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The types of Economics System Capitalisti c Economy @ Capitalism

- Known as free market or laissez-faire economic system

- A pure market economy is one which no one is told what to do or how to do it. Everyone is left on
their own to do economic decision
- The forces of market demand and supply, without any government intervention, determine how
resources are allocated, which known as the working of price mechanism
- Examples of countries practicing the capitalistic economic system are the USA, Canada, J apan and
Hong Kong.
Characteri sti cs Advantages Disadvantages

Pri vate ownership of resources
- Individuals are free to own
factors of production and use
them in whatever manner they
wish to.

Automati c working
- Market is automatically
- No needs for costly and
complex bureaucracies
to coordinate economic
- The economy can
respond quickly to the
changing of demand and
supply conditions

Income Disparity
- Widen income disparity
- Those who have power and
property, such as big business
and landlords, will gain the
expense of those without
power and prosperity
- The rich become richer, the
poor become poorer

Freedom of enterprise and
- All economic decisions are
taken by households and
firms, which acted on their
own interest.
- Firms are free to choose what
to sell, what production
method and can freely set up
any types of business.

Promote Soci al Welfare
- A free market economy
promotes economic
development and
prosperity by
encouraging innovation
and technological
progress, and optimum
resource allocation

Macroeconomi c Instability
- Leads to macroeconomic
instability as there is no
institution, such as
government body that will
monitor the economic activities
- May be periods of very high
unemployment and falling
output, and inflation

Profit moti ve
- Main objectives : profit

Maximization of Utili ty
- Utility maximization can
be achieved because of
consumers sovereignty
and wider choice of
goods and services

Externali ties
- Prices may not reflect the
actual social costs and
- Example: pollution to the
environment as a result of
production activities is not
considered in a pricing of a

Perfect competition
- Producers compete with one
another to sell their products
- Healthy competition brings
about better quality products
being offered at lowest
possible prices.
- Results in efficiency amongst

Promote Economic
- Competition between
firms keeps prices down
and acts as an incentive
for them to be more
- Competition also makes
the firms more
responsive to consumers

Insuffi ci ent Suppl y of Public
- Producers motive is to
maximize profit. Thus, they
would supply products which
are profitable
- Public goods such as
healthcare centers, public
transportation, which are not
profitable, are not sufficiently
provided for.
- Therefore, in the capitalist
system, there will be lack of
public goods exists in the

Li mited government Intervention
- Government intervention is
very limited.
- Role of the government is
confined to the national
defense and maintaining law
and order.
- Market/price mechanism is the
interaction between prices of
goods and services and price
of economic resources to
determine what, how and for
whom to produce.
- Prices are determined by
demand and supply of each
goods and services

The types of Economics System Socialistic or Command Economy @ Soci al ism

- An economic system in which the government owns and manages the factors of production
- Government solves the fundamental economic problems
- A government planning office decides what will be produced, how it will be produced, and for whom
it will be produced.
- Involves great deals of economic planning by state government.
- The price mechanism has no active role in a pure command economy since market price is rarely
- Examples of countries practicing socialism are North Korea, Cuba, Laos and China
- The motive of such economy is to make sure that everything that people needs is produced and
that everyone gets what they need.

Characteri sti cs Advantages Disadvantages

Economi c planning
- The government,
through its planning
authority, plays its role to
direct the nations
resources in accordance
with specific national

Economic free from
serious probl ems
- There are no serious
inflation and
unemployment problems
because the government
is supposed to control
- Unemployment could be
largely avoided if
government makes a
careful plan in allocating
its labor

- In the absence of price system,
planning is likely to involve inefficient
use of resources
- This is because the prices of goods
and services do not reflect their
relative scarcity, so a rational
decision is hard to make

Public ownership of
- Individuals are not
allowed to own
productive resources
- The government
controlled resources by
carefully planning their
allocation according to
the planning requirement
and the needs of the

Equitabl e income
- There is more equitable
income distribution as
government considers
the needs of the society

Lower economic growth
- Slow economic development and
growth happens because there is no
freedom of choice and enterprise.
- Individuals are not sufficiently
rewarded since all profits belong to
- In the absence of competition and
profit motive, research and
development will slow down and
there is no incentive for firms to be
involved I product innovation and
- All of which would lead to economic
inefficiency and lower economic
growth compared to that in a market

No/ very limited freedom
- There is almost no
economic freedom for
individuals. For instant,
individuals do not have
the choice of choosing
what they want as
decision is made by
government authority.
- They also cannot set
up their own business
enterprises as all
enterprises and their
profits belong to the

Minimi ze externaliti es
- Social repercussion of
production and
consumption, such as
the effects on the
environment, could be
minimized with close
monitoring system done
by the government

Loss of economi c freedom
- Workers would have no choice
where to work and consumers would
have no choice what to buy.
- Therefore, they are unable to
maximize utility.

