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Economic systems are popularly classified into various ideological types, with supplementary modifications for stages of economic development and productive structure. Until recently, the great ideological divide counterpoised capitalism and socialism, each with sub typologies. Communism was given pride of place as an important socialist variant.

Development divided the world into advanced and backward categories, allowing scholars to debate whether the gap between rich and poor was narrowing or widening. Productive structure served as an indicator of modernization. The economies of advanced countries once were highly industrialized, but as of the late twentieth century have stressed high-tech services. Agricultural economic systems for the most part were viewed as premodern.

These taxonomies are becoming increasingly obsolete as ideological concerns fade, displaced by concepts such as globalization, which imply that all economic mechanisms will be more or less the same in the future, characterized by state supervised competitive markets and harmonized by international institutions such as the International Monetary Fund and the World Bank. Also, many less-developed nations now possess advanced industrial high-tech sectors with cosmopolitan enclaves. Backwaters of the colonial type are vanishing. Globalization, however, should not be conflated with the reality of world government and a common economic mechanism. Systems remain diverse, but the cultural, political, and institutional forces distinguishing them have become more subtle.

Core System Models

There is no consensus of categorization for the new comparative reality. Two obvious criteria are political governance and civic liberty, but there is a reluctance to treat authoritarianism and civic repression as ingrained to important systems like those of China and Russia. Likewise, while it is widely understood that national markets are heterogeneous, there is a tendency to suppose that the distinctions are secondary. For example, although Chinese economic efficiency is handicapped by its ban on freehold property, imposed in accordance with communist doctrine, few analysts acknowledge that communism still matters.

Systems, nonetheless, remain important. They affect productivity, income, wealth, sustainable growth, inequality, social justice, and economic welfare. The best way to appreciate the nuances is to trace the evolutionary trajectory. There were three globally dominant economic systems in 1985, when Mikhail Gorbachev was installed as the last general secretary of the Soviet Communist Party: reform (1) communism, (2) American free enterprise, and (3) European Union (EU) social democracy (collectivism). Soviet, east European, Chinese, North Korean, Vietnamese, Laotian, and Cambodian communism all featured state ownership of the means of production, the criminalization of private business, and command planning, supplemented with various bonus incentive mechanisms. The adjective reform refers to this latter aspect, not reliance on leasing property and markets.

American free enterprise in 1985 was a system that paid lip service to laissez-faire while being strongly affected by huge state programs, intrusive regulation, and social transfers. It was often mischaracterized as a welfare state, suggesting that government expenditures were genuinely in the public interest rather than the consequences of political rent granting.

EU social democracy cloned the American model, with three differences. First, welfare was conceptualized in socialist terms, stressing income equality; free basic public services such as health, housing, and education; and civic participation. Second, state ownership of portions of the means of production was commonplace, and third, it discouraged entrepreneurship whenever change threatened the social welfare status quo.

The year 1985 was a watershed because it marked the onset of a worldwide liberalization movement to foster efficiency and growth by denationalizing state assets, expanding market scope, and strengthening the forces of market competition. Communist nations switched from reform to market communism, culminating in the destruction of the Soviet Union and the accession of most former east and central European communist states into the EU. But these negative results (from a communist perspective) were partly compensated by the economic invigoration of China, Vietnam, and more recently Laos. Liberalization, including state outsourcing, was pressed under Republican and Democratic presidential administrations in the United States as well as throughout the EU. In the process, all three systems declared their rhetorical support for civic participation, individual empowerment, and social justice while simultaneously adopting policies that increased income inequality and privatized aspects of the social safety net.

States everywhere reduced their role as affordable providers of basic services, preferring to act instead as indirect providers of outsourced services, market regulators, and social transfer agents. This convergence has blurred the lines among the core models. All now possess markets with professed progressive social missions and stress individual empowerment that is harmonized with social justice. All have legalized some types of private property, although communists still primarily rely on asset leasing. The differences that remain, however, are essential.

System Differences

Communism not only is wary of freehold property but insists on one-party political control (autocracy), privileged-party rent granting in the state and private sectors, and civic repression wherever social action jeopardizes party rule. The model installs the rule of men over the rule of law. Laws, including private contracts in communist countries, are predominantly instruments of state/party administration rather than universal principles to which the regime itself is held to account. Communist regimes reject democracy, the common law, and free markets in favor of insider rent granting and party rule with or without the facade of balloting, embellished with the rhetoric of prosperity, harmony, and social justice. The model is internally inconsistent and corrupt, with inferior long-run potential after advantages of economic backwardness in nations like China are exhausted.

The EU economy, by contrast, is a democratic, open society that prioritizes workers’ and minorities’ rights and empowerment, a broad social safety network, and soft power. It tolerates some individual liberties that conflict with this agenda but tends to restrain private ownership, business, and entrepreneurship whenever they limit social justice and political discretion, including rent-granting insider privileges. The net result has been what is often called “Eurosclerosis”: feeble economic growth, converging toward stagnation. The repercussions of the 2008–2009 global financial crisis and depression are likely to exacerbate the tendency.

The administration of Barack Obama, for a multiplicity of reasons, is pushing the U.S. free enterprise system toward EU collectivism, especially with regard to old-fashioned state-provided basic services such as health care. The comparatively feeble influence of trade unions and the working class in American politics, coupled with a stronger tradition of private-sector entrepreneurship, however, continues to make the two systems distinct. Long-term economic growth in the United States is apt to outpace its EU rival.

Systems Outside The Core Models

Beyond these fundamentals, it should be noted that economic arrangements in many nations throughout the globe fall outside the market communist, EU social democratic, and U.S. free enterprise paradigms. Japan has a communalist system that stresses team sharing, consensus building, and mutual community support. Individual utility seeking and profit maximizing are subordinated to communal concerns, violating all the fundamental axioms of classical Western market theory. Acquiescent satisficing, rather than individualistic utility seeking, prevails.

North Korea continues to rely on a pre-reform, terror control, communist command model with forced penal labor that causes tens of thousands annually to die prematurely. Russia has had a Muscovite model in place since the time of Ivan the Great that relies on authoritarian rent granting, revocable property rights, and the antidemocratic rule of men. Thailand, under the guidance of the crown and influenced by Theravada Buddhism, is experimenting with a sufficiency economy that subordinates material acquisitiveness to spiritual and ecological pursuits.

Thus, despite the homogenizing effects of market communism and global liberalization, national and transnational economic systems continue to diverge and flourish, with distinct agendas, property rights regimes, and regulatory mechanisms governing the public, private, and civic sectors (all aspects of rational economic choice making). Leaders no longer seem interested in perfecting archetypes such as democratic free enterprise, privilege-free social democracy, participatory democracy, or Marxist-Leninist communism. The evolution of the core transnational models instead is being diversely driven by deep-seated cultural forces and political expediency.

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