Economic System

An economic system is a process that involves the production, distribution

and
consumption of goods and services by organizing labor, capital an
d n a t u r a l resources between the entities in a particular society. It is the
method used by society to produce and distribute goods and services.
In general, there are three major types of economic systems prevailing
around the world.
1. Planned Economy
2. Capitalism
3. Mixed Economy

Planned Economy
A p l a n n e d e c o n o m y i s a l s o s o m e t i m e s c a l l e d a Command economy.
T h e m o s t important aspect of this type of economy is that all
m a j o r d e c i s i o n s related to the production, distribution, commodity and service
prices, are all made by the government. The planned economy is government
directed, and market forces have very little say in such an economy.
The government is the fi nal authority to take
decisions regarding production, utilization of the fi nished industrial produc
ts and the allocation of the revenues earned from their distribution.A plan
ned economy aims at using
all available resources for developing production instead of allotting
the resources for advertising or marketing.
Characteristics of Planned Economy:
By n atu re , a Pl an ne d E con omy i s more stab l e , gu a ran te ei n g c
o n s t a n t e x p l o i t a t i o n o f t h e e x i s t i n g r e s o u r c e s . I t i s l e a s t a ff e c
t e d b y fi n a n c i a l downturns and inflations.
In a carefully structured Planned Economic system, both surplus production
and unemployment rates remain at a reasonable level
The steady nature of Planned Economy encourages investments in
long-standing project-related infrastructures without any possibility of
financial recessions.
 The vision of Planned Economy is not making profit. This system prefers
deliberate planning of the entire money making process for better results.
Infect, such sincere economic planning in the long run proves
benefi cial to improve the economic conditions of a country.

Advantages of Planned Economy

Stability:
Long-term infrastructure investment can be made without fear.
Equity:
In this system equality is focused on. The government tries to eliminate
all p r i v a t e p r o p e r t y a n d d i s t r i b u t e i t s g o o d e q u a l l y.
T h e g o v e r n m e n t w i l l provide equal health care, education opportunities, and
make sure all people are fed.
Assurance of the use of resources:
A p l a n n e d e c o n o m y c a n m a x i m i z e t h e continuous utilization of all available
resources.
Efficiency of managing:
This system is organized in such a way that helps to satisfy the majority of
the population.
Quick problem solving:
It is capable of rapid change for major problems. The government owns the
companies, so if production needs need to be shifted into a different area, the
government is capable of doing it rather quickly.
Reduction of unemployment:
Th i s sy ste m h el p s to re d u ce u ne mp l oyme n t. Government provides
services to all.

Disadvantages of Planned Economy

Inefficient resource distribution:
S o m e t i m e s i t c a n n o t detect consumer preferences accurately.
 Lack of freedom:
People cannot decide about the production of their desired products. They
have less opportunity to decide what they want to do for a career.
Lack of incentive for innovation:
Planned Economy does not encourage taking innovations.
Individuals initiative goes unrewarded:
H a r d w o r k i s n o t r e w a r d e d h e r e . Everybody is equal here.
Overstaffing problems
Sometimes organizations are filled with over staffs.
Waste of resources:
Resources owned by the government are sometimes.
Production standards problem:
The absence of profit motives acts as a deterrent to individual contribution. For that
sometimes products are not maintained standard.
Corruption:
A p l a n n e d e c o n o m y c r e a t e s s o c i a l c o n d i t i o n s f a v o r i n g p o l i t i c a l corru
ption.
Two concept of Planned Economy:

