Types of economies
Depending upon the shares of the particular sectors in the total production of an economy and the ratio of the dependent population on them for their livelihood, economies are given different names, such as:
(i) Agrarian Economy
- the share of its primary sector is 50 per cent or more in the total output (the GDP) of the economy.
- At the time of independence, India was such an economy. But now it shows the typical symptom of a service economy with primary sector’s contribution falling to almost 18 per cent of its total produce while almost 60 per cent of its population depends on the primary sector for its livelihood.
- Thus, in monetary terms India is no more an agrarian economy, the dependency ratio makes it so—India being the first such example in the economic history of the world.
(ii) Industrial Economy
- If the secondary sector contributes 50 per cent or more to the total produce value of an economy, it is an industrial economy.
- Higher the contribution, higher is the level of industrialisation.
(iii) Service Economy
- The economy whose 50 per cent or more produce value comes from the tertiary sector is known as the service economy.
- First lot of such economies in the world were the early industrialised economies.
- The tertiary sector provides livelihood to the largest number of people in such economies.
Types of economic systems
Every society has to answer three questions
- What goods and services should be produced in the country?
- How should the goods and services be produced? Should producers use more human labour or more capital (machines) for producing things?
- How should the goods and services be distributed among people?
Market Economy Or Capitalism
- Origin in the famous work of Adam Smith—Wealth of Nations (1776), raised voice against the heavy-handed government regulation of commerce and industry of the time which did not allow the economy to tap its full economic worth and reach the level of wellbeing.
- Stressing ‘division of labour’, an environment of ‘laissez faire’ (non interference by the government) and proposed that the ‘invisible hand’ of the ‘market forces’ (price mechanism) will bring a state of equilibrium to the economy and a general well-being to the countrymen with competition as the main tool.
- Answer to these questions is to depend on the market forces of supply and demand.
- only those consumer goods will be produced that are in demand, i.e., goods that can be sold profitably either in the domestic or in the foreign markets.
- If labour is cheaper than capital, more labour intensive methods of production will be used and vice-versa.
- Goods produced are distributed on the basis of purchasing power of people rather than their needs.
Such a society did not appeal to Jawaharlal Nehru, for it meant that majority of people of the country would be left behind without the chance to improve their quality of life.
- Rooted in the ideas of the German philosopher Karl Marx
- this kind of economic system first came up in the erstwhile USSR after the Bolshevik Revolution (1917) and got its ideal shape in the People’s Republic of China (1949).
- we see two versions of the state economy—in erstwhile USSR known as the socialist economy and in pre-1985 China as the communist economy.
- While socialistic economy emphasised the collective ownership of the means of production (property and assets) and it also ascribed a large role to the state in running the economy, communist economy advocated state ownership of all properties including even labour and absolute power to state in running the economy.
- Though for Marx, Socialism was a transitional stage to Communism, it never did happen in reality.
- The socialist and communist economies used to criticise capitalistic economics of being based on exploitation.
- Here the government decides what goods are to be produced in accordance with the needs of society and not purchasing power.
- The desires of individual consumers are not given much importance-govt knows better.
- The government decides how goods are to be produced and how they should be distributed.
Unlike under capitalism, for example, a socialist nation provides free health care to all its citizens. Strictly, a socialist society has no private property since everything is owned by the state. In Cuba and China, for example, most of the economic activities are governed by the socialistic principles.
- The belief in the self-correcting quality of the market and the ‘invisible hand’ of Adam Smith got a major setback in early 20th century during the Great Depression (1929).
- The impact of the depression spread from the USA to the other economies of western Europe escalating large scale unemployment, downfall in demand and economic activities and lockouts in industrial enterprises.
- A new approach came to the fore in the famous work, The General Theory of Employment, Interest and Money by John Maynard Keynes (1883–1946) questioning the laissez faire and the invisible hand. Conceded that it brings equilibrium only upon strangulating the poor.
- He suggested that prices and wages of the labour are not flexible enough to provide employment to all. It means there will be some people unemployed when the economy will be at its full potential.
- Ultimately, a fall in demand will be imminent resulting in recession and if unchecked, in depression which happened in 1929.
Almost everything the people required was supplied by the private enterprises via the market which was ultimately an unidimensional movement of money and wealth (from the mass of people to the few who controlled the production and supply chain) and the masses were going through the process of pauperisation(the process of making a person or group very poor; impoverishment.) every day, thereby weakening their purchasing power. In the end, it affected overall demand and culminated in the Great Depression.
Keynes suggested strong government intervention in the economy.
- To get the economy out of the depression, he suggested and increase in the government expenditures, discretionary fiscal policy (fiscal deficit, lower interest rates, cheap money supply, etc.) to boost the demand of goods and services as this was the reason behind the depression.
- As Keynesian policies were followed, the concerned economies were successfully pulled out of the Great Depression.
- He suggested the capitalistic order to assimilate the goals of the socialistic economy.
- The essential goods and services which were till date being purchased by the people as ‘private goods’ were soon made available by the state ‘free-of-cost’ giving people more spare money to create demand for the goods and services which were part of the market- this part of spending by the governments came to be called as social sector.
Suggestion for socialist economies
- Prof. Oscar Lange praised the state economy for many of its good things but also suggested inclusion of some of the good things of the capitalistic economy.
- He advised the state economies to adopt ‘market socialism’ (the term was coined by him). His suggestions were outrightly rejected by the state economies as such compromises in socialistic economic order were blasphemous at that time (this was ultimately a suggestion towards democracy from dictatorship).
- Democracies are flexible thus they were able to go for an experiment which paid them in coming times. But as the socialist and communist political systems had been stubborn by nature, they did not go for any experiment and thus started moving towards their economic decay.
Market experiment in socialist/communist world
It was the communist China under the leadership of Mao Tse Tung where the first opinion came against the total state economic control. And the ultimate example of the state economy (i.e., China) started its preparation towards a limited market economy under the political design of dictatorship. In 1985, China announced its ‘open door policy’, the first experiment in ‘market socialism’. However, switch over to market socialism has not been smooth for most of the state economies.
- The efforts towards market socialism in the Soviet Union, fuelled by the lofty ideas of ‘glasnost’ (openness) and ‘prestroika’ (restructuring), resulted in the very disintegration of the nation-state.
- Basically, for smooth transition to market socialism some prerequisites were required to be put in place beforehand. China was well ahead doing this homework since Mao’s time (specially since 1975 onwards) which emerged as a real winner—the ideal type example of state economy getting smoothly (!) metamorphosed into giant market economy.
World after 1990s
The world by the late 1980s was having neither a pure example of capitalistic economy nor a pure example of state economy.
- Post WW II, many colonies adopted mixed-economic model. The leaderships are now considered visionary, for the World bank since 1990, accepted the goodness and the need of ‘state intervention’ in the economy, which earlier were ardent votaries of free market economics.
- The economic system of India was a mixed economy in pre-1991 years as it is in post-1991 years but the composition of state-market mix has gone for a change. In future, as the socio-economic and political factors will be changing, India will be redefining its mixed economy, accordingly.
- Today, once the World Trade Organisation (WTO) has taken over the world economy, the brand of the mixed economy it advocates, is more inclined towards the free market economy. But it does not propagate to make the state an economic non-entity i.e., it leaves scope, for greater state intervention in the required areas if need be.
The government and the market together answer the three questions of what to produce, how to produce and how to distribute what is produced. The market will provide whatever goods and services it can produce well, and the government will provide essential goods and services which the market fails to do.