World Development And Economic Systems: Theory And Applications
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World Development And Economic Systems: Theory And Applications

Theory and Applications

S I Cohen

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eBook - ePub

World Development And Economic Systems: Theory And Applications

Theory and Applications

S I Cohen

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About This Book

Mainstream economics generally assumes a universalistic market-oriented economic behavior that drives countries to adopt one economic system, with marginal variations. This book extends the scope of theory and applications by asserting that other distinct behaviors evolve and dominate in other economic systems. Systemic differences arise from distinct social, political and economic behavioral-motivational types that associate with intensive agent activity in household, state and firm settings. External conditions, historical events, and agent interactions ultimately result in domination of one motivational type over others; thus determining distinct profiles of structure, conduct, and performance in different economic systems, that are generally observed in the adopting countries.

The book validates the theory empirically, traces the historical evolution of the respective economic systems in the world regions and evaluates their responses to various systemic failures such as monopoly, uncertainties, externalities and collective needs. The evaluation is extended to structural changes and system performance regarding growth and distribution.

This book draws on microeconomics, welfare economics, development economics and the international economy. The book projects the influence potential of leading countries/systems, and treats effects of displacement of incumbent leaders (US, Japan) by newcomer leaders (China, India) on system competition and on world governance.

Contents:

  • Introduction
  • An Integrative Theory of Economic Systems
  • Empirical Validations
  • Evolution and Evaluation of the Firm Intensive System in FIS-Centered Countries
  • Evolution and Evaluation of the State Intensive System in SIS-Oriented Countries
  • Economic Systems in the Development Regions
  • Focus on China and India as Upcoming Global Leaders
  • System Competition and World Governance in the Near Future


Readership: Professionals working in the areas of economic systems, transitions, development and policy making; instructors and students of economics and finance; consultants and officials in international agencies working in fields related to economics and development.
Key Features:

  • Unique book that examines the topics of development economics, economic systems and world development as a coordinated whole
  • The book presents a comprehensive theory that relates evolution of economic systems and world development to each other
  • Analyzes historical timelines in the evolution of market- and state- oriented economic systems in western industrial and transition countries; and evaluates their recent developments and performances
  • Studies empirically systemic orientations of six world development regions
  • Studies changes in the influence potential of countries/systems and their impact on system competition and world governance

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Information

Publisher
WSPC
Year
2015
ISBN
9789814632348

Chapter 1

INTRODUCTION

1.1. OBJECTIVE

The choice of the socio-politico-economic system has far reaching effects on the welfare of the people living in that system, and those in other systems. The raison de etre of the comparative study of economic systems (CSES) is that it is a central activity in assessing the prospects of alternate economic systems and highlighting the preferable choice for a particular system under a fluid and uncertain world development. In addition to providing basic theoretical and applied guidance in economic and social policies, knowledge on comparative economic systems contributes to a mutual appreciation and understanding among agents who live and work in different economic systems and attached countries, and who nevertheless share one world development which affect them all.
Although there exists no unique, commonly accepted definition of an ‘economic system’, nor is there an objective way of delineating that part of the total social experience to be described and analyzed under this topic, yet economists recognize the existence of different economic systems in their study of economic phenomena, and give practical definitions of an economic system as actors and institutions that interact along certain ways in producing and distributing goods and services for the concerned population. At the national level, specific countries, or groups of countries, may have different ways (systems) of production and distribution.
World development is a wider concept that singles structural changes (in ideas or in facts) occurring in one place and spreading further on an international scale, with usually major repercussions for the world at large. There are intricate relations between the evolution of economic systems and world development that are barely investigated.
The objective of this book is to present an integrative theory of economic systems, demonstrate its applicability time wise and worldwide, and make use of its implications for policy and designs. We explore crucial relationships between the evolution of economic systems in leading countries and their links with world development, project their intercourses for the near future and discuss design options for world governance.
In this introductory chapter, we shall address the following questions in Sections 1.2 and 1.3. What is the current state of the art regarding the study of economic systems and how to assess this current state in terms of our objective? What are the building blocks of our theory and applications? Section 1.4 gives the outline of the book.

