Modern concepts, functions and structure of the economic system

So what is an economic system?

A system in general means a complex and interconnected set of some elements. And although economists do not argue with this, their ideas about what an economic system is are far from unambiguous. There are several approaches to this problem.

One of them is called “technological”. With this approach, the economic system is understood as the totality of all technologically related branches of the economy, personifying the social division of labor. The main problems here are to find a more optimal combination of factors of production, and the main relations between people are technical and organizational relations.

In the second, the so-called “basic” approach, the economic system is understood as a set of social processes, ways and forms of appropriation of goods on the basis of a certain property. This approach draws special attention to the dependence of the principles and methods of appropriation of created goods on the dominant forms of ownership, on the relations between property subjects and their material interests.

The third approach identifies the economic system with the mode of production, and this is understood as a historically formed way of creating material goods on the basis of the interaction of specific productive forces and their corresponding production relations. The determining factor in such a system is the method of connecting direct producers with the means of production, on the basis of which production is carried out and all production relations are formed – appropriation, distribution, and exchange of goods.

The fourth approach is characteristic of modern Western economic literature, where the concept of “economic order” has become widespread instead of or in addition to the concept of “economic system”. The “economic order” is usually understood as a set of norms, rules and institutions that determine the relationship between the main subjects of the economy: enterprises, households, the state.

Another, fifth approach to the concept of economic system can be designated as complex. According to this approach, the economic system of society is understood as a stable set of economic components, which, under the influence of its driving forces and coordination mechanism, ensures the material viability of society.

What is the economic system for? What is its main functional purpose? What other functions should it perform?

The function of the economic system is understood as the direction and method of its activity. Unlike simple phenomena, which often have one function and therefore are single-functional, the economic system as a complex formation is multifunctional. Therefore, among its many functions, one becomes the main one, and others complement it. In addition, the functions differ both system-wide, inherent in the entire system, and subsystem, characteristic of the components of the system.

The main system-wide function of the economic system, independent of its specific characteristics and features, is to create and improve economic conditions to ensure the material viability of society and its subjects.

This function is logically complemented by a number of other functions of economic systems.

These are:

creation and development of the sphere of production of material goods that ensure the viability of society; possible coordination of the interests of economic entities; improving people’s living standards; ensuring fuller employment of the population; ensuring the growth of economic efficiency of activity; ensuring conditions for social progress.

Different economic systems, and even more so in different historical eras, function in different conditions. Nevertheless, there are two conditions common to any economic system:

1 – unlimited development of needs;

2 – Limited resources to actually meet the needs.

Directly related to these general conditions is the complex and important problem of choice.

What parts does the economic system consist of?

The concept of “system” means a complex and interconnected set of some elements. And since the elements of the economic system are themselves complex, they are called subsystems. To live, you need to produce, and to produce you need certain forces. The productive forces are the first, one of the main subsystems of the economic system. Productive forces are a set of personal and material factors used to produce the material conditions of society – goods and services.

The composition of the productive forces includes:

workers, people with inherent abilities and qualifications; means of production, including objects of labor and means of labor; science and all knowledge that is embodied in engineering, technology and organization of production.

The level of productive forces depends on many things, it develops multifactorially: depending on the qualification, cultural and technical levels of training of workers, and on the degree of perfection of engineering and production technology, and on the achievements of science, on the scale of their practical use.

The nature of the productive forces is also different. The nature of the productive forces is understood as one or another of their social organizations, which is formed under the influence of the division and cooperation of labor, the degree of socialization of the means of production and other factors.

Creating various goods in the sphere of production on the basis of certain productive forces, people cannot but interact with each other. The totality of relations between people regarding the use of resources for the effective reproduction of the material conditions of society is economic relations. They are another subsystem of the economic system.

As a subsystem, economic relations themselves are a complex entity. Thus, in the structure of economic relations, three main components are noticeably distinguished.

First, it is the relations of production – the relations between people regarding the direct production and appropriation of the goods they create.

Secondly, organizational and economic relations, which are relations that connect and organize the economy into a single whole through management. Thirdly, technical and economic relations, which are understood as relations between people regarding a more rational and efficient use of available technical and economic resources.

