Economic SystemsEvery economy, in order to produce and consume, needs to address basic issues such as the following:

• what goods and services should be produced and in what quantities;

• How scarce resources such as labour and capital should be allocated to produce goods and services;

• How the available supplies of goods and services should be distributed across the population; and

• What price should be charged for a good or service.

Individuals, the state or both can make and implement decisions on these issues.

Capitalist Economy In a capitalist economy, most of these decisions are made by the citizens acting individually. In capitalism, individuals

are driven by self-interest, and market forces direct and co-ordinate the decisions they make. As a result, capitalist

economy is often referred to as a ‘market’ economy.

Socialist Economy In a socialist economy, on the other hand, most of these

decisions are made by citizens acting through the state, which co-ordinates and implements these decisions through central planning and command. In fact, a socialist economy is often

referred to as a ‘planned’ or ‘command’ economy.

Nowadays, most economies are known as ‘mixed’ economies because, in reality, both market and state

play a substantial role in them.

Evolution of the Concept of Mixed EconomyMixed Economy is the compromise between the two diametrically opposite schools of thought – 1. Capitalismand 2. Socialism.

• The vast economic development of U.K., U.S.A, Australia etc was due to private enterprise.

• According to the classical and neo-classical economists, the economic system worked smoothly and what was most profitable for the individual, was also most conducive to the economic welfare of the community at large .

• Perfect harmony in the economic system could be achieved through the acceptance of the invisible hand of self-interest and the use of market forces of demand and supply.

• These ideas were not accepted by Karl Marx who believed that the capitalist economy allowed the few powerful industrialists and traders to exploit the vast majority of workers.

• Marx advocated socialization of all the means of production and wanted the state to direct the economy.

• The rise of communist regimes in USSR and eastern European countries, Communist China, Vietnam, Cuba etc., was the direct consequence of the impact of Marxist ideas.

• While Marx was laying the foundations of a socialist system, the capitalist system failed to respond to the needs of the people during the great depression of the thirties.

• Lord Keynes wrote in 1926 : “ The world is not so governed from above that , private and social interests always coincide…. It is not a correct deduction from the principles of economics that enlightened self-interest always operates in the public interest. Nor is it true that self- interest is generally enlightened.”

• Keynes was proved correct when the Great Depression of the 1930’s showed the hollowness of the classical claim of the smooth working of the economic system.

• As a direct relation to the failure of the old capitalist order, the socialist economy was advocated as an alternative system.

• Keynes, however ,thought that capitalism, shorn of some of its defects, was an admirable system as it helps to promote competition and efficiency in production.

• Keynes viewed that, Socialism of the authoritarian type would spell death to individual freedom. But state control and direction was inevitable in the modern complex society.

• A compromise was, therefore, necessary between the high degree of state intervention and participation in the socialist economy on the one side and free enterprise capitalist economy based on market forces on the other.

• It was from these ideas of Keynes that the concept of mixed economy evolved. Mixed Economy A Mixed Economy is that form of economic organization wherein elements of capitalism or free market economy and Socialism or Centrally planned economy are found to be co-existing and working together.

Features of a Mixed Economy

1. Coexistence of the Private and Public Sectors2. Price Mechanism and Government Control and Regulation work together3. Economic Freedom and Control4. Economic Welfare

The foundations of the mixed economy were laid in India with the Industrial policy of 1948.

• Under this policy some industries like arms and ammunition, atomic energy, railway transport, etc., were made the monopoly of the state.

• Some more industries like iron and steel, aircraft and Shipbuilding, minerals etc., were sought to be progressively owned by the state .

• Government control over other industrial sectors was also extended and strengthened.

The Industrial Policy of 1956 further expanded the ownershipof the state to a wide variety of industrial sectors.

• 17 industries like arms and ammunition, atomic energy, railway transport, aircraft building, air transport etc., were brought under the exclusive ownership of the government.

• 12 more industries like machine-tools, fertilizers, antibiotics and other essential drugs etc., were sought to be progressively owned by the state .

• Thus the government was extended to cover 29 industrial sectors and with this the state assumed the commanding heights of the economy. • The future development of all the remaining industries was left to the initiative of the private sector.