1.2. PAST AND CURRENT STUDIES OF ECONOMIC SYSTEMS

What is the current state of the art regarding the study of economic systems and how does it relate to our objective? In assessing studies of economic systems, it is necessary to distinguish between those which focus on the in-depth study of (one) economic system, ISEC, and those that undertake a comparative study of (several) economic systems (CSES). A brief literature review of the study of economic systems indicates outstanding scientific contributions made in segment SSEC, but a relatively poor state of the art with respect to CSES. There are reasons for the relative failure of CSES, which we shall touch upon, but there are also promising avenues in CSES that we propose to seek and develop further.
To start with, the ISEC have commonly distinguished between three broad economic systems that are generally labelled as the traditional system, the (centrally) planned system and the (decentralized) market system. In-depth studies of each of these systems in the individual countries where they apply have produced a wealth of knowledge on how each system operates, performs, is affected by and affects other aspects of the social system. The main contours of these studies are briefly reviewed below.
Studies of the traditional system have treated a wide range of economic arrangements covering primitive society, tribal communities, family-based rural farm settings, informal sector enterprises; all of them lumped in what can be called preindustrial settings. The first major contributions on the working of the traditional system came from anthropologists. It suffices to mention Malinowski (1922), being the first to describe the institution of reciprocity as a guiding rule for exchange of goods and services, conceived as gifts among kinship and tribesmen in Polynesia. A wave of studies of the traditional system followed soon after, and subsided thereafter. Their conclusion is that in traditional settings, exchange is determined in the context of institutions of reciprocity and of sharing that are typical of closely knit personal relationships based on loyalty to shared kinship, community and belief. Another wave of studies was concerned with the informal economy in rural and urban areas, especially in the developing world, among the first to coin the term was Lewis (1955). The informal economy was traditional in its sociological relations and production technology and was politically non-participative. Later waves of studies launched the social economy as distinct from the private and public sectors, among the latest of these studies is Bridge et al. (2009). Essentially, the social economy is made up of the voluntary, non-profit and co-operative ventures. The motivational behaviour in these socio-based economic activities is closest to social sharing, making it logical to treat contemporary social economy activities in the traditional subsystem.
Studies of the planned system were short lived, starting around the initiation of Soviet Plans in the 1920s, and ending with the collapse of the communist regime towards the end of the century. While there is vast documentation describing the operation of the planning system, its problems and reforms in the Soviet Union and allied satellites; for example, Ellman (1989), Kornai (1967), among many others, there are also insightful analytical works that focus on the collapse of the planned system, and the economic depressions which followed. Some of these works emphasized the failures of communicating information and management incentives (Stiglitz, 1993). Others emphasized a nationwide confidence crises in the communist regime’s ability to realize its promised expectations, and the failure of the governing and managing bureaucracies in a crises situation to coordinate and control their acquired rent from their exclusive political role in a state-run economic system, cf. Eggertsson (1990) and Cohen (2009). It is relevant to refer also to Beck and Laeven (2006) who show that some rent-acquiring behavioural traits of the communist regime have re-emerged in ex-Soviet countries during and after their transition.
Studies of the functioning of the market system and the history of economic thought have been tied to each other from the very start. The elements of the market system that were outlined by Adam Smith (demand and supply determining prices in competitive markets, combined with utility maximization and profit maximization by consumers and producers) required refinements and extensions involving great economists including Pareto, Walras, Marshal, Samuelson, Arrow, Debreu and others before these elements were rigorously integrated and formalized in a static general equilibrium theory of interlinked markets, some three centuries later. The growth dynamics of the market system is due to Schumpeter (1943), which he saw as being led by innovations and entrepreneurs, but is retarded by increased power of corporatism and greater monopoly. This is a form of market failure that urged Schumpeter to argue for a shift from a capitalist distribution of wealth and decision-making powers to a socialist distribution. Practically speaking, such redistribution requires collective action by the elected government, and if the majority of the electorate is convinced, then the redistribution will happen. But the redistribution does not affect the rules of the market system. The redistribution can reinforce competitive markets and bolster the economic performance of the market system. In due course, other economists pointed to other market failures and the need for market and non-market solutions to mend these failures, i.e. Stigler (1971) on capture practices; Coase (1960) on internalizing externalities, Stiglitz (2008) on reducing financial instability and so on. In many cases, the market system itself is able to develop institutions to mend the failures, and/or governing regulations are instituted in mutual consultations between firm associations and the state; and thus the market system is institutionally strengthened and continues further.
As the market system evolves over time, it sets in motion other effects and norms that can be experienced as negative or positive, depending on the value judgment of the evaluator. The most prominent negatively conceived effects are human alienation and conspicuous consumption. Marx (1867) was moved by the negative effects: the market system with its focus on private property, business capitalism and strict division of labour degraded and dehumanized labor, and estranged him from his true nature. He went further into speculating that ultimately, the conflicting interests between the capitalist employer and the employed labour will explode and destroy the market system. The theme of estrangement and alienation was revisited and elaborated further by Polanyi (1944): The market system with capitalism as its driving force gave birth to a new economy that is disembodied from its social environment. By commoditizing not only goods but also labour in terms of exchangeable money, the market capitalist system dismantles a whole lot of protective institutions for the common people. Veblen (1899) focused on the pecuniary culture and conspicuous consumption that are seen as an outgrowth of the market system economy. Conspicuous consumption served as a public display of the spender of his economic power and is as such a waste. Levy-Gerboa (1979) elaborated on conspicuous consumption by linking the joint collaboration of producing firms and admired leaders of consumption styles in the introduction and communicating of new consumption styles and products in the market. As stated above, there are also positively experienced side effects of the market system. For instance, Friedrich Hayek and Milton Friedman are convinced that the market system fosters freedom and democracy. All the above negatively and positively conceived side effects of the market system have some truth and are recognizable by the objective observer.