Analyzing the structure of economic relations, it should be emphasized that the main, defining element of it is production relations. It is on their content, on their features that other economic relations depend, and, moreover, the economic system itself largely depends. Such a role of industrial relations requires a closer study of them.

Production relations, in turn, consist of several components, of several types of relations.

The first of these should be called need relations, which are relations between people about the formation, ways of expressing and realizing their economic needs. At the same time, economic needs include the need for economic goods, i.e. those goods that are created by the labor of people in the economic sphere. And since it is the needs that are the initial signal of the development of the production of some goods, insofar as the ways of manifesting these needs, the methods of their “recognition” and the ways of realizing them are important for the economy, for society.

In the structure of production relations, labor relations are also distinguished. In economic theory, labor relations are understood as relations between people regarding the formation of the labor force and the principles of its use in the field of labor activity.

The main functions that are performed by labor relations and for the sake of which they are formed are the following:

create and maintain favorable conditions for the preparation, development and optimal structuring of human abilities to work; to ensure full and rational employment of workers; to ensure conditions for the efficient use of labor; create conditions for an objective assessment of labor results; ensure rational organization and effective management of labor activity; to form conditions for objectively fair remuneration.

An economic system is a stable set of economic elements, the interaction of which ensures the material conditions for the life of society.

Another, moreover, very important structural part of production relations is the relations of appropriation, which are such relations between people that exist about the ways of including the goods obtained as a result of production in the vital activity of individual subjects or their groups.

The main function of the relations of appropriation is to ensure that the goods – the results of the production process – are made their own and, through the inclusion of them in the sphere of their belonging, are used at their own discretion. Appropriation relations are directly related to property.

There is another approach to the structure of industrial relations. With this approach, the successive phases of the social process of production become the main one: direct production, distribution, exchange and consumption. In this case, the relations of production differ as relations concerning the production of goods; attitudes over the distribution of created goods; relations regarding the exchange of distributed goods; attitudes over the consumption of goods.

But no matter how the relations of production are structured, in general they are a system of relations, which is characterized by several common characteristics.

First, the objectivity of production relations, which means that they do not depend on the will and desires, people cannot be “invented” by them.

Secondly, these relations are characterized by materiality, as well as those processes of production about which they are formed.

Thirdly, historicity, variability, development are a common characteristic of production relations.

Fourthly, the qualitative homogeneity of all these relations, their unity, the unidirectionality of the structural parts, despite the specificity of each of them. That is why  they  constitute the system of production relations.

In addition to the subsystems “productive forces” and “economic relations” discussed above, the structure of the economic system also includes a subsystem of driving forces. The driving forces of the economic system are understood as a set of those forces and factors that, interacting, act as the causative agents of formation and the engines of development.

The main elements of this subsystem are needs, interests and rivalry (competition).

In economics, everything starts with a person, with his needs. They are the starting point of the economy. Needs can be defined as an expression of the vital needs of the organism, important for its self-preservation and reproduction. Needs, their emergence serve as the first stimulus to action, to obtain goods that are able to satisfy them. Therefore, needs are the beginning of the subsystem of driving forces.

However, the needs themselves are indifferent, indifferent to the social environment in which they have to be satisfied. Another, purely social phenomenon, reacts to this environment, catches its features. Thus, it predetermines the selectivity of the path, those actions that can lead to the satisfaction of a specific need.

The fact is that the need, as such, only reflects a certain need for something, but it does not catch the objective conditions of existence, does not reveal the way in which it can be realized. And the needs and objective conditions of life are often in contradiction. How do I resolve it? The form of resolution of such a contradiction is interest. Showing the ways of achievement, determining the  direction of the necessary actions in these specific objective conditions, interest becomes the driving force of a person. It motivates and directs its activity. Moreover, both the mental and activity activity of a person seem to merge together and move his actions. Therefore, it is interest that should be considered as the main driving force of the subject.

Economic interest, therefore, is understood as the active attitude of the subject to the external environment, manifested in the form of such an objectively directed activity, which, under given economic conditions, can lead to the satisfaction of the need that has arisen.

Interest, increasing the energy of a person, brings him into a state of special activity, both activity and emotional. Therefore, interests become the driving force behind the development of the economic system. It is not for nothing that Helvetius noted that if the physical world is subject to the law of motion, then the human world is subject to the law of interest.

