ECONOMIC SYSTEM

To deal with the fundamental problem of scracity, three types of

economic system exist traditional, market and command.
Command economies often have a communist form of
government. Countries with market economies are called
capitalist nations, and socialist countries often have a
combination of both command and market economies.

The three forms of organization- communism, socialism and

capitalism are shown in table below
The spectrum of economic systems runs from communism on the
left to capitalism on the right. The ditinguishing feature is the
owership of the factors of production and the role of government
in deciding WHAT, HOW AND FOR WHOM to produce. Since the
collapse of the Soviet Union, many countries have shifted more
toward capitalism.

COMMUNI SOCIALIS CAPITALIS

SM M
Directed by Directed by Free
command Market
Ownership of Resources
All productive Basic production Productive
resources are resources area resources are
governmet owned government owned privately owned
and operated and operated; the and operated
rest area privately
owned and operated
Allocation of Resources
Centralized Governments plans Capital for
planning directs all ways to allocate Production is
 resources resources to key obtained through
industries the lure of profits in
the market
Rule of Government
Government makes Government directs Government may
all economic the completion of its promote
decision economic plans in competition and
key industries provide public
goods

At the far left is communism, in which a strong central

government influences almost every economic decision. At the
far right is capitalism, in which the government has a limited
role. As one moves from left to right along the spectrum, both
the ownership of resources and the degree of government
involvement in the operation of the economy change. No fine line
separates communism, socialism and capitalism. They appear on
the spectrum as having a greater or lesser degree of government
and private ownership of resources.

a. Capitalism. Under capitalism, the means of production are

privately owned. Supply and demand determines prices and
business are free to direct resources into activities that
promise the greatest profits.
1. Advantages of Capitalism :
The main advantage of capitalism is efficiency. If there are
many buyers and sallers, if resources area reasonably
mobile and if buyers and seller are reasonably well-
informed, then resources will be directed to their most
profitable and efficient use.

This efficiency is a result of individual freedom and the

operation if the price system. Individuals have the freedom
to purchase the goods and services that best satisfy their
preferences. Producers have the freedom to direct
productive resources into activities that consumers
demand most. Prices serve as signals to both consumers
and producers.

Capitalism has the flexibility to accomodate change. When

consumer preferences change, or when the price of
resources change, signals area sent through the price
system and everyone adjust accordingly. Capitalism has
evolved and adapted into a system capable of answering
the basic WHAT, HOW and FOR WHOM question in a
decentralized manner.

2. Disadvantage of Capitalism :
Capitalism has a few weaknesses. Although it is efficient
in satisfying the demands of consumers, it does not
always satisfy everyones needs.

At a collective level, capitalism ignores the production of

many public goods such as roads, public schools, a
system of justice and national defense. The market
produce private goods and services items that can be
withheld if people refuse to pay for them. At an individual
level, capitalism produces only for those who have
demand, which means the ability and willingness to pay.
A system of pure capitalism would ignore poor people,
the unemployed and less productive members of society.

Pure capitalism can also be unstable, as illustrated by

the Great Depression. Life under capitalism can be harsh
for some people unless the system has been modifying
by adding safety nets in the form of unemployment
 insurance, Social security and other entitlement
programs.

b. Socialism. Under socialism, many of the basic productive

resources are government owned and operated, with prices
playing a major role in the allocation of resources. Most
socialist societies area democracies in which elected officials
and, ultimately the people direct the allocation of resources in
key industries.
1. Advantages of Socialism :
Socialism addresses the FOR WHOM quetion directly. Those
who are not fortunate or productive enough to earn a
comparative income still share in the benefits of society.
These benefits may include free education, health care,
welfare, access to the arts and cultural events and even
guaranteed jobs in government owned industries.

Although the government owns the majority of the

productive resources in a socialist society, people use their
electoral power to influence many of the HOW, WHAT and
FOR WHOM questions. Those who might have been left on
the fringes of a capitalist society the unemployed and the
homeless can benefit more fully from the activities of a
socialist society.
2. Disadvantage of Socialism :
Socialism is normally less efficient than capitalism. If
workers receive government guarantees of jobs, more
workers will be hired than are really necessary, driving
up the cost of production.

The price system will plays a vital role, but its effeciency
is reduced when the government guaranteeds of jobs,
more workers will be hired than are really necessar,
driving upthe cost of production.
 The price system will plays a vital role, but its effeciency
is reduced when the government substitutes its
judgment for the discipline of the market. Finally special
interest often become enterenched and have a political
influence far in excess of their numbers. When this
happen, decision over WHAT, HOW and FOR WHOM to
produce tend to be waged at the ballot box rather than
in the marketplace.

c. Communism : Under pure communism, which is both a

political and an economic framework, all property is
collectively owned, and labor is organized for the common
advantage of the community. Because private property does
not exist, the state owns all economic goods, including
factories and other means of production.

Theoretically, communism is a selfless society, where

everyone works to the best if their abilities and consumes
according to their needs. Goods and services have no prices,
eliminating the need for wages, rents, interest rates and
profits. Theoretical comunism has no social classes and no
need for a central government authority.

To date, no modern country has achieved the ideal of pure

communism. Countries such as China and the former Soviet
Union instead developed rigid command type economies
where the state usually represented by a single
authoritarian party - claimed ideal of pure communism as its
eventual goal. The advantages and disadvantages listed
below relate to the realisties of communism as found in these
countries, not to the theoritical ideal.
1. Advantages of Communism :
One of main advantages of communism, from the workers
point of view, is security. The state direct workers into their
jobs, and workers are not fired or dismissed as they could
be in other societies.

The state also provides a board of public goods such as

health care, education, and a military defense system.
Because of the guarantee of a steady job, workers seldom
face job uncertainly.

2. Disadvantage of Communism :
The disadvantages of communism are numerous. First,
individual freedom is lost. People have a little or no say in
their jobs and are not free to move elsewhere if they are
dissatisfied. The bureaucracy determines pay and most
people receive the same pay regardless of how hard they
work.

The lack of incentives can cause frustration on the low

productivity, and shoddy products. Most communist states
place a high priority on military preparedness, resulting in
the neglect of consumer goods that are highly prized in
other parts of the world.

One of the biggest drawbacks to communism is the

inefficiency of centralized planning. The resources needed
to execute the planning and the overwhelming obstacle to
effective execution are serious problem that communist
countries encounter after reaching a certain size. The
virtual collapse of the soviet economy is evidence of these
inefficiencies.