Capitalism
Capitalism is an economic system where private entities own the factors of production. The four factors are entrepreneurship, capital goods, natural resources, and labour. The owners of capital goods, natural resources, and entrepreneurship exercise control through companies. The individual owns his or her labour. The only exception is slavery, where someone else owns a person’s labour. Although illegal throughout the entire world, slavery is still widely practised.
Characteristics of Capitalism
Capitalistic ownership means two things. First, the owners control the factors of production. Second, they derive their income from their ownership. That gives them the ability to operate their companies efficiently. It also provides them with the incentive to maximize profit.
Capitalism requires a free market economy to succeed. It distributes goods and services according to the laws of supply and demand. The law of demand says that when demand increases for a particular product, the price rises. When competitors realize they can make a higher profit, they increase production. The greater supply reduces prices to a level where only the best competitors remain.
The owners of the supply compete against each other for the highest profit. They sell their goods at the highest possible price while keeping their costs as low as possible. Competition keeps prices moderate and production efficient.
That means the laws of supply and demand set fair prices for stocks, bonds, derivatives, currency, and commodities. Capital markets allow companies to raise funds to expand. Companies distribute profits among the owners. They include investors, stockholders, and private owners.
Advantages of Capitalism
Capitalism results in the best products for the best prices. That’s because consumers will pay more for what they want the most. Businesses provide what customers want at the highest prices they’ll pay. Prices are kept low by competition among businesses. They make their products as efficient as possible to maximize profit.
Most important for economic growth is capitalism’s intrinsic reward for innovation. This includes innovation in more efficient production methods. It also means the innovation of new products. As Steve Jobs said, “You can’t just ask customers what they want and then try to give that to them. By the time you get it built, they’ll want something new.”
Disadvantages of Capitalism
Capitalism doesn’t provide for those who lack competitive skills. This includes the elderly, children, the developmentally disabled, and caretakers. To keep society functioning, capitalism requires government policies that value the family unit.
Despite the idea of a “level playing field,” capitalism does not promote equality of opportunity. Those without the proper nutrition, support, and education may never make it to the playing field.
In the short term, inequality may seem to be in the best interest of capitalism’s winners. They have fewer competitive threats. They may also use their power to “rig the system” by creating barriers to entry. For example, they will donate to elected officials who sponsor laws that benefit their industry. They could send their children to private schools while supporting lower taxes for public schools.
In the long term, inequality will limit diversity and the innovation it creates. For example, a diverse business team is more able to identify market niches. It can understand the needs of society’s minorities, and target products to meet those needs.
Socialism
Socialism is an economic system where everyone in the society equally owns the factors of production. The ownership is acquired through a democratically elected government. It could also be a cooperative or a public corporation where everyone owns shares. The four factors of production are labour, entrepreneurship, capital goods, and natural resources.
Socialism’s mantra is, “From each according to his ability, to each according to his contribution.” Everyone in society receives a share of the production based on how much each has contributed.
Workers receive their share after a percentage has been deducted for the common good. Examples are transportation, defence, and education. Some also define the common good as caring for those who can’t directly contribute to production. Examples include the elderly, children, and their caretakers.
Socialism assumes that the basic nature of people is cooperative. That nature hasn’t yet emerged in full because capitalism or feudalism has forced people to be competitive. Therefore, a basic tenet of socialism is that the economic system must support this basic human nature for these qualities to emerge.
These factors are valued for their usefulness to people. This includes individual needs and greater social needs. That might include the preservation of natural resources, education, or health care. That requires most economic decisions to be made by central planning, as in a command economy.
Advantage of Socialism
Under socialism, workers are no longer exploited, since they own the means of production. All profits are spread equitably among all workers, according to their contribution. The cooperative system realizes that even those who can’t work must have their basic needs met, for the good of the whole.
The system eliminates poverty. Everyone has equal access to health care and education. No one is discriminated against.
Everyone works at what one is best at and what one enjoys. If society needs jobs to be done that no one wants, it offers higher compensation to make it worthwhile.
Disadvantage of Socialism
The biggest disadvantage of socialism is that it relies on the cooperative nature of humans to work. It negates those within society who are competitive, not cooperative. Competitive people tend to seek ways to overthrow and disrupt society for their own gain.
A second related criticism is that it doesn’t reward people for being entrepreneurial and competitive. As such, it won’t be as innovative as a capitalistic society.
A third possibility is that the government set up to represent the masses may abuse its position and claim power for itself.
