An economic system is composed of all those institutional arrangements, which govern the principles regarding the allocation of resources amongst competing uses, determination of production mix, choice of techniques, consumption of goods services, and, distribution of income amongst different factors of production.

All these assist in making decisions regarding what to produce? how to produce? for whom to produce?  And, how to distribute?


Several globally recognized institutions, such as AIMS’ Islamic finance institute and AlHuda Center of Islamic Banking and Economics are working for the growth of Islamic banking and finance from over a decade.

Key Problems in the Conventional Economic Systems:

The world is divided into two main economic systems, Capitalism and Socialism, and they are contradictory to each other. However practically, the capitalist economies are having a lot of features of socialist economies, while the socialist economies are rushing towards market economies.

For example:  USA, which claims to follow capitalism, does not fully practice capitalism and is furnished with mixed economic system. On the other hand, China is practicing socialism, though not in its absolute form.

The four basic economic problems are: Determination of Priorities, allocation of Resources (such as: Land, Labor, Capital and Entrepreneur), distribution of Income, and, development.

Understanding Capitalism, Socialism and Mixed Economic System:

Capitalism is an economic system, based on the private ownership of the means of production. Distribution and exchange are in private hands of individual or corporate. Features of capitalism are, unrestricted and private ownership of means of production, exchange, and distribution, economic freedom, existence of monopolies, banking and institution of interest, and, economic exploitation of the weak by the strong.

According to the theory of socialism, the country’s land, transport, natural resources, and chief industries should be owned and controlled by the whole community, or by the state, and that wealth should be equally distributed. The key features of socialism includes: public or state ownership of all means of production, distribution, exchange and abolition of private property, economic equality and provision of basic necessities of life for every citizen, materialism and emphasis on economic factors, totalitarian state and dictatorship of proletariat, and, suppression of civil liberties.

Most of the countries are experiencing an Economical system, which is mixture of capitalism, state intervention and variant of capitalism. The question is, “Why there is a need of Intervention?” Here are the reasons: capitalism leads to misallocation of resources and unequal income distribution. Market forces do not create a balance between demanders and suppliers. Since, there is an absence of government body, big business corporations and business unions increase the prices and reap abnormal profit, which creates havoc for the poor class.

Price Mechanism in Capitalism

Price mechanism of capitalism may be understood from these facts:

Owners of the resources will sell their resources to those users, which give them higher prices. Investors make expenditures on those goods, which produce further goods, or which produce more investment. Investors borrow from the banks while investing and they have to give interest. Consumer preferences are determined by the branding, advertisement, and gift schemes offered by the producers. In Capitalism, the techniques of production have two types:
FIRST: Where more labor is employed as compared with other factors of production, is called labor-intensive technique.
SECOND: Where more capital is employed as compared with other factors of production, is called capital-intensive technique.

Flaws of Capitalism and Socialism

In Capitalism: There are no bindings or restrictions when maximizing profits.
While the other extreme Socialism not even give the natural freedom.

In Capitalism: Monopolies and Cartels are created, that exploit the society as a whole.
While in Socialism: Perfect planning is assumed to be the “Cure of all ills”.

In Capitalism: Government and Industrialists join hands for mutual benefit and make laws that exploit common people. While in Socialism: Governments are assumed to be angels, which can’t commit a deliberate mistake.

Courtesy By: Sarah Uksay