ECONOMIC SYSTEMS

ECONOMIC SYSTEMSTYPES OF ECONOMIESWhat is Economics?Economics studies how individuals and societies seek to satisfy needs and wants through incentives, choices, and allocation of scarce resources.

Oil & fuelLand

Doctors

Technology2Resources and Factors of ProductionEconomic Resources Natural Resources raw materials found in nature that are used to produce goodsHuman Resources peoples knowledge, efforts, and skills used in their workCapital Resources used to produce goods and services (buildings, materials, and equipment)Entrepreneurial Resources - recognize the need for new goods or service

Four Factors of Production 1. Land 2. Labor 3. Capital 4. Entrepreneur

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Socialism: You have 2 cows. Give one to a neighbor.

Communism: you have 2 cows. Give both cows to government and they may give you some milk.

Nazism: You have 2 cows. The government shoots you and takes both cows

Anarchism: You have 2 cows. Shoot the government agent and steal another cow.

Capitalism: You have 2 cows. Sell 1 cow and buy a bull.

Bovine Economic Philosophies4Song : USSR, BeattlesWhat are Economic Systems?Nations use economic systems to determine how to use their limited resources effectively.Primary goal of an economic system is to provide people with a minimum standard of living or quality of life.Different types of Economic SystemsTraditional EconomyMarket Economy (free enterprise)Command Economy(Centrally PlannedMixed Economy5Broad Goals of an Economic SystemEconomic Efficiency (max value, min waste) Economic Equity (fairness)Economic Freedom(freedom of choice)Full Employment(no unemployment)Economic Development (GDP, health, literacy, . . .)Security (defense, safety net)Price Stability(zero inflation)

Goals are not necessarily mutually compatible!66. natl defense & safety net (soc sec, medicare. . . .)7. stable P level less risk to invest; infl (hurts those on fixed inc, lenders at set rate infl>int!); defl1.Traditional EconomyFound in rural, under-developed countries Vanuatu islands near AustraliaPygmies of CongoEskimos & Indian tribes Belarus in central Europe Customs govern the economic decisions that are made Farming, hunting and gathering are done the same way as the generation beforeEconomic activities are centered around the family or ethnic unit Men and women are given different economic roles and tasks Advantages: people have specific roles; security in the way things are doneDisadvantages: Technology is not used; difficult to improve72.Market Economy (Free Enterprise)Also called a Free Market Economy or Free Enterprise EconomyBusinesses and consumers decide what they will produce and purchase and in what quantities Decisions are made according to law of supply & demand

Supply of and demand for goods and services determine what is to be produced and the price that will be charged.Advantagecompetition to have the best products and servicesDisadvantagehuge rift between wealthy and poorNote: a true market economy does not exist.83.Command EconomyThe government (or central authority) determines what, how, and for whom goods and services are produced.Two types: Strong Command where government makes all decisions (communism China, Cuba) Moderate Command where some form of private enterprise exists but the state owns major resources (socialism France and Sweden)AdvantagesGuarantees equal standard of living for everyone Less crime and povertyNeeds are provided for through the governmentDisadvantagesMinimal choicesFewer choices of items No incentive to produce better product or engage in entrepreneurship

Also known as a Planned or Managed Economy94.Mixed EconomyCombination of a market and a command economy Government takes care of peoples needsMarketplace takes care of peoples wants.Most nations have a mixed economy: India, United States, England, AustraliaAdvantagebalance of needs and wants met by government and in marketplaceDisadvantagecitizens have to pay taxes10INDIA AS A MIXED ECONOMYJawaharlal Nehru, our first Prime Minister, felt that mixed economy is ideal for developing economies.

The concept of mixed economy implies that the decision making process covering economic activities (and more particularly those relating to allocation of productive resources ) are shared between private and public sectors.

As a matter of fact every modern economy is a mixed economy.

Resource allocation through market forces is supplemented by non-market ones and in practice the state economic activities tend to be all pervading in the economies of both MDCs and LDCs.India: A Mixed EconomyPost Independence (1947), Pandit Jawaharlal Nehru proposed the idea of Mixed Economy.Initial motive: to reduce social and economic stress.Priority on Economic growth with social justice.Commanding role of state in industrial production and import substitution strategy.Role in agriculture limited to infrastructure development, irrigation and trade.Resulting low GDP at 3-4% p.a. Finally, Balance of payment crisis of 1991 initiated Economic Liberalization.

Two contradicting views:Should India adopt Free enterprise or the Capitalism model such as in USA?

OR

Should India continue to work on the Mixed Economy Model as it has done since independence?

Such an argument is very controversial and we shall discuss both the sides of the coin.Preference for Capitalism ScenarioThe recent case of failure of Indias esteemed airline services Air India can be attributed to faulty government enterprise handling by Mr. Morarji Desai.The destruction of Air India started with the airline becoming a public sector undertaking in 1977.Once JRD Tata moved out, babus came in, AI was used and abused by ministers and bureaucrats.Motives were short term planning and sightedness which resulted in inept and demotivated management, political interference, and corruption.Perfect example of government run enterprise gone wrong.Preference for the Mixed Model ScenarioIn wake of current recession, the recent collapse of GM in USA is a perfect exemplar of failure of free enterprise/capitalism model.Iconic GM filed bankruptcy with government acquiring 60% of the auto giant signals nothing short of nationalism.Hence, mixed economy model, where government produces for social interest is preferable in a developing economy like India, which cannot yet afford disasters like GM.Mixed economy model was adopted to safeguard Indian companies from competition and foster economic growth in backward regions.Public Sector Performance in past yearsAccording to 2006-2007 estimates, the public sector in India earned profits to the tune of Rs 81550 crore and achieved a turnover of more than Rs 9,60,000 crore. The Central public sector enterprises contributed as much as Rs 1,26,900 crores by way of taxes and more than Rs 20800 crores by way of interest and dividend to the Central Government. The Public Sector employs 16 Lakh people and there by providing employment to sizable section of the population. The national policy on public sector envisages that generally profit making PSUs do not qualify for privatisation. ConclusionThus what India needs is to stick to mixed economy model to protect and generate jobs and usher balanced development of backward regions. We need not opt for a blind private enterprise.Its true that inefficiency and failure to bring profits characterized the public sector undertakings few years ago.With competition lurking from liberalized economies, the public sector too has pulled up its socks.Indiscriminate privatization only encourages businessmen with profit motives, which a developing nation like India cannot afford.

Need of the HourWe need to invent India specific solutions for the economic problems and not to go by the wish list of the Private Industry and Private Financial Institutions. There need to be healthy but friendly competition to offer goods and services to the common man at a reasonable and affordable cost.If the Government opts for Disinvestment as the policy option, it endangers employment opportunities and balanced development of the nation. Private Enterprise alone is not the mantra that can ensure rapid development and growth of the nation need to be kept in mind. India needs the strong policy option of ECONOMIC GROWTH WITH SOCIAL JUSTICE