NELSON The Economic System Question Revisited

Industrial and Corporate Change, 2022, 31, 591–609
DOI: https://doi.org/10.1093/icc/dtac012
Advance access publication date: 12 April 2022
Article
The economic system question revisited

Richard R. Nelson*
USA. e-mail: rrn2@columbia.edu
*Main author for correspondence.
Downloaded from https://academic.oup.com/icc/article/31/3/591/6566805 by guest on 07 February 2024

Abstract
The core argument of this paper is that thinking of modern economies, like that of the United States, the
UK, Germany, and Japan, as “market” economies—a view presented in most of the standard economic
texts that provide populations with their economic education—greatly oversimplifies the complex and varied
ways that these economies actually use to organize and govern provision of the great variety of goods and
services that serve their multiple needs and wants. These economies certainly do make extensive use of
for-profit firms selling their wares on markets. However, even in sectors where market mechanisms are
central, there almost always are important non-market mechanisms involved as well. And for many of the
most important goods and services these economies provide and use, non-market institutions are central
and market mechanisms secondary. It is important to recognize the oversimplification. It makes dealing with
the problems in sectors whose performance is widely judged to be unsatisfactory much more difficult to
resolve adequately.
JEL classification: A10, D02, L20
1. Introduction
The intense argument regarding what kind of an economic system is better—one based on private
enterprise and markets, or one based on state ownership and planning—that raged through much
of the 20th century is over.1 The most cited reason is that state ownership and comprehensive
central planning failed to deliver the goods and, not unrelatedly, seemed inevitably to be associ-
ated with a despotic political regime. But clearly another important reason that economies that
make extensive use of market mechanisms have survived is that they have changed significantly
from what they were prior to World War II. Most of them successfully have adopted a Keynesian
approach to preventing the deep and sustained economic depressions that earlier had generated
widespread political unrest as well as economic misery. They also have taken on many of the
features of what has come to be called “welfare states.” More generally, the role of government
in economic activity today is much more extensive than it was earlier.
To some extent these reforms are widely recognized. However, their implications tend to be
repressed. When asked about how modern high income economies, like the United States, or
Great Britain, or the countries of the European Union, or Japan, organize and govern provision
of the great variety of goods and services that serve their multiple wants and needs, there still is
a strong proclivity, among professional economists as well as lay persons, to characterize these
economies as “free enterprise market economies.” This greatly oversimplifies the picture.2
All of these countries certainly do make extensive use of for-profit firms selling the products
and services they provide through markets, and for many economic activities and sectors this
is the major part of the story. However, even in economic sectors where market mechanisms
1 Perhaps the most confident cry of victory was that of Fukuyama (1992).
2 I began calling attention to this matter in Nelson (2002).
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592 R.R. Nelson
are central, there usually are important non-market mechanisms as well. Consider, for example,
passenger air travel, which is subject to a variety of regulations, is based on publicly owned or
licensed airports, and operates under a government provided air traffic control system. And in
the provision of many important goods and services, while for-profit firms and market mecha-
nisms may be involved, they are subordinate to other governing structures. Thus, governmental
processes and agencies make most of the basic decisions regarding what is to be done in fields that
range from national security to primary and secondary education to urban garbage collection.
There are a number of important activities where, while private organizations play an impor-
tant role, these are not-for-profit actors, not for-profit ones. Higher education is very much this
way in the United States. In some important activities and sectors, for example the criminal jus-
tice system, for-profit actors are to a considerable degree fenced out. Later in this paper, I will

elaborate on these examples and others.
However, even this small peek into this varied and complex picture highlights the oversimpli-
fication of the widely held presumption that modern economies, like that of the United States,
are basically market economies. In particular, and as the focus of this essay, that presumption
blinds thinking and analysis from seeing clearly that different economic sectors serving different
wants and needs tend to be organized and governed in different ways. These economies are very
“mixed” in the ways in which they organize and govern the provision of different goods and
services.
Complementing the variety of economic reforms that followed World War II, contemporary
economists developed a body of theory focused on certain conditions, and certain kinds of goods
and services, where there will be “market failures” if society relies on relatively unfettered free
enterprise and market mechanisms to structure the economic activity in question, and thus where
more complex or different modes of governance are needed.3 But it is fair to say that the fact that
these cases are treated under the heading of “market failures” indicates that they are regarded
as “exceptions” to a general rule that markets usually are superior to other modes of economic
organization and governance. The analytic burden is on those that argue for other modes.
My argument here is that this perspective seriously biases deliberation about how to deal with
a number of the most challenging problems faced by modern societies and hinders the ability to
achieve an effective response. Modern economies serve an enormous variety of different wants
and needs. The technologies and other practices used to meet different ones vary greatly. It should
not be surprising that the modes of organization and governance needed to enable and induce
different activities and sectors to meet the wants they serve effectively, and in line with salient
values, differ significantly.
The title of this essay reflects my belief that the economic systems problem has not gone away,
but today cannot be addressed at the level of aggregation at which the old debate proceeded.
Terms like socialism or capitalism simply do not describe the complex mixed nature of modern
economic systems.4 While the advantages of the use of profit incentives and market mechanisms
in many areas of economic activity now are pretty much agreed upon,5 unfortunately there is at
best dim awareness that productive modern economies use a variety of other forms of organiza-
tion and governance as well, with the mix of market and non-market elements varying greatly
across economic sectors. The economic systems challenge we face is to get that mix right in
different fields of economic activity.
I want to highlight that the challenge here is a continuing one, not one that can be resolved
once and for all. Economies are not static things but always evolving. New technologies keep
on emerging, generally having the capability to enable wants to be met better but often also
having the potential to do harm. New industries emerge and grow, often posing new governance
challenges. Wants and needs change, sometimes leading other aspects of economic change and
3 This strand of economic analysis starts prior to World War II, with Pigou (1920), the widely recognized starting
point. But the “market failure” literature expanded greatly after the war.
4 Dahl and Lindblom (1953) made this point more than half a century ago. See also Shonfield (1965).
Unfortunately, recognition of it seems to have diminished over the years.
5 This has been so for a long time even in countries that wish to be considered socialist. As a prominent early
example see the analysis of the future path of British socialism by Crosland (1956). And today’s Chinese economy,
while it calls itself Communist, makes extensive use of markets.
The economic system question revisited 593
sometimes responding to them. The way different economic activities are organized and governed
also evolves, in the broad sense of that term. And the changes going on here often involve the
emergence of new modes of organization and governance designed to fit the new context better
than did the older ways of doing things. By and large these kinds of structural changes are not
predictable in any detail, much less the result of a broad national planning process. However,
the way economic activities are organized and governed is very much influenced by government
policies. And at any time there is sure to be policy argument, often heated, focused on some
economic activities or sectors deemed by some important group in the polity not to be performing
adequately in some respect, and about how to improve the way they are organized and governed.
Some readers might object that, in highlighting the economic organization problem, I implic-
itly am ignoring the two most important challenges countries like the United States are having.