Mixed Economy
A mixed economy is a system that combines aspects of both capitalism and socialism. A mixed economic system protects private property and allows a level of economic freedom in the use of capital, but also allows for governments to interfere in economic activities to achieve social aims. According to neoclassical theory, mixed economies are less efficient than pure free markets, but proponents of government interventions argue that the base conditions such as equal information and rational market participants cannot be achieved in practical application.
Most modern economies feature a synthesis of two or more economic systems, with economies falling at some point along a continuum. The public sector works alongside the private sector but may compete for the same limited resources. Mixed economic systems do not block the private sector from profit-seeking, but do monitor profit levels and may nationalize companies that are deemed impediments to the public good. The United States is mostly a free market economy, but it incorporates elements such as protection for agriculture and manufacturing through trade restrictions and subsidies. This makes the United States a mixed economy by definition.
Advantages and Disadvantages of a Mixed Economy
Many of the advantages of a mixed economy are found in a market economy. Goods and services are distributed where they are most needed while allowing prices to measure supply and demand. Secondly, it rewards the producers who are the most efficient with the biggest profits, meaning consumers get the most value for their dollar. A mixed economy promotes innovation and improvement and gives capital to those producers who are most efficient.
But if the market has too much freedom and liberty, it can make the environment less competitive sans support from the government. Furthermore, the country could accumulate more debt by creating government-subsidized industries — like defence or military — slowing down the economy.
Communism
Communism is an economic system based upon public ownership and a planned economy.
The term originates from the French word ‘commune’ and predates the prescription offered by Marx and Engels during the time of the Industrial Revolution. The most obvious contrast to be made is with capitalism, an economic system based upon private ownership and the market forces of supply and demand. Famously, Karl Marx predicted the collapse of the capitalist system due to internal contradictions between the interests of the bourgeoisie (the social class that owns capital) and the proletariat (the working class or the wage earners). This would result in a revolution led by the oppressed followed by the dictatorship of the proletariat. Eventually, the class conflict would come to an end and the result would be the inevitable victory of socialism. Common ownership would replace private property, and the state would equitably distribute resources.
The German theorist Karl Marx remains by far the most influential figure within the ideology of socialism. Writing during the time of the Industrial Revolution (1848), Marx offered a devastating critique of the capitalist economic system in which he claimed that the owners of capital exploited the working class. The Marxist argument has been subject to modification since his work was first published, but the core argument remains both relevant and insightful. One would only have to consider how multinational companies such as Apple use third-world sweatshops (Klein, 2000) or the treatment of illegal immigrants in the shadow economy by unscrupulous employers.
Marxist analysis is heavily influenced by a Hegelian understanding of historical progress. The German philosopher Friedrich Hegel claimed that history progressed upon a series of logical events based upon dialectic. Hegel believed that every idea or state of affairs contains within it an internal conflict. In other words, a thesis contains an antithesis that drives forward social change. The result is a new state of affairs or set of ideas he called a synthesis. For example, tyranny (thesis) generates the need for freedom (antithesis). Once freedom has been achieved there will be a state of anarchy until an element of tyranny is combined with freedom; thereby creating a system of laws (synthesis). In other words, when a proposition is confronted by an opposite, a new stage of history will emerge. Grounded on this philosophical structure, Marx claimed that socialism would confront capitalism and lead to a new historical epoch.
Furthermore, Hegel argued that alienation was the result of our perception of the world being different to the reality of that world. Progress would therefore occur only when a collective consciousness emerges, thereby generating a new consciousness. Marx adopted this view towards the notion of class consciousness, which he believed would occur amongst the exploited proletariat. Finally, Hegel argued that society was destined to reach the end of the dialectic in which our consciousness would be the same as the collective consciousness. We would therefore reach the end of history. For Marx, this would be a communist society.
Mixed Economy: Public Sector & Private Sector
It is a golden mixture of capitalism and socialism. Under this system, there is freedom of economic activities and government interference in social welfare. Hence it is a blend of both economies. The concept of mixed economy is of recent origin.
Developing countries like India have adopted a mixed economy to accelerate the pace of economic development. Even developed countries like the UK, USA, etc. have also adopted the ‘Mixed Capitalist System’. According to Prof. Samuelson, “Mixed economy is that economy in which both public and private sectors cooperate.” According to Murad, “Mixed economy is that economy in which both government and private individuals exercise economic control.”
