Question

[Must be Unique, No handwriting][Short Answer is Fine]

In understanding the process of rapid transformation of economic systems in many nations in the world from the beginning of 1990s, briefly explain why freedom to choose the right theoretical foundations still do matter to develop an appropriate economic systems for economic growth and better income distribution of a society.

Answer 1

The economic system is determined by the way the resources are controlled and distributed in an economy. Based on this, four types of economic systems can be defined:

1) Traditional economic system where in the states owned and controlled the production resources and factors and lack the advanced production technologies and resort to traditional ways of production and consumption.

2) Command economic system where in the resources and production factors are controlled by the government that is mainly centralized such as USSR.

3) the market economic system: where the allocation of resources are purely determined by the fair play between demand and supply in the market. Eg USA.

4) the mixed economic system: This is a combination of command and market economy. Such as in India, where the government is involved for the corrective purpose and regulation to avoid concentration of resources in few hands.

During 1990s many countries which were previously followed traditional economy where the state owned the resources of production were transformed into mixed economy while those which there following a mixed economic system regime transformed into a pure market economy.

The whole idea of conforming to a particular economic system is to regulate and mitigate the incidents of inequality. An economic system that is based on traditional ways of running an economy where the traditional methods may have less inequality because of the standards of production will yield lower output for one and all or that the CRS returns at best can exist however a lot of resources are wasted due to traditional and out-dated ways which have the potential of reducing the inequality and standard of living by increasing production.

A market economy may increase inequality since it will completely ignore the incapables and the less able ones and will allocate resources to those that will increase the production with the resources. This means that the income is generated for those who are capable of affording the resources at the market price and own these resources while those who are not are left behind thus increasing inequality in the economy.

To set this right maybe the government intervention such as in a mixed economy is worthwhile. This sure will restrict resources from being allocated to only those who are already well off and redistribute the opportunities to those not so well off and can help eliminate the inequality to great extent.

However, the trade-off between inequality and the economic efficiency is to be taken care of and that is why going back to the theoretical foundations become important to determine the right level of intervention by the government. In this sense, it is therefore important to choose the right theoretical foundation to develop an appropriate economic system.