One is somehow remedying the great inequalities that exist in the distribution of income and
wealth. The second is dealing effectively with global warming. While these challenges are not my
direct focus in this paper, I propose that, to a considerable extent, both are associated with the
ways various economic activities are organized and governed, and dealing with them effectively
will call for significant changes there. And to make those changes will require clear recognition of
the major differences across the salient economic sectors in how they can be effectively structured.
Today there are a number of important economic sectors where frustration and complaints
regarding the goods and services being provided or their costs, or the ways they are managed
generally, have engendered significant political pressure for at least considering major structural
reform.6 One of these areas involves companies controlling internet platforms that provide the
base for a variety of online services. Both regulatory and anti-trust issues are involved in the dis-
cussions. There is also a widespread and growing concern about the way retirement and nursing
homes, and preschool child care centers, are organized and governed in the United States. In
addition to regulatory issues, there are questions here of the appropriate role of public subsidy
and of whether these services are better provided by not-for-profit or public organizations than
by for-profit firms Another prominent issue is the scarce supply of low rental housing and the rise
in housing prices generally over the last quarter century. Pharmaceuticals pricing in the United
States is widely regarded as outlandish. For many years the financing, governance, and orga-
nization of medical care more generally has been a source of controversy. And in recent years,
the increased influence of financial institutions on the way economic activity is organized and
governed generally has raised many voices calling for reforms. There is widespread concern that
the current complex financial system that has greatly increased in size and influence in recent
years needs to be reigned in and significantly reformed. I shall widen and deepen discussion of
arenas of economic activity where we clearly are struggling to find more satisfactory structures
of organization and governance later in this essay.7
Dealing effectively with issues like these is inherently very difficult, both because there almost
always are conflicting interests involved, and because our understanding of complex organiza-
tional structures and how to govern them effectively are limited. However, the challenge is made
significantly more difficult by the proclivity of economists to espouse relatively pure market orga-
nization and governance as a generally desirable structure, and while recognizing cases where this
is not appropriate, treating these as exceptions. Further, the characterization of the ways to deal
with these exceptions that are presented in general economics tends to be highly simplified and
abstract. There are economic specialists who study a few of the important economic sectors that
diverge significantly from the general competitive market model (like medical care) but the ana-
lytic tools they have to study non-market or mixed economic sectors presently are limited, in good
part at least because few economists have seen the challenge I am highlighting here as important.
And how economists conceptualize, teach, and write about economic organization and gov-
ernance has a powerful influence on what informed citizens think about these matters. The
teachings of contemporary economists are not the only factor behind the overblown general
6 I have been concerned for many years about the very uneven performance or modern economic systems in
meeting different kinds of human wants. See Nelson (1977).
7 Stiglitz (2019) flags most of the issues listed here and many others concerned directly with aspects of policy
bearing on equity.
594 R.R. Nelson
belief in the efficacy of relatively clean market organization and governance in contemporary
politics, but it is an important source.
The rest of this paper is organized as follows. In Section II, I describe the variety of different
ways the production of goods and services meeting different needs is organized and governed
today in modern economies. I highlight the diversity, and the significant, often dominant, role
played by non-market aspects in a wide range of arenas of economic activity.
In Section III, I consider the reasons that the organization of economic activity in modern
economies is so mixed and varied. I propose that, like other aspects of economic activity and
structure, the way different activities and sectors are organized and governed should be under-
stood as having evolved. However, government programs, and active policy making, play a
significant if limited role in shaping the evolutionary processes at work.

In Section IV, I develop further my argument that, if we are to make good policy choices
regarding the arenas of economic activity that presently are giving us trouble, and make sound
economic policy more generally, we need, first of all, to get rid of the notion that we have a
market economy with some exceptions and recognize explicitly that our economic system today
is a mixed and varied one and needs to be if we are to meet in a satisfactory way our great variety
of different needs. And then we need to understand better the economic system we actually have:
how the way we organize and govern activity varies across economic sectors, how the varied
system we have evolved, and its areas of strength and weakness. This is an absolutely necessary
first step toward building an analysis that can help guide us in evaluating and, where needed,
putting in place needed reforms of the economic activities and sectors that are giving us trouble.
In Section V, I consider a group of economic sectors that make up a large and growing
share of economic activity in modern economies that have characteristics to which contemporary
economists have paid little attention. These are sectors providing goods and services that have
both private good attributes, in that they are provided to particular users who benefit from them
directly, and also public good attributes, in that society at large is strongly influenced by their
provision. Their providers in many cases involve a mix of private firms and non-market organi-
zations, and their funding tends to involve both user purchases and public support. One might
suspect that society is having a hard time figuring out how to organize and govern sectors like
these, and it is.
Sectors and activities, as the above, that differ significantly from the simple market model
of economic activity conceptualized and taught by economists, and which strongly influences
the views of much of the lay population, make up a very large share of what goes on today in
modern economies. We need to recognize far better than we currently do the complexity and
variegation of our political economies if we are to deal effectively with many of the fractious
economic challenges that we face.8
2. Our complex heterogeneous economy

I propose that if you were to ask a professional economist or a well-read lay person in the United
States or other high income countries how their economy was organized and governed, almost
all respondents would say that their economy was a market economy, based on profit-oriented
private enterprise disciplined by competition on the supply side of markets, and free choice by
potential customers regarding what to buy and from whom on the demand side. Regarding the
role of government in economic activity, most respondents would say it is to provide a legal
environment to enable a market system to work well. Many would go on to say that of course
the government also plays other roles in the economy, including managing monetary and fiscal
policy to keep the economy in macroeconomic balance, providing public goods like national
security, and public health, that markets mechanisms alone would not adequately provide, and
regulating some economic activities so as to prevent behaviors that are economically or socially
8 I want to stress that the position I am taking here is not anti-market. Rather, it is that market organization
should be understood as one of a variety of forms of organization and management used by modern economies to
govern different arenas of economic activity. Market organization suits some better than others, and where it is used is
almost always accompanied by non-market elements.
harmful, such as products that could harm users, practices that are dangerous to workers, and
what firms do more generally that contribute to global warming. Many would mention poverty
and disaster relief and various “welfare state” programs designed to assure that all citizens receive
at least a basic level of the goods and services needed for decent living. But these would be seen
as supporting, supplementing, and orienting the core market economy. This basically is the view
presented in most of today’s standard economics textbooks.
The case I am making here is that even this eclectic view greatly oversimplifies the way eco-
nomic activity is organized and governed in modern economies. My focus is on the way we
organize and govern the many different activities and sectors that provide the goods and services
that serve to meet our multiple and varied needs and wants. As I said earlier, I do not deal here
with how the distribution of disposable income among members of the population is determined

in modern economies9 ; on the other hand, an important part of my analysis is concerned with
how different goods and services are made available to those who can benefit from them, and this
clearly is a very important factor determining the well-being of different members of the society.
The examples that follow are of how different economic sectors and activities are structured
in the United States. While there are important differences, the picture in other high income
countries is broadly similar.10 I proposed above that the way different sectors are organized and
governed needs to be posed in dynamic terms, as a moving picture, and later in this paper I will
take that perspective. But first, it is illuminating to look at a snapshot.
Today many economic activities and sectors do look a lot like the economic textbook model,
with market mechanisms dominating, and non-market ones in a subsidiary role. These include
many service industries; restaurants, hotels, and retail stores are examples. They include a num-
ber of manufacturing industries, for example, many of the textile industries. The basic facilities
in these industries are almost always privately owned, and the firms involved serve a market
demand. Their managers aim to make a profit or at least provide a decent living for those who
have invested in them. Generally, managers have a wide choice regarding what they provide and
how and set their own prices constrained by competition but not by regulation.
On the other hand, all of these industries operate under regulatory regimes designed to pro-
tect the public from hazards that managers focused on making profits might otherwise ignore.
Restaurants are required to meet standards of food safety, including both the nature of the inputs
used and the cleanliness of the kitchen and storage facilities. To be sold on the market, a range
of items of clothing is required to be not flammable. Virtually all economic activities and sectors
are subject to specific regulation of these kinds intended to protect customers from buying things
that could harm them and also regulations designed to protect workers. And of course in recent
years environmental protection has been an important part of the regulatory picture.
Needless to say, this body of industry-specific regulation is subject to continuing controversy
between those who see prevailing regulations of this sort as too confining and those that see them
as far too loose. But while often treated by economists as special cases, government-imposed
industry-specific rules aimed to protect customers and workers today are a basic aspect of the
governance of market activity in almost all market-oriented sectors in almost all countries.
In many economic sectors generally thought of as market organized, the role of non-market
institutions goes much farther than simply regulation. Consider the automobile industry. As
with hotels and restaurants automobile design and production is subject to a variety of regula-
tory requirements, but the role of non-market institutions in activity related to automobiles is
much more extensive. The use of automobiles by society is dependent upon publicly provided
infrastructure—the road system—and on a body of public traffic law and its enforcement.
The range of industries, populated by for-profit firms selling their wares on markets, that are
dependent on government for provision of needed infrastructure, and often for a specific legal
regime oriented to their needs and to controlling the hazards they might generate, is substantial.
Earlier I pointed to the airlines and the planes they use. In the United States both the running
9 The bargaining power of labor and the strength of unions more generally clearly is a major issue here. I do not
treat these matters in this essay.
10 Shonfield (1965) provides a broad characterization of the differences in economic organization and the role of
government that emerged after WWII among different high-income economies. But his level of analysis is much more
aggregative than the one I am developing here.
596 R.R. Nelson
of airlines and the production of the passenger planes are done by for-profit firms selling their
wares on a market. (In other countries the structure often is more complex.) However, these
industries could not operate without the presence and operation of airports, which are largely
publicly financed and often managed by a public or quasi-public organization, and an air traffic
control system that is managed by a government agency or a publicly controlled private one. Or
consider pharmaceuticals. In addition to being tightly regulated, the for-profit pharmaceuticals
industry relies on publicly financed research upstream from pharmaceutical development, and
public support of the training of the scientists they employ. And a large part of the market for
pharmaceuticals is supported by, and in many cases structured through, government programs
that pay the cost of medical care.
As I have noted, many characterizations of the workings of “market” economies recognize the

