An economic system, or economic order, 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. 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.
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. 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. 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.
OverviewEconomic 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:
- Planning, coordination and reform.
- Productive enterprises; factor and product markets; prices; population.
- 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.
- 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?
- 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 decentralized 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 or moral suasion. The incentive system may encourage specialization and the division of labor.
- 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.
- 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.
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". 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.
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 or supplementing the private marketplace with social policies to promote equal opportunities, respectively.
In socialist economic systems, 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 mechanismThe basic and general "modern" economic systems segmented by the criterium of resource allocation mechanism are:
- Traditional economy
- * Non-monetary economy
- * Subsistence economy
- * Gift economy
- * Barter economy
- Participatory economics
- Post-scarcity economy
By ownership of the means of production
- Mixed economy
- Socialist economy
By political ideologies
- * Anarcho-communism
- * Anarcho-syndicalism
- * Anarcho-socialism
- * Anarcho-capitalism
- * Libertarian communism
- * Libertarian socialism
- * Syndicalism
By other criteria
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:
- Circular economy
- Collectivist economy
- Digital economy
- Green economy
- Information economy
- Internet economy
- Knowledge economy
- Natural economy
- Virtual economy
- Arthashastra – Hindu economics
- Buddhist economics
- Distributism – Catholic ideal of a "third way" economy, featuring more distributed ownership in a mixed economy
- Islamic economics
- Slave- and serf-based economy
- Wage labour-based economy
Capitalismgenerally features the private ownership of the means of production 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 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 economyThere 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:
- Georgism – socialized rents on land
- Mixed economy
- * American School
- * Dirigisme
- * Indicative planning, also known as a planned market economy
- * Japanese system
- * Nordic model
- * Progressive utilization theory
- * Social corporatism
- * Social market economy, also known as Soziale Marktwirtschaft
- * Socialist market economy
- * State capitalism
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, 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 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 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.
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'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 societyAn 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. Many economic systems overlap each other in various areas. There are also various mutually exclusive hierarchical categorizations.
List of economic systems
- Fascist socialization
- Hydraulic despotism
- Inclusive democracy
- Market economy
- Network economy
- Non-property system
- Palace economy
- Participatory economy
- Progressive utilization theory
- Social Credit
- Workers' self-management
Firm, government, economy or economic system