ECONOMIC  Systems

Delimitation of fundamental types

Explore the fundamental types of economic systems, which provide a solid foundation for understanding them.

Fundamental Types Delimitation –

the Neoclassical Support

Considering the general modes of organizing economic activities is possible through the way one answers three fundamental questions:

(1) Who decides?;

(2) What are the dominant motivations for the decision?;

(3) What are the key institutions of the framework in which decisions are made?;

The coherent set of answers to these questions configures the basic characteristics of theoretical models of the economic system. In this regard, Raymond Barre (1924-2007) distinguishes three main systems: natural economy, market economy, and command economy.

However, economic reality could not be separated into these mentioned systems; they represent theoretical idealizations that coexisted and interrelated, and the assessment of this reality as being organized under one of the three forms is made according to the predominance that each holds within the entire economic activity.

Natural Economy

Sometimes referred to as "autarkic economy," other times "household economy," and often "non-economy," natural economy represents the economic system in which each community meets its needs with the help of its own resources (own production), without resorting to exchange.

The main production factors available are allocated at the level of this closed system, aiming to satisfy needs within the limits of the production obtained. Each individual household carries out all activities, from procuring various raw materials to preparing them in the form required for consumption.

The fundamental motivation for decisions is the creation of goods intended for self-consumption, and the key institution is represented by the family household, economically isolated, in which "production and consumption are combined into a single life-giving function" (Alvin Toffler, sheet no. 4). Over time, natural economy witnesses a distinct trend of contraction.

The division of labor, the autonomy of producers, and the monetization of exchanges contribute to the assertion of the forms of exchange economy, reserving the older system a marginal place within the overall economy.

Market Economy

The general mode of organizing the economy based on mechanisms that highlight the forces of the market and in which the relationship between supply and demand determines the allocation and use of available resources is called a market economy (free economy).

Economic activity is driven by a large number of independent decisions (the multitude of decision centers defines a multipolar economy), and the initiative belongs to the individual. The main motivation of any decision is the pursuit of the greatest monetary gain, and the driving force of economic activity is competition. The key institutions of the framework in which decisions are made are private property (the basis of free initiative) and the market, the mechanism capable of reconciling, through continuous adjustments, autonomous decisions that would otherwise generate anarchy.

The current type of market economy in developed countries retains the following characteristics:

(a) it is a multipolar economy (see the multitude and variety of decision centers);

(b) it is an enterprise economy (the microeconomic universe represents the reference in national economic activities);

(c) it is a calculative economy in monetary expression (money signifies the common denominator of activities carried out by agents, responding to the requirements of quantifying expenses and results);

(d) it is an economy in which the state exerts indirect and global intervention (it does not abolish, but complements the market, correcting its failures);

(e) it is an economy that makes profit the essential mobilizer of activities.

The system of the free economy is not unitary but presents itself in a "mosaic reality" of situations, local (national) practices, and experiences.

Command Economy

When economic initiative returns to a central authority, and the main decisions come from a single center, a command economy (unipolar) is established.

The dominant motivation is associated with the general interest of the national community, with concerns for social welfare, the achievement of which also depends on fulfilling personal interests. Profit becomes an indicator of good management, without being considered a stimulus for economic activity. State ownership of production goods and the central (indicative) plan represent the key institutions of this system.

In the same vein, the market is not free; in fact, it deviates from its role as a direct mediator of the contract between supply and demand, between producers and consumers.

In general terms, command economy can record some results when it comes to large infrastructure works; however, the allocation based on administrative-bureaucratic criteria of resources and the lack of fundamental human freedoms hinder the establishment of an economic-social framework compatible with the requirements of sustainable development.