Main Features of Mixed Economy:
A mixed economy has the following main features:
(i) Co-existence of Private and Public Sector:
Under this system, there is a co-existence of the public and private sectors. In the public sector, industries like defence, power, energy, basic industries etc., are set up. On the other hand, in the private sector all the consumer goods industries, agriculture, and small-scale industries are developed. The government encourages both sectors to develop simultaneously.
(ii) Personal Freedom:
Under a mixed economy, there is full freedom of choice of occupation, although consumers do not get complete liberty at the same time the government can regulate prices in the public interest through a public distribution system.
(iii) Private Property is allowed:
In a mixed economy, private property is allowed. However, here it must be remembered that there must be equal distribution of wealth and income. It must be ensured that the profit and property may not concentrate in a few pockets.
(iv) Economic Planning:
In a mixed economy, the government always tries to promote the economic development of the country. For this purpose, economic planning is adopted. Thus, economic planning is very essential under this system.
(v) Price Mechanism and Controlled Price:
Under this system, price mechanisms and regulated prices operate simultaneously. In consumer goods industries the price mechanism is generally followed. However, at the time of big shortages or during national emergencies prices are controlled and the public distribution system has to be made effective.
(vi) Profit Motive and Social Welfare:
In a mixed economy system, there are both profit motives like capitalism and social welfare as in socialist economies.
(vii) Check on Economic Inequalities:
In this system, the government takes several measures to reduce the gap between rich and poor through progressive taxation on income and wealth. The subsidies are given to the poor people and also job opportunities are provided to them. Other steps like concessions, old age pensions, free medical facilities and free education are also taken to improve the standard of poor people. Hence, all these help to reduce economic inequalities.
(viii) Control of Monopoly Power:
Under this system, the government takes huge initiatives to control monopoly practices among private entrepreneurs through effective legislative measures. Besides, the government can also fake these services in the public interest.
Types of Mixed Economy:
Capitalistic Mixed Economy:
In this type of economy, ownership of various factors of production remains under private control. The government does not interfere in any manner. The main responsibility of the government in this system is to ensure rapid economic growth without allowing the concentration of economic power in a few hands.
Socialistic Mixed Economy:
Under this system, means of production are in the hands of the state. The forces of demand and supply are used for basic economic decisions. However, whenever and wherever demand is necessary, the government takes action so that the basic idea of economic growth is not hampered.
However, this system is again sub-divided into two parts:
(i) Liberal Socialistic Mixed Economy:
Under this system, the government interferes to bring about timely changes in market forces so that the pace of rapid economic growth remains uninterrupted.
(ii) Centralised Socialistic Mixed Economy:
In this economy, major decisions are taken by central agencies according to the needs of the economy.
Features of Mixed Economy:
The following are the main features of the mixed economy:
1. Co-existence of Public and Private Enterprises:
The main feature of a mixed economy is the coexistence of both Public and Private enterprises. They work together. The industries in the Private Sector are managed and operated completely by Private entrepreneurs. The private entrepreneurs are fully free to develop their industries and start new industries in this sector.
On the other hand,,,,,,,,,,, there is the Public Sector in which the enterprises are owned and managed by the State. Usually, the basic industries like defence, equipment, atomic energy, telecommunication, heavy engineering etc. are allocated in the public sector whereas the consumer goods industries, small and cottage industries, agriculture etc. are often given to the Private Sector.
Besides this, the State also ensures to the Private Sector not to inter-venue in its functioning and provides several incentives and facilities for the development and the smooth functioning of the sector, to make the country’s economy rather more economically strong and powerful.
2. State Control over Private Sector:
In such an economy the State imposes certain necessary measures to regulate and control the enterprises relating to the private sector so that they undertake their work by the national objectives and not only in their own interests.
The Licensing System is an effective instrument in the hands of the State by which it controls and regulates the direction of private industrial investment and production. The other measures of control over the private sector which it generally uses are appropriate monetary and fiscal policies. As such the State gives them rebates and tax concessions and credit facilities at reasonable rates, to encourage the private entrepreneurs to invest their savings in the required and right direction.
3. Price Mechanism and State Directions:
Other important characteristics of a mixed economy may be its operation – both by the price mechanism and the state directives. In the public concern, all economic decisions relating to production, prices, marketing and investments are taken by the state authorities. On the other hand,,,,,,,,,,, it is the price mechanism which decides all the important economic policy matters in the private sector. Private entrepreneurs take important economic decisions based on the price and cost analysis of the market to realize maximum profits.
4. Consumer’s Sovereignty is Protected:
In a mixed economy, the sovereignty of the consumers is almost protected which is not possible in a socialist economy. Consumers can purchase commodities freely from the market of their own choice which is produced by private entrepreneurs according to the consumer’s demand or preferences.