need for basic infrastructure and a legal regime to enable effective operation, and see the provision
of these as a role of the state. However, these functions tend to be regarded as providing platforms
for economic activity in general, and there is little recognition of how much of infrastructure and
legal regimes are industry- or activity-specific.
The standard conception of how firms serve customer demands sees them as selling the prod-
ucts or services they provide directly to those that want them. However, there are important
economic sectors where, while for-profit firms are the principal providers of the service supplied,
and potential recipients are free to decide whether or not to use that service and from whom to get
it, the structure of their relationship does not look at all like the textbook market model. Rather,
access to that service is free or at a price far less than cost, with the revenues of the supplying
firms coming from things tied to the basic service. A striking example is television programming,
generally (not in all cases) provided by firms aiming to make a profit, but seeking this not by
directly charging the viewers of the programs they provide but from advertisers who piggy-back
on those programs. Most newspaper and magazine suppliers do require their readers to pay for
access, but usually the lion’s share of their income comes from advertisers. And today of course
this mode of “market” organization is the way several “platforms” operate on the internet. There
are some serious questions about whether the standard arguments about the desirability of mar-
ket organization of economic activity have relevance to this variety of market organization and
about the strength and nature of the regulation they should be put under, which have come more
sharply to attention with the growing importance of services based on the internet.
Virtually all advocates of private enterprise and markets recognize the importance of competi-
tion in spurring and constraining for-profit firms to keep prices in line with costs and pressuring
them to try to meet user demands. And our political systems clearly are resistant to firms obtain-
ing and holding great market power over the provision of goods or services that society deems as
essential to normal life styles. This is a continuing struggle. Societies have had difficulty in pre-
venting firms from gaining great market power in a number of important economic sectors or in
breaking up dominant firms when they arise or effectively regulating their behavior. But the con-
tinuing efforts by government agencies to control market power and the behavior of economic
units that have it can have a non-trivial effect on what firms do.
Almost all countries, and the EU, have anti-trust policies on their books. However, the enforce-
ment of anti-trust tends to be sporadic and problematic not only because of the political influence
of companies that are large enough to attract anti-trust attention but also because of concerns
that breaking them up or otherwise constraining them will result in a decline in economic effi-
ciency. Indeed, a standard defense of firms who are under anti-trust attack or threat is that they
have achieved their market dominance because they have served user needs so well and because
of their efficiency. Anti-trust cases are not easy for prosecutors to win, and the remedies that can
be imposed often are of highly uncertain effect.11
On the other hand, anti-trust enforcement, or the threat of it, often is an important factor
affecting the behavior of dominant firms in industries of this sort. The breakup of the then dom-
inant telephone company AT&T half a century ago is a good example. Today anti-trust action
clearly is a major threat for the companies that have come to dominate important platforms on
the internet. And what those companies do clearly has been influenced somewhat by that threat.
11 Wu (2018) describes and laments the limitations of anti-trust enforcement in the United States.
While the employment or threat of anti-trust makes sense in sectors where there is good reason
to believe that a more competitive structure would be viable and desirable, other approaches to
the monopoly problem are called for where a regime involving significant competition among
providers does not seem to be attainable or, if put in place, in the public interest. Both economists
and the lay public generally recognize that certain economic sectors are what have been called
“natural monopolies”: sectors where there are significant economic advantages in concentrating
provision of the goods and services involved in one or a very few suppliers. These advantages can
come from significant economies of scale or scope or matters of coordination that can best be met
under a unified management. Where such conditions obtain, leaving the arena to unconstrained
private entrepreneurship almost inevitably is going to result in one or a few firms dominating the
market. Yet efforts to use the threat of antitrust to prevent the development of concentration in

new industries that have these characteristic, or to break up dominant firms after they have taken
hold, are going to be frustrated and counterproductive. Thus our political economy often turns
to other modes of control.
The term “public utility” often is used to refer to sectors providing goods or services that are
widely believed should be available on reasonable terms to all citizens and that also are thought
to be natural monopolies or, for other reasons, should have governmental overview of what they
provide and how they price. Such activities and sectors tend to be managed by public agencies,
or private ones subject to regulation regarding what they can do, their investments, and their
pricing. Over the years, the United States has treated as public utilities a wide range of industries,
including the operation of municipal water supplies, the mass generation and distribution of
electricity, telephone service, the railroads, airline travel, and the postal service. A number of
urban services like garbage collecting and bus service tend to be treasured as public utilities. The
list is similar in many European countries, which however tend to use more public management
and less regulated private management than does the United States to exercise control.
As I have highlighted, economic systems are dynamic things, not static, and their structure
changes over time. As the examples I gave above signal, the range of industries and activities
that countries treat as public utilities tends to change over time. Thus in recent years in the US
regulation of pricing and investments of the telephone system, freight rail, and the airlines has
been largely abandoned, regulation of electricity provision has softened greatly, and the federal
postal service subjected to competition from unregulated private firms. At the same time, as I
have noted, agitation has increased for either breaking up or regulating as public utilities some
of the giant firms that have achieved great market power through their ownership of widely used
platforms on the internet. The scope and nature of government’s role in directly or indirectly
managing economic activity in fields where only one or a few firms are operating and, in partic-
ular, for trying to assure a certain quality and availability of service, is controversial, and always
in flux, but it is a durable feature of the political economy we have.
The sectors I identified above are oriented to serving a market demand, in most cases consisting
of a number of different economic units, each making their own purchasing decisions oriented
to meeting their own particular wants. However, large parts of modern economies are oriented
to serving a general public purpose. Generally, activities of this sort receive significant public
funding, and various aspects of them may be managed by government rather than by private
firms. Programs directed to protecting national security or public health are obvious examples,
and the courts and police. In fields like these there is little controversy about the central role that
government needs to play. Public agencies, rather than the market, have the basic responsibility
for assuring adequate provision.
The government agencies and programs engaged in activities like these often procure many of
the inputs they need to do their jobs through relatively standard market mechanisms. However,
when (as is the case of much of defense procurement) what they need is highly specialized, they
may do the work in-house, or if they use private providers, under quite tight control of what is
done. And the quantity and kind of what is provided by programs of this sort is determined not
by what a “market” chooses to procure but through political and administrative processes.
Much of governmental involvement in the provision of particular goods and services is ratio-
nalized under the economists’ argument that the government needs to provide, or at least finance,
“public goods” that benefit the population as a whole, and whose effects are “atmospheric” in
598 R.R. Nelson
the sense that, while different individuals and groups may see and incur the benefits and costs
differently, once they are provided no one can be barred from or immune from them. They are
not provided to individual beneficiaries but to society (or a large piece of it) as a whole, and
decisions about the level and makeup of what is provided are argued out on the political arena.
Indeed, the activities aimed to provide benefits like public health, or national security, or the
workings of the criminal justice system, sometimes are not thought of as “economic” activities,
and the organizations undertaking these activities, like the army, or the courts, tend not to be
regarded as “economic” organizations. But they employ significant resources, and measures of
their outputs are counted as parts of our Gross National Product measures.12
The economists’ conception of “public goods” fits reasonably well a number of the economic
sectors largely operated through government programs and agencies. However, if one considers

