ECONOMICS
HSS 301
Part B (Macroeconomics)
Discussion - 1
Economic Systems
The structure by which
a society manage its
Defining resources, and organize
Economic the production,
System distribution, and
consumption of goods
and services.
Planned Economy
Major
Types of Market Economy
Economic
Systems Mixed Economy
Islamic Economy
Philosophical Affiliations
Planned Economy Market Economy Mixed Economy
Command Economy; Capitalism; Liberal Market Socialist
Communism; Democracy; Laissez- Economy; Chinese
Socialism faire politics (little to Socialism
no government
intervention)
Idea of Market Economy
An economic system in which the decisions regarding the production, distribution, and
pricing of goods and services are guided by the forces of supply and demand.
Decentralized decision-making process. Millions of individuals and businesses make
their own choices about what to produce, how much to produce, and at what price to sell.
Prices and production levels are determined by the interactions between buyers and
sellers in free markets, without significant intervention from the government.
Idea of Market Economy
Individuals have private ownership of resources (land, capital, etc.) & businesses.
Profit maximization is the driving force of this system. Profit is the key motivation of
production.
Competition among businesses encourages innovation, improves efficiency, and helps
keep prices fair by giving consumers more choices.
Consumer choice (preferences and spending decisions) influence what goods and
services are produced.
Accumulation of capital, or the reinvestment of profits back into the business fuel growth
and expansion. Capital drives economic activity - hence the name Capitalism.
Origin of
Free Market
Economy
Origin of Free Market Economy/Capitalism
The ideology of classical capitalism was expressed by Adam Smith in the late 18th
century. [An Inquiry into the Nature and Causes of the Wealth of Nations (1776)]
Idea of Invisible Hand: Smith argued that when individuals pursue their own self-
interest, they unintentionally contribute to the overall good of society.
This "invisible hand" guides resources to their most productive uses automatically
without central planning.
Smith supported minimal government interference (Laissez Faire economics),
believing markets function best when left to operate freely. Self regulating market.
Origin of Free Market Economy/Capitalism
After the French revolution & during the industrial revolution, Smith’s policies
were increasingly put into practice.
Through unregulated decision-making & competition, capitalism allowed mass
production, stimulated innovation & promoted economic growth
New industries (like textiles, steel, and railways) required large amounts of capital,
which led to the rise of banks, stock markets, and financial systems.
Capitalism, driven by industrial power, led to global trade, colonization, and the
spread of capitalist economies worldwide.
Negative Outcomes of Free Market Policies
The growth of industrial capitalism and the development of the factory system
in the 19th century also created a vast new class of industrial workers
In general, they faced miserable working and living conditions. Labor
exploitation by the capital owners was an inherent systematic outcome.
Markets don’t always allocate resources efficiently, especially in cases like
pollution, public goods, or monopolies.
Essential services like defense, infrastructure, may be underprovided since
they aren't profitable.
Commodification/Privatization of everything: essential services like education
or healthcare, can become a product sold for profit—often excluding the poor.
More Criticisms of Market Economy
Inherent instability/unreliability of growth
• Capitalist growth is driven by profit expectations. Capital rushes in when
technological or social opportunities appear bringing an economic boom.
Sooner or later, new opportunities arrive & halt of investment causes recession
& Unemployment in the previous industries.
Bad Quality of growth
• Production process from many industries generate toxic waste, unhealthy
working conditions & accelerate climate change while making useful products.
Inequality of Income
• Labors in a capitalist economy are systematically paid less than the value of
their work by virtue of the superior bargaining power of employers. Claim of
efficiency masks an underlying condition of exploitation.
Idea of Planned/Command Economic System
Public ownership of resources: everything is owned by the state. Private
property rights are very limited or non-existent.
Government/Central authority makes all economic decisions. controls
production by quota, distribution by specified channels & prices are fixed
Everyone receives what state allocates. Consumers have little or no choice.
And there is no competition in business
Planned/Command Economic System
No profit motive: The goal is to meet social needs, not to make profit.
In theory, planned economies aim to reduce income inequality and provide
basic needs for all.
Employment is usually guaranteed by the state, and people are assigned
jobs based on the central plan.
With no competition or profit motive, innovation and efficiency tend to be
low compared to market economies.
A society in which the means of
production, distribution, and exchange
are owned by the community as a whole
rather than private individuals.
