Economic system

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Circulation model of economic flows for a closed market economy DiagFuncMacroSyst.pdf
Circulation model of economic flows for a closed market economy

An economic system, or economic order, [1] is a system of production, resource allocation and distribution of goods and services within a society or a given geographic area. It includes the combination of the various institutions, agencies, entities, decision-making processes and patterns of consumption that comprise the economic structure of a given community. As such, an economic system is a type of social system. The mode of production is a related concept. [2] All economic systems have three basic questions to ask: what to produce, how to produce and in what quantities, and who receives the output of production.

Contents

The study of economic systems includes how these various agencies and institutions are linked to one another, how information flows between them and the social relations within the system (including property rights and the structure of management). The analysis of economic systems traditionally focused on the dichotomies and comparisons between market economies and planned economies and on the distinctions between capitalism and socialism. [3] Subsequently, the categorization of economic systems expanded to include other topics and models that do not conform to the traditional dichotomy. Today the dominant form of economic organization at the world level is based on market-oriented mixed economies. [4]

Overview

Economic systems is the category in the Journal of Economic Literature classification codes that includes the study of such systems. One field that cuts across them is comparative economic systems, which include the following subcategories of different systems:

Components

There are multiple components to an economic system. Decision-making structures of an economy determine the use of economic inputs (the factors of production), distribution of output, the level of centralization in decision-making and who makes these decisions. Decisions might be carried out by industrial councils, by a government agency, or by private owners. An economic system is a system of production, resource allocation, exchange and distribution of goods and services in a society or a given geographic area. In one view, every economic system represents an attempt to solve three fundamental and interdependent problems:

Every economy is thus a system that allocates resources for exchange, production, distribution and consumption. The system is stabilized through a combination of threat and trust, which are the outcome of institutional arrangements. [7] An economic system possesses the following institutions:

Typology

Common typology for economic systems categorized by resource ownership and resource allocation mechanism Economic Systems Typology (v4).jpg
Common typology for economic systems categorized by resource ownership and resource allocation mechanism
Marxist-Leninist socialist states (red) and former socialist states (orange) of the world Communism.PNG
Marxist–Leninist socialist states (red) and former socialist states (orange) of the world

There are several basic questions that must be answered in order for an economy to run satisfactorily. The scarcity problem, for example, requires answers to basic questions, such as what to produce, how to produce it and who gets what is produced. An economic system is a way of answering these basic questions and different economic systems answer them differently. Many different objectives may be seen as desirable for an economy, like efficiency, growth, liberty and equality. [10]

Economic systems are commonly segmented by their property rights regime for the means of production and by their dominant resource allocation mechanism. Economies that combine private ownership with market allocation are called "market capitalism" and economies that combine private ownership with economic planning are labelled "command capitalism" or dirigisme. Likewise, systems that mix public or cooperative ownership of the means of production with economic planning are called "socialist planned economies" and systems that combine public or cooperative ownership with markets are called "market socialism". [11] Some perspectives build upon this basic nomenclature to take other variables into account, such as class processes within an economy. This leads some economists to categorize, for example, the Soviet Union's economy as state capitalism based on the analysis that the working class was exploited by the party leadership. Instead of looking at nominal ownership, this perspective takes into account the organizational form within economic enterprises. [12]

In a capitalist economic system, production is carried out for private profit and decisions regarding investment and allocation of factor inputs are determined by business owners in factor markets. The means of production are primarily owned by private enterprises and decisions regarding production and investment are determined by private owners in capital markets. Capitalist systems range from laissez-faire , with minimal government regulation and state enterprise, to regulated and social market systems, with the aims of ameliorating market failures (see economic intervention) or supplementing the private marketplace with social policies to promote equal opportunities (see welfare state), respectively.

In socialist economic systems (socialism), production for use is carried out; decisions regarding the use of the means of production are adjusted to satisfy economic demand; and investment is determined through economic planning procedures. There is a wide range of proposed planning procedures and ownership structures for socialist systems, with the common feature among them being the social ownership of the means of production. This might take the form of public ownership by all of the society, or ownership cooperatively by their employees. A socialist economic system that features social ownership, but that it is based on the process of capital accumulation and utilization of capital markets for the allocation of capital goods between socially owned enterprises falls under the subcategory of market socialism.

