economic system

1. Economic system-Types,
Advantages, and Disadvantages

2. Meaning of economic system
• An economic system may be defined as a medium or an organised
way by which the means of production in a state are utilised in order
to satisfy human wants. In other words, an economic system refers to
the way in which the available productive resources in a state or
nation are owned, managed or utilised for the satisfaction of human
wants.
The type of economic system practised in any society or nation
depends on the way the available productive resources are owned
and the way society takes decisions on issues relating to the basic
economic problems. In other words, it is the ownership of the means
of production (whether private or public), how the choice is made
and by whom that determines the type of economic system.

3. What is an Economic System?
• The economic system is a system where societies or governments
organize and distribute available resources, services, and goods
across a geographic region or country. And it controls the factors of
production, including land, capital, labor, and it’s physical resources.
• An economic system surrounds many institutions, agencies, decision-
making processes, and patterns of expenditure that comprise the
economic structure of a given community.
• Many types of economic systems are there in the world. Each has its
own unique characteristics to control the economic sector. But they
all share some basic features. So each economy functions based on its
set of conditions and assumptions categorized into four main types.
Most countries today follow a mixed economic system.

4. • Types Of Economic System
• The major types of economic systems of the world are divided into
three major groups:
• capitalism or free market economy,
• socialism
• and mixed economy.

5. Capitalism or Free Market Economy
• Capitalism or free market economy may be defined as the type of
economic system in which the means of production are owned and
controlled by private individuals.
• In other words, it is the type of economic system which is characterized by
private ownership of means of production.
• In this case, private individuals play greater role than government in taking
decisions on what to produce, how to produce, for whom to produce and
the distribution of what has been produced.
• The private individuals utilize their capital and direct its use for making of
profit.
• Capitalism does encourage or give incentives and freedom to individuals to
invest their capital and maximize their profits. Examples of countries
which practice capitalism includes: the United States of America, Japan,
Australia, France and Italy

6. Features of Capitalism or Free Market Economy
• i. Private ownership of properties: There is high degree of private
ownership and control of means of production with minimal participation
by the state.
ii. Existence of competition: There is also a greater existence of
competition among individuals and firms as a result of effort to acquire
wealth or control means of production.
iii. Maximization of profits: Capitalism is characterized by high level of
profit maximization by private Investors.
iv. Individual satisfaction: Capitalism enables an individual to embark on
actions for the least sacrifice that would give him the greatest amount of
satisfaction.
v. Free market enterprise: Capitalism enables individuals the freedom to
choose their occupations based on their capabilities.
vi. Production and consumption are regulated by price system: The price
system determines what producers have to produce, taking into
consideration the demand of the consumers and the price offered for the
goods.
vii. Accumulation of wealth: As a result of individual ownership of means
of production capitalism helps him to accumulate wealth.

7. Advantages of Capitalism
• i. Free enterprise: Capitalism encourages maximum freedom of enterprise.
People are not forced into a system.
ii. It encourages hard work: In capitalism, people are free to own
properties and this encourages hard work.
iii. It leads to specialization: Capitalism also boosts specialization due to
increase in large scale production of commodities.
iv. It encourages economic competition: As a result of individuals
controlling the means of production, it generally leads to competition in
the production of goods and services.
v. Provision of alternative choice: The availability of goods and services
produced by private individuals enables consumers to have a wide range of
choice.
vi. It ensures self-regulation and reliance: Capitalism encourages
individuals to regulate their economic activities as well as helps them to be
self-reliant.
vii. It promotes different forms of production: Individuals pursue different
forms of production unlike when the state pursues a single form of
production.

8. Disadvantages of Capitalism
• i. It creates monopoly: As a result of the economic activities of a fee
individual investor, monopoly can easily be created.
ii. It leads to economic inequality: Only few individuals have full
control of the means production and this can lead to inequality in the
distribution of wealth.
iii. Few individuals are enriched: In capitalism, only a few individuals
are enriched while many are poor.
iv. It leads to economic exploitation: Explanation of the majority by a
few individuals is one of the problems of capitalism.
v. It causes economic insecurity: Job insecurity and unemployment
are some of the negative characteristics of capitalism.
vi. Unhealthy rivalry: As a result of competition in a capitalist
economy, it does lead to unhealthy rivalry among investors and
persons.

