Economics is one of the important elements in every country. It is a study of how people use their scarce resources to fulfil the unlimited wants and involves many other alternatives or choices.In order to ensure that the limited resources are being managed properly and nothing is wasted, economic systems existed.Economic systems are the means by which countries and governments allocate the scarce resources and apportion goods and services in the national community. They are used to control the five factors of production such as labour, capital, physical resources and information resources.In general, economic systems can be divided into four types: socialism economy, capitalism economy, mixed economy and Islamic economy (refer to Figure 1 in Appendix 1). Every economic system can be discussed on their ownership of resources, government intervention, price system, allocation of resources, distribution of wealth and incentive of the production.
The first type of economic systems is socialism economy. Based on “Socialism” (2010), socialism is”Social and economic doctrine that calls for public rather than private ownership or control of property and natural resources”. The ownership of resources is public, where it is own, controlled and standardized by the authority of the state.Government interference is to make sure that producers, consumers, savers, borrowers and investors do not overpower and taking over the flow of capital and other resources. In terms of price system, it works under the arrangement and coordination of the central planning authority according to the market targeted plan. Price mechanism is a system of price determination and allocation of goods by free market force. The government have rights to set up the prices for all of the commodities that are available.Next, the resource allocation refers to the distribution of resources and in particular finance from the centre of peripheral levels. For this economic system, current consumption and future investment will be divided by the central authorities. Therefore, the authority is in charge in the decisions making for the society in terms of economic. Due to that, socialist countries have an equal distribution of income and wealth. In this system, there is no differentiation between the poor and the rich. The soft budget constraint is a result of government interference to full employment (Fischer & Gelb, 1991). Opportunity is opened to the entire native in earning income. Resources such as workers will no longer being exploit considering the profits are given equally to the workers based on their performance and contribution to the production. The incentive of this economic system is the government produces goods and services to maximize the social welfare.
Next, capitalism economy is also one of the types of economic systems. Capitalism economy is an economic system where individuals make all the main economic decisions without any government control. Thus, this economy is characterized as economic freedom, where an individual can be the buyer, seller, employee or employer at his/her own wish. Everyone in the country that is using capitalism economy has the right to acquire the private ownership of resourcesas well as to establish any enterprise of their choice. In capitalism, there is a very limited government intervention as everyone is free to make decision of their businesses. However, the economic decisions are made by referring to the price mechanism. Price mechanism means the free operation of demand and supply forces without any intervention. “Every individual neither intends to promote the public interest, nor knows how much he is promoting it, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention” (Smith, 1776, p. 456).All economic processes of consumption, production, exchange, savings, investment and distribution work under this price mechanism system. Individuals are free to compete while producing the goods and services in order to maximize the profit. The more the resources owns by the individuals, the more their income can be, which lead to the more the goods that the individuals can buy and vice versa. Those who have wealth can obtain resources and start businesses while the poor only have their labour to offer. This condition causes the inequality of distribution of wealth and income. Individuals only produce the goods and services that will lead to profit because the incentive or the main reason of production for capitalism economy is to maximize the profit.
Mixed economy is the third type of economic systems. This is an economic system which combines both capitalism and socialism to solve basic economic problems. In the real world, most countries practise a mixed economy including Malaysia.E. Hansen, J. Clark, P. Samuelson, J.K. Galbraith, Jan Tinbergen and others believed that the establishment of mixed economy is because of the advanced capitalist countries that is becoming more society-centred eventually create the opportunities for economic development (Strachey, 1956) . The private sectors are free to use any resources that they own to produce goods and services buthave to follow all the regulations that have been made by the government. The government also own some of the resources to provide public property. Nevertheless, the government will not intervene in the economy except for particular industries. Besides that, the government will also produce certain goods that the private sectors considers unprofitable such as streetlights and defence for the country. In mixed economy, the price mechanism is being used to decide the price of the goods and services but in the same time, the government control the prices to make sure that the social welfare is protected. For example, the commodities like sugar, salt and oil are declared as controlled items in Malaysia and the prices for all of the goods are fixed by the government.Next, the distribution of wealth in mixed economy is more equal than other economy systems as the government controls income disparity through income taxes and welfare payments. Thus, the government helps to narrow the income gap between the rich and the poor. The incentive of using this economic system is to maximize the profit. The private sectors produce only the profitable goods and services while the public sectors provide public property to maximize the social welfare.
The last economic system is Islamic economy.Islamic economy is an economy which is based on al-Quran and Sunnah. This economic system prioritizes moral aspect by putting it at the highest place. The characteristics of an Islamic economic system are in the range of capitalism and socialism, or in other words, similar to a mixed economy. Some Muslim countries such as Saudi Arabia, Turkey and Malaysia practise this economic system. In Islamic economy, all of the resources are owned by the God. Human being is only considered as trustees of the resources and everyone has the right to use the properties (Sabariah Ali, 2016). In this economy, the government has some of the resources to produce public goods and services and are encourage only under specific circumstances when the market fails. The next characteristic for this economy system is the price system. The prices and the allocation of resources depend on the market which is the forces of demand and supply. It is prohibited for the sellers and the buyers to fix the price of goods and services. The individual or the private parties are free to choose what kind of goods and services they want to produce and have to compete among them in order to get the highest profit. The more resources they have, the higher income they will get and vice versa.Next, unlike the capitalism and socialism economy, those who earn a certain amount of income have to pay zakat. Zakat is a payment made annually under Islamic law and is being collected in purpose to help the poor fulfil their basic needs. This will reduce the income gap between the rich and the poor. Besides that, Islamic economy has another unique element which is the prohibition of interest, also known as riba. In economy system of the Muslim country, they have to reorganize and set up the Islamic institution which apply the principles of ‘Sharia Law’ that prohibits riba (Nakhavali, 2017). The incentive of the production of goods and services for this economic system is to maximize the profit in compliant with the Islamic law.