We can move now from the ISES to the CSES, whose contributions have been remarkably lower. In the first part of the past century, there were some outstanding theoretical contributions that compared the market system with the planned system, such as by Barone (1909),1 and with the traditional system such as by Polanyi (1944).2 In contrast, most of the CSES in the second part of the past century were empirical comparisons and did not add a substantial insight to what is already known from the in-depth studies of specific systems as reviewed in the paragraphs above. Some handicaps prevented CSES from breaking through. In the past century, CSES was influenced by the ideological divide and the cold war between a western and an eastern camp. The dichotomy of the centrally planned system versus the market system carried associations with popular labels, i.e. communism and socialism versus capitalism and liberalism; and this did not help raising the level of analysis beyond comparative descriptions and arguments in favour of one system and against the other system. Very little or no attention went to developing theories of economic systems. It is not surprising, therefore, that as the communist regime faltered by late 1980s, CSES came to face an identification crisis.
The transition economies provided an opportunity for a refreshed CSES with more analytical and policy-oriented contents, but the opportunity was not fully picked. Instead, many CSES repeated their custom of the past century of elaborating typologies of double and triple term labels and sticking them to the countries studied, in what is named varieties of capitalism. For instance, Hall and Soskice (2001) started humbly by classifying the industrialized countries into a liberal market system (i.e. USA, UK) and coordinated market system (i.e. Germany, Japan). Amable (2003) extended the classification of the market system to five types or models: market-based model (USA, UK), social-democratic model (Scandinavia), Continental European model (Germany, France, Netherlands, Belgium), Mediterranean model (Greece, Italy, Portugal, Spain), Asian model (Japan, Korea). Lane and Myant (2007) added four more categories to fit transition countries in the capitalist picture. Bohle and Greskovis (2007) brought in even more complexity by adding another four–isms: neoliberalism, embedded neoliberalism, neocorporatism and transnational capitalism. An extended review of literature on varieties of capitalism by Jackson and Deeg (2006) ended with a highly fragmented picture of CSES, reflecting weak theoretical foundations of CSES.
These studies are problematic. They assume the universality of the Euro-American economic system worldwide, which is empirically false; and tend to reduce CSES to trivial differentiations among industrialized countries; and thus ignore other realities in the development world. Besides, the typologies proposed are loaded with popular labels that stand in the way of scientific rigor. Furthermore, such inductive studies are not backed by an integrative analytical framework of economic systems that allows for deductive reasoning, systemic comparisons and empirical testing. Formally speaking, CSES should be backed by an integrative analytical framework that explains how and why different economic systems emerge. Backing frameworks are practically absent in CSES. In spite of thousands of studies and publications on CSES, that have undoubtedly added empirical knowledge on the functioning of comparative economic systems, nevertheless there is little or no theoretical advances made in developing general theories of economic systems that can explain the mutual co-existence of alternative and basically different economic systems, or how they have evolved to their present shapes from some common origin; and what are the underlying mechanisms. This is very likely due to perceiving other areas of inquiry as more interesting and relevant, and not due to inability to theorize. The ideological divide of the 20th century and the claim that the capitalist market system is anyhow the universal economic system may have been behind neglecting the theoretical justification of the prevalence of contrasting economic systems.
At a more general level, to compare and evaluate in a uniform manner distinctly different systems worldwide, such as the traditional, planned and market systems, there is a need to formulate an integrative analytical framework, sufficiently comprehensive and tuned, so as to accommodate for an objective representation of the three systems; and be able to generate the emergence of the three prototype, or mixed combinations of them. This may sound like a call for a grand theory of social systems a la Pareto (1933), which is not feasible. Notwithstanding, CSES can prosper and become more exciting when the principles and ingredients of a grand theory are brought in the picture. There are already various calls and research agendas that go far beyond the varieties of capitalism in terms of theory and rigor, and are on the borders of a grand theory, such as North et al. (2006) where they propose to develop and apply a conceptual framework for interpreting recorded human history. Our objective is to develop an integrative theory on the formation, evolution and differentiation of economic systems, and support it empirically. The approach of the team of North and our approach share the common purpose of developing a conceptual framework for understanding long-range changes in the economy and polity, but the orientations are different in terms of the organizational focus, agent behaviour and mechanisms of change and choice. Our approach is to make ample use of various contributions in CSES, which we adopt and adapt in formulating an analytical framework that can expand the scope and usefulness of CSES. The constituent elements of the theory displayed below are well known to specialists in their various fields of specialization, but the knitting of these elements in a consistent and testable theory of economic systems as a whole has been barely given the required attention elsewhere.

