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- Islamic, Command, Market and Mixed Economics Systems by Ahsan Khan Eco
Posted by : Ahsan Khan Thursday, 7 February 2013
Capitalism, Communism and Mixed Economics system has purely a materialistic approach in which human social life has no importance. But in Islamic System, the followers of Islam are required to lead a material life in such way that it becomes a source of happiness and respect of others in this world for making secure himself for next world.
Islamic Economic System consist of institutions, organizations and the social values by which natural, human and man made resources are used to produce, exchange, distribute and consume wealth? Goods and services under the guiding principles of Islam to achieve "FALAH" in this world and also other it.
Salient Features of Islamic System
Main characteristics of Economic System of Islam are.
1. The Concept of Private Property
2. Consumption of wealth
3. Production of wealth
4. Distribution of wealth
5. The concept of Zakat
6. Interest free Economy
7. Economic Growth
8. Responsibilities of the Government.
1. The Concept of Private Property
Basic Principles in Islam for Consumption or Investment of private property are:
- Concept of "HALAL" and "HARAM" for earning or in production and consumption of wealth.
- A property cannot be used against public interest.
- Show much as you have something.
- Real/money Capital cannot be used for gain.
- Payment of Zakat is compulsory.
2. Consumption of Wealth
In Islamic System uses of luxuries are not allowed because it against the concept of "TAQWA" should have distinguish between "HALAL" and "HARAM"."BUKHAL" and "ISRAF" are to be avoided.
3. Production of Wealth
Price mechanism plays a key role in carrying out the production process in an Islamic Society. As Price system results in the expectations of workers and consumers the Govt. Interferences with the price mechanism to over come the problem. These things are not allowed in Islamic System.
- Production of drugs, gambling, lotery, music, dance etc.
- Lending and borrowing on interest
- Black marketing, Smuggling etc.
4. Distribution of Wealth
Islamic Economics System favour fair (not equal) distribution of wealth in the sence that it should not be confined to any particular section of the society. For fair distribution of wealth Islam gives following steps
- "BUKHAL" and "ISRAF" are to be avoided.
- Payment of Zakat
- Interest not allowed
- Monopoly of Private firm not allowed
- Earning from Black Market.
5. The Concept of Zakat
Zakat is a major source of revenue the government in an Islamic state. It levy on all goods and money or on wealth if have to pay yearly on the month of RAJAB or RAMADAN.
6. Interest free Economy
The whole financial system the bank structure in particular is run on the basis "SHARAKAT" and "MUZARABAT" in Islamic state. Therefore, Islamic economics is an interest free economy.
7. Responsibility of the Government
Responsibility of the Islamic Government are
- Should check un-Islamic activity like gambling, smuggling, black marketing etc.
- Should secure poor people by giving them necessity of life i.e. food, clothing, health etc.
- Should provide equal employment opportunity.
- Social and Economic Security is required to guaranteed by the Govt.
An Islamic Setup provides a graceful economic and social life. it distribute the wealth in all family.
Comparison of Islamic Economic System with other Economic System
Islamic Economic System possesses the character of both capitalism and socialism and it is free from their evils. Following are the comparison of Islamic state with others.
1. Distinguishing Characteristics
Capitalist says "Economic Freedom" to producers and Consumers.
Communism says Economic Equality achieved through state ownership of the means of production.
The distinguish characteristics of an Islamic System is "Economic and Social Justice" so that every body gets his / her due.
2. The Concept of Private Property
In a Capitalist system unlimited liberty and right of ownership for private property is given which has resulted in the capitalist exploitation of workers. Islam allows the right of private ownership and freedom of enterprise in limited capitalism but not leave the property for the long period.
3. Consumption of Wealth
In Capitalism any thing can be consumed while a communist society only consumer goods and services which are allowed to be produced in the country. In Islamic Country only "HALAL" are allowed to be produced and consumed "HARAM" goods and services are not allowed to be produced and consumed.
4. Production of Wealth
Capitalism motive is only profit they produced goods for only profit. In communist society central plan authority made decision what to produce and how much to produce. But in Islamic System only have to produce "HALAL" goods and "HARAM" goods like alcohol drink, drug etc are not allowed.
