To organise the process of production in an economy, three models of economic system have been evolved in the course of human history;
1). Capitalists Economy –
[Also known as Private Enterprise System, Free Enterprise system or Market Economy.]
It has its origin in Adam Smith’s Wealth of Nations. He raised his voice against the heavy- handed government regulation of commerce and industry of the time which did not allow the economy to tap its full economic worth and reach the level of well- being.
After attaining independence, USA made ideas of Adam Smith as part of its economy. From here, the idea spread to other parts of Euro- America and by 1800 the economic system called ‘capitalism’ was established which was later known by different names such as, Private Enterprise System, Free Enterprise system or Market Economy. The decision of what to produce, how much to produce and at what price to sell are taken by the market and by the private enterprises in this system, with the state having no economic role.
2). State Economy–
[Also known as Centralized Economy, Centrally Planned Economy or Non- Market Economy.]
It has its root in the ideas of historical change proposed by German philosopher Karl Marx.
This kind of economic system first came up in erstwhile USSR after Bolshevik Revolution (1917) and got its ideal shape in the People’s Republic of China (1949).
There are two versions of state economy:
A) In erstwhile USSR known as the socialist economy- It emphasised on the collective ownership of the means of production (property and assets). It also assigns a large role to the state in running the economy.
B) In pre-1985 China, as the communist economy- It advocates state ownership of all properties including labour with absolute power to state in running the economy.
Basically this form of economy came in reaction to prevalent popular economic system of capitalism and proposed just opposite.
3) Mixed Economy:
After Great Depression (1929) USA and other western European capitalist countries got major setback witnessing unemployment, downfall in demand and economic activities and lookouts in industrial enterprises.
A new approach which was needed came from The General Theory of Employment, Interest and Money (1936) by English economist at Cambridge University, John Maynard Keynes.
Keynes questioned the very principles of ‘laissez- faire’ (non- interference by the government) and the nature of the invisible hand’.
He pointed out limitations of market mechanism that prices and wages are not flexible enough to provide employment to all. Meaning, there will people unemployed even when the economy will be at its full potential.
Therefore, he suggested strong government intervention in the economy with increase in government expenditures, lower interest rates, cheap money supply etc. While inquiring causes and cures of Great Depression he questioned the capitalist economic system being practised throughout Euro- America.
Following suggestion from Keynes, concerned economies started supplying some basic goods and services free of cost. This came to be known as ‘Public Goods’. It gave people more spare money to create demand for goods and services which were part of market.
The mixed economy arrived in this way and the classical capitalistic economy was challenged by it. The world by the late 1980’s was neither having a pure example of capitalism nor of a state economy.
There were many states of the world that opted for a mixed economy in the post world war II period after coming out of colonial rules such as India, Malasiya, Indonesia etc.
What type of Economy India chose after Independence?
After Independence, when the state market dilemma was at its peak globally, India opted for a mixed economy.
In the process of organising the economy, some basic and important infrastructural economic responsibilities were taken up by the state / governments (centre and state) and rest of the economic activities were left to private enterprises.
Once the country started the process of economic reforms in early 1990’s, the prevailing state market Mix was redefined and new form of mixed economy began to be practised. As the socio economic conditions had changed, the state market mix also changed.
The economic system of India was a mixed economy in the pre – 1991 and post 1991 years, however the composition of the state – market mix has gone for a change.
In future, as the socio- economic and political factors will be changing, India will be redefining its mixed economy, accordingly.