How Economies Are Organised: Capitalism, Socialism and the Mixed Model

Every country must answer three basic economic questions: what to produce, how to produce it, and for whom to produce it. The way a country organises the answers to these questions — who owns land, factories and other productive resources, and who decides what gets produced — is called its economic system. This Gujarat Std 11 Economics chapter studies India's own economic system after first placing it against the two "pure" models economists compare it with.

In a capitalist (market) economy, the means of production — land, factories, capital — are privately owned, and the price mechanism (the free interaction of demand and supply) decides what is produced, in what quantity, and at what price. Private profit is the main motive driving production, and government intervention is kept to a minimum (the United States is the standard textbook example).

In a socialist (centrally-planned) economy, the state owns the means of production, and a central planning authority decides what is produced and how resources are allocated, rather than the market. Individual profit-seeking plays little or no role (the former Soviet Union, and China before its own market-oriented reforms, are the standard examples).

India chose neither extreme. At Independence, guided by the Directive Principles of State Policy in the Constitution and the Industrial Policy Resolutions of 1948 and 1956, India adopted a mixed economy — one in which the public sector and the private sector coexist, with the government directly owning and running certain key industries and also guiding the wider economy through planning, regulation and welfare policy, while leaving most day-to-day production and consumption decisions to market forces. The 1991 economic reforms studied in the previous chapter reduced the scope of direct government control, but India remains, in its essential character, a mixed economy today — which is exactly what this chapter examines in detail.