1.3. BUILDING BLOCKS OF AN INTEGRATIVE THEORY OF ECONOMIC SYSTEMS

We work with principles of social system theory. Formally speaking, the economic system, being a social system, consists of interactions between agents with differing roles, goals and means. These agents interact in different organizational settings, or subsystems, that are involved in creating value-added. The subsystems are linked to each other through horizontal transactions in the interactive sphere (the multiple inter-presence, movements, communications and transactions of agents in and between the subsystems), and through vertical restrictions in the control sphere. Some of these notions recur in social system theory and coincide with those put forward by Parsons (1956) and Luhmann (1995).
A crucial formulation in our analytical framework is to circumscribe three distinct organizational subsystems where major interaction of agents and significant value-added transformations take place. We identify three subsystems: households, firm settings and state settings (that is, governmental settings). The vast majority of economic activity, decisions and interactions are found in these three subsystems, as evidenced by the fact that all reported data on economic activities originate in these three subsystems. The motivational behaviour and the institutional rules supporting them are distinctly different in the three subsystems and can be operationalized as social sharing in the household settings, maximization of economic returns in firm settings,3 and acquisition of polity rent in state settings.4 Moreover, the vast majority of economic activity, decisions and interactions of agents are found in these three subsystems, as evidenced by the fact that practically all data collected and reported originate in these settings. In formulating an integrative theory of economic systems, it is thus logical to focus on these t...

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