Chapter 2


National Systems of Political Economy

George Friedrich List (1789-1846), wrote a book called “National Systems of Political Economy” published in 1841 He did not agree with the “classical” free market economics of Adam Smith and David Ricardo.

According to him economic policy had to be adapted to the needs of specific nations.  Political economy, in matters of international commerce, draws lessons from experience, and is based on Philosophy, Policy, and History.

According to him less developed nations must encourage their domestic manufacturing industries in order to achieve competitiveness in the global economy.

For the interests of the future and the welfare of men, philosophy requires

a more intimate union and communion of nations, a renunciation of war so far as possible, the establishment and development of international law, transition of the jus gentium to a federal law,

freedom of communication among nations, as well in moral as in material concerns; lastly, the union of all nations under some rule of law, or in some aspects of the subject, a universal association.

In the case of any particular people, a wise administration, with extended views,  pursues special objects,  seeking guarantees for independence and

for duration, measures calculated to hasten progress in civilization,  well-being, and power, and  to improve social condition  so that the body politic shall be completely and harmoniously developed in all its parts, perfect in itself, and politically independent.

The civilization, political education and power of nations, depend chiefly on their economic condition; the more advanced their economy, the more civilized and powerful will be the nation, the more rapidly will its civilization and power increase, and the more will its economic culture be developed….

The progress of some nations, foreign commercial legislation and war have encouraged developing countries to move from the agricultural to the manufacturing stage of industry, and, by a system of duties, to restrain their trade with more advanced nations aiming at manufacturing monopoly.

The system of import duties helps nations to seek for guarantees of their existence and prosperity, and to establish and increase their weight in the scale of national influence….

In the economic development of nations by means of external trade, four periods must be distinguished.

In the first, agriculture is encouraged by the imports of manufactured articles, and by the exports of its own products;  in the second, manufacturers begin to increase at home, whilst the imports of foreign manufactures to some extent continues;  in the third, home manufactures mainly supply domestic consumption and the internal markets;  finally, in the fourth, we see the large scale exports of manufactured products, and the imports of raw materials and agricultural products.

import duties promote the economic development of a nation, by regulating its external trade and industrial education of the country.

Agriculture is encouraged by promoting manufacturing industry;

Internal and external trade flourish alike under the protective system; Home and foreign trade are both insignificant in the merely agricultural countries, and their external commerce is usually in the hands of the manufacturing and trading nations in communication with them.

A good system of protection does not imply any monopoly in the manufacturers of a country; it only furnishes a guarantee against losses to those who devote their capital, their talents, and their exertions to new branches of industry.

There is no monopoly, because internal competition replaces of foreign competition, and every individual has the privilege of taking his share in the advantages offered by the country to its citizens; it is only an advantage to citizens as against foreigners, who enJoy in their own country a similar advantage.


Review of “National System of Political Economy” by Friedrich List

According to List, that Smith and his followers neglect the way the world works in their understanding of economics.  The neglect leads to conclusions that would be irresponsible for the leaders of a nation to pursue.

Smith and his followers assume “a state of things which has yet to come into existence.” They assume “the existence of a universal union and a state of perpetual peace, and conclude that there will be great benefits of free trade.”

List agrees that free trade is beneficial to some nations in some circumstances. He also believes it is beneficial to the world as a whole. However, he does not believe that it is always beneficial to all nations at all times. This seems like a reasonable position, but it puts him at odds with Smith and his followers.

According to List Smith focuses more on wealth as instead of focusing on the ability to produce wealth, he states that, “the power of producing wealth is therefore infinitely more important than wealth itself; lt insures not only the possession and the increase of what has been gained, but also the replacement of what has been lost. This is still more the case with entire nations than with private individuals.”

Finally, List believes that leaders of nations must focus on the long-term welfare of the nation. A Smith-based approach will be too focused on short-term gains at the expense of long-term prosperity.

List makes a very convincing case that development requires some period of protectionism.