5. Distribution of Wealth
In Capitalism concentration of wealth is goes on few hand due to unlimited right of ownership and free competition. In communism system dicta for ship is created due to concept of private property. In Islamic System, Due to "ZAKAT" and "SADQAT" automatically wealth transfer to poor from rich.
6. The Role of Interest
The interest made brings equal between saving and investment to promote, capital formation in a capitalist society. In communism, interest does not pay any role for saving and investment. In the Islamic system interest based economic activities are strictly banned. Hence interest is not a source of capital formation in an Islamic.
We conclude that Capitalist and communist are materialistic in nature and they only looking for to satisfy the material wants of the people. But Islamic economic system provides a fine blend of materialism and spiritualism.
A command economy is where economic decisions are planned out in detail by a central government authority. The plan is implemented through laws, regulations and directives. Businesses follow production and hiring targets instead of individually and freely responding to the laws of supply and demand. Central planners seek to replace the forces that operate in a free market economy, and the customs that guide a traditional economy, to attain specific societal goals.
The concept of a command economy was developed by Viennese economist Otto Neurath as a method to control the hyper inflation after World War I. The phrase comes from the German "Befehlswirtschaft" and was initially used to describe the Nazi economy. However, centrally planned economies were in existence before then, including the Incan empire in 16th century Peru, the Mormons in 19th century Utah, and even the U.S. during World War II mobilization. (Source: Richard Erickson and Barry Ickes, Review of Economic Design, "A Model of Russia's Virtual Economy,", 2001, 6, 185-214.)
Characteristics of a Command Economy
A modern centrally planned economy can be identified by the following five characteristics:
1. The government creates a central economic plan for all sectors and regions of the country. It typically starts with a five-year plan to set the overriding economic goals. This is broken down into shorter-term plans to convert the goals into actionable objectives. The goal of the five-year plan is to generate robust economic growth, increase production efficiency and best utilize scarce resources. For the most part, a command economy needs a political system that is also centrally planned.
2. The government allocates all resources according to the central plan. The goal is to use the nation's capital, labor and natural resources in the most effective way possible. This pretty much eliminates unemployment by promising to use each person's skills and abilities to their highest capacity.
3. The central plan sets the priorities for production of all goods and services. The goal is to supply enough food, housing and other basics to meet the needs of everyone in the country. In addition, it may have other priorities, such as mobilizing for war or increasing the nation's economic growth.
4. The government owns a monopoly business in industries deemed important to the goals of the economy. This usually includes finance, utilities, and automotive. There is no domestic competition in these industries.
5. The government creates the laws that regulate economic activity. These include regulations, directives and wage/price controls to implement the central plan.
Command Economy Advantages
Centrally planned economies are great at mobilizing economic resources quickly, effectively and on a large scale. They can execute massive projects, create industrial power and attain imperative social goals. They are able to override individual self-interest, and subjugate the welfare of the general population, to achieve a greater agreed-upon goal for the society at large.
Command economies are also good at wholly transforming societies to conform to the planner's vision, as in Stalinist Russia, Maoist China and Castro's Cuba. For example, the command economy in Russia built up an effective military might and quickly rebuilt the economy after World War II.
Command Economy Disadvantages
This rapid mobilization often means command economies mow down other societal needs. For example, workers are often told what jobs they must fulfill and are even discouraged from moving. However, people won't ignore their own needs for long. They often develop a shadow economy, or black market, to buy and sell the things the command economy isn't producing. The efforts of leaders to control this market can ultimately weaken support for the central planning authority.
Instead of leading to efficiency, command economies often produce too much of one thing and not enough of another. That's because it's difficult for the central planners to get up-to-date information about consumers' needs. In addition, prices are set by the central plan, and so can't be used to measure or control demand. Instead, rationing often becomes necessary.
Command economies are not good at stimulating innovation. Businesses are focused on following directives, and are discouraged from making any autonomous decisions.
Centrally planned economies also have trouble producing the right exports at global market prices. It's difficult for the various planning sectors to coordinate with each other, not to mention foreign countries' needs.
Command Economy Examples
Cuba, North Korea, China, Russia and Iran are the most commonly referenced examples of command economies. Russia's Gosplan has been the most studied. It was also the longest running, lasting from the 1930s until the late 1980s.
