Classification of Economic Systems


One-dimensional Classification

Vacuum Hypothesis  


When the Convergence hypothesis were loosing its power another  hypothesis began to dominate. It claimed that Capitalism and Socialism are mutually incompatible because they work on very different principles. If mixed the admixtures of the opposite system work against the original system so that the performance deteriorates. In other words each system may be viable when pure, but in the mixed systems neither capitalism nor socialism works. As if it were a vacuum in between of them.

The vacuum hypothesis was probably first formulated by Hayek. He wrote in 'The Road to Serfdom' (1944 edition, page 42):

" most people still believe that it must be possible to find some middle way between 'atomistic' competition and central direction. Nothing, indeed, seems at first more plausible, or is more likely to appeal to reasonable people, than the idea that our goal must be neither the extreme decentralization of free competition nor the complete centralization of a single plan but some judicious mixture of the two methods. Yet mere common sense proves a treacherous guide in this field."

"Although competition can bear some admixture of regulation, it cannot be combined with planning to any extent we like without ceasing to operate as an effective guide to production. Nor is 'planning' a medicine which, taken in small doses, can produce the effects for which one might hope from its thoroughgoing application. Both competition and central direction become poor and inefficient tools if they are incomplete; they are alternative principles used to solve the same problem, and a mixture of the two means that neither will really work and that the result will be worse than if either system had been consistently relied upon"

In Eastern Europe the vacuum hypothesis was resurrected in 1960s during the attempts to reform their economies. It was resurrected second time in 1990s when the strategy of transition to market economy was discussed.


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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