ECONOMIC SYSTEM

way in which humankind has arranged for its material provisioning. One would think that there would be a great variety of such systems, corresponding to the many cultural arrangements that have characterized human society. Surprisingly, that is not the case. Although a wide range of institutions and social customs have been associated with the economic activities of society, only a very small number of basic modes of provisioning can be discovered beneath this variety. Indeed, history has produced but three such kinds of economic systemsthose based on the principle of tradition, those organized according to command, and the rather small number, historically speaking, in which the central organizing form is the market. The very paucity of fundamental modes of economic organization calls attention to a central aspect of the problem of economic systems; namely, that the objective to which all economic arrangements must be addressed has itself remained unchanged throughout human history. This unvarying objective is the coordination of the individual activities associated with provisioningactivities that range from hunting and gathering in primitive societies to administrative or financial tasks in modern industrial systems. What may be called the economic problem is the orchestration of these activities into a coherent social wholecoherent in the sense of providing a social order with the goods or services it requires to assure its own continuance and to fulfill its perceived historic mission. Social coordination can in turn be analyzed into two distinct tasks. The first of these is the production of the goods and services needed by the social order, a task that requires the mobilization of society's resources, including its most valuable and most resistive resource, human effort. Of nearly equal importance is the second task, the appropriate distribution of the product. This task must not only provide for the continuance of society's labour supply (even slaves must be fed) but must also accord with the prevailing values of different social orders, all of which favour some recipients of income over othersmen over women, aristocrats over commoners, property owners over nonowners, or party members over nonmembers. All modes of accomplishing the basic tasks of production and distribution rely on social rewards or penalties of one kind or another. Tradition-based societies depend largely on communal expressions of approval or disapproval. Command systems utilize the open or veiled power of physical coercion or punishment, or the bestowal of wealth or prerogatives. The third methodthe marketalso brings pressures and incentives to bear, but the stimuli of gain and loss are not usually within the control of any one person or group of persons. Instead, they emerge from the workings of the system itself, and, on closer inspection, those workings turn out to be nothing other than the efforts of individuals to gain pecuniary rewards by supplying the things that others are willing to pay for. There is a paradoxical aspect to the manner in which the market resolves the economic problem. In contrast to the conformity that guides traditional society or the obedience to superiors that orchestrates command society, behaviour in a market society is mostly self-directed and seems, accordingly, an unlikely means for achieving social integration. Yet, as economists ever since Adam Smith have delighted in pointing out, the clash of self-directed wills becomes converted into just such a means within the setting of competition that is an indispensable legal and social precondition for a market system to operate. The unintended outcome of this competitive engagement of self-seeking individuals is the creation of the third, and by all odds the most remarkable, of the three modes of solving the economic problem. Not surprisingly, these three principal solutions are distinguished by the distinct attributes they impart to their respective societies. The coordinative mechanism of tradition, resting as it does on the perpetuation of social roles, is marked by a characteristic changelessness in the societies in which it is dominant. Command systems, on the contrary, are marked by their capacity to mobilize resources and labour in ways far beyond the reach of traditional societies, so that societies with command systems typically boast of large-scale achievements such as the Great Wall of China or the Egyptian pyramids. The third of the systems, that in which the market mechanism plays the role of energizer and coordinator, is in turn marked by yet another historical attribute, resembling neither the routines of traditional systems nor the highly personalized achievements of command systems. The mark of the market is the galvanic charge imparted to economic life from the energies unleashed by its competitive, gain-oriented setting. This charge is dramatically illustrated by the trajectory of capitalism, the only social order in which the market mechanism has played a central role. In The Communist Manifesto, published in 1848, Karl Marx and Friedrich Engels wrote that in less than a century the capitalist system had created more massive and more colossal productive forces than have all preceding generations together. They also wrote that it was like the sorcerer, who is no longer able to control the powers of the nether world whom he has called up by his spells. That creative, revolutionary, and often disruptive capacity of capitalism can be traced in no small degree to the market system that performs its coordinative task. set of principles and techniques by which the ownership and allocation of economic resources are decided and organized by society. There are two main types of modern economic system, the private- or free-enterprise economy and the centrally controlled and planned economy. Neither of these is to be found in practice in its pure form; in reality, all economic systems contain varying degrees of each. The basis of the private-enterprise system is the belief that when each member is allowed to pursue his rational self-interest the maximum common good will be generated. In effect, the greatest common good is simply a sum of its constituent parts, and anything that interferes with the pursuit of individual rational self-interest will reduce that sum. The mechanism that assures that the pursuit of myriad private goals will produce public good is the market, which impersonally sets prices for both the factors of productionland, labour, and capitaland the products of industry. With the factors of production in private hands, the proportions in which these factors are combined to produce different goods and services are determined through the price mechanism. If something is supplied in quantities greater than are required, the price will fall or production will be reduced, or both results will occur. If there is unsatisfied demand for any product, the price will rise and, with profits in prospect, production will be stimulated. The central-planning approach is based on the observations that the private-enterprise system accepts patterns of unequal wealth and income distribution and that, moreover, because of technological