Democratic state controls the means of
Socialism production.
Workers contribute according to their
best abilities & share equal output
according to need
Origin of
Socialism &
Communism
Origin of Socialism & Communism
Marx saw capitalism as a system that exploited workers & concentrated wealth in
the hands of a few capitalists.
Socialism emerged in response to the social and economic changes brought by
the industrial revolution & expanding capitalist system.
Socialist thinkers proposed that means of production & distribution should be
owned and controlled by the workers themselves.
Communism originated from socialist ideas & further developed into a radical
idea by Karl Marx & Freidrich Engels. (The communist manifesto in 1848)
They argued that capitalism would inevitably lead to class struggle & revolution,
with the working class overthrowing the capitalists & creating a classless society.
Basic ideology of Communism
The basic idea was to prevent worker exploitation from the ones who
owned means of production since it creates an inherent inequality
Marx called the owners: Bourgeoisie & the workers: Proletariat
His Vision of successful communism entailed:
• Abolition of Private property
• Equal Distribution of Total Output
• Creating a Classless Society
Why Communism Does not Work
Equal share of total output is not consistent with fundamental principles of
human behavior. It doesn’t ensure Fairness
Ignores incentives: People with higher potential gets discouraged without
personal rewards.
Low economic growth: With no competition and limited rewards, there’s little
reason for businesses or individuals to innovate or improve.
Poor productivity: Governments often can’t gather enough information to plan
everything effectively. Resulting shortages of some goods, waste of others.
More Criticisms of Socialistic Economy
Suppression of Freedom: In practice, many communist regimes became
authoritarian, limiting freedom of speech, choice, and political dissent.
One plan doesn’t work for all: Centralized systems often ignore local
needs or diversity in people’s choices. The same plan for a rural farming
area might not work for an industrial city.
Systems meant to create equality often end up concentrating power in the
hands of a few. In practice, party elites may enjoy luxuries while ordinary
people face hardship—creating a new inequality.
Mixed/Market Socialist Economy
Some resources are owned by the private sector and are allocated
through the market system, while other resources are owned by
the government and are allocated through central planning.
In a mixed economy, the government plays a role in regulating the
market, ensuring fair competition, and providing public goods
and services, such as education, healthcare, and infrastructure
At the same time, the private sector is allowed to operate freely,
and individuals and businesses are free to make their own
economic decisions.
Background
of
Mixed
Economy
Story of The Great Depression
Learn from online sources
Mixed Economy/ Market Socialism
The idea developed as a practical response to the failures and
extremes of both pure capitalism and pure socialism.
English economist John Maynard Keynes* argued that inadequate
overall demand could lead to prolonged periods of high
unemployment.
He argued that uncertainty caused individuals and businesses to
stop spending and investing. Government must invest & spend
money during crises to get the economy back on track.
*The General Theory of Employment, Interest, and Money (1936)
Criticisms of Mixed Economy
More emphasis on profit at the expense of the welfare of the citizens
In many cases, high level of corruption and mismanagement
Unequal distribution of wealth. Large gap between the rich and the poor
Tend to lean more on Governments
Bureaucratic Lags can slow down businesses, innovation
Undue Influence from Private Enterprises
Excessive Taxation in some cases to generate public welfare
Country Examples
Planned Economy Market Economy Mixed Economy
Soviet Union, Sweden, Norway,
China (1949-1978), Iceland, Brazil,
U.S.A., EU, Canada,
Cuba, Vietnam, China (since 1979),
Japan
Myanmar, North Vietnam (since 1986),
Korea Bangladesh
Ownership of factors
Allocation Decision
Determinants of
Production Decision
Economic
System Incentive Mechanism
Structure of Governance
Who owns the means of
production?