The state sometimes imposes price control over the goods produced by private entrepreneurs to protect the consumers against the ruthless exploitation undertaken by capitalists or producers of the private sector.
Besides this, the state also introduces a public distribution mechanism followed by the rationing of essential goods in short supply, so that the limited available goods may be fairly supplied and distributed among the people in the society.
5. Proper Protection is provided to Weaker Sections of the Society especially Workers and Laborers:
In the initial stage of the Industrial Revolution, the producers or capitalists ruthlessly exploited the working class. The state thus realized its responsibility to protect this class from exploitation by the industrialists and producers.
It is with this view that the state has implemented several Labour Acts to regulate and control the working conditions of labour, such laws are the Minimum Wages Act; the Industrial Dispute Act; The Workmen's Compensation Act; The Maternity Benefit Act; The Employees State Insurance Act; The Employees Provident Fund Act etc.; provide protection to the workers in respect of employment, injury or casualty by accident, disease, maternity and old age benefits. The state also takes essential steps if there is any dispute arising in the industry in the interest of the workers.
6. State Takes Measures to Control Monopoly and Concentration of Economic Powers in the Hands of Few:
In a mixed economy,, a monopolist uses his powers against the interest and welfare of the consumers and wants to realize maximum profits out of his total production which is possible either by reducing the total output or by raising the prices of the commodity.
It results in growing inequalities in society and enlarging the exploitation of workers. In 1969 MRTP Act was passed to control or restrict monopolists and the concentration of economic power in the Indian economy.
7. It Reduces Economic Disparities:
A Mixed Economy is often blamed for stimulating economic disparities in the country. But the states in such economies take necessary steps to reduce inequalities of income and wealth. The growing inequalities in income usually may create disparities in opportunities for education and jobs and may further generate class-struggle between the rich and poor workers.
Ultimately, the entire society may be divided into two major camps: the rich and the poor or the ‘haves’ and the ‘have nots”. It is with this view that a welfare state always tries to reduce economic disparities through proper fiscal and credit policies.
With the elements or characteristics written above,,,, we can come to the conclusion that in a mixed economy both sectors-Public and Private work together. On the one hand,,,, there are Public and Private works together, on the other hand, there are Public enterprises completely owned and managed by the state and private concerns are fully organized and managed by the individual owners on the other.
However, both sectors still have a few restrictions to remove or minimize all other economic distortions and disparities existing in the economy; to develop those sectors according to the mainstream of economic developments.
Problems of Mixed Economy:
Sometimes it has been experienced that the economy does not work well successfully under a mixed economy. In the Indian economy, there is a Public Sector to a large extent on the one hand and a weak and controlled Private Sector on the other. As a matter of fact, the Public Sector flourishes in a planned economy. The undue importance of the first at the cost of the latter tends to some sort of problems in the pace of economic development.
The difficulties may follow as under:
The Private Sector has to work under certain restrictions and control and it is likely to carry out its programmes under a National Plan. But it is experienced in the Indian Economy that the process of the private sector ultimately depends on the profit motive system and it is generally against the objectives of national planning.
The transportation of the Private Sector into the Public Sector, as a State Policy of nationalization of private enterprises, tends to cause a lot of fear and confusion against private entrepreneurs.
The Public Sector is encouraged throughout the planning period but its performance is not satisfactory and is almost a misfit in the framework of national planning. The result is that none of them fulfils the objectives of national planning and hence it is one of the major factors causing the failure of long-term planning in India.
Measures for the Efficient Working of a Mixed Economy:
Following are the important steps which can be taken up for the efficient working of a Mixed Economy:
Political Stability at the Centre:
There should be a strong central government along with political stability.
Timely Execution of Plans is Essential:
The prompt and timely execution of plans is inevitably necessary.
State Policy should be Clear:
The state policy of nationalization should be clear and understandable to the general public.
Private Sector should Work within the National Guidelines:
The Private Sector should work strictly within the structure of National Economic Planning.
To Maintain a balance between the Public and Private Sectors:
The Government of India has made it clear that in future, the Government has no programme of nationalization of any industry and therefore has decided to maintain a balance between the two sectors. So no danger of take-over by the Government.
Political Stability at the Centre:
Timely Execution of Plans is Essential:
State Policy should be Clear:
Private Sector should Work within the National Guidelines:
To Maintain a balance between the Public and Private Sectors:
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