Capitalism Under a capitalist economic system, individuals own all resources, both human and non-human.

Governments intervene only minimally in the operation of markets, primarily to protect the privateproperty rights of individuals. Free markets in which suppliers and demanders can enter and exit the market at their own discretion are fundamental to the capitalist economic system. The concept of laissez-faire, that is, leaving the coordination of individuals' wants to be controlled by the market, is also a tenet of capitalism. In a capitalist system, individuals own resources, either through inheritance or through industry. The individual receives compensation for the use of resources by others. This, combined with inherited wealth of the person, determines an individual's spending power. The accumulated spending power and the willingness of individuals to allocate resources to consumption determine demand. The availability and costs of resources, together with the potential for profits of firms, determine supply. In a market system the demand of consumers combined with the supply of producers determine what and how much will be produced. Socialism Under a socialist economic system, individuals own their own human capital and the government owns most other, non-human resources— that is, most of the major factors of production are owned by the state. Land, factories, and major machinery are publicly owned. A socialist system is a form of command economy in which prices and production are set by the state. Movement of resources, including the movement of labor, is strictly controlled. Resources can only move at the direction of the centralized planning authority. Economic decisions about what and how much, how, and for whom are all made by the state through its central planning agencies. Communism Under a communist economic system, all resources, both human and non-human, are owned by the state. The government takes on a central planning role directing both production and consumption in a socially desirable manner. Central planners forecast a socially beneficial future and determine the production needed to obtain that outcome. The central planners make all decisions, guided by what they believe to be good for the country. The central planners also allocate the production to consumers based on their assessment of the individual's need. Basic human needs and wants would be met according to the Marxist principle, "From each according to his ability to produce, to each according to his need." Mixed Economic Systems

1996.In practice. and some are closer to the socialist end. most economies blend some elements of both market and command economies in answering the three fundamental economic questions: What and how much will be produced? How will it be produced? For whom will it be produced? Furthermore. West Publishing Company."(Roger A. All the real economies . page 812. "It is best to think of Capitalism and Socialism as occupying opposite ends of an economic spectrum. INTRODUCTION Classification of Economic Systems One-dimensional Classification Traditionally textbooks of economics presented what can be described as 'one-dimensional' classification of economic systems. the degree of the mix will vary. Pure capitalism and pure socialism were located on the opposite sides of the picture with a linear spectrum of 'mixed economies' between them. Third Edition. Arnold: economics. within any economy.) The pure systems were usually presented as hypothetical extremes that do not exist in real world. Countries' economies lie along the spectrum: some are closer to the capitalist end.

were considered a mixture of elements of both capitalism and socialism." The main ingredients that made the country either capitalist or socialist were type of ownership. but Yugoslavia although prevailingly socialist was a significant step away in the direction of capitalism.Wesley. while pure socialism consisted of public property and central planning. market and central planning. yet every nation in the world today is a reflection of some combination of these two systems and their ideologies. Addison . So for example USA was close to pure capitalism. All realworld economies are mixed economies. 1998. "Socialism and capitalism present themselves as two basic kinds. page 48) "No existing system adheres strictly to either pure capitalism or pure command socialism. (Fourth edition. While capitalism is characterized by the essential features of the private ownership of means of production and reliance on the market system (prices and profits). for example. Each country had specific shares of the two pure systems in its mixture.The ideal types of systems do not exist anywhere in the world today in their pure theoretical forms. Such a characterization appears. of economic systems in the world today. or models. with only minor admixture of socialist elements. Similarly USSR was close to pure socialism. but France or Great Britain had much larger dose of socialism in their mixtures. For example. Jr. we merely have to point to the . they represent a blending of the two models... socialism is normally associated with the public (social) ownership of the means of production and reliance on some form of planning. So pure capitalism was made of private property and market. Rohlf. in the textbook "Introduction to Economic Reasoning" by William D..

