1.

HISTORY OF ECONOMIC SYSTEMS

3.1 SOCIALISM

The ideal roots of socialism can be dated back to ancient Greek times. In 360 B.C.
Greek philosopher Plato outlined a type of collective society. Thomas More, in 16th
century plotted an imaginary island where money has been abolished and people work
and live communally.

The invention of the steam engine powered the Industrial Revolution, which brought
extensive economic and social change to the world. The persons who owned the
factories became wealthy, while many workers who worked for long hours under
difficult conditions, lived in poverty.

Socialism refers to an economic and political system of social organization in which

the community as a whole own or manage means of production, distribution of
income and natural resources.

Socialism became the inspiration ideology for others economics and political systems
to emerge throughout history including utopianism, anarchism, soviet communism
and social democracy.

Advantages and Disadvantages of Socialism

Advantages Disadvantages

 No exploitation  Lack of incentives

 Discrimination is rejected
 Relative poverty is reduced
 Diminishing marginal utility of
income
 Public ownership
 An equal and cohesive society
 Encourages selflessness instead
of selfishness
 Over dependence on cooperative
pooling
 Welfare state can cause
disincentives
 No scope for competitiveness
and innovation
 Labour market antagonism
 Government failure
1.2 COMMUNISM

Communism is a developed and more advanced form of socialism. It is an economic

system that aims to create a classless society, where major means of production, like
mills, factories and mines, are controlled or owned communally.

Many of the tenets of communism’s are derived from the works of German
revolutionary Karl Marx. There is no place for private property, currency, government
and the wealth are equally divided among the people of the society or according to
individual need. Karl Marx termed the production and distribution of products based
on the principle “From each according to his ability, to each according to his needs.”

The development of contemporary communist ideology began during the French

Revolution. That revolution replaced the medieval struggle, which contend the cruelty
against the villeins, with the modern one set the merchant class owners of capital
against the proletariat the social class who sell their labor for wages.

Many have contributed to communism ideology over the years which lead to
corruptions and authoritarianism depending on one’s perspective. New ideology was
proposed by Soviet leader Vladimir Lenin, who notably supported authoritarianism,
called as Leninism.

There was resentment against the communism's failure for the system's inherent
inefficiencies, like centralized planning. Millions of people were living in poverty.
The events such as the fall of Berlin Wall, in the year 1989 and the cold war triggered
the collapse of communism.

Many regions plunged into economic recession in the 1990s. A complete ideological,
political, economic and social system diminished, and millions of people had to
choose a new system at the same time. Unemployment and inequality flourished as
efforts were made to privatize and open up markets.

There were persistent efforts to design and implement economic reforms. Idealized
visions of capitalism quickly gave way to the sudden transitioning away from
communist regimes. And most of the economies were already distinguished as mixed
economies
There was time when one-third of the world’s countries adopted communism, most
notably in the republics of Soviet Union. Today, communism is followed in only five
countries.

Advantages and Disadvantages of Communism

Advantages

 Lessens the gap between the poor and the rich

 Country will be strong and safe
 Dictators will be in power
 Importance is given to social goals
 Social tension in a society is reduced
 Citizens will have all their basic needs
 Less problem of discrimination
 Decreases unemployment rates
 Corporate monopolies can be avoided

Disadvantages

 Free market has less or no scope

 Rulers are incognitive
 Sovereign default
 International investors may be hesitant to invest
 Overall level of freedom is confined
 Quiet narrow view on the world
 People cannot make profits
 People might migrate to other countries

Some of the key reasons for communism to fail was the absence of incentives among
citizens to produce for profit. And the economic system had inefficiencies, such as
centralized planning. In many instances, society were made to believe in deceptive
progress based on fabricated growth data.
3.3 CAPITALISM

Capitalism is an economic and political system in which private individuals or

businesses own capital goods and their operation for profit. It is also known as
command economy or planned economy, where supply and demand in the general
market is the criteria for production of goods and services.

No one can be said to have invented capitalism. But it is being prevalent since ancient
times. Modern capitalist theory was developed by Adam Smith, in the 18th century.
The English cloth industry during the 16th, 17th and 18th centuries spearheaded the
development of capitalism. Capitalism encouraged innovation and economic growth.

The Industrial Revolution led to obsolesce of domestic system and paved way to
factory system, where the new machines and steam power replaced simple tools, use
of animal and manual power. Capitalist owned the facilities for production, raw
materials, the finished products, trade and the workers were paid wages for their
work.

In the subsequent centuries, more and better products were available for the wide
population due to rapid growth in production capacity, thus raising the standard of
living.

Most significant development of capitalism took place post World War I. The
economies around the world collapsed and trade barriers multiplied. The Great
Depression of the 1930 ended the laissez-faire policy. The decades after World War
II, many countries have implemented policies based on the principles of equitable
distribution of wealth, equality of opportunity and minimal provision for a good life.

In 1970’s, the intensity, frequency and synchronization of overproduction resulted in

the sharp drop in the economic growth across the capitalist world. Unemployment,
income equality widened and sowed doubts about the capitalism economic system.

Presently, many countries have adopted ideologies from different economics systems,
resulting in a new economic system known as “mixed economy”. In mixed economy,
the system protects the private property and allows the leverage of economic freedom.
In this system, Government can intervene in economic activities to attain and
maintain social aims.
Advantages and Disadvantages of Capitalism
Advantages
 Consumers have plenty of choices
 Economic growth
 Supply and demand determine the
price
 Encourages technological
development
 Limits government’s spending
 More scope for innovation and
incentives
 Hard work is rewarded
 Quality of goods and services
 Maximum market efficiency
 Encourages competition
 Low consumer prices
 Better international relationships
Disadvantages
 Inequality in income and distribution
of wealth
 Unemployment
 Poverty
 Segregation of society
 Scope for private monopoly
behavior
 Negative Externalities, ex: pollution
 Exploitation in labor
 Class conflicts
 Excessive focus on consumption
 Insufficient welfare