Economic Systems Across The World Politics Essay

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Economic system refers to an organized way in which a state or nation allocates its resources and apportions goods and services in the national community. Every nation or state has a definite set of resources and the state needs to adopt a mechanism in which it can distribute and allocate its resources so that this distribution is fair and just and it leads to a maximum utilisation. The resources should be distributed in such a manner as to they may benefit a larger number people and at a broader sphere too. Hence, this system adopted to equitably allocate the resources is called economic system. Economic system comprises of various processes ranging from organizing and motivating labour, producing, allocating and eventually circulating the outcomes of human labour in1cluding products and services, consumer goods, tools, machines, and various other technology which would be used as inputs to production in future. Economic system is rather a combination of various agencies, consumers, sectors and entities that ultimately provide an economic structure to a community. According to The New Encyclopaedia Britannica, economic system is, infact, the set of principles which address the problems of economics. [1] Economic system comprises of people, rules, institutions and relationships. If defined loosely, economic system is a country's plan aimed at its services, goods produced and the way in which its economic plan would be carried out.

Each and every economic system existing in the world today has to basically answer three very primary questions:

What to produce?

How much to produce?

And for Whom to produce?

Economic systems have to keep this thing in mind that these questions are satisfactorily answered. And that system which takes into consideration these questions and answers them satisfactorily can be termed as a good and successful economic system. Every economic system must have a way of determining what commodities it must produce, how these commodities are produced and for whom they are produced. These three fundamental questions of economic organizations- what, how and for whom- are crucial today as they were at the dawn of human civilization.

Contemporary economic system includes the capitalist system, socialist system and mixed economy. In today's world, these are the most common economic systems which prevail but besides that many authors and economists also include traditional system as an of economic system too. A brief overview of these systems is as follows:

Capitalist economy: This is an economic system in which the means of production is based on private ownership and the chief aim of production is maximising profit. In a market economy, the national and the state governments have a minimal role and it is the consumers and their buying decisions which drive this economy.

Socialist economy: In this type of economy all the major and important decisions regarding production, distribution, commodity and services prices are all made by the government. The socialist economy is basically a government driven economy and the market forces have a very little say in it. All the policies and decision making are the responsibility of the government. It aims at using all the available resources for developing production rather that allotting the resources for advertisement etc.

Mixed Economy: A mixed economy is the mid way between the socialist economy and capitalist economy. It inculcates in itself the goods of both and sheds the ills. This system prevails in many countries where neither the government nor the private sector has a full-fledged role but instead both the sectors play an important role in the economic decision-making of the country.

Traditional economy: It is the economic system which involves extensive subsistence agriculture. Traditional economies are popularly conceived of as "primitive" or "undeveloped" economic systems, the tools or techniques of which are seen to be as outdated. Traditional economies may be based on custom and tradition or commands with economic decisions based on the traditions of community, family, or religion.

Review of Literature

Capitalism: Capitalism, as we all know, is an economic system which aims at driving profit with minimal control of government. It is the market that decides all the policies and it is the driving force in it. Adam smith in his book "An inquiry into the nature and causes of the wealth of nations" [2] has advocated capitalism. He is regarded as the father of capitalism. Going through this text put forward by Adam Smith, it can be seen that he believed the fact that within a given stable system of commerce and evaluation, individuals would respond to the incentive of earning more by specializing their production. That is, the individuals would put in more effort into the work wherein they would be given incentives of earning. If the individuals are given total freedom regarding the way they are producing and if they get incentives out of their adopted strategy of working then they would put in more effort to get a better profit. And by this way the economy would become more productive and wealthier.  Adam Smith advocated the letting of a free market control production and price, and allocate resources.  He stressed that every individual should free to carry his business as he neither intends to promote the public interest, nor does he know how much he is promoting it. He, basically, is concerned with his own security and interests only directs his work in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this led by an invisible hand to promote an end which was no part of his intention. If every individual promoted his own interest then ultimately the entire society would be promoted indirectly.

