The History of Economic Systems

Date: May 23, 2010

Throughout the course of history, many new economic systems have appeared all around the
world. Some of the economic systems were developed for better situations, while others were
adapted to fit certain social structures. Here are the main five major changes that the
economic system has gone through to be in a proper system:

1. Feudal Society: An economic system in which traditions ruled the economy

Feudalism was the predominant economic system in Europe about the 8 th to 15th century.
Under feudalism, goods were allocated according to the economic system in which economic
decisions were made based on customs, beliefs, religion and habits.

How traditional economic method of allocation emerged:

Communities were primarily self-sufficient. Because transportation was difficult, trade

between communities was not common or reliable. Therefore, whatever a community
needed, the community would have to produce. The technology available was primarily labor
and land intensive. Production of the necessities of life required both the labor of most able
body citizens but also good luck (i.e. good weather).Because teamwork was required to
produce the necessities of life, people were taught that community was most important, not
the individual. Moreover, an individual could not easily both produce the necessities of life
and defend what was produced. Therefore, community led by tradition was necessary for the
survival of each individual.

What led the system to change:

Economic growth in this system was typically zero because the factors of production were
land, labor and capital. Land could only be acquired via warfare. Increasing labor did not
generally improve a communities’ standard of living. [i.e. doubling population may double
output, but per person output is the same]. Finally, capital was relatively scarce. So a
community could not generally increase the quantity of its factors of production. Moreover,
innovation for technological development was not encouraged due to the vast uncertainty of
life.
In conclusion, under feudalism economic growth is typically zero because communities could
not increase either the quantity or quality of its factors of production.

2. From Feudalism to Mercantilism: An economic system in which the government

determines the allocation of resources by assigning the rights to certain economic
activities.

How Mercantilism emerged:

Under feudalism, the vast majority of people were tied to a specific community. On the other
hand, merchants made the drive for their individual gain, which enabled them to accumulate
wealth.

The accumulation of wealth increased the power of merchants and traders than the feudal
lords. Consequently, the merchants became the victims of tariffs and tolls for transportation
imposed by the communities; they were subjected to the theft from bandits, rogue states,
and started facing difficulties for different systems of weights and measures. As a safeguard,

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 The History of Economic Systems

the merchants created political unity via the creation of nation-states. Kings, who acquired
their power via the financing of merchants, ruled these nation-states.

Challenges with Mercantilism Economic System:

Thus, power shifted from lords to kings and merchants; from the manors to cities and towns.
As long as merchants could play a role in setting the price, the restriction of competition
could confer monopoly profits on to the merchants. Gradually, the government started
exercising active and strong influence on economic decision-making encouraging growth by
legitimizing and financing a variety of activities. Event, the government limited growth by
protecting monopolies.

Why would the merchants, who financed the establishment of these nation-states, agree to
such a system?

3. From Mercantilism to Capitalism: This is an economic system based upon private

property and the market in which, industrialists supported and financed
democratic reform movements limiting the power of kings.

How the change took the shape:

Adam Smith (1776).

In his famous book, “An Inquiry into the Nature and Causes of the Wealth of Nations” argued
against Mercantilist policy and advocates laissez-faire emphasizing the following areas:

A. Self Interest and Competition will lead the market price to equal the cost of
production.
B. Self-Interest and Competition will lead producers to provide the goods consumers
demand.
C. Self-Interest and Competition will erode above-normal profits so that in the long run,
rates of return will be equalized for capital and labor.

In Smith’s view, markets are self-regulating. Government intervention is unnecessary because

the power of the competitive market limits the power of any one individual. He argued that
markets could coordinate the economy without active government involvement. Thus,
another economic system with new social structure started to get the acceptance.

4. Road to Socialism:

Socialism (As Karl Marks described) - An economic system where the incentive system of
capitalism remains in place, but the workers own the means of production.

Karl Marx (1867). Das Kapital

Karl Marx saw the basic conflict in capitalism to be between labor and the owners of the
capital. Remember that Marx was writing in the middle of the 19th century. At this point in
the history of England, workers generally worked six to seven days a week, with the workday
extending beyond 10 hours a day. Workers were not allowed to unionize, and wages were at
or near subsistence.

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 The History of Economic Systems

Marx argued that workers would revolt and that capitalism would be replaced by a socialist
economic system. Thus, the idea of Socialist Capital System came into being.

Socialism (When Marks was proved wrong)- An economic system where the three economic
questions are primarily addressed by government actions, not unregulated market forces.

The revolution predicted and encouraged by Marx did not occur in England or any other
industrialized nation. Rather, via democracy, the inequity of capitalism was addressed.
Workers were allowed to unionize, which raised wages and redistributed the gains of the firm
from the owners to workers. Furthermore, and more importantly, the government frequently
stepped into the marketplace to determine the allocation of resources.

Problems with Socialism:

Centrally planned socialism, or what is commonly referred to as communism, is the extreme

version of this economic system. In this system, the government creates a central plan,
which answers all of the basic questions facing society. The plan determines what will be
produced, how the goods will be produced, and who will be given the goods after production.

In general, the system of communism arose in nations who previously utilized the feudalistic
system. The lack of production inherent in these systems subjected the vast majority of its
citizens to a life of poverty, hence ultimately reducing the enthusiasm people had for this
method of allocating resources.

5. Mixed Capitalism: An economics system characterized by largely private

ownership of the factors of production, market allocation of resources, and
decentralized decision making. Most economic activities take place in the private
sector in this system, but government plays a substantial economic and regulatory
role.

In general, societies in the present industrialized world do not use capitalism or socialism to
allocate resources. Rather, each society uses a mixture of these two economic systems.

Conclusion:

Economic growth and technological change occurred most rapidly in capitalist societies.
Socialism is a response to the negative byproducts of the capitalist system.
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Submitted to:
Mr. Shariful Islam
Assistant Professor, (Course Co-ordinator)
Institute of Business Administration
University of Rajshahi

Submitted by:
Md. Ziaur Rahman
EMBA, Second Semester (2nd Batch)
Roll No. Ex-020041

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