Classification of Economic Systems

  Three dimensional Classification   


For explanation of the difference between command system and planning I will quote here from my paper "The Market Mechanism in a Socialist Economy" presented to a seminar at St. Anthony's College, Oxford in 1965. (Note: Keep in mind that this text is 35 years old and that I was at that time teaching at the Charles University in Prague.  For obvious reasons I used  the term "administrative methods of a highly centralized system of management" instead of "command economy" )

  " for many years Marxist as well as non-Marxist economists seem to have held the over-simplified belief that socialism should be as thoroughly equated to centralized planning as is capitalism to a free market. This equation, together with variant methods of distributing the national income and different class and political relationships, were considered to be the decisive characteristics distinguishing socialism from capitalism...

The traditional conflict between planning and the market mechanism arose from mistaken premises: both sides identified planning with the administrative methods of a highly centralized system of management

In other words, the term "planning" was used to designate a situation in which virtually all economic decision-making was concentrated in some central agency - in the sense of Barone's Ministry of Production - leaving individual enterprises merely to fulfill its orders. This view is well enough known from von Mises and subsequent discussion, and was until recently the majority view in the socialist countries.

   ... it is possible to distinguish between a system of highly centralized day-to-day management of the economy and long-term planning. To plan means primarily to anticipate the probable and preferable evolution of the economy in the future and, within the potential defined by objective characteristics, to choose the optimal path to that development.

Planning, so conceived, may be associated with a system of centralized administrative day-to-day management of the economy which aims at an exact fulfillment of the plan, but it may also be connected with an economic system where economic decision-making is largely devolved to the individual enterprise, and coordination of the whole is achieved by the market mechanism, not by decree.

Correspondingly, a centralized system of administrative management does not necessarily have to be linked with planning, if the orders given by the central agency to enterprises are not based on reliable projections of the long-term development of the economy. In fact the Czechoslovak economy was for a time managed only under annual plans, of which the period covered was so short that it could hardly be said to have been planned.

 In other words, while highly centralized administrative management negates the operation of the market mechanism, it does not necessarily coincide with planned development. The alternative to the market mechanism is administrative centralized day-to-day management of the economy - not planning.

Hence four types of economies may be distinguished:

  • first, an economic system based only on the market mechanism, without planning;

  • second, an economic system based only on administrative centralized day-to-day management, without planning;

  • third, a planned economy with administrative centralized day-to-day management; and

  • fourth, a planned economy with a market mechanism. "

  Note that separation of planning from command or "administrative centralized day-to-day management" brings another dimension into the classification. Of course, the full classification would have also the division between capitalism and socialism. In this case we could have eight distinct categories:

1) Unplanned market capitalism

5) Unplanned market socialism

2) Planned market capitalism

6) Planned market socialism

3) Unplanned command capitalism

7) Unplanned command socialism

4) Planned command capitalism

8) Planned command socialism

Today I would make the following modification:  Both plan vs. non-plan and  market vs. command divisions belong to the coordinating mechanism, however one is a short run coordination and the other is long run coordination. In the long run coordinative mechanism the opposite of plan is not just "non-plan" but primarily the coordination by "future markets". There is one distinction between short run and long run coordinative mechanism. No economy cannot work without a short run coordination, but it can work without long run coordination. Such an economy could be statically efficient but dynamically would be inefficient.

   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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