Sociology of Economic Life

 
II. LITERATURE REVIEW 
In the following section, we will discuss the theoretical 
aspects of the economic systems and the institutions, the role 
of institutions in the economic systems and the relationship 
between the two. The thorough literature for this paper is 
gathered from past literature, published papers and books. 
Economic Systems 
Economic systems, according to (Stuart et al., 2003), are 
described as a set of methods and organizations for making 
and implementing decisions concerning production, income, 
and consumption within a specific geographical area. 
Work on economic systems has been addressing the question 
of what mechanisms and institutions lead individual 
economic behavior to achieve socially desirable outcomes 
since the beginning of economics. This was the central 
question addressed in Adam Smith's 1776 book, The Wealth 
of Nations, which marked the beginning of modern 

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economics. Because Adam Smith was both an economist and 
a philosopher at the time, economics and philosophy were 
closely linked. The Wealth of Nations is made up of six books 
in which he covers a wide range of topics, from the causes of 
economic growth to economic policy debates (Kim, 2012). 
Capitalism was dubbed "the system of natural order" or "the 
system of perfect liberty" by Adam Smith. The main concern 
of scholars in the 17th and 18th centuries was how to reduce 
conflict between the pursuit of one's own self-interest and the 
welfare of society as a whole. Some philosophers warned that 
individuals' unrestrained pursuit of self-interest would lead to 
the destruction of society (Bradley, 2010). As a result, they 
contended that such a pursuit required the control of a central 
body. Tomas Hobbes was a well-known scholar who 
followed this line of thought. In his book Leviathan, he 
claimed that in order to avoid a "war of all against all," each 
person should voluntarily delegate his or her right to a strong 
central authority. 
The claims made above were rejected by Adam Smith. 
According to Adam Smith, the welfare of society is increased 
not by personal vices, but by individual self-interest. Self-
interest, according to Adam Smith, is the love of oneself 
without harming others, whereas selfishness is self-love that 
undermines the interests of others. For example, a butcher's 
pursuit of profit by selling meat has no effect on other 
people's property or bodies, and thus can be considered self-
interest. Through the invisible hands of self-interest, 
economic growth is generated. Although the term "invisible 
hands" appears to be a more theological term in his books, he 
uses concrete examples of the price mechanism and wage 
determination to illustrate this invisible hand (Mikkelson, 
2021). 
Karl Marx's understanding of capitalism was diametrically 
opposed to Adam Smith's. He contends that human beings' 
pursuit of self-interest leads to class struggles, increased 
income inequality, resource underutilization, and business 
cycles. As a result, he believes that coordination through 
central planning and public ownership, rather than the market 
mechanism and private ownership, should be the essential 
foundation of a new economic system, namely socialism. 
High economic growth and social equity would be guaranteed 
if economic agents followed the instructions provided by this 
central planning. In this way, following central planning 
instructions in socialism substitutes for self-interest in 
capitalism (Fiuza, 2016). 
The collapse of socialism indicates that the socialist 
economic system is not long-term sustainable. It had achieved 
some success in the early stages of economic development, 
primarily through the forced mobilization of inputs. 
However, economic agents did not behave as Karl Marx 
predicted: they pursued their own self-interests rather than 
simply following central planners' instructions. As the 
economy became more complex, the principal-agent problem 
became more prevalent in the system as a whole. Corruption, 
a lack of transparency and fairness, and a lack of democracy 
all contributed to a decline in institutional quality ((ATO) et 
al., 2012). 
Socialism was a large-scale experiment in establishing an 
alternative economic system based on state ownership and 
central planning. The failure of this experiment after only 
eighty years suggests that any economic system that does not 
take into account human self-interest and lacks proper 
coordination mechanisms is not long-term sustainable 
(Chattopadhyay, 2021). As a result, one can conclude that no 
coordination mechanism can successfully replace market-
based coordination based on private property rights. 
The preceding discussion points in the direction of future 
economic system research. To begin, research should focus 
on a market economy rather than a socialist or other economic 
system. A sustainable economic system should be based on 
the human instinct of self-interest, private property rights, and 
markets. These three elements are so important that a lack of 
any of them would result in a failure of economic outcomes 
(Raman & McClelland, 2019). Furthermore, they reinforce 
each other and should be treated as a package: combining one 
or two of the three with a different element, such as market 
socialism, will fail. 
Second, the variety of capitalist economies is an exciting 
research topic. As previously stated, economic systems are 
primarily concerned with coordinating institutions that link 
agent behavior to aggregate economic outcomes. In terms of 
coordinating institutions, capitalism and socialism are 
diametrically opposed, but there are various versions of 
coordinating institutions within capitalism and socialism 
(Bowden & Goldblatt, 1999). In other words, it is entirely 
possible that there are various capitalist economic systems 
with primarily market-based but distinct coordinating 
institutions. 
Economic system research will survive and possibly thrive as 
the economy becomes more specialized and complex. When 
the economy reaches a higher stage of development, several 
causes of market failure tend to intensify. Specialization is 
associated with economic development, which increases 
asymmetric information. Asymmetric information can stymie 
market formation and growth (Sloman, 2006). As we saw 
during the 2008 financial crisis, an information gap between 
businesses and a government regulator can have serious 
consequences. Because agents are more interconnected than 
ever before, externalities can occur more frequently. The 
tragedy of the commons may be linked to agent specialization 
and interconnectedness. In other words, when the economy 
expands, self-interests may diverge from public interests, 
implying that there would be a greater requirement for 
understanding economic systems. Of course, an expert in 
each economic subsystem, such as a financial economist, can 
deal with unique market failures in financial markets (Kopp 
et al., 2017). Experts in economic systems, on the other hand, 
can add to the debates by bringing a broader understanding of 
the subsystems. Because of the linkages between subsystems, 
this skill will become more relevant. 

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