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The political economy of development
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economic system

Way in which humankind has arranged for its material provisioning. One would think that there would be a great variety of such systems, corresponding to the many cultural arrangements that have characterized human society. Surprisingly, that is not the case. Although a wide range of institutions and social customs have been associated with the economic activities of society, only a very small number of basic modes of provisioning can be discovered beneath this variety. Indeed, history has produced but three such kinds of economic systems--those based on the principle of tradition, those organized according to command, and the rather small number, historically speaking, in which the central organizing form is the market.

The very paucity of fundamental modes of economic organization calls attention to a central aspect of the problem of economic "systems"; namely, that the objective to which all economic arrangements must be addressed has itself remained unchanged throughout human history. This unvarying objective is the coordination of the individual activities associated with provisioning--activities that range from hunting and gathering in primitive societies to administrative or financial tasks in modern industrial systems. What may be called "the economic problem" is the orchestration of these activities into a coherent social whole--coherent in the sense of providing a social order with the goods or services it requires to assure its own continuance and to fulfill its perceived historic mission.

Social coordination can in turn be analyzed into two distinct tasks. The first of these is the production of the goods and services needed by the social order, a task that requires the mobilization of society's resources, including its most valuable and most resistive resource, human effort. Of nearly equal importance is the second task, the appropriate distribution of the product. This task must not only provide for the continuance of society's labour supply (even slaves must be fed) but must also accord with the prevailing values of different social orders, all of which favour some recipients of income over others--men over women, aristocrats over commoners, property owners over nonowners, or party members over nonmembers.

All modes of accomplishing the basic tasks of production and distribution rely on social rewards or penalties of one kind or another. Tradition-based societies depend largely on communal expressions of approval or disapproval. Command systems utilize the open or veiled power of physical coercion or punishment, or the bestowal of wealth or prerogatives. The third method--the market--also brings pressures and incentives to bear, but the stimuli of gain and loss are not usually within the control of any one person or group of persons. Instead, they emerge from the "workings" of the system itself, and, on closer inspection, those workings turn out to be nothing other than the efforts of individuals to gain pecuniary rewards by supplying the things that others are willing to pay for.

There is a paradoxical aspect to the manner in which the market resolves the economic problem. In contrast to the conformity that guides traditional society or the obedience to superiors that orchestrates command society, behaviour in a market society is mostly self-directed and seems, accordingly, an unlikely means for achieving social integration. Yet, as economists ever since Adam Smith have delighted in pointing out, the clash of self-directed wills becomes converted into just such a means within the setting of competition that is an indispensable legal and social precondition for a market system to operate. The unintended outcome of this competitive engagement of self-seeking individuals is the creation of the third, and by all odds the most remarkable, of the three modes of solving the economic problem.

Not surprisingly, these three principal solutions are distinguished by the distinct attributes they impart to their respective societies. The coordinative mechanism of tradition, resting as it does on the perpetuation of social roles, is marked by a characteristic changelessness in the societies in which it is dominant. Command systems, on the contrary, are marked by their capacity to mobilize resources and labour in ways far beyond the reach of traditional societies, so that societies with command systems typically boast of large-scale achievements such as the Great Wall of China or the Egyptian pyramids.

The third of the systems, that in which the market mechanism plays the role of energizer and coordinator, is in turn marked by yet another historical attribute, resembling neither the routines of traditional systems nor the highly personalized achievements of command systems. The mark of the market is the galvanic charge imparted to economic life from the energies unleashed by its competitive, gain-oriented setting. This charge is dramatically illustrated by the trajectory of capitalism, the only social order in which the market mechanism has played a central role. In The Communist Manifesto, published in 1848, Karl Marx and Friedrich Engels wrote that in less than a century the capitalist system had created "more massive and more colossal productive forces than have all preceding generations together." They also wrote that it was "like the sorcerer, who is no longer able to control the powers of the nether world whom he has called up by his spells." That creative, revolutionary, and often disruptive capacity of capitalism can be traced in no small degree to the market system that performs its coordinative task.