Comparing Economic Systems

1. Comparing Economic Systems Chapter 16

2. Capitalism • An economic system in which individuals own and control the factors of production.

3. Capitalism became the dominant economic system in Europe and the U.S. in the 1800’s. • This system emerged as part of a series of economic systems over the last several centuries.

4. During the Middle Ages, Europe’s main economic system was manoralism , with land-owning nobels granting peasants the opportunity to work the land in exchange for fixed payments.

5. Population growth encouraged the expansion of trade. • As trade increased, people began to invest money in businesses to make a profit.

6. Over time, the powerful land-owners began to decline. • Kings grew stronger politically and were able to form centralized governments. • The rise of these new nations created a need for national currencies and banking or banking system, two key institutions of capitalism.

7. Between 1500 and 1800, the governments of major European nations used the theory on mercantilism to direct their economics.

8. Mercantilism defined a nation’s power in terms of its supply of gold and silver. • Since these commodities were rare, Europeans generally believed that a nation could grow stronger only by gaining more wealth (and therefore power) than other nations. • This theory encouraged European nations to establish colonies around the world.

9. By the mid 1700’s, many Europeans believed that mercantilism interfered with economic growth. • Some economists encouraged governments to grant individuals more economic freedom.

10. One of the most influential of the reformers opposed to mercantilism was Adam Smith • Smith’s book, Wealth of Nations, argued that economies would prosper without governmental interference.

11. He wrote that competition in the marketplace would eliminate inefficient businesses and that people would be driven by profits to succeed. • Later this type of economic system became known as a free-enterprise, or capitalist, system.

12. Capitalism currently functions with varying degrees of government involvement. • Governments in every capitalist economy play an active role in assisting the poor and in providing public services as law enforcement, education, and environment protection.

13. In the U.S. the government intervenes in the economy only on a limited basis • In other nations the government has a great deal of influence on how the economy is run. • Ex. – Japan, Germany, France, South Korea

14. Socialism • An economic system which protects the idea of private ownership by individuals (as in Capitalism) and promotes the idea of ecomonic collectivism, in which everyone in society owns all and shares all.

15. There have been many different forms of socialism used throughout world history.

16. Socialism developed during the 1800’s in response to conditions created during the industrial revolution. • Ex. – Long working hours, low wages, unhealthy working conditions, child labor.

17. Largely in response to these conditions, socialists began to question the capitalist system. • Some favored an end to capitalism and the establishment of an economic system (socialism) that would provide a more equal distribution of wealth.

18. Some socialists believed in a peaceful, slow change in their existing country’s society. • One of these adaptations became known as market, or democratic, socialism.

19. Under market socialism, the people retain basic human rights and elect government officials. • Ex. - Sweden

20. In modern market socialist countries, the state (government) owns and controls businesses/industries in 4 major areas: • Transportation systems – ex. - British airlines • Banks or banking systems • Health care – ex. - Hospitals • Major industries – ex. – steel, energy, ect.

21. A socialist country has both a public and a private sector: • Public Sector – industries, businesses, etc. owned and controlled by the government. • Private Sector – businesses that individuals own.

22. Some socialist countries are referred to as “welfare states” because they provide many free services to their citizens. • Ex. – free health care, free dental care, retirement

23. How are all these free services paid for by the government? • Taxes are very high, especially on the middle and upper classes. • Ex. – some of the wealthy pay as much as 60% of their income in taxes

24. Communism • An economic system in which the state owns ALL means of production, distribution, and consumption and no private ownership is allowed by citizens. • In its purest sense, wealth is to be equally divided among all citizens.

25. Fredrick Engels and Karl Marx wrote a pamphlet entitled “Communist Manifest” which explained the economic system of communism.

26. Marx and Engels said that all human history was a struggle between the rich and the poor. • They also said that the state was used by the rich to keep their wealthy positions and to keep the poor down.

27. During the industrial revolution Marx and Engels were angry about how workers were being exploited in factories by the rich factory owners. • This situation encouraged them to devise a new type of economic system where wealth would be spread out more evenly among all citizens.

28. Marx said the state was a tool for the bourgeoisie (rich factory owners) to stay rich and it must be destroyed in a bloody, violent revolution as the proletariat ( the working class) would take over everything, killing the bourgeoisie and state leaders.

29. The communist would guide them in setting up their system and then would disappear. • This was a lie.

30. Goals of Communism • Equal distribution of wealth. • No socio-economic class.

31. In 1917, the Bolsheviks (later called communist) overthrew the existing government in Russia and proclaimed Russia the world’s first communist nation.

32. Communist countries are usually totalitarian dictatorships where the top communist leader or leaders run the government and forces every citizen to obey communist ideas.

33. Production levels for goods are usually poor because workers get paid the same no matter how hard they work. • This is the major reason why communism fell in the Soviet Union (late 1980’s, early 1990’s).

34. In communist countries, no religion is allowed. • The only loyalty and worship goes to the state.