Summary of List’s work

In the first stage nation’s must adopt free trade with the more advanced nations in order to improve in agriculture.

In the second stage they must resort to commercial restrictions to pro­mote the growth of manufactures, fisheries, navigation, and foreign trade.

In the last stage, after reaching the highest degree of wealth and power, they must gradually revert to the principle of free trade and of unrestricted competition in the home as well as in foreign markets, so that their agriculturists, manufacturers, and merchants may be preserved from indolence and stimulated to retain the supremacy which they have acquired.


Writing in 1841 List concludes the survey

In the first stage we see Spain, Portugal, and the kingdom of Naples.

In the second Germany and the United States of North America, and France apparently stand on the boundary line of the last stage.

But Great Britain alone has actually reached it.


List emphasised the importance of institutions and the make-up of the population for economic growth.

According to him the well-being of the nation been in equal proportion to the  intelligence, morality and industry of its citizens as also on the suitable public institutions, state laws and  and administration, foreign policy and above all due to the unity and power of the nation.

List does not ignore power. He says power is more important than wealth, because national power is a dynamic force by which new productive resources are opened out, it helps us to acquire wealth, maintain our independence. According to him it was power that made England the dominant force in the world.




The two main types of national economies are –

1] Centrally planned economy.

2] Market based economy.

The difference between the two systems is the degree of individual autonomy within them.

1 Such economies are also known as command economies because everyone is expected to follow the guidelines given by the controlling authority. A pure capitalist economy is a market based economy as it is free from external control.
2 The government takes various measures to achieve the objectives of the plan. The government does not interefere in the economic affairs of the people.
3 The CPA takes all the decisions – what, when, where, for whom, how, how much to produce, what price to sell etc.

It directs and controls the economy.

the price mechanism indicate the consumers’ preference totheproducers’and determines what, when, where, for whom, how, how much to produce, what price to sell etc
4 Here the CPA restricts the free choice of individuals so as to be compatible with the plan objectives. Here all enjoy economic freedom.
5 Here a machinery is set up to mobilise resources and directs them to different sectors, to achieve the plan objectives in real terms. The resources are directed todifferent sectors by price mechanism.
6 The CPA allocates the scarce resources between the various sectors of the economy. The price mechanism allocates the scarce resources between the various sectors of the economy
7 The allocation of resources is done arbitrarily by the state. The price mechanism is not manipulated by the state to to direct allocation of scarce resources to different sectors.
8 Different sectors have to be mutually consistent with the other sectors. The coordination is brought about by the price mechanism.
9 The CPA maintains proper coordination between the financial and physical aspects of the plan. The price mechanism maintains proper coordination between the financial and physical aspects of the plan
10 There is an evaluation machinery to assess the overall economic progress. Such a machinery does not exist in an unplanned economy.
11 This type of planning makes sure that most of peoples needs are fulfilled, compensation is morally based. Here individuals are compensated according to work done.
12 All assets are owned by the state ie collective ownership. All assets are privately owned.
13 Need based production. Profit based production.
14 There will be no shortage as government ensures adequate production There may be shortages and unprofitable goods may be produced.
15 All needs fulfilled

No unemployment


Everyones needs may not be fulfilled

Lack of regulation, therefore unemployment exists.

16 . Individual soverignty, rapid growth, greater efficiency,.


Social market capitalism:

Social market capitalism is found in china, cuba, Vietnam etc.the concept of Social market capitalism is based on “The Communist Manifesto” published by Karl Marx and Fredric Engels in 1848.

This system was first adopted by USSR after the October Revolution in 1917. Later some other countries followed.

This system is controlled and regulated by the state

It is a planned economy.

A welfare oriented system

It based on collective ownership.

Definition of social market capitalism [Socialism]

Prof Paul Samuelsson, “Socialism refers to the government ownership of the means of production, planning by government and the redistribuyion of production”.

Features of social market capitalism.