Third edition.(5) the dynamic capitalist economy of Japan. Shackelford. 1987.: (Riddell. (3) the welfare states of Scandinavian countries . pages 522-523. particularly Sweden.) Convergence Hypothesis: . Stamos: economics. (2) the African socialism of Julius Nyerere in Tanzania. Usually what differentiate these systems from each other. aside from basic ideology and property relations. are the roles of the market and the state in the economy.following examples to appreciate this fact: (1) The French socialism of Francois Mitterand in the early 1980s. (6) the economy od South Africa. Each example is testimony to the fact that the world's two great economic systems have successfully given birth to many different offspring. Addison-Wesley. (7) West Germany. A Tool for Understanding the Society. (4) Eastern Bloc nations such as Bulgaria and Romania.

333-41) " WE are witnessing today the coexistence of two radically different economic systems. Analysis of the nature of this change can prove quite fascinating. April 1961. No 4. " "The main forces behind the changes may be brought under . Perhaps the most imprecise thing about them is the suggestion that each of these systems represents something welldefined and hence invariant. Vol. This essay proposes to show that the changes are in many respects converging movements. XII. the “communist” and the “free” economies (according to western terminology) or the “socialist” and “capitalist” systems (according to the eastern vocabulary). Let us quote from the original paper: Jan Tinbergen: Do Communist and Free Economies Show a Converging Pattern? (Soviet Studies. Reality shows both to be in permanent change. pp. The various names given to them are far from precise.Formulated by the Dutch economist Jan Tinbergen and popular especially in 196 0's.

Now it is not so much imitating some of the western methods as learning economics from its own experience. On the other hand the systems begin to influence each other more and more.. increasing the role of government and the degree of centralization." Convergent hypothesis starts from the assumption that both capitalism and socialism have good and bad features but distinct each from the other. as a result all the countries are moving toward the center of the spectrum. socialist countries are decentralizing.two broad headings. that eliminated all the defects of both pure systems but preserved the . While in the beginning the communist system was not taken seriously by the free system this has changed to a considerable extent. Where capitalism has faults socialism found better solution and where socialism is defective. nationalizing key industries. capitalist countries are adopting planning. Some examples: Capitalism unemployment business cycles efficiency income inequality high quality of products Socialism full employment smooth growth inefficiency equality low quality Countries are learning from each other. allowing some private business. adopting institutions and methods that proved successful. In the center an optimal mixture of capitalism and socialism. banks etc. The communist system has been interested in some “capitalist” achievements from its very start. adopting market incentives. On the one hand each system is learning from experience and trying to overcome some of its own weaknesses. capitalism works just fine.

positive traits is located. they tended to exhibit worst rather than best features of both. In other words each system is viable when pure. It claimed that Capitalism and Socialism are mutually incompatible because they work on very different principles. During 1970s and early 1980s the convergence hypothesis lost its credibility. reduced government intervention and began to privatize public enterprises. As if it were a vacuum in between of them. If mixed the admixtures of the opposite system work against the original system so that the performance deteriorates. but in the mixed systems neither capitalism nor socialism works. . Capitalist countries abandoned planning. Mixed system failed to prove that they can work better than the pure systems. The convergence hypothesis claims that all the countries are over time converging to that optimal mix of capitalism and socialism. Vacuum Hypothesis: Another hypothesis began to dominate. Decentralization and marketization reforms were discarded in socialist countries and orthodox central planning was restored.

they are alternative principles used to solve the same problem. Both competition and central direction become poor and inefficient tools if they are incomplete. page 42): " most people still believe that it must be possible to find some middle way between 'atomistic' competition and central direction. Nor is 'planning' a medicine which. He wrote in 'The Road to Serfdom' (1944 edition. it cannot be combined with planning to any extent we like without ceasing to operate as an effective guide to production." "Although competition can bear some admixture of regulation. 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. can produce the effects for which one might hope from its thoroughgoing application. Nothing. taken in small doses. 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" . indeed. seems at first more plausible. Yet mere common sense proves a treacherous guide in this field.The vacuum hypothesis was probably first formulated by Hayek. or is more likely to appeal to reasonable people.