Ownership
Means of Production: land and
capital, such as factories and farms
and the equipment in them used to
create goods
Ownership
Planned Economy Market Economy Mixed Economy
The state owns the Individuals or The state owns most of
means of production companies own the the means of production
(public property); means of production (through State-owned
foreign investment is (private property); Enterprises, SOEs), but
discouraged foreign investment is private ownership is
greatly encouraged allowed and substantial;
foreign investment is
allowed and encouraged
Allocation How the decision of
resource & factor
Decisions distribution is made
Resource Allocation Decisions
Planned Economy Market Economy Mixed Economy
The state makes these Individuals or Both the state and the
decisions and imposes companies make these market (individuals
them by force or by decisions based on and companies) make
law supply and demand these decisions,
depending on the type
of production
Who or what determines
Production the type and quantity of
Decisions goods and services
produced in an economy
Production Decisions
Planned Economy Market Economy Mixed Economy
State planners set targets Consumers determine Comprehensive state plans
and decide what and production of goods exist. Planning is more
how much is to be and services, as decentralized (taken at a
produced; these targets companies adjust regional/provincial level).
are to be met despite production of what and The state maintains power
possible surpluses and over SOEs, but the market
how much based on
deficits of goods and forces of supply and
demand from
with no direct consumer demand are much more
consumers. prevalent.
input
Incentive How are people motivated
to work and produce goods
Mechanism and services
Incentive Mechanism
Planned Economy Market Economy Mixed Economy
Moral incentives or Material incentives, Both material and
perks, where where people who are moral incentives are
productivity can be more productive earn present, with
rewarded with more and therefore productivity rewarded
nonmonetary awards, have a greater with monetary
such as state medals or incentive to work bonuses, wage
awards, or gifts from harder and longer increases and state
the state honors and awards
How large is the income gap
Income between the poor, middle class,
Equality and the rich? What policies are
in place to protect the
and Social unemployed, the sick, and the
Safety Nets elderly?
Planned Economy Market Economy Mixed Economy
Theoretically, income High income inequality Changing income
inequality is low due to due to free market control inequality. As the state
state control of worker of wages based on supply gives up most control of
wages; the state protects and demand (if there is a worker wages to the free
and provides for almost high supply of workers market, inequality
increases; workers and
all disadvantaged citizens, for a certain job, the
companies start paying
but with a lower quality of employer can pay less for
taxes to fund social
benefits overall that position and someone programs, as the state
will still take it); social attempts to work more
safety nets depend on tax efficiently and does not
levels, where generally the provide as many benefits
higher the tax level, the as it did under a command
more benefits offered economy
Structure of Governance
• How political decisions on economic issues are made
• What is the structure of Government
Planned Economy Market Economy Mixed Economy
Dictatorial Democratic Democratic
Trump Trudeau
Xi Jinping Modi
Planned Market Mixed
Economy Economy Economy
Property Rights ? ? ?
Allocative Decision ? ? ?
Production Decision ? ? ?
Incentive Systems ? ? ?
Structure of Governance ? ? ?
Income Equality ? ? ?
Criticisms ? ? ?
Islamic Economic
System
Context
The Islamic economic system can be studied properly only in the
context of the Islamic way of life as a whole
Role of Religion is central to this system
Originates from: 1) Quran 2) Sunnah 3) Fiqh
Core Principles: 1) Tawhid 2) Adl & Ihsan 3) Halal & Haram
Primary Objective
• Pleasing Allah & earning his satisfaction
(compared to profit maximization in conventional economics)
• Inclusion of reward & sin (morality in economic activity)
• Definition of Success combines the worldly life with the afterlife
• The goal is not just profit-making, but to serve human well-being
in a manner that is pleasing to Allah.
Objectives
Fair Distribution & equitable circulation of wealth
Gap between rich & poor to be narrowed
Equal rights & opportunities
Balancing individual freedom with Social Responsibility
Economic activity based on necessity
Economic Stability of individuals & the ummah
Ownership of Resource & Property Rights
Idea of ownership in Islamic economics roots from the belief that
all resources in the world belong to the One creator. (Tawhid)
Human beings are trustees of those resources.
They are free to earn & spend the wealth responsibly according to
Allah’s orders (shariah laws)
Islam approves personal property, but public interest exceeds
individual interest. Hoarding & wasting wealth is discouraged.
Features
Driving Force: Taqwa (accountability to Allah) and Amanah (wealth as
a trust from Allah)
Economic actions are guided by the moral framework of Islam, not
just market forces or state control.
Individuals are motivated by both material benefit and spiritual duty.
Just profit instead of maximizing profit
Concept of Tazkiyah (purification of Wealth & Soul)
Attitude towards Wealth & Economic Activity
Using property as a productive resource not a selfish goal
• Aim of property is not a lavish lifestyle with more & more consumption.
