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. .
- 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.
- 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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