5 Important Types of Economy – Explained!

The economies may be classified in a number of ways. A layman, for instance, may classify economies as rich and poor.

In a rich economy, the per capita income and the standard of living are very high, whereas in a poor economy like that of India, the per capita income is extremely low and the average citizen hardly gets two square meals a day.

The economies can also be classified as simple or complex. A simple economy like that of an isolated Indian village is a self-sufficient economy. All the needs of the villagers are fully satisfied in the village itself. It has no trade with the outside world.

The requirements of the people must be very few. Each family in the village may be carrying on what is called subsistence economy, i.e., producing enough of all goods to satisfy its own wants. For a long time, the Indian farmer carried on subsistence farming, i.e., producing for the family and not for the market. The economy of a modern town or city is an example of a very complex economy. Millions of people are crowded together in a small area and there are hundreds and thousands of occupations.

There is extreme degree of specialization of products and. businesses, and no person can even dream of self- sufficiency. To be self-sufficient is considered neither desirable nor feasible. For the satisfaction of the wants of the people, millions of workers, producers and businessmen must co-operate.

Goods have to come sometimes from the farthest end of the world. Just think how many hundreds of people—producers of raw materials or paper industry, paper manufacturers, printers and the workers, the authors and the writers of hundreds of books they may have consulted, publishers’ representatives long chain of middle men and retail book­sellers—must have co-operated to place this’ book in your hands. Specialisation and co-operation that it necessitates in the form of mutual exchange are the dominant characteristics of a modern economy.

The economies can further be classified as agricultural and industrial. In an agricultural economy, agriculture is the main occupation of the mass of the people. The economy largely produces agricultural products, raw materials and food-grains. They export these commodities and import manufactured goods. Such economies are generally backward and poor. On the other hand, industrial economies are rich and advanced.

The towns and cities represent industrial economy. A country where the bulk of the population resides in the rural areas is an agricultural economy, whereas a country with predominantly urban population is an example of an industrial economy.

1. Socialist Economy:

There is still another classification. Socialist Economy and Capitalist Economy. In the Socialist Economy, as that of the U.S.S.R. and China, all means of production, farms, factories, etc., are socialised. That is, they belong to the State. There is no private sector; it is all public sector enterprise.

The instruments of production are owned and managed by the State in the interest of general welfare. All profit goes to the State to be ploughed back in further economic development or to be spent on the welfare of the people. There may not be absolute economic equality but equality of opportunity is guaranteed. Employment is guaranteed. The resources are allocated not according to demand or wishes of the people but by a central authority with a view to the overall interests of the State.

2. Capitalist Economy:

Such an economy prevails in the U.S.A., the U.K., Western Europe .and most other countries of the world. In this economy, economic .decisions regarding production are taken by private entrepreneurs who are solely guided by the expected rate of profit based on consumer’s preferences, actual or anticipated. Thus profit motive is the mainspring of all economic activity. The institution of private property, dominant role of the entrepreneur, uncoordinat­ed nature of economic activities, competition as well as co-operation and class-conflict are some of the important features of a capitalist economy.

However, the more important classifications are, whether an economy is:

(a) Developed or under-developed, or

(b) Free-enterprise, unplanned or controlled and planned economy.

Under-developed and Developed Economies:

Under-development refers to low level of economic and technical achieve­ment. The people are generally poor and their productivity is low. The Indian Planning Commission defines an under-developed country as one “which is characterised by co-existence, in greater or less degree, of unutilized or under-utilized man-power, on the one hand and of unexploited natural resources on the other.”

The main characteristics of under-developed economies are:, excessive reliance on agriculture, a rapidly increasing population, capital deficiency, under-utilisation of human and natural resources, low per capita income, low standard of living, uneconomic social structure, under-developed infrastruc­ture, and so on.

On the contrary, a developed economy shows opposite characteristic.-; viz., high rate of capital formation, proper balance between agriculture and industry and between rural and urban population, high per capita income and high standard of living, advanced techniques of production, restricted popula­tion growth, full employment and optimum utilisation of human and material resources, a fully developed infrastructure, and so on.

