New Paradigm for Economic Systems

 

If you study basic economics, you will learn that there are 4 economic systems: traditional, free market, command and mixed.  Without getting too bogged down in the details here’s a quick rundown of them.

A traditional economy is one that places a huge priority on tradition and customs.  They are uninterested in innovation and growth and are more concerned with keeping things the same. 

A free market economy is one in which there is no outside control on what you do.  You are 100% free to decide what you want to do with your time, money, resources, possession and anything else.

A command economy is the opposite of that.  You have no freedom to decide.  Every decision is made by some form of central authority, probably the government. They control everything.

A mixed economy lies between a free market and a command economy with some freedom to decide and some control by an authority.

Three of the four lay on a nice, simple spectrum.   We have free markets on one side, command on the other and mixed in the middle.  

Traditional economies sit off to the side.  Because of their unwillingness to engage in other markets and their insular nature, they can often be effectively ignored.

It seems a pretty simple system.  Except it has always nagged me that traditional economies are sitting off on their own like some sort of unwanted leftover.  It makes things not so pretty or simple.

I don’t want to digress into a long discussion on political ideologies, but bear with me for a second. 

A lot of people look at political ideologies in a similar way.  We have a nice precise spectrum.  Liberals on the left, conservatives on the right, and the moderates are in the middle.  

Instead of a line, a better diagram is a diamond.  Because there isn’t just one axis.  The left-right axis is still liberal and conservative, but there’s a second axis with libertarians at the top and big government or statists at the bottom.  It looks like this.

This isn’t a post about government ideology, so I’m not going to into it any more than that.  If you’ve never seen this before, search a bit on the internet.  It’s easy to find.  The point is that what seems to a lot of people to be a spectrum on a line, actually exists on a plane.

Okay, back to econ.

What if there’s a second axis for economic spectrums? 

What if traditional economies are not some weird outlier that don’t mesh with the others, but are just another cardinal point?  What if instead of a line, the diagram for economic systems should also look like this?

The question then becomes, what goes opposite traditional economies?

The definition of a traditional economy says it is a system in which tradition and custom are most important.  They aren’t interested in innovation, but instead in continuing on doing things the same way they have always been done.

Perhaps then a working definition for the opposite would be an economy that is constantly looking for new ways to replace the outmoded.  In which a tradition, custom or method only lasts as long as it is useful.  An economy in which we are always seeking a better alternative and once it is found we abandon the old.

Except that doesn’t take it far enough.

I’m sure there are some who will disagree, but the optimal spots on both the political ideology diagram and the economic systems diagram are not in the corners.

An economy with 100% government control or 100% freedom is not desirable.  There are huge negatives to both.  Instead we want something in between.  There’s a lot of ground in the definition of a mixed economy, and we can argue about just how far to the left or right of center is optimal, but mixed is where we want to be.

Similarly, nobody wants to be all the way in the corner of traditional.  In truth, there are no true free markets or true command economies.  Every economy has at least some government control and everywhere has at least a small amount of freedom.  Similarly, I doubt there are any true traditional economies out there either. 

But if we use the working definition we just created of what lies opposite traditional and place that in the opposite corner, I can not only envision such an economic system, I can see it working.  It looks like a solid plan.  The problem with our working definition of what lies opposite traditional is that it’s too perfect.  If it was the opposite corner, everyone would want to be there.

Given all that, it seems the opposite would need to be an economy in which we favor innovation to the extreme.  It would be an economy in which doing things the same way would be discouraged.  Tradition, custom and old methods would have no value. 

In fact, doing things the same way twice would be discouraged.

“No economy could work like that!” you declare.  “It couldn’t sustain itself.”

Exactly.

There are no true free markets or command economies because in the long run they don’t work.  They can’t sustain themselves.  Somewhere in the middle is best.

There are no true traditional economies either.  Thus there also wouldn’t be a true opposite of traditional in existence either.  The ideal is somewhere in the middle.

Thus the opposite corner has to be the Novel Economy.  The economy in which new is best and old is always bad.

I was tempted to call this opposite corner an innovative economy.  But that won’t work.  Innovation implies making things better.  This economy wouldn’t be worried about making things better, it would be worried about making things different and new.

Sometimes new is better.  But sometimes the old way is the better way.

Thus our diagram should look like this:

The left-right axis is the personal freedom axis.  The further left you go, the more freedom you have and the less control anyone else (including the government) has on you.  The further right you go, the less freedom you have and the more control someone else (probably the government) has on you.

The up-down axis is the change axis.  The further up you go, the more you are concerned with keeping things the same and the less you want to find something new.  The further down you go, the less you are concerned with keeping things the same and the more important creating change becomes.

The best spot will be somewhere in the middle.  Closer to the mixed zone in the center.  How far off the center and in which direction is the best is something we can argue about.