Evolution of Economies

TYPES OF ECONOMIES BASIC FUNCTIONS OF AN ECONOMY: An economy or economic system of a country refers to the form of Economic Organization constituted by the mode and method of production, kinds of economic entities and institutions, the objectives and the functions of the economy directed towards satisfying people’s wants. Every economy has to accomplish certain basic tasks: 1] Allocation of Resources: It is the decision as regards what goods and services are to be produced and in what quantities. The society has to devise methods and an institutional framework in order to mobilize and exploit resources in the desired direction. It seeks the optimum use of resources. 2] Exploitation of Resources by Whom and How: It involves the determination by the economic system as to who will produce the required goods and services and how, for the satisfaction of it’s member’s wants. It is also the problem of choice of techniques. 3] Problem of Distribution: Distribution of income or national product is another related task of an economic system. The economic society has to decide as to who , among its members, will enjoy the material benefits of these goods. MECHANISMS ADOPTED FOR SOLVING THE ECONOMIC PROBLEM There are three main mechanisms adopted for solving the economic problem. These are i) Custom ii)Central direction or Command iii)Market or price mechanism 1] The Custom Mechanism or the tradition-based Economy: In a traditional economy, the problems of production and distribution are solved by long established customs and traditions. Production in a custom-oriented economy is arranged through a social division of labour based on hereditary allocation of occupational tasks. Distribution is also accomplished by following the age-old patterns or traditions and customs in the primitive economic societies. Traditions and customs can divide a social product in a very subtle and ingenious manner which may sometimes happen to be very crude and harsh also Advantages of a Tradition-based Economy: It is a simple and smooth economy. It works automatically It provides social division of labour It rules out undue competition It has no problem of un employment. It ensures security and stability. Drawbacks of a tradition –based Economy 1) It is a static economy It lacks dynamism No technological advancement It restricts the mobility of labour No economic progress 2] Central Direction or Command Economy: In a command based or centrally-directed economy, the economic problem or resource adjustment is solved by the command of the authority at the Head. Production and distribution are arranged as per the orders of an economic commander-in-chief. We may mention a few illustrations in this regard: Kautlya’s Arthshashtra is a masterpiece of constructive and judicious central direction in governing the economic life of the people. Akbarnama provides us a comprehensive record of the activity governed by the directions or command of the /sovereign during Mughal King Akbar’s regime Sher Shah’s economic reforms also indicate the influence of King’s command on the economic life of the people. Merits of a command-based economy: The following are the main merits or advantages of a command based or centrally directed economy: Regulation and stability Provision of security Fair distribution Rapid economic transformation and dynamism. Utility-oriented production Efficient use of resources Employment for all Full satisfaction of the social needs Drawbacks of the Command Economy: Impersonal approach Lack of initiatives and incentives Suppression of individual liberty Bureaucratism and corruption Arbitrariness and whims. Rigidity and inflexibility No automatic functioning. 3] Market Mechanism The most common solution to the economic problem of resource adjustment is the market mechanism or price mechanism It is adopted by the capitalist countries. Under the market-oriented economy, economic organizations run by individuals seeking their own interest, interact voluntarily among themselves and thereby solve the economic problems of production, distribution and growth. Features of the Market Economy: The following are the features of the market economy Free enterprise No Government Intervention Economic Freedom Profit Motive Price System Competition Product markets and Factor Markets: A market economy comprises product markets as well as factor markets. Commodity prices are determined by the interaction of demand and supply in the product markets as well as factor markets. Commodity prices are determined by the Interaction of demand and supply in the product markets. Similarly, factor prices are determined by the interaction of demand and supply in the factor markets. Advantages of a Market Economy: The following are the main advantages of Market mechanism of a market- oriented economy. Automatic working Optimum allocation of resources Unrestricted economic freedom Economic dynamism and progress Absence or government interference Drawbacks of a Market Economy Lack of economic stability Growth of monopolies Inequalities in distribution Lack of security Mal-allocation of resources and lopsided development Myth of consumer’ sovereignty