Capitalist economy has been by many authors seen as a promoter of Gross Domestic Product. In the time span of 1000 to 1820 the world economy grew by six folds. But after capitalism i.e. in the span of 1820-1998 the world economy grew by 50 folds. [3] Since capitalism promotes the individual growth of the person involved in a trade hence he made out that if each and every individual grows then ultimately the entire society would end up growing.  Richard Cantillon also advocated capitalism as according to him it maintained the balance of flows of income, and argued that it is the supply and demand mechanism around land which influenced short-term prices.

But at the same time, great people like Karl Marx have heavily criticised capitalism too. The opponents of capitalism have associated it with social inequality, unfair distribution of wealth and power,  various forms of economic and cultural exploitation; repression of workers and trade unionists; social alienation; economic inequality; unemployment etc. Capitalism can be considered to be irrational wherein the production and the direction of the economy are very much unplanned, thereby creating numerous inconsistencies and internal contradictions. Even criticism has arisen from environmentalists too who have argued that capitalism requires continual economic growth, and that it will inevitably deplete the limited natural resources of the Earth. [4] Capitalism at one hand promotes development but at the other hand it leads to exploitation of the working of class too as the producer wants to produce more and more and increase his profits hence this excessive work might lead to his exploitation too.

Socialist Economy: This type of economy is the one wherein the means of production is in the hands of the government. A socialist economy is a system of production where the goods and services which are produced are directly for use, in contrast to a capitalist economic system, where the goods and services are produced with the aim of generating profit (and therefore indirectly for use). [5]  Production in a socialist economy is therefore "planned" or "coordinated", and does not suffer from the business cycle inherent to capitalism. The ownership of the means of production varies in different socialist theories. It can either be based on public ownership by a state apparatus; direct ownership by the users of the productive property through worker cooperative; or commonly owned by all of society with management and control delegated to those who operate/use the means of production. Economic planning is the mechanism for the allocation of all economic inputs and decision-making which are based on direct allocation, contrary to the market mechanism, which is based on indirect allocation. [6] 

Karl Marx was the one who strongly advocated the concept of socialism. According to his conception, socialism is that stage of economic development where wage labour, private property as the means of production and monetary relations have been made redundant through the development of productive forces, so that capital accumulation has been superseded by economic planning. And Economic planning in this definition means the conscious allocation of economic inputs, resources and the means of production by the associated producers in order to directly maximise use-values as opposed to exchange-values, in contrast to the concept of "anarchy of production" of capitalism. He was of the view that capitalism which leads to accumulation of wealth is the basic cause of exploitation of the working class. This economy was supposedly to be a highly planned economy wherein all the means of production would be channelized and would be in the hands of the government or would be publicly owned. The aim of production would not be to make whooping profits but to satisfy the needs of the masses. Unlike the capitalist economy wherein the basic aim was to make profit hence the production was aimed at growing at all cost which lead to exploitation of the working class.

But besides this there has been criticism to this form of economic system too. This is criticised on the grounds that socialist economy leads to slower rate of growth of the country as compared to the growth in a capitalist economy. Market economists generally criticise socialism for eliminating the free market and its price signals, which according to them is necessary for rational economic calculation. Socialism at the same time also causes a lack of incentive. And these problems lead to a slower rate of technological advancement and a slower rate of growth of GDP. Lack of incentive makes the workers disinterested to a large extent which might lead to poor performance at work field.

Mixed Economy: This economy is the midway between the capitalist economy and the socialist economy. To a great extent inculcating the goods of both and shedding off the ills. Mixed economy can be termed as an economic system in which both the state and private sector direct the economy, reflecting the characteristics of both market economy and planned economy. [7] All what mixed seeks is that the means of production should be in the hands of private entities, the market should remain one of the dominant form of economic coordination and that the profit seeking nterprises and the accumulation of capital should remain the most important driving force behind economic activity. However, government also has a significant role to play wherein it creates new fiscal and monetary policies which regulate the actions of the profit seeking private enterprises aiming at reducing financial crisis, unemployment and doing social welfare. [8] Governments in a mixed economy often provide employment, environmental protection a modernized welfare system along with  maintenance of competition. In a mixed economy the market is driven not just by private entities or by governmental instruments but both collectively play a major role in its working. It is the private organization and the public enterprises which complement each other and work in coordination with each other to provide employment, services, fulfil necessities, social welfare etc.

