Types of Economic System

There are three main forms of economic system :

Capitalism : On the extreme, there is the capitalist economic system or free market economy. It is characterized by free enterprise and profit motive. In this type of economic system, all important decisions concerning production, distribution, exchange and consumption are based upon the price mechanism. Self-interest guides all the economic activities. The factors of production (land, labour, capital, etc.) are privately owned and production takes place at the initiative of private enterprise. People have freedom of choice concerning occupation, savings and investment. This economic system is found in the United States, U.K., Japan, Canada, etc. though a completely free market economy is rare.

Socialism : On the other extreme is the socialist or communist economic system. Under this system the State owns and controls all means of production. Decisions pertaining to production, distribution are made through central planning, The State dictates the consumption pattern. This economic system prevails in China, Russia, Czechoslovakia, Hungary and Poland. In recent years, however, these countries have moved towards the market economy. Communism is based on the principle : “from each according to his ability to each according to his needs”.

Some countries such as Yugoslavia, Romania, etc. have adopted liberal socialism characterised by democratic values and decentralised decision-making.

Mixed Economy : In a mixed economy like India, both public and private sectors coexist. Some resources and enterprises are owned and controlled by the State. Other economic activities are left to the private initiative. Private sector is allowed to work for profit motive but under certain regulations decided by the Government. The extent of State participation and regulation decided by the Government. The extent of State participation and regulation may vary from time to time.