and other developments, some producers attain a size and importance that destroy the competitive conditions required for the operation of the market mechanism. The answer, for proponents of central planning, is public ownership of the means of production and the central determination and control of what is produced. In this way, inequalities of wealth and income are to be reduced or eliminated and economic activities organized according to agreed-upon social and political objectives. The developed economies of western Europe, North America, and Japan are described as private-enterprise systems, while those few countries that are still communist have centrally planned and controlled economies. (Developing countries have no established pattern; in many the rival philosophies coexist, often uneasily, with each other.) Most developed free-enterprise countries, however, recognize the criticisms of the pure market economy and accept the need for a degree of state involvement. In many of these countries there is a degree of state ownership of economic enterprises, mainly in public utilities and some basic industries. In addition, all governments take an active hand in influencing the nature and tempo of economic growth by controlling such key economic variables as the money supply, interest rates, and government expenditure and borrowing. In most cases, government action in these areas reflects a judgment relating to political, social, or economic objectives, but it is radically different from the prescriptions of the central-planning doctrine in stemming from the belief that freedom of enterprise is the most efficient way of maximizing economic growth. Although the extent of state involvement varies from country to country and may change with successive governments, Western countries agree that private enterprise is to be preferred on both philosophical and practical grounds. Centrally controlled economies begin with the assumption that state determination of economic goals and detailed state control of economic activities are desirable as matters of principle. In centrally controlled economies, state ownership of the means of production is the rule. Resources are allocated to investment, and the output of goods and services is decided and organized in accordance with a detailed economic plan that attempts to ensure, by administrative direction rather than incentive, that all parts of the economy and every enterprise perform according to a complex set of officially determined interlocking objectives. In practice, this has proved to be impossible. Despite a vast planning and controlling bureaucracy, the fulfillment of each of thousands of objectives cannot be guaranteed, yet such is the rigidity of the system that failure in one aspect will compromise the integrity of the entire plan. After the Stalinist era, Yugoslavia, Hungary, and China were among the communist countries that experimented with limited degrees of individual enterprise and decision making to overcome the inflexibility of the system without compromising state control over the basic aims of economic development. After the Soviet Union abandoned its control over eastern Europe in 1989, the eastern European nations retreated from the rigid controls of central planning and adopted the economic model that had been pioneered by Hungary in the late 1960s. In subsequent years the eastern European countries came to rely more and more on private enterprise and the price mechanisms of the free market. Meanwhile, the collapse of the Soviet Union and its communist government in 1991 was accompanied by the complete breakdown of that country's system of central planning. New governments in Russia and other former Soviet republics then began to make the difficult transition to an economic system based largely on private ownership and market price mechanisms. The demise of the Soviet Union left the world with only a few nations still relying on undiluted central planning and complete state ownership of the means of production. (See also economic planning.) Additional reading General texts Historical analysis is presented in Robert L. Heilbroner, The Making of Economic Society, 8th ed. (1989). An excellent presentation along more functional lines, well written but requiring some acquaintance with, or willingness to learn, economic theory, is Frederic L. Pryor, A Guidebook to the Comparative Study of Economic Systems (1985). Morris Bornstein (ed.), Comparative Economic Systems: Models and Cases, 6th ed. (1979), a book of readings, is also recommended. Capitalism Broad-ranging treatments of capitalism are surprisingly few, excepting the great classics, such as Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776); and Karl Marx, Capital: A Critical Analysis of Capitalist Production, 3 vol. (18861909; originally published in German, 18671894); both works are available in many later editions. Robert L. Heilbroner, The Nature and Logic of Capitalism (1985), treats the social formation of capitalism. Fernand Braudel, Civilization and Capitalism, 15th18th Century, 3 vol. (198284; originally published in French, 1979), is a wide-ranging overview, intensely interesting but more about history than capitalism. John Kenneth Galbraith, The New Industrial State, 4th ed. (1985), is a modern classic and very accessible. Andrew Shonfield, Modern Capitalism: The Changing Balance of Public and Private Power (1965, reissued with corrections, 1980), remains the best survey of alternative structures of modern capitalism, although it lacks any treatment of Japan. On the Japanese system, Yutaka Kosai and Yoshitaro Ogino, The Contemporary Japanese Economy, trans. from Japanese (1984), is useful but technical. The Economic Report of the President Transmitted to the Congress (annual), issued by the Council of Economic Advisers, is usually interesting with respect to current economic problems and is a rich source of data on the U.S. economy. The Soviet experience Ed A. Hewett, Reforming the Soviet Economy: Equality Versus Efficiency (1988), offers thoughtful criticisms and considered appraisals, as do two essays in Seweryn Bialer and Michael Mandelbaum (eds.), Gorbachev's Russia and American Foreign Policy (1988): Robert Campbell, The Soviet Economic Model, pp. 6595; and Seweryn Bialer, Gorbachev's Program of Change: Sources, Significance, Prospects, pp. 231299. Socialism Alec Nove, The Economics of Feasible Socialism (1983), is a brilliant criticism of centralized socialism and an imaginative projection of an alternative market socialism. An even more far-reaching proposal for economic and political democratization within a socialist framework is presented by the Yugoslav economist Branko Horvat, The Political Economy of Socialism: A Marxist Social Theory (1982).Events are changing too rapidly in China and eastern Europe to present considered retrospective accounts. The interested reader may consult two papers in The American Economic Review, vol. 78, no. 2 (May 1988): Jinglian Wu and Bruce L. Reynolds, Choosing a Strategy for China's Economic Reform, pp. 461466; and Tams Bauer, Economic Reforms Within and Beyond the State Sector, pp. 452456, which discusses Hungary and Poland. Robert L. Heilbroner