The second characteristic has two basic varieties: private property and public property. It allows to combine capitalism not just with market but also with command. Two-dimensional Classification In 1960s Gregory Grossman came with what can be called two-dimensional classification. In contemporary societies mainly market and command are used. Market and Command.In Eastern Europe the vacuum hypothesis was resurrected in 1960s during the attempts to reform their economies. tradition exists but does not dominate the other two. Grossman distinguished three different types of coordinating mechanisms: Tradition. This new approach to the classification of economic system is more flexible than the one-dimensional spectrum. He looked at each system from two distinct angles: 1) 2) Way how economic decisions are coordinated. If private property prevails the system is called "Capitalism". If public property prevails then it is called "Socialism". It was resurrected second time in 1990s when the strategy of transition to market economy was discussed. As an example of command capitalism . The first characteristic determines the "Coordinating mechanism". Distribution of property rights. For more details see the excerpts from the book "Economic Systems" by Gregory Grossman.

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

Albania Market capitalism e. Japan The main difference between this and Grossman's classification is replacement of the term "Command" by "Central Planning". (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.g. Dornbusch and Schmalensee shows the similar table as the one just above Primary method of allocating resources Markets Private Primary ownership of capital State Market socialism Classic socialism e. Anthony's College.g. Soviet Union. Hong Kong Central planning Planned capitalism e. For example the chapter 40 of "economics" by Fischer. This is not a trivial difference. South Korea.g. Yugoslavia. For obvious reasons I used the term "administrative methods of a highly centralized system of management" instead of "command economy" ) .The two dimensional classification penetrated also into some introductory economic textbooks. Hungary e. Many WestEuropean countries used central planning for some time after the WWII so that to call them "planned economies" might be quite appropriate. 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. As will be argued bellow. But it would be hardly appropriate to call them "command economies". Oxford in 1965. there is a significant difference between the "command principle" and "central planning".g. Under the heading "planned capitalism" many other countries than South Korea and Japan may fit.

not by decree. together with variant methods of distributing the national income and different class and political relationships.. 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. 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 . if the orders given by the central agency to enterprises are not based on reliable projections of the long-term development of the economy. 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 was until recently the majority view in the socialist countries. Planning.. This equation. a centralized system of administrative management does not necessarily have to be linked with planning." 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. were considered to be the decisive characteristics distinguishing socialism from capitalism. to choose the optimal path to that development.. so conceived. In fact the Czechoslovak economy was for a time . This view is well enough known from von Mises and subsequent discussion. within the potential defined by objective characteristics. and coordination of the whole is achieved by the market mechanism.leaving individual enterprises merely to fulfill its orders. 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. Correspondingly. .

and fourth. In other words. while highly centralized administrative management negates the operation of the market mechanism. " Note that separation of planning from command or "administrative centralized day-to-day management" brings another dimension into the classification. the full classification would have also the division between capitalism and socialism. without planning. The alternative to the market mechanism is administrative centralized day-to-day management of the economy . Hence four types of economies may be distinguished:     first. In this case we could have eight distinct categories: 1) Unplanned market capitalism 2) Planned market capitalism 4) Planned command capitalism 5) Unplanned market socialism 6) Planned market socialism 8) Planned command socialism 3) Unplanned command capitalism 7) Unplanned command socialism Today I would make the following modification: Both plan vs. a planned economy with a market mechanism. an economic system based only on administrative centralized dayto-day management. without planning. it does not necessarily coincide with planned development. a planned economy with administrative centralized day-to-day management.not planning.managed only under annual plans. second. Of course. an economic system based only on the market mechanism. third. non-plan . of which the period covered was so short that it could hardly be said to have been planned.

There is one distinction between short run and long run coordinative mechanism. To send me a message. Such an economy could be statically efficient but dynamically would be inefficient. however one is a short run coordination and the other is long run --. but it can work without long run coordination. command divisions belong to the coordinating mechanism.and market vs. No economy can work without a short run Nutrisystem Diet Coupons . In the long run coordinative mechanism the opposite of plan is not just "nonplan" but primarily the coordination by "future markets". please use one of the following addresses: okyn@bu. OK Economics was designed and it is maintained by Oldrich Kyn.

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