Economy – Its Meaning and Types: Types of Economies: Socialist Economy (For CBSE, ICSE, IAS, NET, NRA 2022)

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Types of Economies

On the Basis of Ownership and Control over Means of Production or Resources

Socialist Economy

In the socialist or centrally planned economies all the productive resources are owned and controlled by the government in the overall interest of the society. The socialist economy has the following main features.

Socialist Economy
  • Collective Ownership of means of Production - In a Socialist economy means of production are owned by the government on behalf of the people. The institution of private property is abolished, and no individual is allowed to own any production unit and accumulate wealth and transfer it to their heirs.
  • Social Welfare Objective - The decisions are taken by the government at macro level with the objective of maximization of social welfare in mind rather than maximization of individual profit. The forces of demand and supply do not play any important role.
  • Central Planning - The Central Planning - Authority keeping the national priorities and availability of resources in mind allocates resources. Government takes all economic decisions regarding production, consumption and investment keeping in mind the present and future needs.
  • Reduction in Inequalities - The institutions of private property and inheritance are at the root of inequalities of income and wealth in a capitalist economy. By abolishing these twin institutions, a socialist economic system is able to reduce the inequalities of incomes.
  • No class conflict - In capitalist economy the interests of the workers and management are different. Both of them want to maximize their own individual profit or earnings. This results in class conflict in capitalist economy. In socialism there is no competition among classes.

Mixed Economy

Mixed Economy A mixed economy combines the best features of capitalism and socialism. Thus, mixed economy has some elements of both free enterprise and capitalist economy as well as a government controlled socialist economy.

The main characteristics of a mixed economy are as follows:

  • Co-existence of public and private sectors - The private sector consists of production units that are owned privately and work on the basis of profit motive. The public sector consists of production units owned by the government and works on the basis of social welfare. The areas of economic activities of each sector are generally demarcated.
  • Individual Freedom - Individuals take up economic activities to maximize their personal income. They are free to choose any occupation and consume as per their choice. But producers are not given the freedom to exploit consumers and labourer. Government puts some restrictions keeping in mind the welfare of the people. For instance, government may put restrictions on the production and consumption of harmful goods.
  • Economic Planning - The government prepares long-term plans and decides the roles to be played by the private and public sectors in the development of the economy. The public sector is under direct control of the government as such production targets and plans are formulated for them directly. The private sector is provided encouragement, incentives, support and subsidies to work as per national priorities.
  • Price Mechanism - Prices play a significant role in the allocation of resources. For some sectors, the policy of administered prices is adopted. Government also provides price subsidies to help the target group. The aim of the government is to maximize the welfare of the masses. For those who cannot afford to purchase the goods at market prices, government makes the goods available either free of cost or at below market (subsidized) prices. Thus, in a mixed economy people at large enjoy individual freedom and government support to protect the interests of weaker sections of the society.

Types of Economics on the Basis of Level of Development

On the basis of level of development economies can be classified in two categories:

  • Developed economy – “developed countries economy have high standard of living” . The countries are labelled developed or rich and developing or poor on the basis of real national and per capita income and standard of living of its population. Developed countries have higher national and per-capita income, high rate of capital formation i.e.. high savings and investment. They have highly educated human resources, better civic facilities, health and sanitation facilities, low birth rate, low death rate, low infant mortality, developed industrial and social infrastructures and a strong financial and capital market.
  • Developing economy – “they have low standard of living and poor health and sanitation, high infant mortality, high birth and death rates and poor infrastructure.” Developing countries are low on the ladder of development. They are sometimes also called underdeveloped, backward or poor countries. But economists prefer to call them developing countries because it gives a sense of dynamism. The national and per capita income is low in these countries. They have backward agricultural and industrial sectors with low savings, investment and capital formation. Although these countries have export earnings but generally, they export primary agricultural products.

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