1] Political power owned by working class

Under socialism all resources land, factories, mines, capital etc are brought under social ownership ie state or government ownership.

Also no one is allowed to form a political party.

2] There is no system of private property.

All means of production are socially owned. Government represents the society and uses the means of production as it deems fit.

Individual can hold on to as much private property as necessary for his subsistence.

3] Limited private sector.

All large industries and public utility services are controlled and regulated by the government. Public sector is dominant and hence the private sector has a very limited role to play.

4] There is a permanent organisation known as the centralised planning authority that prepares a plan

It is a team of experts competent to take the right decisions.  It represents the country as a whole. It provides effective control and implementation (agencies also deliver resources to various enterprises and collect their products for distinction according to the central direction)

The state or the central authority has absolute control over the economy and deliberately and consciously makes all economic decisions  relating to various problems of the country.

5] The short term and long term aims on the basis of this survey

The very purpose behind planning is to achieve these objectives and therefore it involves major policy decisions.

There is full employment, reduction in the inequalities of income and wealth, maximization of per capita income, no exploitation etc. It is a welfare state.

6] There is comprehensive planning.

A comprehensive survey of all the sources, capacities and needs of the economy are made by statistical agencies.c

This plan covers financial and physical details.and all the sectors in the country.

It settles the minutest details of how much and how to cultivate land for producing food grains.  It decides the quality and quantity of agricultural production.

How to utilise economically the available labour in all the sectors of the economy, how to allocate jobs to workers, their wages, education, training for talents aptitude and capacity.

How to achieve balance sectoral growth and it determines the savings, investment and capital formation in the country – maximum and proper utilisation of resources to achieve the aims.

7] Government control

CPA formulates the plans Plans are formulated and enforced under government control. Every economic activity ie consumption, production, distribution, exchange investment, prices etc are controlled by the government through economic plans (individuals cannot invest or undertake production without government consen

8] Lack of competition

Since the state is the major entrepreneur – a monopolist – . there is no competition. The prices of goods and services are determined by the government.

9] Social welfare

Production is utility oriented and distribution is need-based and welfare motivated.

10] Economic equality

Due to state and collective ownership there is no accumulation of private wealth. Therefore there is economic equality.

11] Equal opportunity

Every individual has equal opportunity under socialism. To ensure this free education/training and health services are provided for all.

12] No individual freedom

This system therefore is based on social preference rather than individual preference

The government demands obedience from the citizen

State or the C.P.A. assigns jobs to the workers.

Producers have to abide by the decisions of the C.P.A.

After the decisions regarding the production are made, prices are fixed in such a way that the necessary demand is created for the same.

13] Workers are paid in terms of money and are required to spend it on the goods and services produces, which are sold at government fixed prices therefore the money paid as wages flows back to the Governmentas consumption expenditure

14] Prices are fixed by the C.P.A. Prices are suppressed and administered therefore there is no important role for the price mechanism in the allocation of resources.  Prices are used by the state as tools for planning.

15] The economic plans also imply a time-limit i.e. the programmes have to be implemented within a specified time.

This time-limit is essential because otherwise it would not be possible to achieve the desired aims and objectives.

16] Classless society

A socialist state is a secular state and every individual enjoys equal opportunities irrespective of class, caste, religion etc. thus socialism creates a classless society.


1] Consistent and balanced plans can be made to develop the economy.

2] Optimum utilization of resources. The plan is implemented through systematic control and therefore no waste in the use of resources and maximum social welfare

3] Greater productive efficiency is achieved. Production plans can be more exact and therefore rapid economic growth is possible.

4] Social justice is achieved. The distribution of income is also planned and therefore there is a greater equality in the distribution of income and wealth and opportunity.

4] No competition therefore wasteful expenditure eg advertisments is avoided.

5] Plan targets are achieved.

6] No class struggle and no exploitation of labour.

7] Need based production ensure survival, better health and efficiency, no poverty therefore better standard of living.

8] No unemployment.