The U.S.A., Canada, the U.K., and Western Europe are examples of developed economies’ and most of the Asian countries fall in the category of under-developed economies. India may, however, be described now as a developing economy. That is, from an under-developed stage, it is moving towards a developed stage.

3. Free-enterprise Economy:

In a free enterprise or unplanned economy, economic decisions regarding production are taken by innumerable independent entrepreneurs. Similarly, the decisions regarding consumption are taken independently by millions of consumers. There is no central authority to co-ordinate, guide or direct economic activities. It is a full-fledged economic democracy. An entrepreneur may take up any business that he thinks profitable.

There are no checks, no restraints and no control of any type. A consumer may spend his income in any manner that he thinks best to give him maximum satisfaction. There is no rationing and no price control. In other words, there is full economic freedom.

The main features of a free-enterprise economy (as in the case of a capitalist economy) are:

The existence of the institution of private property under which the State protects the private property of citizens and guarantees its use by them for their own benefit. Every citizen has a right to own property in any form he likes and pass it on to his heirs and successors.

There is freedom of enterprise under which every citizen is free to take up any profession or start any business he likes.

Profit motive is the main guiding factor for all economic undertakings.

There is consumer’s sovereignty giving the consumers a free choice in spending their income or assets in order to derive maximum satisfaction for themselves.

Price-mechanism plays a vital role guiding both producers and consumers. It determines the allocation of the productive resources of the community.

There is keen competition between producers and producers on the one hand and consumers and consumers on the other as well as bargaining between producers and consumers.

Inequalities of incomes and wealth as well as of opportunity are another salient feature of a free enterprise economy.

4. Planned Economy:

In the planned economy, however, there is a central authority which chalks out the entire plan for the economy. It is immaterial whether the economy is capitalist or socialist, a central planning authority is essential. In the field of production, all enterprise must fit in the overall plan. It is not the market which guides production but what the planning authority thinks most desirable to secure optimum utilisation of resources and the maximum rate of economic growth.

Naturally, there are extensive controls both on production and on consumption, e.g., licenses for setting up industrial undertakings, control over capital issues, import controls, export controls, exchange control, price control and rationing.

There is a detailed plan regarding investment and production in all sectors of economic activity agriculture, industry, trade, transport and communications, and even for social services like education and public health. There are set objectives to be achieved.

5. Mixed Economy:

What may be called a new type of economy seems to be shaping itself. In Britain, which may be regarded as the home of capitalism and free enterprise, certain important industries have been nationalized. India is also following her example. Britain nationalised the Bank of England and the steel industry (steel industry was later denationalized by the Conservative Government).

India has nationalised the Reserve Bank of India, the life insurance business and 14 major commercial banks. If the Government of India had not been handicapped by the lack of funds and trained personnel and if it had not been engrossed in more urgent problems, India would have also nationalized certain industries. The Government of India declared in 1948 that for ten years there would be no nationalisation, which meant that when 10 years were over, steps towards nationalisation might be taken.

According to the industrial policy of the Government of India announced in 1948 and later in 1956, some industries have been put under State control. These industries are owned by the Government. Such industries may be considered to constitute the socialized or public sector. In a mixed economy, the private sector (capitalism) and public sector (socialism) exist side by side. There are industries which are owned by private capitalists; there are industries which are owned exclusively by the State; and there are industries in which the State and the private capitalists form partnerships.

It seems very likely that mixed economy will make a rapid headway in the capitalistic countries. In fact, today all capitalist countries including the U.S.A. and the U.K. may be better called mixed economies, because of the emergence of a considerable public sector in them.

In India, under the Five-Year Plans, the scope of State-operation, State-control and State-interference has been very much enlarged. The private sector operates according to ‘wider’ policies laid down by the Government. Our mixed economy tends to assume the shape of democratic socialism ultimately. Under it both private and public sectors shall operate, but the private sector will work under the overall general control of the Government.

India has decided to establish a socialistic pattern of society. For this purpose public sector is being expanded. Taxation of the rich and beneficent State activities for the poor and measures of social security and social welfare are some of the steps taken in this direction.