BCom Indian Economic System Notes Study Material

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BCom Indian Economic System Notes Study Material

Introduction

The economic system at work is often influenced by the political ideology of the party in power under democracy. The leftists in power often promote the cause of socialism, and the rightist, on the other hand, promotes capitalism. The mixed economic system indicates the coexistence of the private sector and the public sector. (BCom Indian Economic System Notes Study Material)

Meaning of Economic System

An economic system refers to the mode of production, exchange, distribution, and the role that the government plays in the economic development of the country. It consists of all those institutions which are accepted by society at large for the use of available resources. The purpose of utilizing these resources is to maximize the economic and social welfare of the society and nation.

According to Loucks and N. William, “Economic System consists of those institutions which a given people, a nation or a group of nations have chosen or accepted as the means through which their resources are to be utilized for the satisfaction of the human wants.” Finally, we can say that the Economic system is a broad mechanism through which society receives identical goods and services as produced by relevant production processes for the wellness of people and society. (BCom Indian Economic System Notes Study Material)

Nature of Economic System

The nature of the economic system obtained within a country is a critical element of the economic environment of business in that country. The political system has a close relationship with the economic system and economic policy. For example, the communist countries had a centrally planned economic system. In most countries, under the role of a communist or socialist government, the State owns all the means of production, determines the goal of production, and controls the economy according to a central master plan. However, recently several of these countries discarded the communist system and have moved toward the market economy.

The nature of an economy can be described in terms of the systems of consumption, production, distribution, and exchange transaction. The factors like prices, markets, planning, policy guidelines, regulations, control, and other forms of governmental intervention provide further insight into the nature of the economic system. (BCom Indian Economic System Notes Study Material)

Before we set out the parameters of an economic system, we should study about determinants of the economic system. However, the nature of the economic system is determined by the following forces:

(i) The historic, cultural sources of its people, ideas, desires, and attitudes.

(ii) Its natural resources including climate.

(iii) The philosophies which some or many of its people possess and advocate.

(iv) The past and present theorizing of its people to achieve chosen ideas and goals.

(v) The trial and error of the people in seeking economic ends.

TYPES OF ECONOMIC SYSTEMS

The economic system may be broadly classified into three types of economic systems and these are capitalism, socialism, and mixed economy. Our political system is a very important determinant of the scope of the economic system. In India, an example of a mixed economy both the public and private sectors co-exist The extent of state participation varies widely in the mixed economy. The explanations about these systems are as below:

1. Capitalism or Free Market Economy: A capitalist economy is a free market economy. Goods are produced for sale in the market. Consequently, there are markets for all kinds of consumer goods and investment goods. Prices are determined by the unhindered operation of the forces of demand and supply, i.e. the relative pressure of buyers and sellers on the market. There are markets for factors of production also. The process of determination of their prices is similar to that of goods. According to Prof. Loucks, “Capitalism is a system of the economic organization featured by the private ownership and the use of the private profit of man-made and nature-made capital.”

According to Webbs, “Capitalism, Capitalistic system or Capitalist civilization means the particular stage in the development of industry and legal institutions in which the bulk of the workers find themselves divorced from the ownership of the instruments of the production in such a way as to pass into the position of the wage earners whose subsistence, security and personal freedom seem dependent on the wall of a relatively small proportion of the nation, namely those who own and through their legal ownership, control the organization of the land, the machinery and the labor forces of the community and do so with the object of making for themselves individual and private gains.”

Prof. Pickersgill defined capitalism in the following words: “The capital system is one characterized by the private ownership of the means of the production, individual decision-making, and the use of the market mechanism to carry out the decision of individual participants and the flow of goods and services in markets.”

Thus, a capitalist economy is a free enterprise economy, characterized by the operation of the profit motive. It means that everybody is guided in his action by considerations of economic benefit. (BCom Indian Economic System Notes Study Material)

Features of Capitalism: The main features of capitalism are as below:

(i) Free Private Enterprise: It is a free enterprise economy with economic liberty about the right of individuals to own property. There is full freedom to utilize resources to earn an income from property (means of production like land, machinery, factories, etc.). Under this system, workers are also free to choose their occupation. Every worker enters that occupation in which he expects the highest reward in form of money wages and other benefits. Employers are also free to choose their workers as per their requirements.

(ii) Profit Motive: It is a profit motive economic system and all are guided by consideration of economic benefit. Producers seek maximum profit. If profit is higher in one industry than in others, they divert resources from other industries to this industry. Under this system, the profit motive serves as an incentive to the people to put in their best at the highest level of production with reduced cost.

