides all economic activities. In a socialistic economy, State can fix the price of finished goods and give to the consumers in a market at fixed price.

5. Economic planning : Economic planning is the essential feature of socialism. Since under socialism, the principal means of production are owned by the State, it is possible to direct the production of commodities and the utilisation of resources in the desired channel. Economic planning ensures speedy economic development. It ensures efficient and optimum allocation of resources.

6. Very limited ownership of private property : In a socialistic economic order, the right to own private property is very limited and private property can not be utilised for earning.

7. Central planning authority : Under socialism, a central planning authority determines the allocation of resources among various uses whose sole aim is to promote social welfare and social security.

8. Government performs the activities of production and distribution : Under socialism, the State engine is utilised for the production of wealth and its equal distribution. Private enterprises are put to an end. All productions are carried by salaried State officials and profit is utilised for the upliftment of the masses.

Economic System Study Material