Classification of Economic Systems

 

Two dimensional Classification

 

Property Rights vs. Coordinating Mechanism

 

In 1960s Gregory Grossman came with what can be called two-dimensional classification. He looked at each system from two distinct angles:

1)       Way how economic decisions are coordinated.

2)       Distribution of property rights.

The first characteristic determines the "Coordinating mechanism". Grossman distinguished three different types of coordinating mechanisms:  Tradition, Market and Command. In contemporary societies mainly market and command are used, tradition exists but does not dominate the other two.

The second characteristic has two basic varieties:  private property  and public property. If private property prevails the system is called "Capitalism". If public property prevails then it is called "Socialism".

For more details see the excerpts from the book "Economic Systems" by Gregory Grossman.

This new approach to the classification of economic system is more flexible than the one-dimensional spectrum. It allows to combine capitalism not just with market but also with command. As an example of command capitalism Grossman pointed out Nazi Germany. Similarly Socialism may have two varieties command socialism and market socialism. 

Most of the scholars in the Comparative economic Systems area adopted Grossman's classification and in some cases modified it further so that the real economies better fit in it .

In the following animation I use Grossman's classification with a small modification. Notice that the two-dimensional classification also allows richer specification of mixed economies. Now we can mix market and command or capitalism and socialism or both. It has also nontrivial implications for the convergence and vacuum hypotheses. For example there may be a vacuum between market and command (do not mix!) but convergence of capitalism and socialism.

 

 

Command Principle vs. Central Planning

 

 

The two dimensional classification penetrated also into some introductory economic textbooks. For example the chapter 40 of "economics" by Fischer, Dornbusch and Schmalensee  shows the similar table as the one just above                         

 

 

Primary method of allocating resources

Markets

Central planning

Primary ownership of capital

Private

Market capitalism
e.g. Hong Kong

Planned capitalism
e.g. South Korea, Japan

State

Market socialism
e.g. Yugoslavia, Hungary

Classic socialism
e.g. Soviet Union, Albania

The main difference between this and Grossman's classification is replacement of the term "Command" by "Central Planning". This is not a trivial difference. As will be argued bellow, there is a significant difference between the "command principle" and "central planning". Under the heading "planned capitalism" many other countries than South Korea and Japan may fit. Many West-European countries used central planning for some time after the WWII so that to call them "planned economies" might have been quite appropriate. But it would be hardly appropriate to call them "command economies".

The difference between Command Economy and Central Planning relates to the difference between the short-run and long-run coordination. It was mostly overlooked and it gave me opportunity to introduce a third dimension into the classification of economic system. It is discussed in the following section.

   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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