Examples of Planned economies
- North Korea
- Iraq (until 2003)
A market economy is where economic decisions are made by the free market. That means production of goods and services are regulated by the laws of supply and demand. Producers sell their goods and services at the highest possible price that consumers are willing and able to pay. Workers also bid their services at the highest possible wages that their skills allow.
It is generally thought that any market economy got its start as a traditional or command economy. However, most societies in the modern world have elements of all three, and are therefore mixed economies.
Characteristics of a Market Economy
A market economy is defined by six characteristics:
1. Private Property -- Most goods and services are privately-owned. This allows the owners to make legally binding contracts to buy, sell, lease or rent their property. In other words, their property gives them the right to profit from ownership. However, there are exclusions to what is considered private property. For example, since 1865 the U.S. does not allow you to buy and sell other people, or even yourself. This includes your own body or body parts.
2. Freedom of Choice -- Owners, businesses, consumers and workers are free to produce, sell and purchase goods and services in a free market. Their only constraint is the price they are willing to buy or sell for, and the amount of capital they have.
3. Motive of Self-interest -- The market is driven by everyone trying to sell their goods or services to the highest bidder, while at the same time paying the least for the goods and services they need. Although the motive is selfish, it works to the benefit of the economy over the long run. That's because this auction system fairly prices all goods and services, accurately depicting true supply and demand at any given point in time.
4. Competition -- The forces of competitive pressure keeps prices moderate, and ensures that goods and services are provided most efficiently. That's because, as soon as demand increases for a particular item, prices rise thanks to the law of demand. As competitors see there is additional profit to be made, they start production, adding to supply. This lowers prices to a level where only the best competitors remain. This force of competitive pressure also applies to workers, who are competing with each other for the highest-paying jobs, and consumers, who are competing for the best product at the lowest price.
5. System of Markets and Prices -- A market economy is completely dependent on an efficient market in which to sell goods and services. In an efficient market, all buyers and sellers have equal access, and the same information upon which to base their decisions. Prices rise and fall freely depending purely on the laws of supply and demand.
6. Limited Government -- The role of government is simply to ensure that the markets are open and working. For example, it is in charge of national defense so no other country can destroy the markets. It also makes sure that everyone does have equal access to the markets. For example, government exerts penalties on monopolies, which unfairly restrict competition. The government watches to make sure no one is unfairly manipulating those markets, and that all information is distributed equally.
Whether the society is developed or underdeveloped, a market economy has several important advantages and several major disadvantages: Among the advantages, we find the following:
- Competition between different firms leads to increased efficiency, as firms do whatever is necessary—including laying off workers—to lower their costs;
- Most people work harder (the threat of losing one's job is a great motivator);
- There is more innovation as firms look for new products to sell and cheaper ways to do their work;
- Foreign investment is attracted as word gets out about the new opportunities for earning profit;
- The size, power, and cost of the state bureaucracy is correspondingly reduced as various activities that are usually associated with the public sector are taken over by private enterprises;
- The forces of production, or at least those involved in making those things people with money at home or abroad want to buy, undergo rapid development;
- Many people quickly acquire the technical and social skills and knowledge needed to function in this new economy;
- A great variety of consumer goods become available for those who have the money to buy them; and
- Large parts of the society take on a bright, merry and colorful air as everyone busies himself trying to sell something to someone else.
