Towards a Well-Functioning Economy: The Evolution of Economic Systems and Decision-Making

By Webb, James L. | Journal of Economic Issues, March 2004 | Go to article overview
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Towards a Well-Functioning Economy: The Evolution of Economic Systems and Decision-Making

Webb, James L., Journal of Economic Issues

by Louis Haddad. Cheltenham, U.K.: Edward Elgar. 2002. Cloth, ISBN: 1858988926, $110.00. 294 pages.

The author intends "to see how and why economic systems work and change across time and space, and to establish some plausible conditions for a well-functioning economy" (p. 1). The book has three parts: first, an abstract taxonomy of economic systems which attempts to incorporate elements of mainstream theory (especially the treatment of principal-agent relations, information, and decision making); second, a historical discussion organized around modal types of economic systems (customary, command, competition, and composite); and third, a normative discussion of the well-functioning economy.

Louis Haddad's knowledge of centrally planned economies of the Soviet type and their transitions to decentralized, privatized systems leads him to believe that simplistic theories and historical narratives are inadequate. He sees historical centrally planned economies as quite diverse--Stalinist Soviet planning as the extreme but not typical case. Clearly Haddad objects to the simplistic centralized/decentralized dichotomy as presented by Frederick Hayek.

The taxonomy is based on five dichotomized dimensions: decision-making authority (centralized/decentralized), decision-making procedures (authoritarian/democratic), information flows (concentrated/diffused), decision-making criteria (economic/non-economic), and incentives (altruistic/egoistic), yielding a matrix of thirty-two ideal types. The values of each dimension are assumed to lie on a continuum whose extremes could be taken as ideal types. Thus decision-making procedures are characterized as authoritarian or democratic at the extremes and presumably some blend, compromise, or average (arithmetic or geometric mean?) along intermediate points of the continuum. Not only are the individual dimensions treated as continua but the product of all of the dimensions (that is, each of the thirty-two ideal types) is also treated as lying along a single grand continuum (with Soviet-style central planning versus a laissez-faire economic system as extrema).

The author undermines the taxonomy by suggesting that several of the thirty-two ideal types have not existed empirically and are logically implausible and by citing experience in which apparently highly centralized planned economies have a much more complex system of authority and decision making than stereotypical accounts suggest. The second section of the book, the historically based (but generalized) discussion of modal economic systems, does not rely heavily on the author's taxonomy. This, arguably, is the most interesting part of the book though it could use more detail and more specificity.

This book is quite well written and not without value. But there is a tension running throughout it between mainstream economic theory as applied to information, decision making, organizational behavior, and the like and a nuanced understanding of actual behavior in empirically existent socio-economic systems. This tension carries over to normative issues as well in which terms such as "efficiency" and "optimal" (as customarily used by neoclassical economists) are treated as unproblematic while simultaneously grasping for a more adequate and comprehensive conception of a well-functioning economy; this conception includes five normative categories (allocative efficiency, innovative efficiency, adaptive efficiency, macroeconomic stability, and distributional justice).

At places the book's perspective is that of the technocrat with a reliable tool kit who only has come up with a system that puts the "right" people operating under the "right" incentives, and so on in order to make the "right" decisions.

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