9] Economic stability.- Since trade cycles are controlled there is more economic stability.

10] Rapid and balanced economic growth.

11] better equipped to face economic crises.


1] There is no private property.

2] No consumers sovereignty.

3] There is no freedom

of enterprise – the managers of industrial enterprise have to work according to government orders.

of consumption i.e. consumers can consume what is allotted to them through rationing i.e. what is supplied by the government.

or occupation – ie workers ie can work only in those factories or industries or sectors where they are just ordered to do whether they are fit or not.

4] Planning is rigid and no changes can be made without affecting the whole plan therefore it is expensive.

Since planning is from above it is difficult to implement it effectively and keep a control ofn efficient utilization of financial resources.

5] Fulfilling targets may become difficult because of unpredicted events.

6] Officials would be interested in achieving the aims and objectives rather than minimising the cost of production and therefore become inefficient.

7] Waste of resources likely due to overproduction of some goods and underproduction of others and thus the welfare of the masses will be affected.

8] Overall and complete control by the government may lead to monopoly of state and therefore selfdom.

9] Lack of incentative to work hard.

since there is need based distribution of income incentive to work hard is reduced.

10] Bureaucracy and red tapism.

Bureaucracy is a system of administration distinguished by its

Clear hierarchy of authority,

Rigid division of labor,

Written and inflexible rules, regulations, and procedures, and

Impersonal relationships.

Once instituted, bureaucracies are difficult to dislodge or change.

Red tapism the practice of requiring excessive paperwork and tedious procedures before official action can be considered or completed.


Conclusion -  In order to reduce the misallocation of resources there is a tendency among the present communist countries to introduce some sort of a “price mechanism” by providing freedom of consumption and occupation and also greater freedom is given to the managers of public enterprises to manage them efficiently.




Market oriented capitalism [Capitalism]

1.  This system makes greater use of capital in the process of production and therefore it isknown as capitalism.

2.  It is also known as the “Laissez Faire Economy”

3.  It is one of the most natural, automatic and logical mechanism to solve economic problems (i.e. the price or market mechanism). it exists in most of the countries in some form or another.

4. Classical economists like Adam Smith believe that the invisible hand of price mechanism or market mechanism brings about the maximum and economical allocation of resources.

5.  The price mechanism guides all the economic activities.

6.  Price mechanism is a continuous process.  changes in demand and supply bring about changes in prices  resulting into economic decisions about production and consumption and therefore price mechanism is known as the invisible hand.

Definition of Market oriented capitalism [Capitalism]

1] Ferguson and Krips, “capitalism is a system in which property is privately owned and economic decisions are privately made”.

2] R.T.Bye, “Capitalist economy may be defined as that system of economic organization in which free enterprise, competition and the private ownership of property generally prevail”.

3] Sombart, “Capitalism dignates economic system significantly characterised by the predominance of capital”.

4] Loucke and Hooter, “capitalism is a system of economic organization featured by the private ownership and the use of private profit of manmade and naturemade capital”.


Features of capitalism:-

1. There is no centralised planning.

2. Private property

There exists an institution of private property. People have a right to hold and use, buy and sell, inherit and bequeath private property. They can entre into any contract regarding their property.

Under capitalism there is social property like roads, railways, public parks,libraries, hospitals, universities etc owned by the government/by the entire society.

3] Private ownership of resources

There exists private ownership of resources ie land, labour, capital,machines, tools, mines etc.

4] Under capitalism consumer is a sovereign.

Under capitalism there exists consumer’s sovereignty. Consumers have full freedom of what to consume

Consumers decide their consumption on the basis of their scale of preferences and the prices in the market, so as to maximize their satisfaction.

This guides the producers’ decisions of production. They will invest their funds in the production of goods and services demanded by consumers.

he consumers also have the freedom to save and invest as they decide.

5]. There exists the institution of private enterprise.