An individual producer may not be able to influence the price in the market. But he can certainly adopt measures which will reduce his cost. Through the proper division of labor, use of machinery, proper location of production units, proper storing of materials, and other such steps, he can make the best use of his resources to reduce the loss and maximize the profit.

(ii) Market Mechanism: A capitalist economy is a free market economy guided by the forces of demand and supply of production factors. For example, in the labor market, wages are determined through free bargaining between workers (supply) and employers (demand). Consequently, prices are determined by the free play of market forces of goods and services.

(iv) Consumer Sovereignty: Under this system, the consumer is treated as the king and all the decisions about production are governed by the buyer’s desires, performance, or choice. Consumers enjoy the freedom to have commodities and services according to their needs.

(v) Less Control of State: Under Capitalism, the state has no role to play in the economic planning of the country. Enterprises are free to take our decisions. Generally, Entrepreneurial decisions depend on consumer preferences which finally decide what should be produced and what should not be produced. Thus consumer plays a big role in entrepreneurial decision-making.

(vi) Class Conflict: Under this, society has been divided into two categories—Richer class and Poor class categories. There is an unequal distribution of income and wealth, which is the main cause of conflict among them.

(vii) Directive Role of Entrepreneurs: An entrepreneur plays a directive role in all productive machinery of the country regarding to investment of capital and risks and has every right to control the business under their command.

Merits of Capitalism: Capitalistic System has the following merits:

(i) Higher Rate of Production: Under a capitalistic set-up production system has got the highest growth from qualitative and quantitative points of view. Customers enjoy a variety of goods and services as per their requirements. There is growth in the production of the workers with new machines and technology and society get benefited from new types of products.

(ii) Efficient Utilization of Resources: Under this system, every entrepreneur tries to use the productive resources at his disposal in the most efficient manner with the objective to maximize his profit. There is a competitive environment among producers to provide new innovative products at the lowest cost. It is possible only when wastage of resources is at least level. So that entrepreneurs try to maximize profit with the most efficient use of resources. (BCom Indian Economic System Notes Study Material)

(iii) Good for New Entrepreneurs: Profit motive induces new entrepreneurs to take more risks. The higher the risk, the greater the profit enforced by new producers for active participation in the production of goods and services.

(iv) Maximum Profit: Under this system commodities and services produced by the entrepreneurs are expected to yield maximum profit. So that an entrepreneur gets maximum profit through cost reduction with effective utilization of resources.

(v) Economic Prosperity: It ensures economic prosperity through maximum investment and a large level of production with profit maximization. Higher investment also ensures a higher level of employment opportunities. Our society benefits from the availability of a large number of goods and services at the lowest cost. (BCom Indian Economic System Notes Study Material)

(vi) Free Market Mechanism: Under Capitalism, there are markets for all kinds of consumer goods and investment goods. Prices are determined by the free operation of the forces of demand and supply, i.e. the relative pressure of buyers and sellers on the market. Thus, capitalism implies the existence of a free price mechanism without any political or other pressure.

Limitations of Capitalism: Some important limitations of capitalism are as follows:

(i) Class Conflict among Capital and Labour: Under Capitalism society has been divided into categories: the haves and haves not, which have conflicting with each other. Very few people get ownership over the means of production in the country and the remaining population gets converted into the labor class. Workers are exploited by industrialists because they have a tendency to maximize their profit by taking maximum work from the workers. (BCom Indian Economic System Notes Study Material)

(ii) Unequal Distribution of Income: There happens that, society divides into two categories: The richer and poor classes because of wealth maximization by a few industrialists. A maximum part of our society becomes poor and exploited by exploiters. The state does not responsible for the production and distribution of goods and services. Very few persons get ownership over the means of the country due to private property and the law of succession.

(iii) Economic Instability: There is no coordination between national production and need because manufacturers undertake pro-individual profit. They produce only those products where the profit margin is maximum. As a result, there is a problem of overproduction of valuable goods and underproduction of less marginal goods. Thus, this habit leads to economic instability.

(iv) Exploitation of Consumers: Under this system economic entrepreneurs are taken for self-interest, not for social welfare. Entrepreneurs involve themselves in various agreements which lead to mergers, acquisitions, and monopolies in place of effective competition. Lack of effective competition, high cost, manipulative practices, ignorance about customer profit, etc. factors by consumers are exploited. (BCom Indian Economic System Notes Study Material)

(v) Downfall of Art and Culture: Under Capitalism, the importance of all types of goods is evaluated in terms of money. An entrepreneur does not support these activities, where the profit margin is lesser. Therefore, no attention is given by the Entrepreneurs to the development of art and culture.