Mixed economy has the features of both, planned economy as well as free market economy comprising of two sectors which are the public sector and the private sector. The public sector takes care of all the business where the private sector would not want to invest as there might be very less or no profit such as defence, street lighting, road construction etc. Whereas the private sector takes into consideration basically the profit generating sectors such as privately owned companies, schools, public use commodities etc.

Formulating Hypothesis

The reality of various economies across the world can be examined can be accessed by comparing them with the model theories of their type of market. For this we check ask the question:

Whether the three types of economies, namely the capitalist economy, socialist economy and mixed economy exist in their purest form or not?

The market is said to be working in its pure form when it satisfies all the preconditions laid down by the theory of that market in its absolute terms.Now let us assume that wherever any one of the three systems exists, it exists in its pure and absolute form. This has to be supported by matching each of the characteristics prevailing in the market with that of the essentials of their theories.

To test the present hypothesis to check the sanctity of presence of the three economic systems, the characteristics of each of them are to be examined:

Capitalist Economy:

Private property: private individuals and firms own resources

Freedom of enterprise and choice

Risk taking 

Decisions about what and how much should be produced, how it should be produced, and for whom it should be produced are decentralized 

Limited government intervention

Socialist Economy:

All the enterprises are owned by government

Regulation of income made by each individual

Minimal accumulation of wealth.

Policy of general welfare

Mixed Economy:

Balance between the public and private enterprises.

Involvement of the private sector in public domain or vice versa

Social welfare as well as competition

Research And Test of Hypothesis:


Capitalism, as already stated, is that form of economy wherein the private sector plays the main role. It is the private sectors which is the driving force of the market and it determines what, how and for whom to produce. In a pure capitalist economic system the government has no role to play and all sectors of economy are governed by the actions of the private sectors. The flow of money in a capitalist state is said to gain its momentum from the private sectors only. The public domain is said to be non-existent and it is the private sector only that leads from the front.

There are many nation states which advocate capitalism and are still following it in some or the other form and one amongst them is The biggest economy of the world which is the United States of America. Capitalism is strongly championed by the United States, Canada, and the emerging "tiger economies" of Southeast Asia. In fact capitalism has become synonymous with the American ideal of self-determination, which led to the belief that government plays only a minuscule role in the administration of a capitalist economy. Capitalism has led to the belief that the government intervention is minimal and it is the private sector only that plays the game. But the truth is a bit contrary to the fact believed. Capitalism does not exist in its purest form in today's world. America does advocate capitalism but it itself does not have the purest form of capitalism in its economic structure. The Federal institutions existing in the United States of America, for example, govern the amount of money in circulation, administer the flow of money from one sector to the other, manage growth in the economy and through taxation and regulation they end up redistributing the wealth. These days the modern capitalist societies, however, are hardly free from state intervention. A capitalist state is one where there is no state intervention but even in the most developed economies which call themselves capitalist the state intervention is very much prominent.

Capitalism is characterized by private ownership and a decentralized decision making body whereas in the present day situation all the decisions regarding the flow of income and the economic policies to be adopted are taken by the government or with pervasive state intervention which are implemented over the privately owned enterprises as well as public enterprises.

Canada is also one of the capitalist country having a huge economy. Canada is basically a capitalist country which allows privately owned businesses and enterprises. It however has several nationalized corporations such as the Canadian Broadcasting Corporation (CBC), it has divested itself of several others in the recent past (Petrocanada). Canada is referred to as a capitalist country but there are nationalized corporation too which exist over there. The public health system is in the hands of the government and all its policies are regulated by the government. The economic policies are taken care of by the government which can be demonstrated by the fact that the Canadian government ceased its economic relations with Cuba calling it an angry and alien land with soviet missiles and 90 miles from the coast of US.

Mexico which claims to be a capitalist country itself has achieved its fiscal and pension reform only after the intervention of the government led by the second president Felipe Calderon of National action Party since 2000. Mexican government has still not deregulated the telecommunication sector and still keeps energy sector under its own thumb. The Mexican government has held onto key industries such as state-owned oil giant Pemex and other important and huge industries. The government spending in Mexico is around 26.9 percent of the total domestic output [9] .

