CHAPTER 1
COMPARATIVE ECONOMIC SYSTEMS

Economics is the study of economic utility-seeking under conditions of scarcity at work and play, and implies rational choice. It tacitly assumes that the utility sought is exclusively associated with consuming goods and services including leisure. Vindictive utility-seeking, which diminishes personal welfare by subordinating rational choice in order to get even with enemies, is noneconomic. People may feel better relinquishing reason for malice or love, and act sensibly on this basis, but their behavior is explained by psychological, physiological, cultural, and ethical principles properly the domain of other disciplines.

The collective outcomes of individual utility-seeking are shaped by people's preferences, technologies, mechanisms, institutions, and rules of personal interaction. These elements are the building blocks of economic systems.

The performance of economic systems can be evaluated "positively" by monitoring variables like the size and growth of the gross domestic product, and "normatively" by making value judgments about matters like income distribution and social justice.

Theoreticians frequently try to assess both the "positive" (technical efficiency), and "normative" (welfare) dimensions of aggregate economic activity by making assumptions about the rules of the game governing utility-seeking. If perfect competition, or perfect planning, is assumed it is relatively easy to interpret economic outcomes and offer policy guidance.

However, perfect competition and perfect planning rarely, if ever, occur. They may apply in some activities, but others will be inefficient, imperfectly competitive (planned), obligatory (force), and state-governed (command, administration and regulation).

Ethics, politics, and culture play important roles in determining the performance of systems. Communal cultures may proscribe or constrain individual utility seeking, fundamentally altering the rules of the economic game, while competitive societies may over stimulate self-seeking. Ideology may also be a factor, but is usually subsidiary. Real economic systems are governed primarily by specific individual motivations, technology, and the rules of interpersonal utility-seeking, rather than idealistic principles.

ECONOMIC SYSTEMS

Economic systems are sets of self-regulating and culturally regulated "utility-seeking" activities transacted through voluntary exchange, reciprocal or unilateral obligation, and assignment, with scarce resources. A utility-seeking activity may involve work (training, producing, managing, financing, distributing, and governing), or leisure. The utility sought can be any experience consumers desire (demand). A utilitarian experience itself is not "economic," although it usually is the result of "economizing," understood as the rational choice required to achieve higher levels of utility. Scarcity depends on demand and is connected derivatively with supply side sacrifices called "tradeoffs" or "opportunity costs." Most utility-seeking activities are economic, but if resources are free, preferences are inconsistent, or rational choice is overwhelmed by passions like domination, malice, and love, these pursuits are noneconomic. The self-regulating principles, or culturally determined rules of conduct governing patterns of utility-seeking in economic units, or nations, and their corresponding mechanisms and institutions, define and distinguish economic systems.

This broad concept of economic systems as diverse self-regulating or culturally shaped utility-seeking search processes pursued through markets, state governance, and obligation, involving the consumption of goods and services in a world with scarce resources, implies that there may be many ways of achieving goals, and that economizing pervasively affects our lives. However, it is often better to utilize a more restricted framework which focuses on work. Although work and leisure both involve utility-seeking, "work" serves as a proxy for the time people devote to producing, while the remainder of the day is reserved for consuming, including romancing, family building, socializing, politicing, and philosophizing. Materially oriented societies stress work over leisure. Spiritual communities may spend more time on contemplation, working only to secure necessities. Often when people speak informally about economics and economic systems, they have this "work-leisure" dichotomy in mind. Economic activity is perceived as "making a living," as a means to an end (leisure), rather than as a component of a larger economic utility-seeking process which includes leisure. This convention is adopted throughout this text when discussing the gross domestic product, a concept defined exclusively for work activities, but the broader notion of economics as a process covering all scarcity constrained utility-seeking is retained when appraising welfare and comparative economic merit.1

MECHANISMS AND INSTITUTIONS

Economic activities can be conducted through self-direction, voluntary exchange (markets), and external regulation (obligation and governance). Individuals can command themselves. They can voluntarily negotiate with others, in which case they are "in the market." And they can be governed by state authority (a supply side imposed transaction) or obligation (custom, or nongovernmental compulsion).

Each mechanism takes many forms. Individuals can use a variety of principles to direct themselves. The rules of market entry and conduct may vary, and obligation and governance may involve mutual support, criminal coercion, edicts, commands, administration, programs, and market regulation by states and private associations.

Organizations which set formal rules of economic conduct and establish compliance mechanisms are called economic institutions. They are distinct from custom, which constitutes an economic mechanism in its own right operating independently, or influencing markets and government, although some economists like Douglas North treat obligation as an aspect of economic institutions. Organizations in this restricted sense vary widely, and sometimes are the defining feature of economic systems. The Yugoslavian economy under Tito was classified as a labor-managed system because managerial decisions were made by workers' councils. The misnomer "Soviet" or workers' council conveyed a similar idea in the early days of Bolshevik rule.

Economic mechanisms also have been employed to classify systems. The classical distinction is between markets and plans; voluntary negotiated transactions (free enterprise) and state command. These concepts seemed to epitomize the distinction between the Soviet and American systems. But they were also a source of misunderstanding because they misleadingly implied that these principles were mutually exclusive; that governance in America and market forces in the USSR were negligible.

These mischaracterizations highlight a deeper problem. Markets, governance, and obligation are almost always complementary because individuals seldom are able to voluntarily agree on and honor rules for conducting business and enforcing contracts. In the real world, some obligation and governance is usually needed to establish markets, and systems are typically mechanistically mixed. Even authoritarian regimes like Stalin's found it expedient to permit a variety of voluntary exchange activities.

UTILITY-SEEKING

The primary force propelling economic activity is utility-seeking. The utility sought applies both to work and leisure, and is conceived as a set of psychic benefits like pleasure, derived from consumption. Economic utility-seeking is considered rational if it is dispassionate and makes people feel better, or enhances their well-being, whether they spend their money on dental care, laundry services, or gourmet delights. Economic utility-seeking, including the pursuit of leisure, always involves choices about what and how much to acquire (work) at prevailing prices. It is usually beneficial, but can be detrimental if reasoned choice is deranged by mania or addiction. And utility-seeking ceases to be economic at all when people act without weighing alternatives. The intensity with which people, groups, and authorities utility seek is often influenced by competition, suasion, and fear.

UTILITARIAN ETHICS

Economic utility-seeking in the most general case is unrestricted. Individuals are permitted to consume goods and services and can employ others for profit, treating people fairly, or manipulating them for their own advantage. Each individual's conduct will depend on his or her utilitarian ethics, and the vulnerability of others. If everyone adheres to the golden rule, doing unto others as they would have others do unto them, all will be treated well,2 forging social contracts like those advocated by John Locke (1632-1704) to avoid the "war of all against all" which Thomas Hobbes (1588-1679) believed typified human relations. Otherwise scoundrels may victimize the virtuous, restraining trade, domineering, cheating, stealing, and subjugating for their own benefit. "Rational" economic utility-seeking alone thus does not assure good outcomes, and the merit of economic systems often depends heavily on utilitarian ethics.

ECONOMIC MISCONDUCT

Every economic system is vulnerable to four types of economic misconduct. Individuals may be indolent,...