These are the main advantages of the market economy, and in his article Professor Kang gives a good account of them. But, as I said, there are also major disadvantages, and these Kang neglects. Among the disadvantages, we find the following:
- Distorted investment priorities, as wealth gets directed into what will earn the largest profit and not into what most people really need (so public health, public education, and even dikes for periodically swollen rivers receive little attention);
- Worsening exploitation of workers, since the harder, faster, and longer people work—just as the less they get paid—the more profit is earned by their employer (with this incentive and driven by the competition, employers are forever finding new ways to intensify exploitation);
- Overproduction of goods, since workers as a class are never paid enough to buy back, in their role as consumers, the ever growing amount of goods that they produce (in the era of automation, computerization and robotization, the gap between what workers produce—and can produce—and what their low wage allows them to consume has increased enormously);
- Unused industrial capacity (the mountain of unsold goods has resulted in a large percentage of machinery of all kinds lying idle, while many pressing needs—but needs that the people who have them can't pay for—go unmet);
- Growing unemployment (machines and raw materials are available, but using them to satisfy the needs of the people who don't have the money to pay for what could be made would not make profits for those who own the machines and raw materials—and in a market economy profits are what matters);
- Growing social and economic inequality (the rich get richer and everyone else gets poorer, many absolutely and the rest in relation to the rapidly growing wealth of the rich);
- With such a gap between the rich and the poor, egalitarian social relations become impossible (people with a lot of money begin to think of themselves as a better kind of human being and to view the poor with contempt, while the poor feel a mixture of hatred, envy and queasy respect for the rich);
- Those with the most money also begin to exercise a disproportional political influence, which they use to help themselves make still more money;
- Increase in corruption in all sectors of society, which further increases the power of those with a lot of money and puts those without the money to bribe officials at a severe disadvantage;
- Increase in all kinds of economic crimes, with people trying to acquire money illegally when legal means are not available (and sometimes even when they are);
- Reduced social benefits and welfare (since such benefits are financed at least in part by taxes, extended benefits generally means reduced profits for the rich; furthermore, any social safety net makes workers less fearful of losing their jobs and consequently less willing to do anything to keep them);
- Worsening ecological degradation (since any effort to improve the quality of the air and of the water costs the owners of industry money and reduces profits, our natural home becomes increasingly unlivable);
- With all this, people of all classes begin to misunderstand the new social relations and powers that arise through the operations of a market economy as natural phenomena with a life and will of their own (money, for example, gets taken as an almost supernatural power that stands above people and orders their lives, rather than a material vehicle into which people through their alienated relations with their productive activity and its products have poured their own power and potential; and the market itself, which is just one possible way in which social wealth can be distributed, is taken as the way nature itself intended human beings to relate to each other, as more in keeping with basic human nature than any other possibility. As part of this, people no longer believe in a future that could be qualitatively different or in their ability, either individually or collectively, to help bring it about. In short, what Marx called "ideological thinking" becomes general);
- The same market experiences develop a set of anti-social attitudes and emotions (people become egotistical, concerned only with themselves. "Me first", "anything for money", "winning in competition no matter what the human costs" become what drives them in all areas of life. They also become very anxious and economically insecure, afraid of losing their job, their home, their sale, etc.; and they worry about money all the time. In this situation, feelings as well as ideas of cooperation and mutual concern are seriously weakened, where they don't disappear altogether, for in a market economy it is against one's personal interest to cooperate with others);
- With people's thoughts and emotions effected in these ways by their life in a market economy, it becomes very difficult for the government, any government, to give them a true picture of the country's problems (it is more conducive to stability to feed people illusions of unending economic growth and fairy tales of how they too can get rich. Exaggerating the positive achievements of society and seldom if ever mentioning its negative features is also the best means of attracting foreign investment. With so much of the economy depending on "favorable market psychology", the government simply cannot afford to be completely honest either with its own people or the rest of the world on what is really happening in the country);
- Finally, the market economy leads to periodic economic crises, where all these disadvantages develop to a point that most of the advantages I mentioned earlier simply dry up —the economy stops growing, fewer things are made, development of the forces of production slows down, investment drops off, etc. (a close look at the trends apparent in the disadvantages of the market should make clear why such crises are inevitable in a market economy). Until an economic crisis occurs, it is possible to take the position that the advantages of a market economy outweigh its disadvantages, or the opposite position, and to develop a political strategy that accords with one's view, whatever it is. But if a crisis does away with most of the important advantages associated with the market, this is no longer possible. It simply makes no sense to continue arguing that we must give priority to the advantages of the market when they are in the process of disappearing.
Market Economy Examples
The U.S. is most commonly thought of the world's premier market economy. One reason for its success is the U.S. Constitution, which had many provisions that facilitated and protected the market economy's six characteristics. Here's the most important:
- Article I, Section 8 protects innovation as a property by establishing a copyright clause.
- Article I, Sections 9 and 10 protects free enterprise and freedom of choice by prohibiting states from taxing each others' goods and services.