Another example of capitalist economy is Britain. United kingdom is also a capitalist economy but like many other countries capitalism does not exist in its purest form over there too. The banks in UK are nationalized. The policies of the market are decided by the government and the government keeps a check as to how its economy is growing. President Margret Thatcher had introduced market reform policies in 1980s, Labour party has increased the government size and spending in the market, conservative-liberal coalition government has made deep cuts into the market spending, the health services and the international relations are still kept in the hands of the government. Government spending in Britain is around 51.2 percent of the GDP [10] . The government in UK has a deep and pervasive control over the policies which govern the actions of the private enterprises. The government comes out with plans so as to keep a balanced economy and to avoid any untoward situation like recession, inflation etc. and it plays a major role in pulling up the economy of the country from such situations. Inspite of all these government interventions UK is said to be a capitalist economy. Hence, capitalism does not exist in its purest form in UK too.

Similar is the state of capitalism in various other countries which have a capitalist economic system like that in Ireland, France, Portugal, Spain, Belgium, The Netherlands, Luxembourg, Germany, Italy, Sweden, Finland, Denmark, Malta, Cyprus, Austria, The Czech Republic, Slovakia, Poland, Hungary, Slovenia, Romania, Bulgaria, Latvia, Lithuania, Estonia and Greece. Some or the other important sector is held by the government be it the health sector, the telecommunication, railways etc. Capitalism in its purest form is just a myth in the contemporary world.


Socialism has its existence in ownership by the common public workforce instead of private individuals or group of individuals. State control is enforced to achieve this and the primary motive is general welfare. To test the purity of its presence we match the characteristics of the economies with the basic framework of socialism.

Socialism is said to exist in Cuba, Russia, China, Vietnam and a few other countries.

The Cuban regime looks to be in China-like transition from bureaucratic state capitalism to free market capitalism.

Socialists should defend Cuba against US imperialism and call for an end to the blockade, but Cuba is not a model that can take the mass movements in Latin America toward socialism. In Cuba socialism does not exist in its purest form. Only around 70% jobs are given by the government while the rest are in the hands of private enterprise. [11] The current Chinese economic model is unsustainable, which will have important implications for the capacity of the Communist Party to run China as a single-party authoritarian state. The country has been engaged in an almost 30-year long process of restoring capitalism. Vietnam economy is also said to be a socialist but now Vietnam itself is dependent on the market for a better economic conditions. State owned enterprises have been partially privatised, trade regimes have been liberalized and property rights are now being highly recognized. [12] The element of socialism in Vietnam is also not a pure one. Elements of capitalism can easily be seen in its economic systems.

The economist Hutton states that China "is neither a communist nor a capitalist economy". He writes: "There has been no top-down 'big bang' initiation of privatisation, price liberalisation and democratisation as in Eastern Europe". At the same time, China has been engaged in "phasing out planning with as few losers as possible". Therefore, China is not a planned economy, even one bureaucratically managed from the top by a Stalinist elite, like that which resulted from the Chinese revolution of 1949.

Taking a look at the Russian economy, it has to be marked that post the end of Cold War, it has been continuously shifting to private ownership. The Russian government under Yelstin opened up the economy for private investment. As of 2012, Russia has taken the form of a mixed economy with the co-existence of private and government sector.

It has been seen that socialism although claimed to exist in countries like China and Vietnam, does not really holds ground in any of the countries. Public ownership, the primary factor of socialism is absent in these countries. Ownership is confined to the government and in recent times with the private sector too. Social policy of welfare has to a great extent been replaced by profit motive. The government has opened up various sectors for private investment, including construction industry. Huge accumulation of individual wealth has been seen.

Hence, it has to be concluded that pure socialism does not really exists in any of the countries around the world, even though they might have certain characteristics of socialism.