Socialism
A) Socialism
T h e U n i o n o f S o v i e t S o c i a l i s t Re p u b l i c ( U S S R ) w a s b o r n w i t h t h e
B o l s h e v i k Revolution of 1917. Marxs ideas helped shape the economic
system adopted by the new nation. The communist leadership set up a
centrally p l a n n e d s y s t e m t h a t , u n t i l 1 9 8 5 , w i t h o u t t h e p r o fi t m o t i v e .
I t w a s a classic example of a Planned Economy. The government owned
productive resources, fi nancial enterprises, and retail stores and banks. In a
planned economy, the government is the owner because it speaks for the
people. Privet citizens own personal property, such as autos, clothing and
furniture.
B) Perestroika
Mik h ai l Gorb a ch e v, ge n e ral se cre t ary of the Commu n i st p art y, b e g
an a new
p rog ram call ed Pe restroi ka in 19 85 . Pe restroi ka me an s
e c o n o m i c re stru ctu ri n g . Un de r th i s p rog ra m on J an u ary 1, 1988,
a b o u t 6 0 % o f Soviet enterprises were put on self-financing basis. Gorbachev
promoted
Increase of unemployment:
Rate of unemployed people increases. Business wants to maximize profi t by
minimizing costs. They get minimum number of staffs.
Capitalism
A system of economics based on the private ownership of capital and production
inputs, and on the production of goods and services for profit. The production of
goods and services is based on supply and demand in the general market (market
economy), rather than through central planning (planned economy). Capitalism is
generally characterized by competition between producers. Other facets, such as
the participation of government in production and regulation, vary across models of
capitalism.
Explanation
Capitalism rose to prominence with the end of feudal economies, and has become
the dominant economic system in developed countries. Specific tenets of
capitalism, such as property rights and wage labor, can also be considered
cornerstones of representative government. Capitalism is often closely associated
with economic growth, as production and price are determined by the market rather
than by governments. Private property rights provide individuals with the freedom
to produce goods and services they can sell in the market.
Capitalism has been criticized for its underlying focus on profit, and how that focus
can lead to social and economic inequality. Further, it is also criticized for its
emphasis on consumption, as the constant purchase of goods and services is
necessary for capitalism's success.
Advantages
Economic freedom helps political freedom. If governments own the means of
production and set prices, it invariably leads to a powerful state and creates a
large bureaucracy which may extend into other areas of life.
Efficiency. Firms in a capitalist based society face incentives to be efficient
and produce goods which are in demand. These incentives create the
pressures to cut costs and avoid waste. State owned firms often tend to be
more inefficient (e.g. less willing to get rid of surplus workers and less
incentives to try new innovative working practices.)
Economic growth. With firms and individuals facing incentives to be
innovative and work hard this creates a climate of innovation and economic
expansion. This helps to increase real GDP and lead to improved living
standards. This increased wealth, enables a higher standard of living; in
 theory, everyone can benefit from this increased wealth, and there is a
trickledown effect from rich to poor.

Disadvantages
Monopoly Power. Private ownership of capital enables firms to gain monopoly
power in product and labor markets. Firms with monopoly power can exploit
their position to charge higher prices.
Monopsony Power. Firms with monopsony power can pay lower wages to
workers. In capitalist societies, there is often great inequality between the
owners of capital and those who work for firms.
Social Benefit Ignored. A free market will ignore externalities. A profit
maximizing capitalist firm is likely to ignore negative externalities, such as
pollution from production. This can harm living standards. Similarly, a free
market economy will under-provide goods with positive externalities, such as
health, public transport and education. This leads to an inefficient allocation
of resources. Even supporters of capitalism will admit that government
provision of certain public goods and public services is essential to maximize
the potential of a capitalist society.
Inherited Wealth and Wealth inequality. A capitalist society is based on legal
right to private property and the ability to pass on to future generations.
Capitalists argue that a capitalist society is fair because you gain the rewards
of your hard work. But, often people are rich, simply because they inherit
wealth or are born into a privileged class. Therefore, capitalist society not
only fails to create equality of outcome, but also fails to provide equality of
opportunity.
Inequality creates social division. Societies which are highly unequal create
resentment and social division.
Diminishing marginal utility of wealth. A capitalist society argues it is good if
people can earn more leading to income and wealth inequality. However, this
ignores the diminishing marginal utility of wealth. A millionaire who gets an
 extra million sees little increase in economic welfare, but that 1 million
spent on health care would provide a much bigger increase in social welfare.
Boom and Bust cycles. Capitalist economies have a tendency to booms and
busts with painful recessions and mass unemployment. See: Boom and bust
economic cycles

