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Economic Systems, Capitalism, Free Enterprise Economy

Economic Systems

The term economic system refers to the form of manufacture and the distribution of goods and services within which fiscal activity takes place. In a wider sense, it refers to the way "diverse economic elements (individual workers and managers, productive administrations such as factories or firms and government agencies) are correlated together to form an organic whole." The term also refers to how the diverse economic essentials unravel the central problems of an economy: what, how and for whom to produce.

Capitalism or Free Enterprise Economy

Capitalism is a fiscal system in which each individual in his capacity as a consumer, producer and resource owner is occupied in economic activity with a large activity of economic freedom. Individual economic actions be conventional to the existing legal and institutional frame work of the society which is governed by the organization of private property, earnings motive, autonomy of enterprise and consumers sovereignty. All aspects of production are privately owned and supervised by individual. The raw materials, the machines, the firms and the factories are owned and supervised by individuals who are at autonomy to dispose of them within the conventional laws of the country. Individuals have the liberty to decide any profession and to buy and sell any amount of goods and services.

Features of Capitalism

The principle features of capitalism are discussed below.
  • Private property - Capitalism increases on the institution of the private property. I t means that the owner of a firm or factory or mine may use it in any manner he likes. He may hire it to anybody, sell it or charter it at determination accordance with the customary laws of the country. State's role is restricted to the fortification of the institution of private property through laws. It persuades its owner to work hard, to systematize his business economically and to manufacture further, thereby profitable not only himself but also the society at large. All this is triggered by the profit motive.

  • Profit motive - the main motive behind the working of the capitalist system is the profit motive. The approach of materialistic which lies behind person's proposal and venture in a capitalist economy.

  • Price Mechanism - This activates mechanically without any direction and control by the central powers that be. It is the earnings motive which decides production. It is the customer's option which decide what to produce, how much to produce and how to produce. Thus capitalism is a system of joint exchange.

  • Role of the state - The maintenance of laws and order, defence from external hostility and stipulation for education and public health facilities.

  • Consumer's Sovereignty - Under Capitalism, the customer is the king. It means freedom of choice by customers. The customers are at liberty to buy any number of goods they desire. Manufacturers try to manufacture assortment of goods to convene the tastes and inclination of customers. This also entails liberty of manufacture whereby manufacturers are at autonomy to create a enormous mixture of merchandise in order to convince the customers.

  • Freedom of Enterprise - Freedom of venture means that there is free preference of activity for an industrialist, a capitalist and a manual worker. But this choice is subject to their aptitude and instruction, lawful precincts and prevailing market conditions.
Merits of Capitalism

Capitalism leads to increase in production leads to increase in income, increase in savings and investment and to development. Due to capitalism, it is possible to assure better quality along with less cost. Increase in efficiency leads progress and prosperity. It stimulates in wealth maximization with optimum utilization of resources. It is a flexible system of operating price mechanism.

Demerits of Capitalism

Capitalism leads to monopoly, it contains tendency to destroy competition and ultimately to the formation of trusts, cartels and combinations. It creates inequalities of income and wealth. The fact of consumer's sovereignty is a myth. Consumers are ignorant about the quality and utility of products. Depression and unemployment is caused by capitalism. Excessive competition and unplanned production leads to over production which ultimately leads to depression and unemployment.


A socialist economy is a financial administration in which the means of manufacture are owned and kept pace by the state. The resolution as to how much to manufacture with means of production for utilize and for whom to manufacture are taken by the scheduling authority.

Features of Socialism

  • Public Ownership - The economy of socialists is characterised by the means of production and distribution. There is a collective ownership whereby all mines, farms, factories, financial institutions, distributing agencies etc are regulated by government departments and state corporations.

  • Central Planning - A socialist economy is centrally planned with functions under the direction of a central planning authority. It lays down the various objectives and targets to be achieved.

  • Freedom of consumption - Under socialism, the consumers are at sovereignty that production in state owned industries is generally governed by the preferences of consumers and the available commodities distributed to the consumers at fixed prices through the state run department stores.

  • Equality of Income Distribution - In a socialist economy, there is great equality of income distribution as compared with free market economy. The elimination of private ownership in the means of production, private capital accumulation and profit motive under socialism prevent the amassing of large wealth in the hands of a few rich persons.

  • Planning and Pricing Process - The pricing process under socialism does not function liberally but works under the rules and parameters of the central planning power. There are control prices which are fixed by the central planning power.
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