I. INTRODUCTION TO COMPARATIVE ECONOMIC SYSTEMS

Not long ago, the world was divided into two seemingly monolithic systems - the socialist and the capitalist worlds. We even referred to first (capitalist), second (socialist), and third (developing) worlds. Now, everything has changed.

What we have left is one of the greatest economic experiments in history. Formerly socialist economies are transitioning into market economies, and we get to observe (and occasionally participate in) the construction of economic systems from the ground up, to learn how economic systems really work.

What we are learning is that economic principles really matter, that incentive matters and markets work, and that everything is so much more complicated than we had believed. Change is slow and difficult, information is limited, economic institutions and behaviors evolve slowly, and everything in a modern economy is dependent on everything else.

This field, comparative economic systems, is also evolving. Not long ago it focused on studying the comparative performance of socialism vs. capitalism, but that is becoming less relevant. Now, we are focusing on the diversity of institutions and systems even among the capitalist economies, the process of economic reform and transition, and the emergence of new alternatives.

A. The Classification of Economic Systems

How do you classify economic systems?

1. Marx used ownership, especially of what he called the means of production

Private, state, or common ownership - Private ownership of productive assets is predominant in capitalist economies, while state-ownership is more common in socialist economies.

Three aspects of property rights - the rights of control, right of transfer, and right to residual income. But private rights are never total; zoning laws, for example, prevent many uses of private property, and taxes limit residual income.

Included in this is the information (collection and dissemination) system
So we might refer to a planned vs. a market economy

Related to hierarchy, politics, institutions, firm structure, culture...

Are economic decisions centralized or decentralized?

A command/coercive economy vs. others using material or moral incentives

Efficiency, fairness or equity, state power

Mao's China had revolution as an end in itself

Others (Friedman) might argue that free enterprise (or consumer sovereignly) is a goal, not a means to an end.

1) Who makes the ultimate decisions?
2) What are the goals and objectives?
3) What are the institutions (relatively fundamental arrangements, formal and informal)?
4) What are the instruments (e.g., government policies that are relatively easy to change)?
5) What is the pattern of resource allocation and distribution?

Some people refer to Sweden as socialist, because equity is an objective and the government is heavily involved in redistributing income through welfare and labor market policies, but it is also a market economy with private ownership. A fascist economy like Nazi Germany used private ownership and state control for purposes of building state power, and incentives could be quite coercive. Thus, ownership appears to be among the most important characteristics.

All economies are "mixed" economies, not ideal types. Black markets helped the classical Soviet centrally-planned economy function. All capitalist economies have always had governments which intervened in the economy to some degree to change market-determined outcomes.

We need also to distinguish between economic and political systems. Communism is a political system in which the Party maintains a totalitarian control over society for the express purpose of creating an ideal communist economic system, but since such a system has not yet been created anywhere, the Soviet Union and related economies had a socialist economic system. Similarly, Sweden is a capitalist economy even though the party in power has usually been socialist in its political philosophy. Capitalist economies may be characterized by liberal democratic political systems, but many have been politically authoritarian (with fascism as the extreme).

In this class, we will tend to use the term "market economies" and "capitalist economies" interchangeably, and I will use Kornai's definition that a socialist country has a Marxist-Leninist party in unchallenged control. The term "communist" I will assume to refer to an ideal economic system that has not been implemented. There is overlap in these definitions, such as China's SME.

B. The Comparison of Economic Performance: Criteria and Difficulties

How do we compare economic performance?

Opinions change. During the Great Depression many Americans believed that Stalin's USSR worked better - partly because our economy was such a mess, partly because the USSR's economic problems took time to blossom, and finally because Stalin limited access to the truth. In the 1950s and 1960s, we feared the USSR because of its military strength, and because it seemed it was overtaking us. Now, we think that the latter fears were overblown, and it was always a mess.

So, it helps to have some objective criteria.

Common criteria:

1. Output

a. Output levels: should be adjusted for inflation, population, comparable currencies. A truly accurate measure would measure the net social value of all economic activities, rather than merely the final market value of goods produced.

b. Growth rates: change over time. But lesser-developed economies have the potential to grow at faster rates (since they start at a lower initial base).

c. Output composition: civilian or military goods; consumption, investment, or government goods; food vs. housing vs. luxury goods.
 

a. Static efficiency - Can a reallocation of existing resources increase output? Do prices reflect scarcity values? This includes technical efficiency (using the most productive technology), allocative efficiency (are resources distributed to the right producers, in the right mix?), and consumption efficiency (are consumers consuming the right mix of goods?). We often look at labor productivity, which is an incomplete measure at best.

b. Dynamic efficiency - Savings, investment, technological progress, etc.

3. Economic freedom - To own, buy, or sell what you want, to work and live where you want.

4. Economic security - Full employment, healthcare, pensions, disability, etc.

5. Stability - Prices, employment, or output. Does the economy suffer extremes?

6. Equity - The relative equality of wealth, incomes, or opportunity.

7. Long-term viability - Is the economic system adaptable? Does it maintain or destroy itself? Is it sustainable in its use of the natural environment?

Problems:

1) How do you weight these criteria? O = Sum_i a_i o_i where o_i are different outcome values and a_i are the weights.

Too many dimensions to the problem, weights are biased and subjective.

For example, some static inefficiencies may be dynamically efficient.

Also, economic freedom may trade off with security, and efficiency may be a trade-off with equity.

Comparing theoretical capitalism to actual socialism is poor science.

Statistics are measured differently for each country, e.g., unemployment in U.S. vs. China

GNP, GDP, or NMP?

Should output include black or grey markets? Nonmonetary goods?

Inflation is often hidden or repressed.

Do growth rates accurately adjust for capital accumulation, or natural resource depletion?

The problems of exchange rate comparability:

• Purchasing Power Parity is not true, at least in the short-run.
• Relative prices differ.
• Trade markets are segmented, distorted.
• Gershchenkron Effect - An economy looks better if measured in foreign prices, e.g., the CIA measurements of Soviet GDP were typically overstated.

5) The Source of Performance Differences may not be Economic System.

Bornstein argues that performance depends on:

1) The level of economic development - capital and technological, size and structure of economy, the degree of centralization.
2) Social and cultural forces - beliefs, values, education, social mobility, and the role of ideology in influencing, rationalizing, and disguising.
3) The Natural Environment - geography, climate, resources, population.