By resource allocation mechanism

The basic and general "modern" economic systems segmented by the criterium of resource allocation mechanism are:

Other related types:

By ownership of the means of production

By political ideologies

Various strains of anarchism and libertarianism advocate different economic systems, all of which have very small or no government involvement. These include:

By other criteria

Corporatism refers to economic tripartite involving negotiations between business, labor and state interest groups to establish economic policy, or more generally to assigning people to political groups based on their occupational affiliation.

Certain subsets of an economy, or the particular goods, services, techniques of production, or moral rules can also be described as an "economy". For example, some terms emphasize specific sectors or externalizes:

Others emphasize a particular religion:

The type of labour power:

Or the means of production:

Main types

Capitalism

Capitalism generally features the private ownership of the means of production (capital) and a market economy for coordination. Corporate capitalism refers to a capitalist marketplace characterized by the dominance of hierarchical, bureaucratic corporations.

Mercantilism was the dominant model in Western Europe from the 16th to 18th century. This encouraged imperialism and colonialism until economic and political changes resulted in global decolonization. Modern capitalism has favored free trade to take advantages of increased efficiency due to national comparative advantage and economies of scale in a larger, more universal market. Some critics[ who? ] have applied the term neo-colonialism to the power imbalance between multi-national corporations operating in a free market vs. seemingly impoverished people in developing countries.

Mixed economy

There is no precise definition of a "mixed economy". Theoretically, it may refer to an economic system that combines one of three characteristics: public and private ownership of industry, market-based allocation with economic planning, or free markets with state interventionism.

In practice, "mixed economy" generally refers to market economies with substantial state interventionism and/or sizable public sector alongside a dominant private sector. Actually, mixed economies gravitate more heavily to one end of the spectrum. Notable economic models and theories that have been described as a "mixed economy" include the following:

Socialist economy

Socialist economic systems (all of which feature social ownership of the means of production) can be subdivided by their coordinating mechanism (planning and markets) into planned socialist and market socialist systems. Additionally, socialism can be divided based on their property structures between those that are based on public ownership, worker or consumer cooperatives and common ownership (i.e. non-ownership). Communism is a hypothetical stage of socialist development articulated by Karl Marx as "second stage socialism" in Critique of the Gotha Program , whereby the economic output is distributed based on need and not simply on the basis of labor contribution.

The original conception of socialism involved the substitution of money as a unit of calculation and monetary prices as a whole with calculation in kind (or a valuation based on natural units), with business and financial decisions replaced by engineering and technical criteria for managing the economy. Fundamentally, this meant that socialism would operate under different economic dynamics than those of capitalism and the price system. [13] Later models of socialism developed by neoclassical economists (most notably Oskar Lange and Abba Lerner) were based on the use of notional prices derived from a trial-and-error approach to achieve market clearing prices on the part of a planning agency. These models of socialism were called "market socialism" because they included a role for markets, money and prices.

The primary emphasis of socialist planned economies is to coordinate production to produce economic output to directly satisfy economic demand as opposed to the indirect mechanism of the profit system where satisfying needs is subordinate to the pursuit of profit; and to advance the productive forces of the economy in a more efficient manner while being immune to the perceived systemic inefficiencies (cyclical processes) and crisis of overproduction so that production would be subject to the needs of society as opposed to being ordered around capital accumulation. [14] [15]

In a pure socialist planned economy that involves different processes of resource allocation, production and means of quantifying value, the use of money would be replaced with a different measure of value and accounting tool that would embody more accurate information about an object or resource. In practice, the economic system of the former Soviet Union and Eastern Bloc operated as a command economy, featuring a combination of state-owned enterprises and central planning using the material balances method. The extent to which these economic systems achieved socialism or represented a viable alternative to capitalism is subject to debate. [16]

In orthodox Marxism, the mode of production is tantamount to the subject of this article, determining with a superstructure of relations the entirety of a given culture or stage of human development.