the varied areas of major government involvement in the provision of goods and services, the
public goods conception fits some of these better than others, at least if one has in mind a sharp
distinction between public goods and private goods. Thus, one finds public financial support,
and often direct provision, of a range of goods and services, which, like private goods, serve
particular individuals who procure or are directly provided with them. However, public support
is rationalized either on the argument that provision of these services and their use by private
parties generates benefits for the whole or a large part of the population, or that in a just society
all people should have reasonable access to the good or service in question regardless of their
ability to pay for it, or in a number of cases both.
A number of “public services” are examples of the former. Garbage collection, street cleaning,
and mass transportation services like bus lines clearly serve the interests of the community as a
whole by keeping the place cleaner, healthier, and less congested. At the same time, individuals
and households and other economic units receive and benefit directly from services of these kinds.
The question of how to fund and provide services that directly benefit individual economic
units, but which also give widespread if sometimes diffuse benefits to the population as a whole,
or large groups of it, tends to be under continuing debate. Part of the argument is about how
much the direct beneficiaries should pay and the appropriate amount of government financial
support. But the debate often also is about how such services should be provided. Thus the
United States has seen periodic waves of “privatization” of provision of public services, followed
by movements to shift management of the service back to government. The contracting of the
management of prisons to private for-profit firms, which many states have done in recent years,
is extremely controversial these days, and there are strong pressures to eliminate this practice
and bring all prisons under public management. At any time one often sees a mixed system of
provision in which service is provided both by a public agency and by private firms, with the latter
under some form of regulation regarding the nature and quality of the services they provide, and
their pricing, with overall funding provided by a mix of public subsidy and individual payments.
Education is another activity that generates both public and private benefits and also is widely
regarded as a service that should be available to all, independent of income. Most of primary
and secondary education, and a good portion of university education, is funded publicly, and all
children are required to attend school. A prominent issue in this arena is whether there should
be relatively uniform education for all children through required public school attendance, or
whether diversity of the kind of schooling desired and differences in the willingness to pay should
be given outlet. In most countries, in addition to a public school system that provides free or very
low cost education, one also finds private schools that charge tuition which those seeking an
education are free to choose, which often receive government subsidy.13
In virtually all high income countries many activities serving individual needs receive subsidy
and in some cases are subject to public overview or management, on the grounds that a good
society should provide availability to all, regardless of ability to pay. These include child care
12 I note that since the services these activities provide are not purchased by those that use them, expenditure on
them by those that benefit is not available as a measure of the value of output, and the National Product accountants
are forced to use cost of provision as a measure of output. This clearly is problematic.
13 Another example of an activity that is widely regarded as generating both private and more public “benefits” is
professional sports. Here, in addition to direct spectator benefits, there often is strong city or state or national interest
in having a successful team, and funding for the team is often provided both through spectator fees and public support.
services, old age homes, and basic medical care, as well as education. In these kinds of sectors, as
in education, one sees in many countries a mix of providers, some public, some private for-profit,
and some private not-for-profit. While the organization and governance of these arenas of activity
often involve significant market elements, they certainly do not look like the market organized
sectors of the economics texts. Activities and sectors of this kind are playing an increasingly
important role in many countries and certainly in the United States. Today’s standard economic
texts are largely blind to this fact.
The organization and governance of medical care, how it is financed and operated, and the
kind of access people needing care have to it, is a striking example. Here, in the United States at
least, one finds a mix of private and public financing of delivered medical care, with direct govern-
ment funding of the care of some groups, and governmental as well as private insurance systems.

There are both public and privately owned hospitals, with many of the latter not-for-profit. It is
worth noting that several of the most prestigious providers of medical care, for example Kaiser
Permanente and the Mayo Clinic, are private not-for-profit organizations.
A major reason why much of private provision in many of these areas is undertaken through
not-for-profit organizations is widespread belief, and concern of individuals seeking the service
in question, that if the provider is largely motivated by the possibilities for making a profit,
what is provided will often be shoddy or dangerous to the recipient, unless the customer is in
a good position to judge this, which in many of the arenas is not the case. I noted above the
controversy in the United States as to whether for-profit firms should be allowed to operate
institutions of higher education. There also currently is a rising debate about the poor service, to
the point of endangering the residents, found too often in for-profit nursing homes. Regulation
is one way to try to guard against this kind of problem, but effective regulation is in many
cases difficult to establish and enforce. It sometimes is presumed that having a not-for-profit
organization do the job is likely to yield better care, but the evidence for this is limited. I note that
in many activities where customers are presumed to have only limited ability to judge what they
are getting, professional ethics is thought of as a protection. Thus private doctors are expected to
be bound by professional ethics to provide the best diagnosis and treatment they can, rather than
to maximize their own earnings. How well these protections work is an open question, but their
presence in a number of fields of economic activity indicates that there is widespread distrust of
having the profit motive be the principal driver of economic activity in these areas.
This distrust and dislike of the workings of for-profit firms and markets show up in a number of
arenas of economic activity. In addition to those cited above, the open source movement among
computer programmers and their creation and support of systems like Linux are prominent
examples. Wikipedia is another.
My basic argument is that in order to understand how the production of goods and services is
organized and governed in modern economies, it is a grave mistake to focus simply on for-profit
firms and markets. To highlight this point my final examples are the two complex collections of
activities that are widely regarded as the foundations of dynamic capitalism: finance and innova-
tion. Both are very “mixed” systems, involving both market elements and a variety of non-market
ones.
The range and influence on economic activity of private for-profit financial institutions is enor-
mous in modern economies, involving in addition to banks of various sorts, companies managing
insurance and pension plans, and a variety of other firms whose principal activity is the selling and
buying of financial instruments. But all are subject to regulation; indeed virtually all countries are
struggling with the question of how much and what kind of regulation is needed for reigning in
the tendencies of the financial system to operate in ways that cause financial instability, including
the generation of bubbles that, when they burst, cause significant economic harm. There also are
various regulations designed to prevent for-profit financial institutions from deceiving and cheat-
ing customers who lack the expertise to evaluate what they have been urged to do. And while
finance generally is thought of as private market activity, if often highly regulated, in fact in most
countries there is a variety of government programs that provide funds directly, or subsidize
private finance, for particular activities or enterprises. Development banks and small business
investment programs are examples. Public central banks have responsibility for monitoring and
600 R.R. Nelson
influencing the supply of money and credit in the system as a whole. And not-for-profit organiza-
tions, principally foundations, play a major role in financing organizations providing education,
various arenas of medical care, child care, and other activities judged under-supported by the
market and government.
And while most people tend to think of innovation as something that is done by private profit-
seeking firms and entrepreneurs, the institutions supporting and orienting innovation include
universities, governmental agencies and laboratories, scientific and technical societies, founda-
tions, the roles and importance of which vary greatly across different fields and industries where
innovation is going on.14 For instance, in the United States, government funding and orienting
of R&D plays a very major role in activities and industries oriented to national security, health,
and agriculture, and much less of a role in the chemical products and textile industries. Most of

