Economic system

Circulation model of economic flows for a closed mixed economy.

An economic system is the combination of the various agencies, entities (or even sectors as described by some authors) that provide the economic structure that defines the social community. These agencies are joined by lines of trade and exchange along which goods, money etc. are continuously flowing. An example of such a system for a closed economy is shown in the flow-diagram. The economics system involves production, allocation of economic inputs, distribution of economic outputs, Landlords and land availability, households (earnings and expenditure consumption of goods and services in an economy), Capitalists, Banks (finance institutions) and Government. It is a set of institutions and their various social relations.

Alternatively, it is the set of principles by which problems of economics are addressed, such as the economic problem of scarcity through allocation of finite productive resources.^[1] An economic system is composed of people, institutions, rules, and relationships. For example, the convention of property, the institution of government, or the employee-employer relationship. Examples of contemporary economic systems include capitalist systems, socialist systems, and mixed economies. Today the world largely operates under a global economic system based on the capitalist mode of production.

"Economic systems" is the economics category that includes the study of such systems.

Decision-making structures

The decision-making structures of an economy determine the use of economic inputs (the means 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. Some aspects of these structures include:

• Coordination mechanism: How information is obtained and used to coordinate economic activity. The two dominant forms of coordination include planning and the market; planning can be either centralized or de-centralized, and the two mechanisms are not mutually exclusive.
• Productive property rights: This refers to ownership (rights to the proceeds of output generated) and control over the use of the means of production. They may be owned privately, by the state, by those who use it, or held in common by society.
• Incentive system: A mechanism for inducing certain economic agents to engage in productive activity; it can be based on either material reward (compensation) or moral reward (social prestige).^[2]

Types

Marxist-Leninist Communist states (red) and formerly Communist-run (orange) countries 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.^[3]

Economic systems can be divided by the way they allocate economic inputs (the means of production) and how they make decisions regarding the use of inputs. A common distinction of great importance is that between capitalism (a market economy) and socialism (economic planning).

In a capitalist economic system, production is carried out to maximize private profit, decisions regarding investment and the use of the means of production are determined by competing business owners in the marketplace; production takes place within the process of capital accumulation. The means of production are owned primarily by private enterprises and decisions regarding production and investment determined by private owners in capital markets. Capitalist systems range from lassiez-faire, with minimal government regulation and state enterprise, to regulated and social market systems, with the stated aim of ensuring social justice and a more equitable distribution of wealth (see welfare state) or ameliorating market failures (see economic intervention).

In a socialist economic system, production is carried out to directly satisfy economic demand by producing goods and services for use; decisions regarding the use of the means of production are adjusted to satisfy economic demand, investment (control over the surplus value) is carried out through a mechanism of inclusive collective decision-making. The means of production are either publicly owned, or are owned by the workers cooperatively. A socialist economic system that is based on the process of capital accumulation, but seeks to control or direct that process through state ownership or cooperative control to ensure stability, equality or expand decision-making power, are market socialist systems.

The basic and general economic systems are:

• Market economy ("hands off" systems, such as Laissez-faire capitalism)
• Mixed economy (a hybrid that blends some aspects of both market and planned economies)
• Planned economy ("hands on" systems, such as state socialism)
• Traditional economy (a generic term for older economic systems)
• Participatory economics (a system where the production and distribution of goods is guided by public participation)
• Gift economy (where an exchange is made without any explicit agreement for immediate or future rewards)
• Barter economy (where goods and services are directly exchanged for other goods or services)

Types of socialist systems

Socialist economic systems can be subdivided by their coordinating mechanism (planning and markets) into planned socialist and market socialist systems. Additionally, socialism can be divided based on the ownership of the means of production into 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 Marx as "second stage Socialism" in Critique of the Gotha Program, whereby economic output is distributed based on need and not simply on the basis of labor contribution.

The primary concern for socialist planned economies is to coordinate production to directly satisfy human needs/economic demand (as opposed to generate profit and satisfy needs as a byproduct of pursuing profit), to advance the productive forces of the economy while being immune to the systemic inefficiencies (cyclical processes) and crisis of overproduction that plagues capitalism so that production would be subject to the needs of society as opposed to being ordered around capital accumulation.^[4][5]

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.

Planned systems

• Calculation in kind
• Indicative planning
• Planned economy
• State socialism

Market systems

• Market socialism
• Socialist market economy
• Mutualism (economic theory)

Types of mixed economies

Economic systems that contain substantial state, private and sometimes cooperative ownership and operated in mixed economies - i.e., ones that contain substantial amounts of both market activity and economic planning.

• Distributism - Catholic ideal of a "third way" economy, featuring more distributed ownership
• Georgism - socialized rents on land
• Mixed economy
  • American School
  • Dirigisme
  • Nordic model
  • Japanese system
  • Mercantilism
  • Social market economy also known as Soziale Marktwirtschaft
  • Social corporatism
  • Socialist-oriented market economy
  • Progressive utilization theory
  • Indicative planning also known as a planned market economy

Evolutionary economics

Karl Marx's theory of economic development was based on the premise of evolving economic systems; specifically, 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.^[2] 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, etc. 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

This section overlaps with other sections too much. It should be combined with the rest of the article. Please improve this article if you can.

This list attempts to sort all possible economic systems in alphabetical order, without any division or hierarchization.

See also

• Economy
• History of economic thought
• Political economy
• Economic ideology

Holmes System

Further reading

• Richard Bonney (1995), Economic Systems and State Finance, 680 pp.
• David W. Conklin (1991), Comparative Economic Systems, Cambridge University Press, 427 pp.
• George Sylvester Counts (1970), Bolshevism, Fascism, and Capitalism: An Account of the Three Economic Systems.
• Robert L. Heilbroner and Peter J. Boettke (2007). "Economic Systems". The New Encyclopædia Britannica, v. 17, pp. 908–15.
• Harold Glenn Moulton, Financial Organization and the Economic System, 515 pp.
• Jacques Jacobus Polak (2003), An International Economic System, 179 pp.
• Frederic L. Pryor (1996), Economic Evolution and Structure: 384 pp.
• Frederic L. Pryor (2005), Economic Systems of Foraging, Agricultural, and Industrial Societies, 332 pp.
• Graeme Snooks (1999), Global Transition: A General Theory, PalgraveMacmillan, 395 pp.

References

External links

• Video Overview of Economic Systems by Thinkwell
• Social Studies VSC Glossary
• Glossary-Cultural Anthropology
• ECONOMIC SYSTEMS, a refereed journal for the analysis of market and non-market solution, by Elsevier since 2001.
• Economic Systems by WebEc, 2007.
• World Economic Systems