Every individual are free to use their resources in any manner they like. They can start a business, an industry,

An entrepreneur can take independent decisions regarding what, where, when, how for whom to produce, where and at what price to sell etc.

An entrepreneur can select any profession or occupation depending on their ability, skill, education etc.

The entrepreneur’s choice is dependent on profit maximizing and the government does not interfere in the economic activities.

6] Production is profit motivated

Production is profit motivated and market oriented. Producers are free to save and invest as they like.

Producers select those methods of production which are the most efficient is they will try to minimize cost and maximize profits.

7] Competition

There is free competition in production i.e. new producers can enter the production process; existing producers can close their units.

Because of freedom of enterprise there are a large umber of producers of almost all commodities. Producers compete with one another. Each producer will try to “capture the market” so that he maximises his profits.

This competition will increase the efficiency of industrial units and consumers can get products at lower prices.


8] Labour as a commodity

Individuals who do not own capital or any other means of production are unable to use their own labour. They sell their labour in order to earn a livelihood.

Therefore, like any other commodity, labour is also bought and sold in the labour market and the demand and supply of labour decides its price ie wages and salaries.

In some cases there may be exploitation of labour under capitalism.

9]. Autonomous or voluntary exchange.

Exchange guided by the relative products prices and factor prices.

10]. Price mechanism

Under capitalism the price mechanism or market mechanism ensures proper or the most efficient allocation of resources

Here the free market forces of demand and supply determine the equilibrium price.

All decisions of consumers and producers decide –ie consumption, production, distribution, exchange, savings, investment etc – and are decided by the price mechanism.

Functions of price mechanism therefore is a

a) Coordinating device with internal consistency and an optimising instrument without any central direction.

b) Ensures optimum allocation of the communities resources .

c) Guides all economic activity.

d) Harmonises conflicting inters of the buyers and sellers

e) Efficient allocation of work force as each gets a job to which he is best suited.

f) Curbs consumption to promote savings for economic growth or when a shortage is feared. A rise in price achieves this objective.

11] Money plays an active role .

12] Minimum government interference

Since most economic activities are guided by price mechanism the governments function is limited to regulation of market, internal and external defence, foreign policy, currency etc.

Therefore though the role of the government in minimum a stable and well organised government is necessary



1] Economic liberty eg to earn spend and use resources.

2] Right to private property increases the inducement to work.

3] Freedom of choice – for consumers, producers and labour.

4] Encouragement to growth of private enterprise. Profit motive and competition makes entrepreneurs more competent, dynamic and efficient.

5] Protects the individuals self interest and maximizes welfare.

6] Effective price mechanism i.e. optimum allocation of resources, incentive to work and produce, efficient production, competition

7] Increases productivity of all eg agriculturist, industrialists, professionals etc in their own self interest. However this increases income, savings and investment.

8] Greater variety of goods and services eg necessaries, comforts and luxuries.

9] Increases the standard of living. of all as there is large scale production at lower cost therefore more consumption.

Also luxuries are produced therefore standard of living of rich will also rise.

10] Minimum government interference. All institutions function automatically. The self interest of individuals promotes efficient and economic use of resources eg mini-max principal.



1] Gives rise to inequalities in the distribution of income and wealth (social and economic injustice as capitalists exploit working class).

This may also lead to class struggle between haves and haves not eg strikes, lockouts etc.

2] Emergence of monopoly. Large scale industries, cartels, MNCs, etc.

3] Economic instability brought about by business cycles eg during depression.

4] Cut throat competition under monopolistic competition therefore huge wastes, particularly heavy expenditure on advertisements and competing rivals therefore it violates the very philosophy of competition and efficiency attributed to capitalism.

5] Mechanisation and automation results in unemployment

6] Welfare may be ignored as production of luxuries being more profitable, the production of basic goods and basic needs may be ignoed.

7] Exploitation of labour through low wages, hire and fire policies etc.

8] lack of coordination. Since there is no CPA there may be surpluses and shortages of goods and services.