government R&D spending oriented to issues of national security supports work in industrial
firms; public research funding concerned with medical care goes mainly to universities.
I conclude this discussion of the varied ways in which modern societies meet their diverse
needs for goods and services by calling attention to the fact that the lines often are blurry, not
sharp, between what is thought of as “economic” activities undertaken through “economic”
organizations and what is thought of as social activities or what families do.
Earlier I noted that a number of governmental activities, like those of the court system, often
are not thought of as part of the “economy.” In the same vein, consider churches and other reli-
gious organizations, the girl and boy scouts, or neighborhood philanthropic activities. Should
these be considered part of the economy? Generally those that receive the services provided by
these organizations do not pay for those services directly or at least not their full costs. And a
non-trivial fraction of the people working in such organizations and activities may do so vol-
untarily and do not receive payment. I note that the money costs incurred in providing these
kinds of services is counted in the National Income and Product accounts, but the contribution
of voluntary work is not.
Or consider the care and upbringing of children. Caring for children almost surely is among
the jobs done by humans that take the greatest amount of resources and time. And by far the
lion’s share of it still is done by families, not separate “economic” organizations. The same is
the case of providing care for elderly members of the family who need watching over and help in
many things. However, in recent years, as a result of changes in family composition and lifestyles
associated with growing affluence, a growing share of these services is provided by suppliers
outside the family. And increasing affluence also has led to the shifting of many other things
that traditionally have been done by households to business enterprises who now do much of
the work. Today there is much greater patronage of restaurants than there used to be, and much
more of the inputs to home cooking now are store bought rather than made at home. Similarly
for laundry and yard care.
I note again that when an activity is done within the family the unpaid labor involved generally
does not get counted as “economic” activity in our standard accounts, but if a person is hired and
paid to do the job, it is. More generally, an important aspect of the economic evolution that we
have experienced over the years is the continuing movement of activities into the formal economy
that had been outside of it. Should the lines between what is treated as an economic activity and
what is not be drawn in terms of where that activity is located? Or whether the transfer of money
is involved?
3. Why such a complex and varied system?

The lines between the economy, the polity, and the society certainly are blurry, and it probably
would be better to recognize these domains as not separate but overlapping. A broad concep-
tion of the domain of economic analysis would include all human activities undertaken to meet
particular needs that employ labor time and other resources that are scarce in the sense that if
14 Innovation is one of the very few complexes of activity in modern economies where there has been an empirical
study of the range of different kinds of institutions involved. There now is a significant body of research and writing
on “innovation systems.” See, for example, Lundvall (1992) and Nelson (1993).
we had more of them we would be able to satisfy some of our wants better, whether or not
provision involves exchanges or money transfer. While not often articulated explicitly, this is the
view of the scope of economics held by many economists. A much narrower conception of what
an economy is would focus on the provision of goods and services by firms or individuals for
use by others with money changing hands in these transactions. I believe this is the conception
of what economics is all about that is in the heads of most people, and occasionally economists
slip into this orientation. Under this conception, the economy almost by definition is charac-
terized in terms of market activity. The economy, as implicitly defined by the National Product
and National Income accounts that purport to measure various aspects of it, is somewhere in
between these two conceptions. In addition to goods and services sold on markets, these eco-
nomic accounts include public services whose provision costs money but which are not paid for

directly by beneficiaries (who may however pay taxes), and similarly services provided for free
by private organizations whose inputs are paid for by external funding sources, and a few mis-
cellaneous items that do not involve money payments like “imputed rent” on owner occupied
houses. On the other hand, as I noted above, it does not count volunteer work or include such
things as child and elder care provided by the family.
In any case, if one views what the economy is in other than the most narrow conception, it
is clear that modern economies use a variety of different ways of organizing and governing the
provision of goods and services—not just for-profit firms and markets. Why?
One way of explaining it is to propose that the economists’ “market failure” theory reflects rea-
sonably well beliefs widely held in the population regarding the conditions and kinds of goods and
services where relatively unfettered market organization is not likely to work well, and therefore
calling for more complex or different ways of organizing and governing the activities in question.
Earlier I noted the near universal belief that government has a range of responsibilities concerned
with protecting and advancing the general welfare, ranging from national security to providing
law and order, to basic education, to public health, and that while private enterprise may be used
to undertake some of the needed work, the responsibility is government’s. Similarly, while they
may draw on external sources of help, families are responsible for raising their children. And
regarding activities that are largely left to the market, there generally is grass roots support for
regulations assuring that products are safe, and labor of course advocates regulations to assure
work place safety. Users of certain products and services often are strong advocates for requir-
ing suppliers to provide certain types of information, and in some cases for regulation requiring
certain standards on what is provided. Once one recognizes the wide range of conditions and
kinds of goods and services where there is broad recognition that unadulterated market organi-
zation is not adequate to the task, and that supplementary or different modes of organization and
governance are needed, the fact that we have such a diverse economic system is not surprising.
A basic limitation of this point of view, however, is that it seems to suggest that, some-
how, society has a clear understanding of and is able to solve the “economic systems” problem
pretty well. In contrast, I would argue that, while there are some clear-cut cases where there
is widespread agreement on the appropriate structures, the problem of identifying and getting
in place well working modes of economic organization and governance for different economic
activities and sectors is one of the most difficult challenges faced by modern societies and we
always are struggling with it.
I go back to a proposition I made earlier: the way our diverse economic activities and sectors
are organized and governed at any time should be understood as having evolved (in the broad
sense of that term) and as continuing to evolve. I propose that the nature of the challenge and the
roles that public policy deliberation and action taking need to play in the way we organize and
govern our diverse economic activities is broadly to serve the society’s interests and values should
be seen in this light. Unfortunately, there has been little empirical research that enables one to
see clearly the details of the evolutionary processes involved. In the remainder of this Section, I
sketch some broad aspects of what I think is going on.
First of all, it seems clear that the structure of an economic activity or sector today is strongly
influenced by how it started out. In the societies I am considering here, for-profit businesses are
free to spring up in any arena where entrepreneurs think they may be able to make a profit,
and funding sources are willing to go along, except for ventures that clearly would be illegal.
602 R.R. Nelson
Thus when new opportunities are perceived to be opening up, for example, by the emergence of
a new technology, almost invariably some new firms (or branches of existing ones) will give it a
try. If some of these firms develop a business model that yields them a profit, there almost always
is a rush of additional entry, and an industry based on for-profit firms develops.
While entrepreneurs seeking ways to make a profit undoubtedly are the principal source of
new economic activity in countries like the United States, important new economic activity also
originates in other ways. I have highlighted the wide range of social needs where there is a broad
agreement that government (at various levels) has basic responsibility. At any time there is in place
a variety of government agencies with responsibility in different arenas, who can put in place new
programs if the political environment is encouraging. As a result, new activities in these arenas
can be launched relatively routinely when circumstances seem to warrant. And from time to time