(vi) Cut-throat Competition in Market: There is cut-throat competition or wasteful competition in a market that leads to wasteful use of resources. The competition encourages wasteful expenditure like advertisement as selling cost that is the main cause of the high cost of production.

2. Socialism or Centrally Planned Economy: Under a planned socialist economic system the means of production are owned and controlled by the state for Central planning and social welfare objectives. Resources mobilization and allocation are also governed and regulated by the government. The state constitutes a powerful political authority and an economic instrument in a socialist economy. The state is authorized to control production and distribution. (BCom Indian Economic System Notes Study Material)

According to Dickenson, “Socialism is an organization of society in which the material means of production are owned by the whole community and operated by organization’s representative of, and responsible to the community. According to a general plan, all members of the community are entitled to benefits from the result of such socialized planned production on the basis of equity rights.”

Loucks defined “Socialism refers to that movement which aims at vesting in society as a whole, rather than in individual’s ownership and management of all nature made and manmade producer’s good used in large scale production to the end that an increased national income may be more equally distributed without materially destroying the individual’s economic motivation or his freedom of occupational and consumption choices.”

Thus, a Socialist centrally-planned economy can function, provided the government has the resources at its command, has the authority to formulate and execute a comprehensive economic plan of resource use, and the resource use is planned from standpoint of social welfare.

Features of Socialism: Following are the main features of socialism:

(i) Social Ownership: Under Socialism, property, i.e. the means of production are owned, controlled allocated, directed, and managed by the state. The state constitutes a powerful political authority and economic instrument in a socialist economy. The state is authorized to control and distribute production. The large-scale governmental intervention implies liquidation of the private sector and restriction on individual freedom and incentives.

(ii) Central Planning: There is central planning and the state sector has to perform its function according to the blueprint of a central plan. The socialist plan is centralized planning, it is planning from the top from the national level to the regional level to the local level to the industry level to the corporate level to the individual level if possible.

(iii) Social Welfare: Is centrally planned economy has the authority to formulate and execute a comprehensive economic plan from standpoint of social welfare. Socialization of property and nationalization of Social Justice through fair distribution of national wealth and income.

(iv) Social Equality: Socialism provides equality of opportunity and equality in money distribution to all. Every person has an opportunity to receive an educational facility and to achieve his goal, mission, or objective of his choice. Every individual gets a reward according to his work and ability. Thus, the gap between rich and poor in society could be eliminated.

(v) Least Exploitation: Socialism ensures the least exploitation of resources through the effective allocation of productive resources. All means of production come under the control of the Government and there is no possibility of the exploitation of one person by the other person.

Merits of Socialism: Socialism has the following merits:

(i) Effective Utilisation of Resources: Under a socialistic pattern, the economy is governed by central planning. Planning Commission or central planning authority assesses the basic needs of people and their desires and allocates the resources to satisfy these desires in the best possible way.

(ii) Economic Stability: In socialism, the central planning authority determines the level of investment and the level of aggregate demand to prevent the imbalance between aggregate demand and aggregate supply. These regulatory measures ensure that there will no problems of overproduction or underproduction. It provides economic stability. (BCom Indian Economic System Notes Study Material)

(iii) Economic Development: A Socialist economy works according to predecided development programmes and in a systematic manner. Through effective coordination between planning and execution, the economy gets an acceleration in growth rate and that is a clear indication of the economic development of the country.

(iv) Social Justice: Under the Socialistic pattern the maximum stress is given to social justice by equal distribution of wealth in society. There is no chance for the exploitation of human resources. The government tries to remove dissimilarities by charging more taxes on the richer class and spending more money on the welfare poor class in society.

(v) Democratic Environment: In Socialism, workers are paid according to their efficiency and experience. There is proper recognition of workers and they put their initiation in managerial decision-making. The works of production and distribution are done by them. They get equal opportunities for employment, wages, security, and progress.

Demerits of Socialism: Socialism is criticized in different ways. Some demerits of socialism are as below:

(i) Centralisation of Economic Power: Under socialism, all economic powers are generally concentrated in the state and the individual has no role in the economic decision-making. Workers do not have the capacity to take the right decision at right time. This state capitalism takes place in place of public-private capitalism. (BCom Indian Economic System Notes Study Material)

(ii) Lack of Personal Liberty: There is no initiation of workers’ activities because of state governance and control. The business enterprise is not given any freedom. So, people have no inspiration to work more as there is no right to personal property.