Evolutionary economics

Karl Marx's theory of economic development was based on the premise of evolving economic systems. Specifically, in his view over the course of history superior economic systems would replace inferior ones. "Inferior" systems were beset by "internal contradictions" and "inefficiencies" that make them "impossible" to survive over the long term. In Marx's scheme, feudalism was replaced by capitalism, which would eventually be superseded by socialism. [17] Joseph Schumpeter had an evolutionary conception of economic development, but unlike Marx he de-emphasized the role of class struggle in contributing to qualitative change in the economic mode of production. In subsequent world history, communist states run according to Marxist–Leninist ideologies have either collapsed or gradually reformed their centrally planned economies toward market-based economies, for example with perestroika and the dissolution of the Soviet Union, Chinese economic reform and Đổi Mới in Vietnam.

Mainstream evolutionary economics continues to study economic change in modern times. There has also been renewed interest in understanding economic systems as evolutionary systems in the emerging field of complexity economics.

Context in society

An economic system can be considered a part of the social system and hierarchically equal to the law system, political system, cultural and so on. There is often a strong correlation between certain ideologies, political systems and certain economic systems (for example, consider the meanings of the term "communism"). Many economic systems overlap each other in various areas (for example, the term "mixed economy" can be argued to include elements from various systems). There are also various mutually exclusive hierarchical categorizations.

List of economic systems

Firm, government, economy or economic system

See also

Related Research Articles

A planned economy is a type of economic system where investment, production and the allocation of capital goods take place according to economy-wide economic plans and production plans. A planned economy may use centralized, decentralized, participatory or Soviet-type forms of economic planning. The level of centralization or decentralization in decision-making and participation depends on the specific type of planning mechanism employed.

The economic calculation problem is a criticism of using economic planning as a substitute for market-based allocation of the factors of production. It was first proposed by Ludwig von Mises in his 1920 article "Economic Calculation in the Socialist Commonwealth" and later expanded upon by Friedrich Hayek.

A market economy is an economic system in which the decisions regarding investment, production and distribution are guided by the price signals created by the forces of supply and demand. The major characteristic of a market economy is the existence of factor markets that play a dominant role in the allocation of capital and the factors of production.

A mixed economy is variously defined as an economic system blending elements of a market economy with elements of a planned economy, free markets with state interventionism, or private enterprise with public enterprise. While there is no single definition of a mixed economy, one definition is about a mixture of markets with state interventionism, referring specifically to a capitalist market economy with strong regulatory oversight and extensive interventions into markets. Another is that of an active collaboration of capitalist and socialist visions. Yet another definition is apolitical in nature, strictly referring to an economy containing a mixture of private enterprise with public enterprise. Alternatively, a mixed economy can refer to a socialist economy that allows a substantial role for private enterprise and contracting within a dominant economic framework of public ownership. This can extend to a Soviet-type planned economy that has been reformed to incorporate a greater role for markets in the allocation of factors of production.

Participatory economics, often abbreviated ParEcon, is an economic system based on participatory decision making as the primary economic mechanism for allocation in society. In the system, the say in decision-making is proportional to the impact on a person or group of people. Participatory economics is a form of socialist decentralized planned economy involving the common ownership of the means of production. It is a proposed alternative to contemporary capitalism and centralized planning. This economic model is primarily associated with political theorist Michael Albert and economist Robin Hahnel, who describe participatory economics as an anarchist economic vision.

Private property Legal designation of the ownership of property by non-governmental legal entities

Private property is a system that allocates particular objects like pieces of land to particular individuals to use and manage as they please, to the exclusion of others and to the exclusion of any detailed control by society. In legal terms it's usually a designation for the ownership of property by non-governmental legal entities. Private property is distinguishable from public property which is owned by a state entity and from collective or cooperative property which is owned by a group of non-governmental entities. Certain political philosophies such as anarchism and socialism make a clear distinction between private and personal property while others blend the two together. Private property is a legal concept defined and enforced by a country's political system.