Finally, the third component of the subsystem of driving forces is called rivalry. People’s activity also increases due to the fact that their needs often coincide, and interests collide. The possibilities of their implementation, resources are limited. This is where the rivalry on the way to the object of one’s interest is born, multiplies. Under these conditions, competition for the achievement of those benefits that can realize a particular interest unfolds, intensifying activity.

Thus, rivalry can be defined as a form of activity of people, enhancing their vital activity and energy in conditions of coincidence, clash of interests with limited resources and opportunities for their implementation.

The main condition for the “health” and efficiency of the economic system as a whole is the interaction and coherence of its constituent subsystems. This condition is so important that without achieving it, the balance of the system is disturbed, and it itself is destroyed without taking effective healing measures.

The means of conjugation and coordinated interaction of the main subsystems of the economic system is the coordination mechanism. Pairing components and coordinating their relationships is its main function. Its implementation requires certain levers and methods of a regulatory nature. Much depends on the rationality and flexibility of these methods, on their ability to produce a coordinating effect. In short, the coordination mechanism can be described as a mechanism for harmonizing the links and functions of the economic system on the basis of certain forms, methods and methods of regulatory and corrective influence. This is another subsystem of the economic system (Fig. 2.2.).

Considering the subsystem of driving forces, it should be noted the peculiarity of its manifestations. Needs, interests and rivalries, as the main components of this subsystem, are often manifested not directly, but indirectly. This is due to the fact that people as subjects of the economic system also have different drives, ideas, goals, etc., which either reject, strengthen, accelerate, or even delay the manifestation of these driving forces. Such a complex interweaving of “motivators” to action is manifested, ultimately, in the concept of “motive”. Motif in French is an incentive for action.

It should be noted, however, that motives and motivations in science are approached differently. There is a broad interpretation of the “motive”, when it includes everything that motivates activity: needs, interests, values, hobbies, etc. And there is a narrow interpretation in which only a conscious impulse is considered a motive.

And one more approach. As noted above, the need is the initial link of the number of phenomena and driving forces that lead the subject to activity. Need as a need for something evokes the image of the good that could satisfy it. But the path to satisfying the need is often not simple or close. Both incentives and disstimules appear on it, customs, traditions, ideas, values, etc. In short, many regulators of human behavior will begin to act. However, some of these influences will be internally, personally accepted by this subject as the most suitable for him. It is most likely to be the last push, i.e. the motive for action.

With this approach, the motive is the link in the system of regulators of human activity, which, as an internal motivator, directly precedes and pushes a person to action.

Motives perform a number of important functions:

mediating: the motive combines objective and subjective stimuli for action; meaning-forming: the motive gives the actions a “personal meaning”, revealing their significance for this subject; orienting: motives are oriented when choosing options; mobilizing: the motive motivates, mobilizes for direct action.

The motive, as we see, plays an important role, it is he who can  somehow correct the actions of the existing subsystem of driving forces at the level of the subject. Therefore, it is very important to study, know, be able to recognize and anticipate a motivational situation. But it’s not easy. First, there are many phenomena that have motivational significance. Secondly, they can act in a complex manner and cause polymotivated actions of the subject, and thirdly, the “personal meaning” of each motive is very difficult to predict.

However, it should be remembered that in the understanding of the subsystem of driving forces, simplified ideas and approaches still prevail, and without taking into account the entire motivation system, the effectiveness of its use will be small.

Finishing the description of the structure (Fig. 2) of the economic system, it should be emphasized that its structural parts cannot be separated, autonomous. As such, they exist and only make sense within the framework of the whole. Here the parts manifest and reveal their own characteristics, here they play an indispensable role. However, the whole (system) without all its parts turns into something else, or ceases to exist altogether.

The structure of the system as its structure, as the dismemberment of its interacting parts plays a very important role: in fact, it is the structure, its stability that is the “guardian” of the integrity of the system. Therefore, we can say that as long as this structure is preserved – the “frame” of the system, this system itself exists. The change in the structure, the loss of its stability means the beginning of the changes in the system itself, its decline and the replacement of another.