broad public support develops for a new public program to meet new objectives. Project Apollo is
a dramatic example, and the greatly expanded program of university education in engineering and
the sciences that accompanied it. Or earlier the Eisenhower program of expanding the nation’s
public road system. More recently, there has been a variety of new programs aimed to deal with
environmental degradation, and still more recently new programs concerned with the Covid 19
pandemic.
In addition to private enterprise and government entrepreneurship, one should not underes-
timate the role of community organizations, professional gatherings, philanthropies, and other
private groups oriented to a public purpose, in initiating a variety of economic activities consid-
ered by these bodies to be socially desirable, but which for-profit firms do not find attractive, or
there is concern to keep profit motives out of the activity. While in many such cases the prin-
cipal route of action is through political pressure to get governmental programs going into the
area, in others it is through the establishment of private non-profit organizations to do the job.
Often what emerges is, as I described earlier, an economic activity or sector with considerable
government financial support, but with most of the work done by private organizations.
Clearly the way an activity or a sector gets started has a strong and lasting effect on the shape
it takes as it matures. However, as an activity or complex of them takes hold and grows in
importance, changes are almost certain to occur. One pattern is for activities that have begun
outside the market to attract market entry if they become significant in size and appear to offer
opportunities for profit. The recent surge of for-profit providers of child care and nursing homes
is a good example.
But since the lion’s share of new economic activity in economies like ours is the result of private
entrepreneurial action, a more common pattern of change is through government action bearing
on an industry organized through for-profit firms and markets as that industry becomes more
important. New industries that began as a collection of small firms often become concentrated
as they mature and attract anti-trust attention. Much of the industry-specific regulation that I
discussed earlier emerges in response to complaints and concerns generated as experience with
an industry grows. Programs to provide an industry with needed infrastructure similarly begin to
develop as the industry becomes of significant size and political influence. And there can develop
significant pressure for government action to control or supplement what the industry is provid-
ing, if it is not serving wants adequately in the eyes of actual or potential users. Medicare and
Medicaid are obvious examples.
While at any time only a small portion of the economic activity going on is subject to relatively
high level policy discussion, that discussion tends to concentrate on sectors providing goods or
services where there is relatively wide concern that performance is inadequate or dangerous. In
the United States, the governance and finance of medical care, prominently including how to pay
for it, has been under debate for well over half a century, and over the years has experienced
a number of major changes. Today there are arguments not only to increase the role of public
funding of care through expanded government provided insurance but also to do something about
the decline in the number of hospitals serving many regions, and especially poor neighborhoods,
and about whether or not to increase the ability of government to regulate prices.15
15 In my view, while dated and hence not covering recent developments, Star (2013) remains the best broad coverage
of the many issues that have been under debate about how to organize and govern medical care.
In other arenas, as I have noted there is growing pressure to regulate and perhaps break up
the giant firms that have grown up and control important platforms based on the internet.16 And
after a period of weakening regulation of financial institutions, there now are strong pressures to
tighten them up again, and to have better national control over the kinds of investments being
made.17 Today there is considerable advocacy for greatly increasing public funding for child care
and care of the elderly,18 and while there now is little discussion of how increased care is to be
delivered, that question will come up soon.
I will discuss some of these cases in more detail later. Here I want to flag two things. First, in
each of these arenas much of the dispute is between those arguing for reforms that increase the
role of non-market institutions and those arguing for the maintenance or extension of the role of
markets. Second, in virtually all of these arenas the argument for market organization tends to

proceed behind a background presumption that, while there are exceptions, free enterprise and
free markets generally are the best way of organizing economic activity, while the arguments for
more complex or different modes of organization tend to be specific to the context and somewhat
ad hoc.
4. Reformulating the economic systems problem

The way economic activity is structured for the most part evolves without any high level delib-
eration, driven by the interests of the parties who control what goes on in a sector, and by the
principal users of what they provide, and their major suppliers. In the arenas of economic activity
where a government agency has overview or is otherwise involved, regulatory regimes and other
government policies tend to adapt to the changes going on generally without much in the way
of political controversy. But as the examples I gave indicate, high level attention does tend to
be drawn to areas of economic activity where there is widespread concern that performance is
inadequate in at least some important respects and there is a politically influential group call-
ing for particular changes they deem necessary. Economic arguments play a major role in such
deliberations.19
While economists tend to go into these arguments with a conceptual orientation that sees
market organization as generally the best way of structuring economic activity, as I have high-
lighted they also recognize that there are exceptions to this general principle. Indeed prominent
economists have been forceful advocates for adequate public funding of a variety of goods and
services that they see as serving collective needs (e.g. basic scientific research), for public support
of the provision of goods and services where there is widespread sentiment that access should
not be limited by ability to pay (basic medical care is a good example), for imposing a tax as
well as strict regulatory restraints on effluents that contribute to global warming, and for bet-
ter controlling externalities more generally, for vigorous enforcement of anti-trust law. Thus in
analyzing particular cases, many economists well recognize that relatively straight forward mar-
ket solutions may be quite inappropriate and that a more complex or quite different regime of
organization and governance may be needed.
However, as I have stressed, while general courses in economics usually do bring up matters
like public goods and externalities, the broad picture presented is that of a market economy with
some exceptions. There is little explicit recognition that only a small portion of the economy is
organized and governed through market structures that look like the textbook model, or that
16 See Petit (2020) for a provocative set of proposals.

17 Stiglitz (2019) has a good discussion.
18 See President Biden’s Build Back Better bill.
19 I note that the pro-market orientation of most western trained economists rests on a collection of different beliefs
and arguments, which are not fully consistent with each other. The case for markets that tends to be stressed in the
mainline literature is that market organization of economic activity leads to an efficient use of an economy’s scarce
resources, in that costs of production are kept as low as possible and the allocation of resources to the provision of
different goods and services is best tuned to consumer wants. But some schools of economics assign the virtues of
competitive market organization largely to its ability to respond rapidly to changes in consumer demands and resource
supply conditions, as contrasted with the more static neoclassical argument. And, following Schumpeter (1942), for
many economists and lay persons the principal argument in favor of capitalism is that that it is a superb engine of
economic progress, a very different perspective than one which stresses efficiency in the allocation of resources, given
technological knowledge.
604 R.R. Nelson
virtually all economic activities are associated in some degree with one or more of the conditions
that cause unadulterated market organization to be infeasible or socially problematic.
The consequences of this mindset go beyond oversimplified understanding of how our
economies actually are structured and how they work. In consideration of questions regarding
how a particular activity or sector should be structured, this point of view induces an inher-
ently biased orientation. Market organization is treated as the norm: the way economic activities
should be organized, except when there are market failures. Other more complex ways of orga-
nizing and governing economic activity are treated as exceptions and need to be justified. The
burden is on those who advocate something other than a relative straightforward market solution
to show why the latter is not feasible and appropriate.
An ironic consequence is that professional economists at times find themselves arguing that

