Types Of Economic Systems

We've used the phrase economic system a few times already in this book. But now it's time for a formal definition.

Economic system A system of resource allocation and resource ownership.

The Center for International Comparisons at the University of Pennsylvania (http://pwt.econ.upenn. edu/) is a good source of information on the performance of economies around the world.

An economic system is composed of two features: a mechanism for allocating resources and a mode of resource ownership.

Let's leave aside the rare economies in which communal ownership is dominant and those in which resources are allocated primarily by tradition. That leaves us with four basic types of economic systems, indicated by the four quadrants in Figure 3. In the upper left quadrant, we have market capitalism. In this system, resources are allocated primarily by the market and owned primarily by private individuals. Today, most nations have market capitalist economies, including all of the countries of North America and Western Europe, and most of those in Asia, Latin America, and Africa.

In the lower right quadrant is centrally planned socialism, under which resources are mostly allocated by command and mostly owned by the state. This was the system in the former Soviet Union and the nations of Eastern Europe until the late 1980s. But in less than a decade, these countries' economies have gone through cataclysmic change, moving from the lower right quadrant to the upper left. That is, these nations have simultaneously changed both their method of resource allocation and their systems of resource ownership.

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