Comparative Economics: A Reference Guide

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Economic systems have changed and been modified over time. From the 1980s to the present a strong expansion of economic internationalism has occurred. Many European countries have joined the European Union. The United States, Canada, and Mexico established the North American Free Trade Agreement (NAFTA) in the early 1990s. The process of economic integration shapes political and social institutions as well as expands the role of multinational corporations. Business decisions made by executives of multinational corporations must be consistent with the type of economic system operating in that specific nation.

A comparative economic systems course is an important addition to business and economics curriculum at any university. Employees of multinational corporations need to learn and understand the different types of economic systems. The process of globalization and its impact are becoming of greater importance since the collapse of the USSR. Globalization, which is the interconnection of societies and the interdependence of economies, is an important factor in the decision-making process of policy makers. As the world becomes more internationalized, a growing, rather than declining, interest in comparative economic systems is expected. As long as diversity and globalization are here to stay, the study of different economic systems, in theory and practice, is essential in the 21st century.

Capitalism, in its purest theoretical form, did not exist even during the time of classical economists such as Adam Smith, David Ricardo, and others, with whom it has been associated. In An Inquiry into the Nature and Causes of the Wealth of Nations, published in 1776, Adam Smith did not use the word "capitalism;" instead he referred to "commercial society." Capitalism is an abstract idea rather than a description of historical situations. It can be distinguished from other economic systems because it is a type of system in which individuals, singly or jointly, can privately own properties and possess the right to use these resources. Furthermore, inheritance is essential for the existence of private property and provides a powerful incentive for the accumulation of wealth. Freedom of enterprise, competition, and a limited role of government are basic institutions of capitalism.

At the other end of the spectrum there are currently four types of modern economic systems namely, market capitalism, command capitalism, market socialism, and command socialism. These four systems are theoretically possible. However, in practice, actual modern economies are variations of these pure types of modern economic systems; they are mixed economic systems. In market capitalism, private firms and households are motivated by self-interest and utility maximization. Command capitalism is characterized by private ownership of production, but state coordination of economic and political activities. In the Lange-Lerner model (Lerner, Abba P. The Economics of Control." Principles of Welfare Economics. London: Macmillan: 1944), the Central Planning Board performs the functions of the market in market socialism. Command socialism lacks a free market and implies that economic decisions are government mandates. The government has complete authority and control over …