certain markets need much more strict regulation, or for public provision of certain goods or
services, against lay persons or organizations who are citing the pro-market arguments that they
have been taught in their economics classes.20
The pro-market bias of standard economic teaching clearly is welcomed by those holding a
general philosophical-political point of view that sees government as innately oppressive, and
therefore seek to keep government as small as possible and limit its influence on human activ-
ity. Organizing economic activity through markets is seen as a way of avoiding heavy-handed
government involvement in the day-to-day activities of people.
Of course it may be countered that, particularly in arenas where one or a few firms dominate
the action, the markets they control can be the principal constraints on individual freedom, limit-
ing the range of employment opportunities and the nature of work, the goods and services that are
available and their prices, and dominating relevant politics. Clearly, in many cases legal protec-
tion provided by government is essential for individual liberty, and many government programs
are aimed expressly at enhancing the abilities of people to live viable and rich lives.
However, many people and groups believe that a potentially despotic government is the prin-
cipal danger to liberty, and that having a market economy is the best way to keep government
small. And, needless to say, this perspective is eagerly taken aboard by individuals and organiza-
tions whose income and influence depend on the interests of business and finance being upheld
in deliberations regarding public policies of a wide variety. It enables them to claim their own
positions on these matters as being in the general interest.
Clearly belief in the near universal economic efficacy of market organization, often combined
with a desire to keep government as small as possible, molds the position of those who consider
themselves to be economic and political conservatives. And this point of view enables various
private interests to march under a public interest flag. While some of us believe this orientation
is a major obstacle to making good public policy, at least it is broadly coherent.
Here I am arguing for an alternative general view of the economic organization problem. It is
that we have and need to have a truly mixed and varied economic system, which is not the same
thing as a market system with some additions and exceptions. And to have in place a system that
adequately meets our economic wants and social goals is a continuing political challenge.
My position is that, in contrast to viewing market organization as the norm and other or
more complex modes as exceptions, it is important to recognize, right from the start, that there
is a variety of different mechanisms and structures that can be used to govern and organize
economic activity—the way we use our scarce resources to meet human needs—and that each
has certain strengths and weaknesses, the importance of which depends on the nature of the need
being served by an activity, and the nature of activity itself. Different wants and activities call
for different modes of organization and governance. We need to look at questions of how to
organize and govern economic activity in this way, rather than to start from market organization
as the base and generally preferred case and then consider the circumstances that might warrant
consideration of other or more complex modes of economic organization.
The broad factors relevant to the efficacy of a mode of organization and governance are rel-
atively clear. They certainly include prominently the nature of the needs and wants that are to
20 Stiglitz (2019) is rich with arguments as to why simple market organization does not work well in particular
cases of concern to him.
be met, whether they are individual (or family or small group) ones and the goods and services
employed to meet them used directly by the users, or public in the sense that the provision of
goods and services in question affects the well-being of a large community, or has elements of
both. It also is important whether or not it is deemed morally acceptable that access be rationed
by ability to pay or whether at least a degree of access to the good or service in question is
regarded as a human right, in the broad sense of that term. There also is the question of whether
a recipient of the good or service in question is capable of evaluating it appropriately, and if not
how to assure safety and effectiveness.
The factors to be considered of course also involve the nature of the activities used to meet
particular wants, and the real costs incurred. A particularly important matter is whether those
costs are reasonably fully counted in the prices of the inputs used, or include as well some that

are not priced, but involve harm to others or degradation of capabilities to meet other kinds of
wants. And if one takes a long run perspective on how an economic sector performs, as one surely
should in considering different ways of organizing and governing an economic activity, ability to
adapt to changing conditions and to innovate productively certainly should weigh significantly
in the assessment.
I want to highlight that while many of the benefits and costs that need to be considered are
associated with money expenditures, a number are not. We need to get away from the argu-
ment, often professed by market aficionados, including some economists, that putting in place
policies and organizational structures that would better protect environmental health, or worker
or user safety, or lead to more equitable distribution of a good or service, or sustain or expand
organizations doing things that society deems valuable but are not collecting enough money for
their services to survive on their own, comes at the cost of “economic efficiency.” This argument
implies that economic efficacy is to be assessed in terms of dollars and cents paid for something,
as contrasted with individual and group well-being. This is a most unfortunate implication of the
more narrow conception of what economics is all about and does not obtain if we think more
broadly of what our economy is and what we want it to do.
The importance of these different variables and values obviously differs greatly across eco-
nomic sectors and activities. In many of the aspects I noted above, making cotton clothing differs
from generating and distributing electricity. Running hotels is different than providing medical
care. Providing good extra-family child care and elder care have some attributes in common with
medical care, but also important differences. Education has its own special attributes. So does
access to the internet and its various apps. How to govern what financial institutions do involves
a number of particular challenges.
No form of governance is going to be perfect for any context, but some can be argued to take
better account of the salient features of a particular industry or sector than do others. And in
many cases a mix of mechanisms may do a better job than a single one, particularly if there is
a variety of activities and objectives involved. I propose that a principal reason why one finds
elements of market organization in such a wide range of activities is that market mechanisms
can be effectively constrained, and complemented, by other structures in so many ways. As I
highlighted earlier, in modern economies one finds extensive use of markets, but one finds very
few economic activities or sectors that look like the simple straightforward markets depicted in
the standard economics textbooks.
Also how well a particular regime of organization and governance actually works can be
learned only through experience. Therefore appraisal needs to be continuing.
However, as I have stressed, an empirical study of which forms and combinations of different
modes of organization and governance work decently well, or poorly, in different industries and
sectors has been very limited. Almost all analyses and writings done during the first half of the
20th century on the effectiveness of different “economic systems” failed to recognize the great
variety there was and is within any economy. And more recent research and writing by economists
relevant to this question has mainly focused on industries where for-profit firms and markets play
central roles and has paid virtually no attention to the more complex and different ways in which
most economic sectors are organized and governed. This makes going forward effectively on the
innately difficult agenda I am arguing we face, whether we acknowledge it or not, even more
difficult than it need be.
606 R.R. Nelson
5. The challenge of governing the provision of goods and services that

are used by private parties but which also provide society-wide
benefits
I have proposed that, for better or for worse, in its deliberations regarding how to organize and
govern a class of economic activities, society is strongly dependent on the way economists see the
problem, and unfortunately the perspective on these matters that has come to dominate economic
thinking, teaching, and writing, has been overly narrow. An important reason, I would argue,
is that there has been a strong proclivity to let quite simple theoretical models block, or at least
significantly dull, recognition of important aspects of the complex economic reality that do not
fit the basic premises of the models.

As an important example, I call attention to the sharp distinction made in virtually all eco-
nomic analyses between private goods and public goods. The economists’ strong inclination to
highlight the role of markets clearly is related to their presumption that the lion’s share of eco-
nomic activity is associated with the provision and use of “private goods.” And certainly a large
portion of the different goods and services produced and used in a modern economy is private
goods, as economists define the category. For goods like peanut butter and pajamas and services
like haircuts and house cleaning, it certainly is a reasonable first-order presumption that only
the user receives benefits from their acquisition. Economists do recognize that for certain private
goods there may be certain “externalities” (like noise generated by a powered lawn mower) or
hazards involved in their particular modes of use (the lawn mover again). And there is recog-
nition that users may have limited knowledge enabling them to evaluate the efficacy and safety
of some of the goods they buy. But for pure private goods, with the use of suitable regulation
if needed, and if the sector involved can be kept reasonably competitive, organization and gov-
ernance of provision through for-profit firms and markets generally works reasonably well not
only in theory but in practice.
As I have highlighted, economists also are very clear that certain economic activities, and the
associated goods and services, do not involve provision to particular users who benefit from them
but rather create society-wide benefits. Disease eradication or prevention, clean air, and national
security are standard examples. While different individuals and groups in society may value the
benefits differently, they are not served individually but as part of the collective. Clearly there
can be no “market” that can determine the kind and quantity of the pure “atmospheric” public
goods a society procures; this needs to be decided through collective political processes, although
private firms and contracting mechanisms may be used as instruments of provision. As with the
private goods conception, the economists’ conception of pure public goods fits reasonably well
a number of the goods and services used by a society to meet its wants and needs.
But it is noteworthy that many of the most pressing problems of sectoral organization and
governance we presently are facing involve goods, but more often services, that have both private
and public good attributes: a large and heterogeneous collection that I described in Section II.
As I discussed there, these goods and services are provided to and used by private parties who
benefit directly from them; however, society at large also has a significant interest in their effective
provision, and often in what is provided.21 Earlier I flagged urban services like mass transport
and garbage collection as examples. Similarly primary and secondary education. In these cases
there are tangible benefits to the broader community from services that are directly used by
individuals. Hence there are good reasons for society to encourage or even require that those
services be provided and to have an interest in their quality and character. And this calls for at
least a degree of public support and regulation.
Or consider medical care or extra-family child care. These are private goods in the sense that
the direct beneficiaries are those who use the service. But they also are public goods because
there is broad social concern, stemming from beliefs about human rights and how these should
be assured, that these services be available to all, with access not barred by inability to pay.22 For
those who hold this value, availability of these services to all that need them can be viewed as a
public good that contributes to the quality of the society in which we live. Obviously there are
21 Calling these private goods with externalities does not characterize them adequately.
22 Also good child care certainly creates the kind of social benefits that education in general does.
differences among members of society regarding the value of this “public good,” but similarly
there are differences in how different people and groups value what is bought through defense
expenditures or regarding any atmospheric public good.
In my discussion in Section II of economic activities that have these characteristics I used as
examples a variety of public services and education, but the range is far wider. Newspapers, radio
and television news broadcasting, and particularly important in recent years, provision of news
and opinions on the web not only clearly provide private benefits to members of their audience
but also have a strong influence on the general public ambiance, and in some cases on political
action taking, which are matters of collective concern. What people read or listen to molds what
they believe and the political positions they take, and how they vote. This makes the arguments
about how much and what kind of restrictions and requirements to impose on content, the role

