Three Types of Economies

We discuss capitalism, communism, and anarchy a lot, which are both modes of society, but also references to types of economic exchange. The critique of society often gets confused for the economy type, even though these are rather separate things. So for the sake of simplicity and clarifying, let’s talk JUST about the type of economy today.

The thing people forget about the economy - because we get caught up in accusations of selfishness and assumptions of power - is that it is at heart an information problem, or rather, a method of solving this problem. We have some Stuff, it is distributed among different people, with different degrees of making it or acquiring it, and we would like it to be distributed to the people who need and want it the most, or can make the most productive use of it. Even if we solve every human sin regarding selfishness and power, we will still need to solve the problem of “where does stuff go.”

(Most people are in fact good, and willing to work for the overall good if there’s a solid plan - but just being altruistic isn’t enough to figure out how to feed the hungry.)

There are three different types of economies based on how much information you have. The information is in the form of “what resources do you have? How hard is it to extract them? What do you want? How much of it do you want?” You generally know all of this for yourself, and only some of this information for other people. Ie, you know how hungry you are and how much food from McDonald’s you want, but you are less likely to know how hungry your friend is, or what they are in the mood for.

***

Trust Economy - this is the type of economy where you have TOTAL INFORMATION about everyone (relevant to the problem in question.) Picture a family who has known each other for a long time, sitting down for a meal with food closer to some than others. They know who likes what dish, who needs more food, and they can see what is already on each other’s plates. They can quickly just give each other the food other people want, and judge what a fair allotment is weighed for how important things are to each people there.

We don’t think about this much, as it’s the behavior we do instinctually when the problem is so small we don’t even see an economy is going on. But whenever you are with a group of people who get along, and you’re distributing a limited resource (a turn at the videogame, snacks, conversational space) in a manner that’s trying to be considerate of everyone but is so easy you don’t even think about it -- that’s trust economy.

This is most associated with anarchy. Who needs rulers when people can just help themselves and each other?

Command Economy - This is for situations where a MODERATE amount of information is known by some parties. This means the capabilities of people, the total resources at play, the rough size of demands people need met, etc. But not everything, like “how will widget A fit into device B, who is sick today” or just because one person has a lot of information that does not mean everyone is informed. Most people’s workplaces - be they corporations or the government (especially the military) operate like this. There is one central unit who establishes the group goals and directs where resources go and who should be in which departments… and then lets the individual departments figure out their own structure and how they will use those resources, and those departments will usually just give their managers targets, and let the managers command employees to figure out how best to meet those targets.

(Or it’s just when Dad orders for the whole family at the restaurant.)

The advantages of this are great - you can focus everyone on an important goal, and just because one person happens to start with a lot of resources, those can still be driven to where they are needed the most. The disadvantages are obvious - the bottle-neck of any centralization, where if the leader is dumb or selfish or otherwise inefficient, they screw up the entire economy around them (and insulated leaders tend not to be responsive to changing conditions.)

This is associated with communism and war-time economies, though somewhat unfairly, as a communism will often have sub-markets for areas under it where the government lacks information -- just like as capitalist countries always have various command economies under them, within the corporations that make up the economy.

Market Economy - This is for situations for people share NO INFORMATION with each other, and yet you need to figure out how to disperse stuff. People just announce “I will trade X for Y”, and other people who themselves value Y over X can take that, making both better off, without having to know how important or plentiful X and Y were for any people other than themselves.

This is associated with capitalism, though as said above, you find markets in any type of country, and capitalist countries contain many different types of economies within them. Capitalist ideology just focuses on market economies as the type of ideal to attain.

They are kind of magic, because market economies can make large decentralized systems act incredibly efficiently without any central information processing. Economists are in love with this miracle, and it can indeed be pretty great.

But the magic is that they process all this in the adverse situation of limited information. It’s very impressive that they can do that, but that does not make them always the best. They are a good solution to the problem of lacking information, but if you have information, then they might just be inefficient. Resources might be squandered because the person who has them no longer has any reason to trade them away, etc.

***

The point is that none of these economies are universally better than others. They are optimized responses to different situations, and should be used as such. Using a market economy when you have enough information for a trust economy creates a dreadful waste of time and effort as every exchange is negotiated and verified. Using a trust economy when people don’t know anything about other people, will just lead to mismanagement disaster.

So when discussing capitalism, communism, and anarchy (as social models) we understandably make reference to the economy types we associate with them, but each of those ideologies are more about exalting one particular tool as the social ideal, even as it makes use of all three. We should instead take the detached view of tools, not looking at them as moral imperatives, but useful responses to different situations.