Economic Systems
Economics: The study of how people seek to satisfy their wants and needs by making
choice.
Economic Systems: The method used by a society to produce and distribute goods and
services.
Often closely linked to a nation’s form of government.
“Who gets what, where, when, and how?”
Three Key Economic Questions
In trying to determine “who gets what, where, when, and how?” all societies and all
nations must answer the following questions. Defines a nation’s economic system.
1. What should a nation’s factory produce?
2. How and by whom should the factory’s products be made?
3. Who consumes these goods and services?
a. How much of their different products (X, Y, and Z) should the factory
produce?
b. To whom should products X, Y, and Z be distributed?
Societies answer these questions differently and pursue different economic goals based
upon societal values.
Economic efficiency
Economic freedom – ability to make our own choices
Economic security and predictability – people don’t like uncertainty – safety nets
Economic equity – equal pay for equal work? equality of opportunity or equality
of outcomes?
Economic growth and innovation – societies work to improve their standard of
living. Innovation the key to improvement (technology).
Societies must prioritize their goals. No matter what though, there are trade-offs.
During the last century and currently, there are three major economic systems.
Capitalism, Socialism, and Communism
Free Market Economies (Capitalism) Basic principles:
Private ownership. Capitalists believe that factories, farms, stores, and other properties
should be privately owned. They also believe that the owner or owners of property
should be free to decide what to do with their property.
Profit Motive: The use of the property to make money (profit) for their owners.
Profit is the money left over after total costs are subtracted from total sales.
Competition: Competition in every industry forces a business to strive to create the best
product of give the best service it possibly can.
Free Market: Another name for capitalism is a “Free Market System.” Capitalism is a
“Free” system because the government does not control the system. Instead, producers
decide what products and services they will try to sell to consumers. Consumers are free
to buy…or not buy…what’s for sale. Producers and consumers have freedom of choice.
Now knowing the basic principles of capitalism (private ownership, profit, competition,
and free market) what types of government do you suppose might support a Capitalist or
Free Market Economy?
US, UK, Canada, most nations of the world.
Socialism: (basic principles)
Public ownership. Socialists argue that all means of productions…farms, factories,
stores, etc, should be publicly owned, not privately owned.
What is publicly owned? Usually this means the government…which represents the
people.
Socialists believe that such a system would ensure fair wages and work hours for
everybody (what is fair? Who’s definition of fair?).
Government planning: The government determines what is produced based not upon
what its citizens want or need, but based on what’s best for the nation’s total economy.
So the basic principles of Socialism are public ownership (government) and government
planning. Any guesses as to nations that practice socialism? Sweden (democratic
socialism).
Communism: (Marxist Socialism)
Closely related to Socialism but taken a step further.
Karl Marx 1848 wrote his Communist Manifesto. The workers in a capitalist society
would rise up against the producers.
A nation would then become socialist with the workers electing a government that would
run the nation and control the means of production. In time, there would be no more
need for government at all and in their perfect society there would be no more social
classes (no rich, no poor), perfect cooperation among all nations (no more wars), equal
distribution of goods and services so everyone’s needs are met, everyone owns the means
of production.
From each according to their ability to each according to their need.
During the 20th century, Marxist revolutionaries seized control of Russia, China, and
Cuba. Also Communist governments in Vietnam and North Korea.
The majority of capitalist economies have democratic forms of government. What form
of government do you suppose most Communist nations have?
Why?
Communism doesn’t exist anywhere…it never has. No nation has achieved communism.
No real socialism either.
Why?
Some would argue it’s contrary to human nature. We’re naturally self interested.
Socialism and Communism are known as centrally planned or command economies.
We also have mixed economies.
Illustration: Money…Value