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Francis Fukuyarna observed.
In his view, the end of the Cold War meant the convergence of the entire world on the American model of political economy

. But with the crisis of the world economy startingin 2007 seen as States, its economic problems such as continuing poverty and largescale inequality

previously dynamic economies as China seem to slow down, with China dragging down many emerging economies that have sold to it,including Brazil and South Africa,

Global systemic crises have been further exacerbated by financial crises t

. Many countries sought to emulate aspects of the Japanese economic system, but now Japan is in deep stagnation.

ed, the socialist alternative continu s North Korea and Cuba
s Turkmenistan and Belarus,
. In China, the most populous nation on earth, a grand drama unfolds
r Yugoslavia,t
workers' man-agement or ownership has risen again, from t n, from the profit-sharing share economy,³ to classic cooperatives, to employee stock ownership plans (ESOPs),

the push for integration of the world economy
the push for independence and isolation n by increas-ingly small entities.
e the deep problems of theless developed countries,
y search for appropriate economic systems i

In a traditional economy allocation decisions depend on custom, or what has been done
in the past.
social context
Economic decision making=becomes embedded in the broader social cOntext.4

vVv . The caste system allocates labor:
is self-reproducing

o adopt modern technology and to be involved in the world omy,

In a market economy allocation decisions are made by individuals or firms on the basis of price signals emanating from the interaction of supply and demand. '

), The earliest rraditional economic sys-tthose systems within which the human species evolved as hunter-gatherers, which balanced individual interests and group interests through such mechanisms as reciprocity (Er y (Eric A. Smith and Robert Boyd, "Risk iprocity: Hunter-Gatherer Socioecology and the Problem of Collective Action:' in E. Cashdan. ed.. Risk aintyin Tribal and Peasaut Economies [Boulder. CO: Westview Press. I 990]. pp. 167-195).
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very simple traditional economies such as that of the hunter-gatherer San people of the Kalahari Desert in southern Africa. I

command economy
the most important allocation decisions are made by govern-uthorities
f Sumer and Egypt, , which were the first strong states to wield absolute power over crucial economic decision making over extended territories.

h date back only 5,000 years.

8 Conmunist Manifest who owns the means of production.
. Ownership deter mines the distinction between capitalism and socialism, defined in strictly economic terms.

s. In sociaList economies the state owns the land and the capital stock.

There are various intermediate forms and cases such as cooperatives or worker owner-ship.

t how one class relates to another is the crucial matter, rather than who owns what, and that true socialism involves no exploitation of e class by another. - -. Marx

y by the central government or by local governments

.In parts of Western Europe between the years 1000 and 1500, nearly one third of the land was owned by the Roman Catholic Church, and major techno-s were made in economically self-sufficient abbeys i

n. Gen-erally, the concepts of property and owntrship vary enormously from society to society.

f "cross forms,"," namely, market social-ism and command capitaIism, both of which have existed as well.
The classic example of market sOcialism7 was in the former Yugoslavia.
t allocative decisions were made by worker-managed firms within a market framework

.China has done well with its peculiar form of market socialism, although it appears to be gradu-ally evolving into a peculiar form of market capitalism.
n, The previously mentioned term state capitalism is sometimes used to describe economies that are predominantly state-owned but use markets rather than command central planning.

need for the profit motive to drive private-property-owning decision-makers

There is no pure example of any type of system. All real economies are mixed economies exhi'oiting elements of various allocation and ownership systems, even if they can be cate-gorized as predominantly one or the other.

y consumers' sover-eignt

.s the crucial point that planners' preferences determine allocative decision making only within a command framework, It is command that rules out consumers'sovereignty,

vVv planification
It is possible to have command without planning. An example is Soviet Russia during the period of War Communism (191'/-192l) immediately after the Bolshevik Revolution, when civil war was compounded by invasion by foreign troops. Production followed com-mands from the center, but in a "shock" pattern, whereby commands for production of ods were given when goods viewed as critical to the war effort became scarce, with little effort to consider the impact of each decision or to coordinate it with others. There was no time to plan or to even set up a planning mechanism.9
9. The process of "planning how to plan" waslabeled planifcation by Russian and French planners and econ , omists; it refers especially to the problem of coordinating micro-level plans at the macro level. Despite the 1ow quality of the plarminginvolved,it has been argued that, at least ideologically, the War Communism period saw the most serious attempt to achieve a true communist economy (Peter J. Boettke, Calculation and Coordina-

ltis possible to have central planning coincide with market capitalism, as in the planned market economy. Such planning is known as indicative planning because it lacks the com-mand element,

l.India stopped indicative planning in 2015, while Iran is a rare example

Even in market capitalist economies, planning is done by specific government agencies cture investment in areas such as transportation networks, which in most economies are in the public sector.

vVv Althoughideologists of market capitalism generally eschew planning, r

American and Soviet economic systems were converging on being partly planned, partly marketized n'dustrial states.