9] Poverty

10] Imbalanced economic growth





Developmental capitalism [Mixed economy]

A mixed economy is of a recent origin. It has good points of both capitalism and socialism , and therefore mixed economy is a blend of capitalism and soci8alism.

Objectives of mixed economy:

i) To develop the economy rapidly by means of planning.

ii) to decrease inequalities of income and wealth.

iii) to control the key and basic industries.

iv) to increase peoples welfare and social security.


Definitions of developmental capitalism.

1] Prof Paul Samuelson, “a mixed economy is that economy in which both public and private sector cooperate”.

2] Prof Murad, “a mixed economy is that economy in which government and private individuals exercise economic control”.


Features of mixed economy:-

1. Coexistence of the private and public sectors.

2. The coexistence of profit motive and social welfare.

3. Coexistence of price mechanism and govt. direction[regulated economy]

4. The government however regulates and controls the private sector .

5. Consumers sovereignty is protected.

6. Protection of labour by government.

7.  Inequalities and exploitation decreases.  8. Govt. controls monopolies .

9. Economic planning is democratic ie planned economy and government control.

10] Private property and economic equality.

11] Control of monopoly.




1] Faster economic development.

2] It is more stable

3] It reduces inequalities of income and wealth

4] Institution of private property is protected

5] Provides scope for private initiative and profit motive

6] Increases efficiency of both the sectors and promotes a healthy competition between them.

7] Price mechanism exists.

8] Provides freedom for producers, consumers and labourers .

9] Adopts democratic planning

10] Efficient use of resources.

11] Freedom from exploitation.

12] Advantages of planning..

13] controls monopoly and concentration therefore efficient production.



1] May create monopolies

2] May cause inequalities

3] May become difficult for the private and public sectors to co exist.

4] The publivc sector may expand at the cost of the private sector (to the extent that private sector might also disappear) Therefore may not remain fixed in the true sense for long.

5] Private sector may start depending on the public sector for growth and lose initiative.

6] Problem of allocation of foreign exchange between private and public sectors

7] Uncertainty in classification of sectors.

8] Corruption

9] Wastage

10 delay in economic decisions]

11] poor implementation of planning.

12] Black moneu

13] Red-Tapism

14] Conflict between two sectors.




For the efficient working of mixed economy prefer understanding between private and public sector sna d a perfect understanding of such a system by both sectors is necessary to solve its problems efficiently.


1. Basic industries including public utility services should be undertaken by the government therefore efficient allocation of resources.

2. Inequalities of income and wealth should be reduced. With the help of fiscal and monetary policies to equalise distribution of income and welath, progressive taxation should be adopted.

3. There should be adeuqate provision for social security, insurance against unemployment and accidents as well as old age pensions etc.

4. There should be efficient economic planning and functioning.


Mixed economy in India

Consumer’s sovereignty :

Theoretically speaking a consumer in a capitalist economy enjoys perfect freedom of consumption influence and regulate the nature of economic activity .Directs distribution of economic resources .Production is undertaken to satisfy him.

Every producer has to study the nature requirements tastes and preferences of the consumer before he initiates production or else incur heavy losses. Therefore under capitalism the consumer is the King or Master or sovereign who rules the economy and the producer is his servant.

Consumer’s preferance is revealed through price mechanism which guides the producer

Preference of consumer also guides the investor in his investment decisions .

However consumers sovereignty is limited by production powers of the economy.

State of technical knowledge e.g. carpet lamp etc.

his purchasing power

-restrictions by the state e.g. prohibition.

-taxation reduces the real income


-fashions and customs

-standardised production cheap little choice


-rationing during war times etc.

Consumers sovereignty is desirable ,but in capitalist countries where there is poverty inequality etc. consumers sovereignty becomes meaningless

Consumers sovereignty may cause wrong and uneconomic utilisation of resources .Therefore government intervention is necessary.  In daily consumption however the average consumer shjould have freedom as he can make rational decision.



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