Mixed Economy
M i xe d e c o n o m y i s a t e r m u s e d t o d e s c r i b e a n e c o n o m i c s y s t e m ,
w h e r e s o m e important production is undertaken by the state, directly or
through its nationalized industries, and some is left for private enterprise. In a
mixed type economy, both t h e p r i v a t e o w n e r s h i p a s w e l l a s t h e
g o v e rn m e n t t ake s p ar t in t h e p ro ce s s o f p ro d u ct i o n an d
distribution and other economic activities.
The mixed economy allows private participation in the fi eld of production
in an environment of competition with an objective of attaining profit. On the
contrary following to the socialism features it includes public ownership in
production for maximizing social welfare. In a mixed economy there is flexibility in
some areas and government control in others. Mixed economies include both
capitalist and socialist economic policies a n d o f t e n a r i s e i n s o c i e t i e s
t h a t s e e k t o b a l a n c e a w i d e r a n g e o f p o l i t i c a l a n d economic views.

Characteristics of Mixed Economy:

Consumers are given choices about the products they buy.
Business owners can sell their products and keep the profits.
Government provides services for people in remote areas.
Individuals are free to use their money or resources as they choose.
Government provides service of defense, roads, education, and pension
and some medical care.

Advantages of Mixed Economy

Government support:
In mixed economy government has the control of many of the key aspects of the
economy, such as public schools, police department, fi re department,
military, museums, libraries, and streets, or sewers.
Highest possible use of resource:
A mixed economy can maximize the continuous utilization of all available resources.
Flexibility:
This economic system is more fl exible than planned economy and
Capitalism.
Freedom of choice:
In this type of economic system everybody has the right of enterprise
ownership, work for social welfare, and profit earnings, political freedom.
Limited rules:
The government has limited control, which is good for structure.

Disadvantages of Mixed Economy

Corruption:
Mi xed economi c systems incenti ves corruption and poli tical
bureaucracy capitalist nexus enjoying at the cost of the citizens.
Increase of unemployment:
Rate of unemployed people increases. Business wants to maximize profit
by minimizing costs. They get minimum number of staffs.
Waste of resources:
Resources owned by the government are sometimes.
Lacking of standard:
T h e a b s e n c e o f p r o fi t m o t i v e s a c t s a s a d e t e r r e n t t o individual
contribution. For that sometimes products are not maintained standard.

Economic System followed by different countries.

China
China once had a socialist, planned economy where the government controlled and
own e d all th e me an s an d me th od s of p rod u cti on . It i s n ow n e ar a
m i xe d e c o n o m y a f t e r p r i v a t i z a t i o n o f m o s t o f t h e s t a t e o w n e d e n t e r
prises and
opening up to western countries. For example, peasants now have their own firms;
foreign businesses are allowed to set up in China and so on.
U.S.A.
The USA economic system is mixed capitalism. It became
m i x e d w h e n government established operating guideline and laws for
business to follow.
For e x a m p l e , p o s t a l s e r v i c e i s a g o v e r n m e n t b u s i n e s s t h a t c o m p e t e
s with
p r i v a t e business such as Federal Express.
Cuba
Cuba has a dual economy, with two distinct systems operating side by side.
Thes o c i a l i s t p e s o e c o n o m y a p p l i e s t o m o s t C u b a n s , p r o v i d i n g
them
w i t h f r e e education, free health care, universal employment, unemployment
compensation, disability and retirement benefits and the basic necessities of life:
food, housing, utilities and some entertainment at very low cost. The
market economy operates in the tourist, international and exports sectors, and
substantially sustains the socialist economy.

Bangladesh
Bangladesh economic system is mixed economy. Both private and government
is producing and distributing goods and services. Defense, roads, education,
pension and some medical care are under the authorization of government. Private
sectors are also providing goods and services to the people.

Conclusion
Diff erent countries follow diff erent types of economic system. But now a
days most of the countries are adopting mixed economy system. Even capitalist
country U.S.A., socialist countries like China, Cuba are moving their
economic system towards mixed economy. Now pure capitalism and socialism are
found in books only. Because of fl exibility, government support,
international business policy countries are being interested in mixed economy.