Meaning & Definition of Economic System
An economic system or economy is a system designed by a nation to utilize its resources for the purpose of satisfying the needs and wants of people.
According to W.W. Loucks, "An economic system consists of those institutions which a given nation or group of nations has chosen or accepted as the means through which their resources are utilized for the satisfaction of human wants".
According to Jan Prybyla, "An economic system may be defined as the sum total of devices through which their interaction give effect to economic choice, i.e. which translate choice from an idea into action".
According to Carl Landauer, "An economic system is the sum total of the devices by which preferences among alternative purposes of economic activity is determined & by which individual activities are co-ordinated for the achievement of these purpose".
An economic system comprises all the institutions, organisations and policy mechanisms by which the people of a country manage and utilize the country's resources to obtain the things they need. It is the network of economic relationships in the society arising from the organisation and/or mode of production, distribution, consumption and exchange. Economic system embodies the nature of property rights, ownership of resources, market mechanism, role of the State, etc.
Through the study of economic system people can understand that how:
1) The production of goods and services is organised and influenced by individuals, organisations (including companies – both publicly and privately owned, trade unions, employer groups, etc.), and governments; and
2) Products and services are used to satisfy the requirements of these same individuals, households, organisations, and government.
What is the main functions of an economic system | Major functions of an economic system
- Determination of Production and Allocation of Resources: This is one of the fundamental functions of an economic system. What commodities to produce and in what quantity are the main problem of an economic system. This is mainly because human wants are unlimited, having alternative uses. Hence a rational choice of wants and resources become necessary for the optimum adjustment between wants and preferences on the one hand and the limited resources on the other, the pattern of production or product-mix are to be determined.
- Organisation of the Production Process: After having decided about the product-mix, the next question arises as to by whom, i.e., with what means, in what manner the techniques and methods are to be followed in producing goods and services. These are alternative methods of production such as capital-intensive techniques of production, large-scale and small-scale producing units, sole proprietorship, joint-stock companies, private and public enterprises, and cooperative organisation. An economic system has to make an appropriate choice as to the type of organisation and technology to be used to make optimal use of the resources to satisfy its wants.
- Income Distribution: Distribution of income or national product is another important function of the economic system. Once the goods and services are produced, the economic system enjoy them and in what proportions. The economic system has to decide how to distribute the total national product among different sections of society. Basically, income is distributed on a functional basis, i.e., it is shared by the people in the form of salary and wages, rent, interest and dividends, profits, being a reward for their contribution towards national output.
- Provision for the Future and Posterity: An economic system has not to work just to satisfy the current wants of the people but also to provide for their future needs and welfare of posterity (future generations). Therefore, decision has to be made regarding allocation and diversification of resources to meet present as well as future needs of the economic system.
- Economic Growth and Dynamism: An economic system has to be dynamic and growth-oriented. whatever its nature – capitalism or socialism. It has to provide for innovations, new products, new method dynamic age. The system must provide enough scope to improve its production front with the existing newly developing technology.