The types of Economics System Mixed Economic System

- It has features of both market system aforementioned before
- Most countries are mixed economies, though some are close to the command economy while
others are nearer to the free market economy
- Usually, individuals have economic freedom, but the government owns some business and
provides some goods and services to the citizens
- Examples : Malaysia, the U.K and Singapore
- Characteristics:
o There is both private and public ownership of economic resources.
o The government and private sector interact each other in solving economic problems.
o Many goods and services are allocated through the markets at prices determined by
demand and supply.
o Consumers are free to purchase what they want and workers are free to choose where
to work.
o The government may own hospitals and medical services, so that all citizens can use
o However, it allows other parts of the economy to run on their own so that inefficiency is
minimized and people can have the jobs that they want.
o The government intervenes in the market to provide a sufficient supply of social goods,
maintain law and order, avoid duplication of expensive services, reduce externalities
(social costs and benefits), reduce income disparity, control monopolies and stabilize the

The types of Economics System Islamic Economi c System
Islamic economics has been defined differently by different scholars. Some of these definitions,
arranged chronologically, are:
S.M Hasanuz Zaman
Islamic economics is the knowledge and application of injunctions and rules of the Shariah that
prevent injustice in the acquisition and disposal of material resources in order to provide
satisfaction to human beings and enable them to perform their obligations to The Almighty and
the society . (Hasanuz Zaman, 1984, p.52)
M. A. Mannan
Islamic Economics is a social science which studies the economic problems of a people
imbued with the values of Islam.: (Mannan, 1986, p.18)
Khurshid Ahmad
Islamic economic is a systematic effort to try to understand the economic problem and
humans behavior in relation to that problem from an Islamic perspective. (Ahmad, 1992, p.19)
M. Nehjatullah Siddiqi
Islamic economics is the Muslim thinkers response to the economic challenges of their times.
In this Endeavour they were aided by the Holy Quran and the Sunah as well as by reason and
experience. (Siddiqi, 1992, p.69)
M. Akram Khan
Islamic economics aims at the study of human falah (well-being) achieved by organizing the
resources of the earth on the basis of cooperation and participation. (Khan, 1994, p.33)
Syed Nawab Haider Naqvi
Islamic economics is the representative of Muslims behavior in a typical Muslim society.
(Naqvi, 1994, p.13)

Islamic economics rooted in certain philosophical foundation such as:
i. Tawhid (Oneness of The Almighty) which concerned with the Islamic worldview and the
concepts of vicegerency (Khilafah). Main concerned are the relationship between man and
Creator (Hablum min Allah) and the relationship between man and man (as well as the other
creatures) (Hablum min al-nas)
ii. Rububiyyah (Allah is the Greatest and Absolute Owner)
iii. Tazkiyyah (purification)
iv. Ukhwah and tabarru (brotherhood and mutual cooperation)
Characteristics as the main objecti ves of all economic activiti es:
1. Freedom of an enterprise so long as not going astray from Shariah ordinance (1:275)
2. Achievement of al-Falah
o Comprehensive concept which covers spiritual, moral and socio-economic well being in
this worldly affairs and the success in the Doomsday judgments
o Quranic verses (2:201)
3. Fair and equitable distribution
o Distribution of economic resources, wealth and income
o Islam discourages concentration of wealth in few hands and ensure its circulation among
all the sections of society
o Quranic verses (59:7)
o Distribution of wealth through
i. Institution of zakat and sadaqat
ii. Laws of inheritance and will
iii. Abolition of interest
iv. Prohibition oaf earnings of wealth through unlawful (haram) means
v. Prohibition of ihtikar
vi. Prohibition of ikrah
vii. Prohibition of gharar and maysir

4. Provision of basic human needs
o Basic needs: food, clothing and shelter
o State / government will be responsible to provide basic needs for incapable citizens
through its comprehensive system of social security
o Quranic verses (41:10)
5. Establishment of social justice
o Quranic verses (3:92, 70:24, 70:25)
6. Promotion of brotherhood and unity
o Quranic verses (2:177, 2:215)
o Dr. Khalifa Abdul Hakim writes: Islam desires to mould the economic life of society in
such a manner that antagonistic class divisions of millionaires and paupers shall not
come into existence.
o Shaikh Mahmud Ahmad in his book Economics of Islam, writes, after discussing the
injunctions of the Quran regarding prayer and Zakat: The brotherhood of man is not
realized only by bowing together of the ruler and the subject, the lord and the peasant,
the factory-owner and the wage-earner shoulder to shoulder before One God, but is
established on a firm foundation even outside a mosque where the king and the lord
and the factory-owner are made jointly responsible for the elementary necessities of
life of the subject and the peasant and the wage-earner.
o Mr. M. A. Mannan in his book Islamic Economics: Theory and Practice, writes: Salat
(prayer) rouses the feeling of equality and brotherhood between the rich and the poor,
the high and the low, and Zakat puts that feeling of brotherhood on a firm footing by
making the rich and the capitalists responsible for the maintenance of the poor and
the needy.

7. Achievement of moral and material development
o The economic system of Islam aims at material as well as moral development of the
Muslim community. It can be done through its system of taxation and fiscal
management particularly through Zakat.

8. Circulation of wealth
9. Elimination of exploitation
o To achieve this end Islam has taken many effective measures. First such measure is the
abolition of interest or usury which is and has been perhaps the worst instrument of
human exploitation.
o The Quran calls it riba and declares it a heinous crime which amounts to war against
God and Gods messenger.