9. Socialism
• Socialism also called centrally planned or controlled economic system is defined
as the type of system in which the means of production and distribution are
collectively owned and controlled by the state (the government). Companies and
industries or corporations that are responsible for the production of goods and
services required in the country are owned and controlled by government. The
major aim of socialist economy is to produce goods and services for the general
welfare of the citizen. Thus, profit maximisation is not a feature of the socialist
economic system. Socialist economic system has a restricted market. It is a
centrally planned economy of which there is no private ownership of means of
production.
In this system also, individuals or citizens work collectively for the advancement
of the country, which the government on the other hand caters for the welfare of
the citizens. Goods and services produced are shared to individuals according to
their needs and their contributions to the advancement of the country. But
where private individuals may want to produce goods and services, they do so in
trust and under very close and strict supervision by the state. Examples of
countries that operated socialist system in the past included the former Soviet
Union, China, Czechoslovakia, Romania, Poland, Bulgaria etc.
In Africa, they include Ethiopia, Angola, Burkina faso, Mozambique etc

10. Features of Socialism
• i. Joint decision-making: A greater number of the citizens takes
collective decision on what to produce, how to produce and for
whom to produce.
ii. Non-profit motive: The motive of socialist economy system is not
to make profit.
iii. Promotion of welfare: The primary aim of socialism is to provide
goods and services for the welfare of the citizens.
iv. Freedom of choice: As a result of abundance of goods and services
provided, the consumers have a wide range of choice.
v. Non-price competition: Prices of commodities are fairly stable
unlike price competition in a capitalist economy.
vi. Equitable distribution of income: Income is equitably and evenly
distributed to all citizens in the state.
vii. State ownership of means of production: All means of production
and distribution are owned and controlled by the state.

11. Advantages of socialism
• i. Absence of exploitation: There is always absence of exploitation
since government provides all the goods and services required by the
citizens.
ii. Centrally planned market: Government takes decisions on goods
and services produced and their markets. This makes it to be centrally
controlled by the government.
iii. Prevention of private monopoly: Private monopoly that exists in
capitalist economy is prevented because means of production are
controlled by the government.
iv. Economic security: Jobs and employment for the citizens are
guaranteed and secured.
v. Absence of economic rivalry: Economic rivalries among private
individuals are absent in a socialist economic system.

12. Disadvantages of socialism
• i. Absence of alternative choice: Consumers have no alternative to
choice of commodities produced. They just have to accept whatever
that is produced.
ii. It reduces individual initiatives: Socialism reduces individual who
in Italians as the citizen solely on government for everything.
iii. It creates room for laziness: Since government provides
everything for the people, it breeds laziness among the citizens.
iv. It slows down economic development: As a result of the fact that
government alone provides means of that livelihood. It tends to
reduce or slow down the pace of economic development.
v. Lack of specialization: Socialism encourage division of labor and
specialisation.

13. Mixed Economy
• Mixed economy may be defined as the type of economic system in
which both the private and public ownership of means of production
and distribution exist together in a country. Under this economic
system, resources or means of production are jointly owned and
managed by both the public and private interests. The system is a
mixture of elements of both capitalism and socialism. Examples of
countries which operate mixed economy are Britain, Egypt, Peru,
Tanzania, Nigeria, Kenya, Mexico etc.

14. Features of mixed economic system
• i. Joint participation: In a mixed economy system, there is joint
participation of both private sector and the state in the provision of
goods and services.
ii. Joint decisions: Decisions on what is to be produced and the
quantity are jointly taken by both the private and public sectors.
iii. Freedom of choice: Consumers in this system have freedom of
choice.
iv. Checks and balances: The combination of both private and public
sectors help to put a lot of checks and balances in the economy.
v. Economic freedom: There is also economic freedom in the area of
production, consumption and distribution of commodities.
vi. Fair competition: Since the system accommodates the private and
state ownership means of production, it results in fair competition

15. Advantages of Mixed Economy
• i. It encourages private initiatives: Private initiatives in this type of
economic system are highly encouraged.
ii. There is freedom of choice: Consumers and even producers in this
type of economic system have a wide range of choice to make.
iii. It ensures economic development: The mixed economic system
promotes economic activities thereby leading to economic growth of
the nation.
iv. It ensures job security: This system also promotes the security of
job and employment.
v. It prevents monopoly: Monopoly is prevented because of the joint
participation in economic activities by both the private and put sector.

16. Disadvantages of Mixed Economy System
• i. Inequality of wealth: Wealth is not equitably distributed as there is
a wide gap between the rich and the poor.
ii. Emphasis is on profit: There is more emphasis on profit
maximisation at the expense of welfare for the citizens.
iii. Lack of efficiency: Efficiency scarcely occurs in this type of
economic system because of the involvement of the state.
iv. Corruption and mismanagement: There is a high level of
corruption and mismanagement of resources in mixed economy.
v. Exploitation of labour: Labour is usually exploited heavily in a
mixed economic system. It should be noted that there is no country in
the world which has absolute socialism or capitalism. In each country,
there is some private and state ownership of means of production. It
is the level of private and state ownership of means of production
that determines whether such a state is a capitalist or a socialist state.

17. • Take a quick test for this lesson!
• Define the term economic system.
• Mention and explain the types of economic system.
• State the features of each type of economic system.
• Identify the advantages and disadvantages of each type of economic
system.
•