Excerpts from 

Economic Systems

By Gregory Grossman





Every economic unit in a social economy is dependent on innumerable other units ...Without some mechanism to provide ... coordination ... a modern economy would not be able to meet even the most basic needs of its citizens. 
There are three such coordinating mechanisms,: tradition, the market mechanism, and command.


By tradition we mean generally accepted, customary, and persistent specific patterns of relationship among economic units or agents. ....... In a modern economy, the role of tradition is relatively much smaller but by no means negligible. ... tradition has many advantages, perhaps the most important of which is the predictability of the relations and behavior patterns in question.... Its chief drawback is obviously the slowness with which it adjusts to changing conditions ...  at times the preservation of some measure of tradition may actually facilitate orderly transition to a modem economy and society 


Market Mechanism
in all more or less advanced economies (other than those of the Soviet type), it is chiefly the market mechanism that allocates resources among various units of activity; ....the market mechanism operates in a social economy when the following three conditions are met:

       (1) The individual economic units by and large decide themselves what, how, where, and when they produce and consume.

        (2) They do so largely with reference to the terms on which alternatives are available to them—i.e., with reference to prices in the broadest sense of the word.

        (3) Prices respond, more or less, to the forces of demand and supply for the individual goods or factors.

The end result tends to be the equilibra­tion of demand and supply and the coordination of the economic activities of innumerable individual units and agents. ...More or less automatically and impersonally, in highly complex economies as well as in relatively simple ones, day after day, the market mechanism—Adam Smith‘s “invisible hand“—directs and coordinates the decisions and activities of millions of independent, dispersed economic units and agents. With all its problems and imperfections, it is surely one of the most remarkable of social institutions. 



Yet the same directing, resource allocating, coordinating, and income distributing functions can be accomplished in a social economy by means that are in a sense the very opposite of the automatic and impersonal market mechanism; namely, by means of the command principle ... the individual economic units (though probably only the firms and not the households) are ordered what, when, where, how, and how much to produce and consume. .... these commands (directives, orders, targets, “plans“) derive from some sort of conscious attempt (“planning“) to coordinate the activities of the individual units and to direct the economy as a whole toward certain definite goals.
The command principle implies .. relatively little independence or autonomy ... the presence of superior authority ... a hierarchical organizational structure; and coordinative planning ..




According to Mechanism
One way to distinguish among economic systems is according to the prevailing coordinating mechanism. While it is possible to devise abstract models of economic systems that contain only one of the three social mechanisms, actual contemporary economies ...contain all three in varying proportions. However, one of the social mechanisms usually predominates; accordingly, we speak of a traditional economy, a market economy, or a command economy. 


According to Ownership
Another major way in which economic systems differ is according to the prevailing ownership of productive assets. “Capitalism“ is, of course, a system in which productive assets are privately owned –  “Socialism“  is an economic system in which most productive assets are publicly owned, usually by the state.... The term “mixed economy“ is often applied to an economy in which there are substantial amounts of both private and public ownership side by side.


It used to be thought that every capitalist economy would be governed by the market mechanism, and every socialist economy would forswear the market mechanism in favor of command. True, virtually all capitalist economies that have existed in history have been market economies; but the Nazi economy in Germany (say, between 1936 and 1945) may be called a capitalist command economy. And while most socialist economies—those under communist control—have been command economies most of the time, there is the important historical case of the USSR in the twenties and even the more important contemporary instance of Yugoslavia since the early fifties, both of which have been socialist market economies.




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