State ownership

State ownership, also called government ownership and public ownership, is the ownership of an industry, asset, or enterprise by the state or a public body representing a community as opposed to an individual or private party. Public ownership specifically refers to industries selling goods and services to consumers and differs from public goods and government services financed out of a government's general budget. Public ownership can take place at the national, regional, local, or municipal levels of government; or can refer to non-governmental public ownership vested in autonomous public enterprises. Public ownership is one of the three major forms of property ownership, differentiated from private, collective/cooperative, and common ownership.

In economics, a price system is a component of any economic system that uses prices expressed in any form of money for the valuation and distribution of goods and services and the factors of production. Except for more economically isolated communities, all modern societies use price systems to allocate resources, although price systems are not used exclusively for all resource allocation decisions.

Criticism of socialism is any critique of socialist models of economic organization and their feasibility as well as the political and social implications of adopting such a system. Some critiques are not directed toward socialism as a system, but rather toward the socialist movement, parties or existing states. Some critics consider socialism to be a purely theoretical concept that should be criticized on theoretical grounds while others hold that certain historical examples exist and that they can be criticized on practical grounds. Because there are many models of socialism, most critiques are focused on a specific type of socialism and the experience of Soviet-type economies that may not apply to all forms of socialism as different models of socialism conflict with each other over questions of property ownership, economic coordination and how socialism is to be achieved. Critics of specific models of socialism might be advocates of a different type of socialism.

Post-capitalism

Post-capitalism is a state in which the economic systems of the world can no longer be described as forms of capitalism. Various individuals and political ideologies have speculated on what would define such a world. According to some classical Marxist and some social evolutionary theories, post-capitalist societies may come about as a result of spontaneous evolution as capitalism becomes obsolete. Others propose models to intentionally replace capitalism. The most notable among them are socialism and anarchism.

The Lange model is a neoclassical economic model for a hypothetical socialist economy based on public ownership of the means of production and a trial-and-error approach to determining output targets and achieving economic equilibrium and Pareto efficiency. In this model, the state owns non-labor factors of production, and markets allocate final goods and consumer goods. The Lange model states that if all production is performed by a public body such as the state, and there is a functioning price mechanism, this economy will be Pareto-efficient, like a hypothetical market economy under perfect competition. Unlike models of capitalism, the Lange model is based on direct allocation, by directing enterprise managers to set price equal to marginal cost in order to achieve Pareto efficiency. By contrast, in a capitalist economy managers are instructed to maximize profits for private owners, while competitive pressures are relied on to indirectly lower the price to equal marginal cost.

Economic planning is a resource allocation system based on a computational procedure for solving a constrained maximization problem with an iterative process for obtaining its solution. Planning is a mechanism for the allocation of resources between and within organizations contrasted with the market mechanism. As an allocation mechanism for socialism, economic planning replaces factor markets with a procedure for direct allocations of resources within an interconnected group of socially owned organizations which comprise the productive apparatus of the economy.

An economic ideology distinguishes itself from economic theory in being normative rather than just explanatory in its approach. Economic ideologies express perspectives on the way an economy should run and to what end, whereas the aim of economic theories is to create accurate explanatory models to describe how an economy currently functions. However, the two are closely interrelated, as underlying economic ideology influences the methodology and theory employed in analysis. The diverse ideology and methodology of the 74 Nobel laureates in economics speaks to such interrelation.

Calculation in kind or calculation in-natura is a way of valuating resources and a system of accounting that uses disaggregated physical magnitudes as opposed to a common unit of calculation. As the basis for a socialist economy it was proposed to replace money and financial calculation. Calculation in kind would value each commodity based only on its use value, for purposes of economic accounting. By contrast, in money-based economies, a commodity's value includes an exchange value.

Production for use is a phrase referring to the principle of economic organization and production taken as a defining criterion for a socialist economy. It is held in contrast to production for profit. This criterion is used to distinguish socialism from capitalism, and was one of the fundamental defining characteristics of socialism initially shared by Marxian socialists, evolutionary socialists, social anarchists and Christian socialists.