Rather it is circulation after fulfilling necessity
Optimum Resource Usage
• Efficient production, responsible spending but no misuse
Equality & brotherhood in Economic Activity
• A relationship beyond buyer & seller or owner & worker
• Fair wages, honest trade, and transparency are essential.
Equal participation in profit & loss in business
• Investment models are based on risk-sharing rather than risk transfer.
• Encourages entrepreneurship and discourages fixed, risk-free returns.
Major Economic Tools & Institutions
Zakat
Baitul Mal (Treasury)
Qard e hasanah (Loan without interest)
Mudarabah & Musharakah
Waqf
Major Prohibition in Islamic Economy
Prohibition of Riba (Interest – Fixed returns/unequal exchanges)
• Intended to prevent accumulation of wealth in a few hands & maintaining
distributive justice. Profit & loss sharing instead of fixed return mechanisms.
Prohibition of Gharar (Excessive Uncertainty)
• Sale of a thing that is not in hand (sale of crops in the field, sale of fish in the water
Prohibitoin of Maisir/Qim’ar (Game of Chance)
• Any form of gambling or games of chance that involve risking money for uncertain
outcomes
Production or Business of Haram Goods or Services
• alcohol, pork, and illicit drugs
Exploitation and Injustice
• Cheating, monopolies, price manipulation, frauds, deceptive marketing
Structure of the Government - Khilafah
A group (Shura) of qualified people (scholars, leaders, elders) called "Ahlu al-Hall
wal-‘Aqd" — would pick the Khalifa on behalf of the ummah.
They consult among themselves and nominate suitable candidates based on piety,
knowledge, leadership skills, justice, and ability to govern.
He forms a government based on Shariah (Islamic law). Appoints governors & judges
for the provinces under the Islamic state.
After choosing the Khalifa, the Muslims would give their Bay'ah — a public pledge of
loyalty.
The system is not based on dictatorship, the Khalifa is not a king – he is accountable
to Allah and to the people.
Role of the Government
Uphold justice, protect the religion, defend the Muslim community
Ensuring access to basic needs: food, shelter, healthcare, education.
Market Regulation: ensuring fair competition & fair price
Managing public Resources (Land, water, energy)
State allocation for social equity & welfare
Unifying the community
Ensuring social, economical & spiritual welfare
Challenges
Implementing alongside the current global financial system
harms the purity of this system
Domination of interest-based economies in international
trade.
Absence of Islam in the ruling systems.
Ambiguity in interpreting some Shariah principles
Differentiating Features
Objectives of Islamic economics is to earn the satisfaction of Allah
Self interest could become priority as long as it do not affect the interest of the society
Circulation rather than accumulation of wealth
Profit rather than maximization of profit
Economic activities are the ways to an aim not the aim itself
Care for the poor & socio – economic justice
The concept of welfare in Islam is neither exclusively materialistic nor absolutely spiritual
Taqwah to avoid oppression, fraud, unlawful profit, discrimination
Circular Flow Model of
Modern Economies
• This diagram is a schematic representation of the
organization of the economy.
• It is a visual model of the economy that shows how
inputs, outputs & money flow through markets among
households and firms in a modern economy.
Domestic Currency Overseas Foreign Currency
Import of Goods & Services Sector Export of Goods & Services
Consumption Expenditure Market for Revenue/Profit
Goods & Services bought Goods & Services Goods & Services Sold
Government
Households Public Firms
Savings Public
Debt
Financial Investment Loans
Private Savings
Market
Land,Labor,Capital Market for Land,Labor,Capital
Income/Earning Factors of Production Wages,Rents
Economic Growth
Three
Macroeconomic
Goals Price Stability
Full Employment/Low
Levels of Unemployment
Food for Thought
• Discuss the core ideas of Market/Planned/Mixed economy.
• Differentiate the three major economic systems.
• Identify the inherent/systematic problems of capitalism/
socialism/market socialism
Food for Thought
• Which economic system do you think can bring out the best outcomes
for the society? (or our country)
• In which ways a planned economy can be better for human societies
than a market economy? (vice-versa)
• Do you think Karl Marx’s vision will come true in some distant future?
• How long do you think the reign of capitalism will last?
• Discuss how capitalism has enslaved the minds of modern societies.
How can we break free from that?
Thank You
Md. Monir
Special Assistant Professor
Credit Department of Economics
Bangladesh University of Professionals