(iii) Improper Allocation of Resources: Under socialism, central economic authority fails to ensure the effective allocation of resources. Some commodities are produced in excess and there is a shortage of other committees. The government does not provide sufficient resources which are necessary for the efficient operation of industrial enterprises.

(iv) Bureaucratic Management: Red tape and bureaucracy are the trends under socialism. There is a lack of quick decision-making by Government bodies. No one can take initiative because of improper incentives and profit. Thus corruption takes place in government services and industries.

(v) No Market Mechanism: There is no free price mechanism for the determination of the cost of goods and services. The whole function of the socialistic system is performed by a central authority and there is no place for demand and supply. So, the consumer has to buy only those goods which are produced by the government and at the cost fixed by the government.

3. Mixed Economy: A mixed economic system is a specific form of an economic system that combines the elements of private capitalism with state socialism. The private sector and the public sector are allowed to co-exist. Under this form of the economic system, the means of production are partly owned by the private sector and partly owned by the state. (BCom Indian Economic System Notes Study Material)

According to J.T. Dunlop & N.P. Fedorenko, “A meaningful and purposeful Co-existence between the nationalized state sector and the free private sector in a mixed economy is not possible unless the mechanism of centralized planning is juxtaposed with the system of free market pricing.”

In a fact, the private sector is guided by the profit motive and may not divert its resources to projects which involve social overhead costs. In order to reap the net social returns, the public sector must venture to initiate these projects.

Thus, the public sector is to play a compensating role where the private sector is not forthcoming. So, the essence of the functioning of a mixed economy is cooperation rather than confrontation between the public and private sectors.

Features of Mixed Economy:

(i) Private and Public Sectors: Under a mixed economy, the public sector and private sector are co-exists and participate jointly in the development of the country. At times, the involvement of the Public sector may induce the private sector to venture into unconventional lines of activities like heavy industries and social overhead capital construction. (BCom Indian Economic System Notes Study Material)

(ii) Planning and Pricing: Under a mixed economy, the planning commission develops a central plan and has to lay down the set of socio-economic objectives to set the physical targets, and specify the sources and instruments of mobilizing financial resources for implementing the national economic plan. The market can help both formulations as well as implementing plans.

(iii) Profit Motive and Social Welfare Objective: It is a system of necessary adjustment of the profit motive and social welfare. Government Agencies may adopt to achieve a balance between industrial productivity and welfare goals. The government has to impose restrictions on the rate and volume of profit. Profit controls are essential to optimizing the social welfare function just as price controls are essential for the desired functioning of Central planning, (BCom Indian Economic System Notes Study Material)

(iv) Joint Responsibility: There is the joint responsibility of the individual and the state for doing the functions of production and distribution. So, it is called a dual economy. A mixed economy functions on the principle that business profits do not necessarily conflict with social justice. (BCom Indian Economic System Notes Study Material)

Merits of Mixed Economy: Mixed Economy has the following merits:

(i) Both sectors benefitted i.e. private sector and the public sector.

(ii) Production system is flexible.

(iii) Control of Economic Fluctuation through centralized planning.

(iv) Proper working of price-mechanism

(v) Reduction of class conflict among the upper section and lower section of society.

(vi) Provides equal opportunity to all citizens of the country.

(vii) The functioning of public and private sectors together is a sign of morality and co-existence.

(viii) Provides freedom of consumption, choice of occupation, freedom of enterprise, etc.

(ix) Promotion of backward area development by establishing enterprises in the backward areas.

(x) Equal distribution of national income because one of the Government made plans is the equal distribution of money.

Demerits of Mixed Economy: Following are the main demerits of a Mixed Economy:

(i) Bureaucratice structure and red-tapism.

(ii) Less coordination among private and public sectors.

(iii) Difficulty in operation in both sectors.

(iv) Sorter life of economy because of the mass interference of private sector.

(v) Excessive control of the central authority in planning and execution.

MIXED ECONOMY AND INDIA

Indian economy is an example of a mixed economy due to the active presence of both public and private sectors with cooperative existence. There is central planning implemented by the planning commission (Govt. of India) and public welfare through socio-economic development, which separates the Indian economy from the capitalistic system. (BCom Indian Economic System Notes Study Material)

The Indian economy has the following characteristics which are similar a mixed economy:

(a) Existence of Public-Private Ownership;

(b) Economic Planning System;

(c) Production of goods and services for public welfare;

(d) Production of profit-oriented goods;

(e) Free market mechanism;

(f) Controlled competition;

(g) Rationing System for poor class;

(h) Monopolistic tendencies;

(i) Control of economic fluctuations etc.

BCom Indian Economic System Notes Study Material

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