of policies to support competition, and public finance of non-profit organizations in this arena,
especially controversial. But there is no getting away from the fact that what is being provided
here is at once a private and a public good.23
The behavior of financial institutions also has both private- and public-good attributes.
Finance generally goes to individual economic units. But there clearly is a social interest in preserv-
ing certain kinds of firms (including some local businesses) who often do not do better financially
than break even, and non-profit organizations providing desired services of various kinds, even
though for-profit financial institutions do not regard these kinds of organizations as attractive
customers. It should not be surprising therefore (while often overlooked) that our financial sys-
tem includes, in addition to for-profit financial companies oriented to funding firms and projects
deemed likely to yield a profit, a number of government programs concerned with funding certain
kinds of activities and organizations deemed to be socially valuable if not profit-earning and also
a number of philanthropies. To my knowledge, there has been little research and writing on just
how this mixed system works, or on just what the criteria for satisfactory performance ought
to be.
As I highlighted in Section II, reflecting that they serve both private and public interests, in
many of these sectors the supply side is made up of a mix of different kinds of organizations:
for-profit firms, government providers, and private not-for-profits. And provision tends to be
funded by a mix of user payments and government provided funds and sometimes contributions
from foundations and charities.
As I noted earlier, in sectors that provide goods or services that are both private and public
in the sense I have been developing above, there is the challenging question of how to determine
what and how much should be supplied and the allocation of supply among different groups
of users. In pure private good sectors, with for-profit firms the providers and customers making
their own decisions regarding what and from whom to buy, we rely on “the market” to make
that determination. In sectors where government agencies are responsible for the provision of
pure public goods, just what and how much is provided is decided through political process and
administrative decision making.
In sectors of the sort I am describing here, with both private and public interests and values
at stake, and often involving a mix of both private and public providers and sources of finance,
the mechanisms at work are much more complicated. In some of these sectors, the government
agencies that provide some funding and define the regulatory structure have a responsibility for
assessing the performance of the sector as a whole. But their capabilities to actually control what
and how much is done tend to be limited by the fact that many of the actors on the supply
side are private, and so too the direct recipients of the service being provided. Thus when many
families cry out that they cannot find affordable extra-family child care, who is responsible for
doing what? The wide concern about this matter suggests that the availability and pricing of
extra-family child care is not generally viewed as something that simply should be left to market
forces, and yet there also is reluctance to see government as a child care czar. How in fact should
23 And of course a central reason for the political controversy that sometimes rages around the content and orien-
tation of publicly supported education is very much influenced by concerns about how education affects the way people
think about a wide range of ideologically controversial issues.
608 R.R. Nelson
availability and pricing be determined? There is little evidence that this question is being seriously
considered.
While these kinds of “mixed” economic sectors that generate both private and social values
are an important part of our political economy, there seldom is any explicit recognition of them,
and the organizational and governance issues they pose, in the standard economic writings.
As I said earlier in this essay, I do not deal here directly with how modern economies determine
the distribution of money income among different members of the population. However, it should
be obvious that the way societies structure and govern economic sectors of the kind I have been
describing plays an enormous role in determining the well-being and standard of living more
generally of different members of society. But we know far less about these kinds of activities
and sectors than we should if we are to organize and govern them fruitfully.

6. Reprise
A basic theme running through this paper is that the way economists and well-versed lay persons
think of the way economic activity is organized and governed in modern economies like that of
the United States is badly oversimplified and largely blind to the complex and varied structures
we have in large portions of the economy. In the previous section, I have described an extensive
and important collection of economic activities where this is very much the case. But the diverse
range of ways that we organize and govern economic activity that I described in Section II that
do not fit with the standard model is much wider than that.
We need to shake loose from the belief that we have a market economy with some excep-
tions and the ideological baggage that goes with that perspective. Our economic systems today
employ aspects of market organization in the way we govern a wide range of economic activities
but almost always accompanied by various non-market elements supplements and constraints
tailored to the specifics of the wants being served and the activities used to meet them. And in
many arenas of economic activity markets play at most a subordinate role. More generally, we
need to recognize more clearly that our economic system has to meet a vast variety of differ-
ent needs and wants, the methods used to meet these vary greatly, and so too the most effective
modes of organizing and governing the economic activities involved. Our economies are dynamic
political economies and we face the continuing challenge of molding and remolding the economic
structures we have.
It is highly important that we come to understand better the complexity and variegation of
the economic system we actually have, and how the current structures came to be. This kind
of understanding will not of itself enable us to deal effectively with the challenges for designing
structures of organization and governance that will deal effectively with the new technologies and
economic activities that are always coming into our economic world, or to reform effectively the
organization and governance of prevailing economic sectors and activities whose performance
is widely recognized as problematic. However, seeing more clearly the structures of economic
organization and governance we actually have and the evolutionary paths that got us where we
are is an essential base for dealing with that challenge effectively.24
References
Crosland, A. (1956), The Future of Socialism. Constable and Robinson: London, UK.
Dahl, R. and C. E. Lindblom (1953), Politics, Economics, and Welfare. Harper and Row: New York, NY.
Fukuyama, E. (1992), The End of History and the Last Man. Free Press: New York, NY.
Lundvall, B. (1992), National Systems of Innovation. Pinter: London, UK.
Nelson, R. (1977), The Moon and the Ghetto: An Essay in Public Policy Analysis. W. W. Norton: New York,
NY.
24 In this paper I have not addressed directly the problem of highly unequal income distribution, or the global
warming problem, which are great plagues on modern economies. However, I would propose that adoption of the
view of economic organization and governance that I have developed here is a necessary, if not sufficient, condition for
dealing with these problems effectively.
Nelson, R. (ed.) (1993), National Innovation Systems: A Comparative Analysis. Oxford University Press:
Oxford, UK.
Nelson, R. (2002), ‘The problem of market bias in modern capitalist economies,’ Industrial and Corporate
Change, 11(2), 207–244.
Petit, N. (2020), Big Tech and the Digital Economy: The Moligopoly Scenario. Oxford University Press: Oxford,
UK.
Pigou, A. C. (1920), The Economics of Welfare. MacMillan: London, UK.
Schumpeter, J. (1942), Capitalism, Socialism, and Democracy. Harper: New York, NY.
Shonfield, A. (1965), Modern Capitalism. Oxford University Press: Oxford, UK.
Star, P. (2013), Remedy and Reaction: The Peculiar American Struggle over Health Care. Yale University Press:
New Haven, CT.
Stiglitz, J. (2019), People, Power, and Profits: Progressive Capitalism for an Age of Discontent. W. W. Norton:

New York, NY.
Wu, T. (2018), The Curse of Bigness: Antitrust in the New Gilded Age. Columbia Global Reports: New York,
NY.

NELSON The Economic System Question Revisited

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Industrial and Corporate Change, 2022, 31, 591–609

The economic system question revisited

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2. Our complex heterogeneous economy

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3. Why such a complex and varied system?

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4. Reformulating the economic systems problem

16 See Petit (2020) for a provocative set of proposals.

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5. The challenge of governing the provision of goods and services that

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