Mixed Economy:

Mixed Economy is considered to be the best form of economy prevalent in today's world. It comprises an equitable partnership of both i.e. the capitalist economy as well as the socialist economy. Here the government decides what to produce, how much to produce and for whom to produce in collaboration with private enterprises. There are sectors where the government sector holds a control while in other sectors the private enterprises have a command. The basic idea of mixed economy is that the public and private sector should work in collaboration with each other wherein each of them complement the other. There shouldn't be monopoly of either of them. There should exist a public-private partnership (PPP) where each of them has an equal role to play. Mixed economy is a mixture of freedom and controls where freedom is acknowledged by the existence of private enterprises and control is approved by the government sitting at the top. Mixed economy is a system where everyone's interest is on a public domain.

But even mixed economy does not exist in its purest form as in a mixed economy there must be a complete harmony between the private and public enterprises. But as of now there are sectors where the private entities have no control. For e.g. the government has complete rule in the defence, railways, nuclear energy and processing of certain exclusive metals. In these sectors the private sector has no role to play and they can't interfere with the functioning of the govt. Prior to 1991 India was more inclined towards a socialist structure while after that it gradually moved on to a mixed system where it allowed private sectors to participate too. Before 1991 the government had 17 sectors under its belt but as of now it has only four of them.

There are now sectors where the private enterprises should have had no control but now they are emerging as monopolies of that sector. For instance, 'telecommunication', prior to the '90s decade the telecom sector was totally controlled by the government and every aspect of this sector was influenced by the government but now there is a huge change in it and the private sector have created a very influential place for themselves in this sector and are now the rulers in it.

It has to be noticed that in a flexible market like India, mixed economy does not work in its true sense. In reality there can be no perfect co-existence between a welfare motive and profit motive. In long term one of them supersedes the other and only one kind of economic system survives. Citing the case of India, while prior to 1991 there was a rule of government sector through the mechanism of licensing, closed industry and heavy duties, in the present times most of the industries are controlled by the private sector and the role of government is phasing out through continued disinvestment and sell outs.

Hence, the delicate balance of a mixed economy is something hard to maintain and it does not pertains its pure nature.

Interpretation of Report

With the advent of time and determination of national boundaries, countries have adopted various forms of economic systems to govern their markets. Societies have evolved following the market conditions and have set up various principles to protect their economies.

The 20th century saw a race between various economies to over shadow the other leading to the set up of basically three systems, Socialist economy, Capitalist economy, and Market economy.

It has been seen that the various economic systems, capitalist, socialist and mixed economy have a substantial grasp on the markets of the world. While the concept of capitalism evolved as a result of spread of modern freedom and liberalism, socialism is a more recent phenomenon, propagated by the likes of Marx finding its first base in Russia, promoted by Lenin post the Russian revolution of 1917. Mixed economy developed as a notion of private public coexistence and partnership.

Capitalism has its root in Western Europe, part of North America, and some parts of Africa and Asia. On the other hand, socialism is present in part of Eastern Europe, few Asian countries, Russia, and parts of Latin America.In recent times the extent of a mixed economic system has been widespread. It presently covers most of Asia, parts of Africa, Europe, North America and Latin America.

However, the most striking part is that in modern times none of these systems exist in there purest form in any part of this world. Be it capitalism or socialism or even mixed economy none of them now follows all the basic fundamentals of themselves. They no more exist in their purest.

As we can see from the report capitalism is not any more the purest in its form. Capitalism involves private ownership but nowadays even in countries which are termed as capitalist have huge governmental control and intervention in the market. The government plays a role in the flux of the market and frames policies and plans in order to keep the economy of the country at equilibrium. The government also has its spending in the private sectors. In the case of capitalism, it has been seen that government intervention to control markets has been inevitable. Price level fixing and policies regarding goods production have deprived capitalism from retaining its pure form.

Talking about socialism, it also does not exists in its original form. The factor of public ownership seems to be absent and has been rather developed as part of communism, wherein, ownership is taken up by the government. The public ownership gradually has shifted to private ownership. Private enterprises are entering into the private sectors. We can say that by this way the socialist economy might be moving towards a mixed economy.

While at the same time Mixed Economy also seems to be losing its vigour. In a mixed economy where public-private partnership is an essential element there are sectors in the existing mixed economies where the private sectors has its complete monopoly while at the same time there are sectors where the public sector maintains its monopoly.

Hence from the situation of the economy of the countries we've gone through we can conclude that none of these economies exist in their purest form and there exist an element of other economies in them too.