Tuesday, June 19, 2012

Alternatives to Socialism and Capitalism, the 3 Ideal Type Model

Something that I believe I have remarked on before is that I am rather dissatisfied with the crude portrayal of the choice between socialism and capitalism given by politicians, sometimes by the media, and that is expressed rather often on comment boards and by the public generally. I personally don't believe that socialism and capitalism accurately capture the choices we face in modern society or the factors that impact society, whether growth, social mores, or politics.

Of course, denigrating a perspective isn't worth much unless an alternative can be suggested. Personally, I prefer a model used frequently by economic historians, the 3 ideal type model.* Rather than a simple line between socialism and capitalism, this model separates economic organization into three ideal types, customary, market economies, and command economies. All three types are visible throughout history and all societies have elements of all three.

The first type, customary or traditional economies, are those dominated by role and custom. This can mean guild organizations, functional age groups (in some very primitive economies), gender roles, household economies, castes, and many other variants. At its most basic, these economies are organized on the notion of reciprocal obligations, each actor has a defined role to play and gets some sort of compensation in return, without the need for money or barter (though more complex, mixed interactions are possible, with either culturally proscribed fair prices or defined occupational roles but with money exchange occurring for the actual production). In the modern economy, the household is the primary example, I cook and my girlfriend cleans house. It would also involve other family obligations, or something as simple as rotating who hosts dinner parties among a group of friends.

The second type, market economies, needs little additional explanation. Primarily this means money exchange, though it can also apply to quasi-monetarized barter (such as where a series of commonly traded items have established relative values, a common feature of very primitive economies). Generally speaking, this type of economy has been the most economically efficient and economic growth can largely be attributed to the market economy supplanting the traditional economy as the primary means of exchange.

The third type, command economies, are dominated by authoritative allocation. The stereotypical form for this is corvee labor, such as that used in ancient civil engineering projects (though it is notable that some societies, such as China, were able to conduct some smaller scale engineering through means of the customary economy). Command economies also describe any operations where authority, and generally dependency, dominate as well. This would include many obligations imposed by the state, like jury duty, but would also include relations such as those between employers and employees, non-customary demands within the family (do X because I say so, rather than do X because it's your assigned chore), and duties imposed on members within any organization. The main identifying mark is that compliance is based either on assumed authority (X is representative of the state, church, your father, etc. and should be obeyed) or on compulsion (you'll be fined, ostracized, fired, written up, etc. if you don't comply)

All economies are necessarily a mix of the three ideal types, ranging from a dominant command economy in the Soviet Union (pretty much uniquely so, though I have seen claims that the command economy dominated in ancient Egypt as well), dominant customary economies throughout most of history, and the dominant market economies of today. Even in the more extreme types some aspects of all three exist, the Soviet Union was never able to stomp out household production (despite strenuous efforts to do so in some aspects of daily life) or the black market (or even eliminate money as a whole). Our market economy contains command economies within individual corporations and in the state, as well as important customary aspects within the household.

I am pointing these out because I think it is a superior way of understanding historical economic growth as well as the choices that we face in our society with regards to economic and social change. Broadly, we have evolved towards a market economy from a traditional economy, this is a major determinant of our economic growth. Secondarily, customary economic institutions have been replaced by command economy decisions of the state, this is critically important to understanding why growth stalled out in the customary market economy of China while it proceeded in the west where state determinations replaced many customary institutions. It applies today because the socialist/capitalist dichotomy obscures the drag that the customary economy can place upon growth, even in modern societies.

I'll do some more posts exploring how I use these three ideal types for thinking about modern economic issues and state policies. I find it leads to much clearer thinking on likely outcomes and tradeoffs than the standard two dimensional model. To make sure it is clear, this model is not a critique of traditional economic analysis which centers on the market economy. It is meant to make trade-offs clear at the margins between the market economy analyzed by economists and the other two forms of economic organization present in modern societies.

* I've often seen this used by economic historians, with various changes in the names of the types and precise details but the general ideas are the same, but I'm not really sure of its evolution. There is an excellent discussion of elements of this in Volume 10 of The Cambridge History of China (as well as a discussion of the difference between economies based on small scale competitive marketing and economies based on personal networks), from there I tracked it back to Hicks's Theory of Economic History (I have no particularly strong opinion on the work as a whole, the 3 ideal types I find more useful).


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  2. Can you refer a book that discusses these types in detail?

    1. Unfortunately I don't know of any book that goes into great detail. The best discussion I've seen is in Volume 9 of the Cambridge History of China, specifically, I believe the chapter economic developments 1644-1800 by Myers and Wang. I'm certain there must be an undergraduate economic history book that would cover this, but what I know of the field I've taught myself by tracking down bibliographical references. The Cambridge history references Hicks, but his Theory of Economic History only has about a page on the command economy and customary ideal types, the focus of his book is the transition to the market dominated economy rather than an exploration of the ideal type structure. I've been looking for a good reference to hand out myself, it would be far easier to refer people to a single volume than it would be to piece together the concept second hand through reading economic histories devoted to other topics.

      As a caveat, I'd also note that economic historians have generally been averse to trying to apply this model to modern economies and that I haven't seen any modern economists use it for descriptive purposes either. Personally, I like this framework a lot and think it is underused for exploring modern economies on a theoretical level, but it remains a perspective primarily used for pre-modern economies.

      I'd also note that it seems more common among China scholars than among other specialties, and that most references I've seen to it are from the past 10 years or so. References to Polanyi on non-market economies are more common, but I don't always see this paired up with the command economy as a third point. I believe the popularity of it with China scholars is that China fulfilled the basic neo-classical framework for growth, strong private property rights and a highly developed market economy (alongside a superficial state which had little influence on the internal market), but developed into a tightly networked economy based on personal relationships rather than the classical model based on anonymous market entities trading with each other primarily on an analysis of the price signal. Explaining this divergence from the west requires a different model from the public/private divide that tends to dominate classical explanations of western advance (I group Marxist perspectives in with the classical perspective since they share similar assumptions regarding the interaction between the individual and markets).

      As a further complication, I've seen some scholars separate out these concepts differently, such as distinguishing monetization from the market. But I find the 3 ideal type model more flexible and intuitive on the whole.

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