- Amendment IV protects private property and limits government powers by prohibiting people against unreasonable searches and seizures.
- Amendment V protects the ownership of private property, and Amendment XIV prohibits the state from taking away property without due process of law.
- Amendments IX and X also limit the government's power by reserving all rights not specifically outlined in Constitution automatically to the people.
The Constitution added in its Preamble a goal to "promote the general welfare." This goal meant the government could take a larger role than that purely prescribed by a market economy. This led to many social safety programs, such as Social Security, food stamps and Medicare.
A mixed economy has many of the characteristics of market, command and traditional economies. The United States is a mixed economy because its Constitution protects many of the characteristics of a market economy, including ownership of private property, limitations on government interference, and promoting innovation. However, the Constitution also encourages the government to promote the general welfare. This allows many aspects of a command economy, where needed. In addition, many American traditions still guide economic policy.
A mixed economy seeks to have all the advantages of a market, command and traditional economy with little of the disadvantages. Therefore, most mixed economies have three of the six characteristics of the market economy: private property, pricing and individual self-interest.
Mixed economies also have a command economy in certain areas. Most allow government to have a command role in areas that safeguard the people and the market itself. This usually includes the military, international trade, and national transportation. An increased governmental role depends on the priorities of the people. Many mixed economies also allow centralized planning and even government ownership of key industries, such as aerospace, energy production and even banking. Some mixed economies encourage the government to centrally manage health care, welfare, and retirement programs.
In addition, most mixed economies follow traditions that have been so ingrained that they may not even be aware of it. For example, many mixed economies still fund and give some power to royalty or emperors.
Most of the world's major economies are now mixed economies. It would be difficult to avoid, thanks to globalization. A country's people are best served through international trade -- oil from Saudi Arabia, consumer products from China, and food from the U.S. As soon as businesses within a country are allowed or even encouraged to export, the government must give up some control to free market forces.
Second, the global economy is primarily free-market based. There is very little government control, although some regulations and agreements have been put into place. However, there is no world government today that has the power to override a country's sovereignty and create a global command economy.
Advantages of a Mixed Economy
A mixed economy can enjoy the advantages of a market economy. First, it can efficiently allocate goods and services where they are needed, by allowing prices to measure supply and demand. Second, it also rewards the most efficient producers with the highest profit, ensuring that customers are getting the best value for their dollar. Third, it encourages innovation that meets customer needs more creatively, cheaply or efficiently. Fourth, it automatically allocates capital to the most innovative and efficient producers. They, in turn, can invest the capital in more businesses like them.
A mixed economy also minimizes the disadvantages of a market economy. A larger governmental role allows fast mobilization in priority areas, such as defense, technology or aerospace. Since a pure market economy rewards those that are most competitive or innovative, leaving others at risk, the expanded governmental role can make sure these less competitive members are cared for and valued.
Disadvantages of a Mixed Economy
A mixed economy can also take on all the disadvantages of the other types of economies, depending on which characteristics are emphasized. If it has too much free market, it can reward the competitive members of society and leave others without any government support. Central planning might do extremely well in mobilizing forces for defense, creating a government-subsidized monopoly or oligarchy system. This could also put the country into debt, slowing down economic growth in the long run. Businesses that are already successful can lobby the government for more subsidies and tax breaks. The government's role of protecting the operation of the free markets might mean not enough regulation, and ultimately taxpayer-funded bailouts of businesses that took on too much risk. Article updated August 26, 2012
Economy of Pakistan is an example of mixed economic system.
USA, Canada, England, Germany, France, Denmark, Sweden, Italy, Swiss and Norway are the also the examples of mixed economic systems.
The United States is a mixed economy because, although the factors of production are owned by the private sector, the government does get involved in decisions: The government determines what infrastructure will be built, and the government has passed laws putting many restrictions and regulations upon private industry (just to name a couple, minimum wage laws and anti-pollution laws).
China is a mixed economy because, although it went many years without government acknowledging the role that markets play, it has recently been relaxing many restrictions on market-based activity. This trend began in the agriculture industry and in industries where the activities were extremely local in nature. The government now welcomes letting some industries be controlled by market forces, while at the same time the government totally controls other (usually larger) industries.