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 ABOUT ME

Mentoring, guiding and teaching

UPSC students since 8 years

Polity, Indian Economy, Essay,

Internal Security & Post
Independence India
Teaching Political Science
Optional

GS by Kapil Sikka

https://t.me/kapillive
4
 Chapter 1

An Introduction
 Economic Systems

Models

Non
Market Mix
Market
In 1776
Smith rejects government
interference in market
activities, and instead
states governments should
serve just 3 functions:
protect national borders;
enforce civil law; and
engage in public works
(e.g. education).
 Adam Smith
Adam Smith believed
believed
• Government intervention disrupts the law of demand and
supply
• Idea of Invisible Hand
• laissez faire (leave it alone or Non-interference)
• Specialization of labour
• This idea proliferated across Europe-American under Free
Market System, Private Enterprise System etc
• Promotes idea of Natural Liberty

8
• “There is one and only one social responsibility of
business – to use it resources and engage in activities
designed to increase its profits so long as it stays within
the rules of the game, which is to say, engages in open
and free competition without deception or fraud”
― Milton Friedman, Capitalism and Freedom (1962)

9
 • The unobservable market
Invisible Hand force that helps the
demand and supply of
goods in a free market to
reach equilibrium
automatically is the
invisible hand.

• Buying-Selling is
determined by need and
prices

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 No
interference
Free
Free Market
Exchange Some Govt
Regulation
Capitalism
Creation of
Wealth
 • Private ownership of
resources

• Economic freedom
Capitalist
Economy • Limited intervention of
government

• Profit Motive
 • Incentives for work
• Consumers have choices

Pros • Prevents governments

unnecessary interference

and
Cons • Creates large inequality
• Monopolistic fear in long term
• Exploitation of community
resources
13
 Birth of State Economy

• Marx and Bolshevik Revolution

• Mao’s Policy in China

• Both were result of long done exploitation of workers

class

14
Father of Socialism
• Socialism is a
response to
Industrial
Capitalism
Workers of the world unite you have nothing to lose but
your chains
 State Model or Socialist
• Shared ownership of resources and central planning offer a
more equitable distribution of goods and services.

• In short, they hold that workers who contribute to economic

output should expect a commensurate reward.

• Ownership of resources lies with state (public ownership)

• Also called as Planned Economy; Command Economy

17
 State Model or Socialist

• No Market
• No Property Rights
• Planned/Controlled Production
• Started with Bolsheviks
• USSR, Mao’s China

18
 • No Exploitation of
workers
• Equality is practiced
Pros • Poverty is eliminated

and • Abuse by state

Cons • No incentive means no
hard work
• Internal Decay of system
From each
according to his
ability, to each
according to his
needs
 Socialism Communism
Resources owned by State Resources owned by Society

Means End

Equity is practiced Equality is practiced

State is there to plan and control Withering away of state

Limited private ownership No private ownership

 Mixed Economy
• State-market mix

• Works upon combined principle of Capitalism and

Socialism

• State Intervention exists with necessary regulations &

Taxation

• Profit for Private, Services for State sector

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 Birth of Mixed Economy

• the ‘invisible hand’ of Adam Smith and Capitalist ethos

of markets got a major setback during the Great
Depression (1929).
• It impacted entire globe
• Millions became unemployed
• Industrial units were shutdown due to sharp fall in
demand
• Failure of Smith gave rise to Keynes
24
 Keynes

• Criticized the Invisible Hand Principle

• Suggested that Free Market results into ‘strangulating

the poor’.

• Capitalist wages does not support market at large, fall

in demand brings economy down

25
 Keynes Suggested

• Government Intervention
• Increased government expenditures
• Cheap money supply
• Boost Demand and Supply

• His policies pulled out the world out of crisis and hence
a new concept was born.
26
 Hence,

• Great Depression pushed to this idea

• France announced in 1944 with national planning
• World Bank promoted this in late 80’s
• Socialist countries accepted in 80’s

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 State

Health
Public
Education

Types of Goods Communication

Other Goods
Private
Communication

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 • Freedom for Capitalists
• Welfare for Needy
Pros • Planned growth

and • Unnecessary control on

Cons private sector

• Fear of Nationalization
• Inefficient Public Sector

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