as a mixed economy
HARI BALAJI
SRU COLLEGE OF MANAGEMENT
Duration: 7-10 minutes
What’s my stake?
After this session, you will gain basic knowledge about the Mixed Economy, India
as a Mixed Economy, its features, advantages & disadvantages.
DEFINITION
Mixed economy is a combination of private enterprise working through
the market place and government regulation, taxation and programs.
MIXED ECONOMY
The term mixed economy is used to describe economic systems which
stray from the ideals of either the market, or various planned economies,
and "mix" with elements of each other.
A mixed economy aims at blending together the best control socialist or
communist economy with the best of free enterprise in a capitalist
economy.
The overall planning and allocation of resources is decided by the Central
Government and the planning Commission.
Private enterprises and public enterprises are allowed to function so as to
contribute towards the development of the economy.
The overall objective of the economic system in India is to achieve
economic growth with distributed justice.
Certain areas of economic activity are left open to private enterprise,
certain other s are reserved for the public enterprise while in some areas
both the sectors may compete or collaborate.
Thus, there is a combination of the features of capitalism and socialism.
INDIA AS MIXED ECONOMY
From the point of view of the business system in India the adoption of the
mixed economic system means that business firms whether in the private
sector or in the public sector must work towards the improvement of the
economic lot of the people, and narrowing down of inequalities of
income and wealth.
It also places heavy responsibility on private business to serve the society
by meeting its needs without any exploitation.
Thus, the social responsibilities acquire particular significance for the
business system in the context of a mixed economy in India.
HOW A MIXED ECONOMY WORKS
Entrepreneurs want minimum or no government control over their
business. They want ample freedom in their enterprises.
The industrialists bring in their own finance, they may sell shares to private
individuals and organizations or they may even borrow from open market.
Once finance is arranged steps are taken to invest the fund in productive
purpose so that surplus money can be generated in the form of profit.
Free trade and free market are the most important features in mixed
economy.
Here there is healthy competition among the manufacturers or
businessmen and the goods and services are sold to the buyer offering the
most competitive price.
In short there is a direct link between effort and reward.
The business man is free, he has the freedom to invest in any lawful
business or service and sell them at the most competitive price.
The difference between the price and the cost is his margin of profit.
He will pay tax at the prescribed rate and reinvest the money in his
business after setting apart some portion for his own requirement.
IMPORTANT FEATURES
This open market policy has brought in remarkable progress to the
economy of India development and trade and commerce have prospered
significantly.
Some important features of mixed economy are:
The market mechanism
Trade, Money and Capital
The visible hand of Government
MARKET MECHANISM
In an economy like India, most economic decisions are made in the
market, which are the mechanisms through which buyers and sellers meet
to trade and to determine the price and quantities of goods and services.
The market mechanism works as follows to determine the what and the
how. When people demand more of a good, its price will increase and
business can profit by expanding production of that good. Under perfect
competition, the business must find the cheapest method of production,
efficiently using labor, land, and other factor, otherwise it will incur losses
and be eliminated from the market.
TRADE, MONEY & CAPITAL
As economies develop, they become more specialized. Division of labor
allows the task to be broken into a number of small chores that can each
be mastered and performed more quickly by a single worker. Specialized
arises from increasing tendency to use round about methods of
production that require many specialized skills. As individuals in countries
become increasingly specialized, they tend to concentrate on particular
commodities and trade their surplus output for goods produced by others.
Voluntary trade, based on specialization, benefits all.
Trade in specialized goods and services today relies on money to
lubricate its wheels. Money is the universally acceptable medium of
exchange- including primary currency and checking deposits. It is used to
pay for everything. By accepting money, people can specialize in
producing few goods and can then trade them for others. Without money
we would waste much time negotiating and bartering.
Capital goods-produced inputs such as machinery, structures, and
inventories of goods in process permit roundabout methods of production
that add much to the nation’s output.
These roundabout methods take time and resources to get started and
therefore require a temporary sacrifice of present consumption in order to
increase future consumption. The rules that define how capital and other
assets can be bought, sold, and used are the system of property rights. In
no economic system are private property rights unlimited.
VISIBLE HAND OF GOVERNMENT
Although the market mechanism is an admirable way of producing and
allocating goods, sometimes market failure lead to deficiencies in the
economic outcomes. The government may step in to correct these
failures. Its role in modern economy is to ensure efficiency, to correct an
unfair distribution of income, and to promote economic growth and
stability.
Market fail to provide an efficient allocation of resources in the presence
of imperfect competition or externalities. Imperfect competition such as
monopoly, produces high prices and low levels of output. To combat
these conditions, governments regulates business or put legal anti trust
constraints on business behavior. Externalities arise when activities impose
costs or bestow benefits that are not paid for in the market place. The
government may decide to step in and regulate these spillovers or provide
for public goods.
Markets do not necessarily produce a fair distribution of income, they may
spin off unacceptably high inequality of income and consumption. In
response, the government alters the pattern of income generated by
market wages, rents, interest, and dividends. India uses taxation to raise
revenues for transfers or income support programs that place a financial
safety net under the needy.
Since the development of macroeconomics in the 1930’s, the government
has undertaken a third role, using fiscal powers (of taxing and spending)
and monetary policy (affecting credit and interest rates) to promote long
run economic growth and productivity and to tame the business cycle’s
excess of inflation and unemployment.
ADVANTAGES
Helps in increasing national production
Controls the problems created by free enterprises
Provides freedom of enterprise
Ownership
Profit sharing
Social welfare
Political freedom
All national resources are utilized.
DISADVANTAGES
National resources are not used optimally.
Has negatives of both Capitalism and Socialism.
Seldom achieves progress.
Suffers from backwardness.
Wastage of different resources occurs.
SUMMARY
Drawing the right boundary between market &
government is an enduring problem for
societies.
Economics is indispensable in finding the
golden mean between an efficient market and
publicly decided regulation and redistribution.
An efficient and humane society requires both
halves of the mixed economy system- market
and government.
THANKS