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An economic system is a system of production and exchange of goods and services as well as allocation of resources in a society. It includes the combination of the various institutions, agencies, entities (or even sectors as described by some authors) and consumers that comprise the economic structure of a given community. A related concept is the mode of production.
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).
Among existing economic systems, distinctive methods of analysis have developed, such as socialist economics and Islamic economic jurisprudence. Today the dominant form of economic organization at the global level is based on market-oriented mixed economies.
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. Subcategories of different systems there include:
- planning, coordination, and reform
- productive enterprises; factor and product markets; prices; population
- public economics; financial economics
- national income, product, and expenditure; money; inflation
- international trade, finance, investment, and aid
- consumer economics; welfare and poverty
- performance and prospects
- natural resources; energy; environment; regional studies
- political economy; legal institutions; property rights.
There are multiple components to economic systems. 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.
In one view, every economic system represents an attempt to solve three fundamental and interdependent problems:
- What goods and services shall be produced, and in what quantities?
- How shall goods and services be produced? That is, by whom and with what resources and technologies?
- For whom shall goods and services be produced? That is, who is to enjoy the benefits of the goods and services and how is the total product to be distributed among individuals and groups in the society?
Thus every economy is 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. An economic system possesses the following institutions:
- Methods of control over the factors or means of production: this may include ownership of, or property rights to, the means of production and therefore may give rise to claims to the proceeds from production. The means of production may be owned privately, by the state, by those who use them or be held in common.
- A decision-making system: this determines who is eligible to make decisions over economic activities. Economic agents with decision-making powers can enter into binding contracts with one another.
- A coordination mechanism: this determines how information is obtained and used in decision-making. The two dominant forms of coordination are planning and markets; planning can be either de-centralized or centralized, and the two coordination mechanisms are not mutually exclusive and often co-exist.
- An incentive system: this induces and motivates economic agents to engage in productive activities. It can be based on either material reward (compensation or self-interest) or moral suasion (for instance, social prestige or through a democratic decision-making process that binds those involved). The incentive system may encourage specialization and the division of labour.
- Organizational form: there are two basic forms of organization: actors and regulators. Economic actors include households, work gangs and production teams, firms, joint-ventures and cartels. Economically regulative organizations are represented by the state and market authorities; the latter may be private or public entities.
- A distribution system: this allocates the proceeds from productive activity, which is distributed as income among the economic organizations, individuals and groups within society, such as property owners, workers and non-workers, or the state (from taxes).
- A public choice mechanism for law-making, establishing rules, norms and standards and levying taxes. Usually this is the responsibility of the state but other means of collective decision-making are possible, such as chambers of commerce or workers’ councils.
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.
In a capitalist economic system (capitalism) production is carried out for private profit, decisions regarding investment and the use of the means of production are determined by individuals, corporations and business owners in the marketplace. 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 laissez-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 socialist economic system (socialism), production is carried out to fulfill planned-economy objectives; decisions regarding the use of the means of production are adjusted to satisfy state-conceived economic demand, investment is carried out through state-guided mechanisms. 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 or communism, also known as "command economy")
- 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)
Anarchist and libertarian economies
Various strains of anarchism advocate different economy systems, all of which have very small or no government involvement. These include:
- Right wing
- Left wing
Libertarianism also advocates a minimal role for government, including economic systems like:
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 efficiencies 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.
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. Actual 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:
- Georgism - socialized rents on land
- Mixed 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 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 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 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. 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 is 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; 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.
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.
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:
- Digital economy
- Green economy
- Information economy
- Internet economy
- Knowledge economy
- Natural economy
- Virtual economy
- Circular economy
Others emphasize a particular religion:
- Arthashastra - Hindu Economics
- Buddhist economics
- Islamic economics
- Distributism - Catholic ideal of a "third way" economy, featuring more distributed ownership in a mixed economy
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. 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
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- Hydraulic despotism
- Inclusive democracy
- Network economy
- Non-property system
- Fascist socialization
- Palace economy
- Participatory economy
- Progressive Utilization Theory (PROUTist economy)
- Worker self management
- Social Credit
- • 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.
- JEL classification codes, Economic systems JEL: P Subcategories
- Paul A Samuelson, Economics: An Introductory Analysis, 1964, International Student Edition, New York: McGraw Hill and Tokyo: Kōgakusha, p. 15
- 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
- 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
- David W. Conklin (1991), Comparative Economic Systems, University of Calgary Press, p.1.
- 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.
- Socialism: Still Impossible After All These Years, on Mises.org. Retrieved February 15, 2010, from Mises.org http://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."
- Socialism and Calculation, on worldsocialism.org. Retrieved February 15, 2010, from worldsocialism.org: http://www.worldsocialism.org/spgb/overview/calculation.pdf: "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."
- "What was the USSR? Part I: Trotsky and state capitalism". Libcom.org. 2005-04-09. Retrieved 2014-08-15.
- Comparing Economic Systems in the Twenty-First Century, 2003, by Gregory and Stuart. ISBN 0-618-26181-8.
- 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.
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