Socialist mode of production

The socialist mode of production, also referred to as the communist mode of production, the lower-stage of communism or simply socialism as Karl Marx and Friedrich Engels used the terms communism and socialism interchangeably, is a specific historical phase of economic development and its corresponding set of social relations that emerge from capitalism in the schema of historical materialism within Marxist theory. The Marxist definition of socialism is that of an economic transition. In this transition, the sole criterion for production is use-value, therefore the law of value no longer directs economic activity. Marxist production for use is coordinated through conscious economic planning. Distribution of products is based on the principle of "to each according to his contribution". The social relations of socialism are characterized by the proletariat effectively controlling the means of production, either through cooperative enterprises or by public ownership or private artisanal tools and self-management. Surplus value goes to the working class and hence society as a whole.

The concept of social ownership refers to various forms of ownership for the means of production in socialist economic systems. These systems may encompass state ownership, employee ownership, cooperative ownership, citizen ownership of equity, common ownership, or collective ownership. Historically social ownership implied that capital and factor markets would cease to exist under the assumption that market exchanges within the production process would be made redundant if capital goods were owned by a single entity or network of entities representing society, but the articulation of models of market socialism where factor markets are utilized for allocating capital goods between socially owned enterprises broadened the definition to include autonomous entities within a market economy. Social ownership of the means of production is the common defining characteristic of all the various forms of socialism.

Market socialism is a type of economic system involving the public, cooperative or social ownership of the means of production in the framework of a market economy. Market socialism differs from non-market socialism in that the market mechanism is utilized for the allocation of capital goods and the means of production. Depending on the specific model of market socialism, profits generated by socially owned firms may variously be used to directly remunerate employees, accrue to society at large as the source of public finance or be distributed amongst the population in a social dividend.

Socialist economics comprises the economic theories, practices and norms of hypothetical and existing socialist economic systems. A socialist economic system is characterized by social ownership and operation of the means of production that may take the form of autonomous cooperatives or direct public ownership wherein production is carried out directly for use rather than for profit. Socialist systems that utilize markets for allocating capital goods and factors of production among economic units are designated market socialism. When planning is utilized, the economic system is designated as a socialist planned economy. Non-market forms of socialism usually include a system of accounting based on calculation-in-kind to value resources and goods.

The socialist calculation debate, sometimes known as the economic calculation debate, was a discourse on the subject of how a socialist economy would perform economic calculation given the absence of the law of value, money, financial prices for capital goods and private ownership of the means of production. More specifically, the debate was centered on the application of economic planning for the allocation of the means of production as a substitute for capital markets and whether or not such an arrangement would be superior to capitalism in terms of efficiency and productivity.