Types oflncentives
mon is the materialincentive, which involves paying people according to their productivity. In market capitalism this supposedly involves paying them their mar-ginalproduct, which maximizes profits for competitive firms hiring labor in such a system.
s) for entrepreneurship and capital investment and interest (also a reward) for savings. In theory, socialism rejects receiving profits; also

moralincentives, y appealing to a higher collective goal.
e during wartime. Thus production surged in the United States during World WarII, despite the imposition of wage and price controls limiting the mate-m hard work. Part of the motivation to work came from the wartime appeal to patriotic national sacrifice,

s. But rhey also see limits to this principle, both because of the need to provide charity for the poor and because of the idea that excessive concentration on acquiring mate-rial goods distracts from spiritual matters.
f martyrdom

s, the Japa-nese government engages in less income redistribution than the governments of many other capitalist countries because Japan has a more equal distribution of wages than most other

have less income redistribution because governments initially control the distribution of income by setring wages and for-landincome,

a coaJ miner named Stakhanov was widely praised for his reported high productivity,

se the wealthy are powerful and because iris easier to hide wealth than income from governmer*ts.

e equity-efficiency trade.off.i7 ,nhich states that greater efforts to make income more equal will result in less efficiency,

thus both must be fully rewarded
Most.societies struggle with intermediate approaches,

social safety net

fiscal pressure on sociai safety nets

a lower and a higher phase of socialism,

social market economies. Germany and the Nordic counrries

very unequal income distributions, such as many in Latin America, have had poor growth records.. It is crucial for growth that income and wealth inequalities arise from differences in productiv-ity and entrepreneurship rather than from corruption or inheritance. If inequality is per-ceived as unfair, , then the results may well be strikes, guerrilla war, or revolution, none of

claims that wel-fare state redistribution can lead to command socialist dictatorship.

at too much inequality can lead to excessive redisiributive programs that damage incentives.

vVv 9. This use of liberalis the classical or European usage, meaning individual freedom and minimal govern-ment. The modern American usage, meaning support for government intervention in the economy, arose in the twentieth century from the evolution of the British Liberal Party toward such a position from its earlier classical position.

vVv . Such views are labeled libertarian and laissez-faire,²2

n associate socialism with political dictatorship,

, Social Democratic political parties exist that call themselves "socialist
support income redistribution and extensive social safety nets
been cut-backs
. Nevertheless we have seen over 80 years of such social democracy in Swe-den without the Hayekian prediction of political dictatorship coming true.

loseph Stalin. Although many Western European socialist parties continued to support nationalization and centraJ planning for a long time, opposed dictatorship.

. Karl Marx, claimed that communism entailed the withering away of the state.
id viewed it as in transition to communism.

t market capitalism has coexisted with authoritarian political regimes in parts of Asia, Latin America, and Africa. 1
Thus market capitalism is no guarantee of political democracy,
, Hong Kong,
, Singapore

new traditionalism,

. Nor is there a political theory of Islam other than the basic demand that a shari'a be implemented and obeyed. . It does not matter whether the enforcer of the law is a king, a mullah, a military dictator, or a democratically elected president. Indeed, the current Islamic Republic of Iran is a functioning, if limited. parlia-entary democracy. But it is not a liberal democracy because individual rights and freedoms are subordinated to a shari'a and the will of religious authorities.
Thus every generalization seems subject to so many exceptions as to render it almost unusable,

a more definitive proposition:Permanent command control of an economy implies unequivocal loss of personal freedom because no one can be allowed to challenge the system of such control. Thus, it is perma-nenr command that is incompatible with liberal democracy, not economic socialism.

level of output,
.This figure should be corrected for population and the overall price level, giving us real per capita output as the measure that equals real per capita income.
material standard

Second is the growth rate of output. ~
r middle- to low-income
Malthusian low-level equi-lilmum traps wherein little investment occurs b because nearly all output is absorbed by coisumption merely to stay alive,
the relative backwardness hypOthesjs.

Third is the composition of output..
1 corsumption and investment, the share of military output, and public versus private goods. Command socialist economies generally have higher shares going to investment, although the East Asian market economies, such

Fourth is static efficiency.
mally this means Pareto optimality, the idea that no one in society can be made better off without making someone else worse off. In this situation, resources are fully utilized to their best potential given the existing technology,

Fifth is intertemporalor dynamic efficiency
over time to maximize long-run sustainable growth.
depends on maintaining a viable environment,
1 long-suppressed environmental movements rising

Sixth is macroeconomic stability,
, the lack of large oscillations of output,
employment, or the overall price level.
sually argued that strict command economies achieve greater short-run macroeconomic stability,

Seventh is economic security of the individual i
.1 safety nets
European

Eighth distributions.
socialist

Ninth is the degree of freedom available to the individual in terms of work. consumption,. property, and investment, as well as more broadly in the civil and political realms. Market capitalist

percent shares of GDP going to central government consumption,

between liberal market systems and coordinated systems.
s cooperation between labor unions, man-agement, and governments.

whether an economic system has institutions that encourage inclusive growrh or extractive growth,

~I~~I~IN~N~~lllll
The Theory and Practice of Market Capitalism
I ~ ~ ~ ~ ~ I ~ I ~ IN ~ ~ ~ N ~

s downturns in the 1870s and 1890s.

Among the larger countries, the economy most oriented to market capitalism is the United States, despite its substantial increase in government intervention since the 1930s.

. Both of these efficiencies require market capi-耟 talism to operate within an institutional framework that allows transactions and contracts to take place and be enforced without excessive cost.

world's highest real per capita income countries
1 ability of markets to allocate goods and resources efficiently through the law of supply and demand.