LECTURE : 02
ECONOMIC SYSTEMS
Definition of Economic
System:
An Economic system is a
set of laws, institutions and common practices that help a nation to define
best utilization of its scarce resources (limited resources).
Following are the types
of economic systems;
1. Capitalism (Market Economy, Price System,
Planned Economy)
- It is the economic system based on the principle
of private ownership of economic resources, which include natural resources and
capital.
- People as individuals and private firms have
freedom to make choices about consumption, production and making contracts.
- They work for self interest and profit.
- Government control over economic activities in
minimum.
- It is a system free from govt. control, it is
also called free market system.
- Prices acts as signals and changes in prices
guide to change the plan, in this regard this system is also called price
system.
Advantages: -
- Goods and services go where they are most in
demand
- Free market responds to people’s needs
- Producers and consumers are free to make changes
to their aims - Competition and the opportunity to make large profits.
Disadvantages: -
- It mis-allocates resources.
- Inefficient in equitable distribution of wealth
and incomes.
- It fails to limit the gap between rich and poor
and ensure social justice for all.
- Self-interest of individuals (selfishness).
Countries closer to
capitalism:
- United
States, Canada, United Kingdom, Australia, New Zealand, Austria, Ireland,
Sweden.
2. Socialism (Command Economy)
- It is an economic system in which state plays
the dominant role in economic matters.
- Means of production such as farms, factories,
shops etc. are either directly owned by the govt. or by the govt-controlled
cooperative societies (consumers).
- Production of goods and services is entirely
under govt. control.
- Govt. plans what to produce and how to distribute
incomes in the country.
Advantages:
- Low levels of inequality and
unemployment.
-
Common good replacing profit
as the primary incentive of production.
- Individual self-gain is no
longer the driving force of success among businesses.
- The greater good of the society
is the focus of the economy.
Disadvantages:
- The black market explodes in a command economy.
Due to the governmental restrictions, good and services that are not offered in
the command economy begin being offered on the black market.
- Exporting goods becomes problematic because it
is difficult for the controlling entity to determine which products and prices
will be most successful within the global market.
Countries closer to
socialism:
- Burma, Cuba, Iran, Liberia,
and North Korea. Formerly, USSR and China
3. Mixed Economic System:
Mixed Economic is an
economic system which combines in itself the features of capitalism and
socialism.
· Some private businesses, driven by profit. Some
controlled by government
· Private: mobiles, cars, computers
· Essential services: police, fire service,
defence, social services. Goods and services which can benefit both consumer
and society(merit goods)
· Taxes to the government
· Government places limits on the nature of
business activity: restricting monopoly, control pollution from factories.
Mixed Economy has an
important public sector, i.e. a number of industries which are owned and
managed by the state. The State is not the all pervasive owner of all means of
production. Private enterprise is allowed and even encouraged to operate a
large number of industries and to own the various means of production. Thus in
this economic system the public and private sectors exist side by side. It
supports reduction in the inequality of incomes and seeks to achieve it through
the fiscal machinery. It acts as a welfare state and undertakes a large number
of functions and promotes the welfare of the common man.
Pakistan has mixed
economic system. The public utility concerns like Post and Telegraph,
Electricity etc. are managed by state. There is also semipublic sector which
includes all the concerns, which are jointly owned and managed by the private
individuals and the State. Industrial, trading and commercial enterprises are
also owned and managed by the individuals and they collectively constitute the
private sector.
Advantages
1. Interest of the
people is well served
2. Adequate incentive to
work hard
3. Resources may be
properly utilized
4. Rapid development is
possible
Disadvantages
1. Concentration of
wealth in few hands
2. Existence of anti
social activities
3. Wastage of resources
4. Interest of Common
man suffers
4. Islamic Economic
System: (A blend of material and spiritual
consideration)
It is a particular form
of mixed economy in which spiritual values and
moral considerations are integrated with material objectives.
- People
have freedom to produce and consume goods or organize their business just like
in capitalistic free market system.
- They
remain in limits prescribed by Holy Quran and Sunnah.
- It is
based on the belief that everything belongs to Allah.
- Man has
permitted to avail all material things just like a trustee and not as the
absolute owner.
- Unearned
incomes are condemned.
- Concentration
of wealth is considered as undesirable situation.
- The
government has the right to interfere in the larger interest of the society.
- It is
also called ‘government
regulated free economy’.
- In this,
private sector exists and ownership of private property.
- It is
also a system of prices and markets.
- Freedom
of choice in production and consumption matters.
- Zakat collection and distribution by state.
- Interest
Free Economy (Principle of Musharkah and Muzarbah applied in business).
- Musharkah: the labor (including management skills and business expertise) is
to be provided jointly by the parties (partners).
- Whereas
in Muzarbah, it
falls on the muzarib to provide for all labor requirements (the other partner's
contribution is generally confined to providing capital).
- State
welfare policies and programs for low income groups.
Examples of Terms used
in Islamic Economy:
1. Zakat is given
only when people have a specified amount of wealth continuously for a period of
one year.
2. Ushr is the
tax, 5% on
the harvests of irrigated land and 10% tax on harvest from rain-watered land.
3. Riba is a concept in Islamic banking that refers to
interest.
4. Takaful is a type of Islamic
insurance
Benefits:
- Basically, one of the main
advantages of the Islamic economy is that Banksare not charging
interest on loans. In fact, loans are regarded as an exchange of assets, rather
than the lending of money.
- It forbids the earning of
profits through unfair trading or practices which are damaging or harmful to
society.
- In profits banks receive
a percentage of the profits. If the business fails, the
bank shares the risk. .
Limitations:
- In this system borrowers are not affected by rising
interest rates, they also do not get the benefit of falling rates.
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