References

  1. Daniel J. Cantor, Juliet B. Schor, Tunnel Vision: Labor, the World Economy, and Central America, South End Press, 1987, p. 21: "By economic system or economic order, we mean the principles, laws, institutions, and understandings business is conducted."
  2. Gregory and Stuart, Paul and Robert (February 28, 2013). The Global Economy and its Economic Systems. South-Western College Pub. p. 30. ISBN   978-1285055350. Economic system – A set of institutions for decision making and for the implementation of decisions concerning production, income, and consumption within a given geographic area.
  3. Rosser, Mariana V. and J Barkley Jr. (July 23, 2003). Comparative Economics in a Transforming World Economy . MIT Press. pp.  1. ISBN   978-0262182348. Chapter 1 presents definitions and basic examples of the categories used in this book: tradition, market, and command for allocative mechanisms and capitalism and socialism for ownership systems.
  4. Paul A. Samuelson and William D. Nordhaus (2004). Economics , McGraw-Hill, Glossary of Terms, "Mixed economy"; ch. 1, (section) Market, Command, and Mixed Economies.
    Alan V. Deardorff (2006). Glossary of International Economics, Mixed economy.
  5. JEL classification codes, Economic systems JEL: P Subcategories
  6. Paul A Samuelson, Economics: An Introductory Analysis, 1964, International Student Edition, New York: McGraw-Hill and Tokyo: Kōgakusha, p. 15
  7. Kenneth E Boulding, Economics as a Science, 1970, New York: McGraw-Hill, pp. 12-15; Sheila C Dow, Economic Methodology: An Inquiry, Oxford: Oxford University Press, p.58
  8. S. Douma & H. Schreuder (2013), Economic Approaches to Organizations, 5th edition, Harlow (UK): Pearson
  9. Paul R Gregory and Robert C Stuart, The Global Economy and its Economic Systems, 2013, Independence, KY: Cengage Learning, pp. 21-47 ISBN   1-285-05535-7; Erik G Furubotn and Rudolf Richter, Institutions and Economic Theory: The Contribution of the New Institutional Economics, 2000, University of Michigan Press, pp. 6-15, 21 and 30-35 ISBN   0-472-08680-4; Warren J Samuels, in Joep T J M van der Linden and André J C Manders (editor), The Economics of Income Distribution: A Heterodox Approach, 1999, Cheltenham: Edward Elgar, p. 16 ISBN   1-84064-029-4
  10. David W. Conklin (1991), Comparative Economic Systems, University of Calgary Press, p.1.
  11. Rosser, Mariana V. and J Barkley Jr. (July 23, 2003). Comparative Economics in a Transforming World Economy . MIT Press. pp.  8. ISBN   978-0262182348. This leads us to describe two extreme categories: market capitalism and command socialism. But this simple dichotomization raises the possibility of “cross forms,”, namely, market socialism and command capitalism. Although less common than the previous two, both have existed.
  12. Rosser, Mariana V. and J Barkley Jr. (July 23, 2003). Comparative Economics in a Transforming World Economy . MIT Press. pp.  8. ISBN   978-0262182348. Indeed, aside from the variation of ownership forms, some follow certain ideas in Marx, saying that how one class relates to another is the crucial matter rather than specifically who owns what, with true socialism involving a lack of exploitation of one class by another. This kind of argument can lead to the position that the Soviet Union was not really socialist but a form of state capitalism in which the government leaders exploited the workers.
  13. Bockman, Johanna (2011). Markets in the name of Socialism: The Left-Wing origins of Neoliberalism. Stanford University Press. p. 20. ISBN   978-0-8047-7566-3. According to nineteenth-century socialist views, socialism would function without capitalist economic categories – such as money, prices, interest, profits and rent – and thus would function according to laws other than those described by current economic science. While some socialists recognized the need for money and prices at least during the transition from capitalism to socialism, socialists more commonly believed that the socialist economy would soon administratively mobilize the economy in physical units without the use of prices or money.Cite has empty unknown parameter: |month= (help)
  14. Socialism: Still Impossible After All These Years, on Mises.org. Retrieved February 15, 2010, from Mises.org https://mises.org/journals/scholar/Boettke.pdf, What Socialism means: " The ultimate end of socialism was the 'end of history', in which perfect social harmony would permanently be established. Social harmony was to be achieved by the abolition of exploitation, the transcendence of alienation, and above all, the transformation of society from the 'kingdom of necessity' to the 'kingdom of freedom.' How would such a world be achieved? The socialists informed us that by rationalizing production and thus advancing material production beyond the bounds reachable under capitalism, socialism would usher mankind into a post-scarcity world."
  15. Socialism and Calculation, on worldsocialism.org. Retrieved February 15, 2010, from worldsocialism.org: http://www.worldsocialism.org/spgb/overview/calculation.pdf Archived 2011-06-07 at the Wayback Machine : "Although money, and so monetary calculation, will disappear in socialism this does not mean that there will no longer be any need to make choices, evaluations and calculations...Wealth will be produced and distributed in its natural form of useful things, of objects that can serve to satisfy some human need or other. Not being produced for sale on a market, items of wealth will not acquire an exchange-value in addition to their use-value. In socialism their value, in the normal non-economic sense of the word, will not be their selling price nor the time needed to produce them but their usefulness. It is for this that they will be appreciated, evaluated, wanted. . . and produced."
  16. "What was the USSR? Part I: Trotsky and state capitalism". Libcom.org. 2005-04-09. Retrieved 2014-08-15.
  17. Comparing Economic Systems in the Twenty-First Century, 2003, by Gregory and Stuart. ISBN   0-618-26181-8.

Further reading