Classification of Economic Systems


One-dimensional Classification

 Convergence Hypothesis:

Formulated by the Dutch economist Jan Tinbergen and popular especially  in  1960's. Let us quote from the original paper:

Jan Tinbergen: Do Communist and Free Economies Show a Converging Pattern?
(Soviet Studies, Vol. XII, No 4. April 1961, pp. 333-41)

" WE are witnessing today the coexistence of two radically different economic systems, the “communist” and the “free” economies (according to western terminology) or the “socialist” and “capitalist” systems (according to the eastern vocabulary). The various names given to them are far from precise. Perhaps the most imprecise thing about them is the suggestion that each of these systems represents something well-defined and hence invariant. Reality shows both to be in permanent change. Analysis of the nature of this change can prove quite fascinating. This essay proposes to show that the changes are in many respects converging movements. "

"The main forces behind the changes may be brought under two broad headings. On the one hand each system is learning from experience and trying to overcome some of its own weaknesses. On the other hand the systems begin to influence each other more and more. While in the beginning the communist system was not taken seriously by the free system this has changed to a considerable extent. The communist system has been interested in some “capitalist” achievements from its very start. Now it is not so much imitating some of the western methods as learning economics from its own experience."

Convergent hypothesis starts from the assumption that both capitalism and socialism have good and bad features but distinct each from the other. Where capitalism has faults socialism found better solution and where socialism is defective, capitalism works just fine. Some examples:




full employment

business cycles

smooth growth



income inequality


high quality of products

low quality

 Countries are learning from each other, adopting institutions and methods that proved successful; capitalist countries are adopting planning, increasing the role of government and the degree of centralization, nationalizing key industries, banks etc.; socialist countries are decentralizing, adopting market incentives, allowing some private business; as a result all the countries are moving toward the center of the spectrum. In the center an optimal mixture of capitalism and socialism, that eliminated all the defects of both pure systems but preserved the positive traits is located. The convergence hypothesis claims that all the countries are over time converging  to that optimal mix of capitalism and socialism.  


During 1970s and early 1980s the convergence hypothesis lost its credibility. Mixed system failed to prove that they can work better than the pure systems; they tended to exhibit worst rather than best features of both. Decentralization and marketization reforms were discarded in socialist countries and orthodox central planning was restored. Capitalist countries abandoned planning, reduced government intervention and began to privatize public enterprises. 



   Types of the economic systems

  One-dimensional Classification

 Convergence Hypothesis

Vacuum Hypothesis

Two-dimensional Classification


Property Rights vs. Coordinating Mechanism

Command Principle vs, Central Planning

Three-dimensional Classification


What is Socialism

Socialist Countries
















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