POLITICS AND ECONOMICS • Economics: study of the production, distribution, and consumption of goods and services • i.e. The study of buying, selling, and trading goods and services • Many political questions are also economic ones: • Who should decide what goods will be produced? • How should goods and services be distributed and exchanged within a nation? • What types of income or property should be taxed? • What social services should a government provide? • 3 Economic Systems of Government: Capitalism, Socialism, and Communism 1. CAPITALISM • AKA “The free enterprise system” • An economic system in which the factors of production (land, labor, capital, entrepreneurship) are privately owned • Private ownership of goods • Individuals – not the government - decide how to use capital (resources) • Consumers, business owners, and workers all have freedom of choice 4 FUNDAMENTAL FACTORS OF CAPITALISM 1. Private Ownership Of resources used to produce goods and services Of your own labor (i.e. you sell your labor by taking a job) Of your property 2. Individual Initiative All individuals are free to start and run their own businesses Entrepreneurs are essential. They start businesses and make them grow 3. Profit Individuals are entitled to benefit from their labor and investments “profit motive” – the desire to gain from business dealings 4. Competition When a number of companies offer the same product or service Keeps prices low and quality high 2. SOCIALISM • says that the benefits of economic activity (wealth) should be distributed evenly in a society • Rejects the emphasis on individualism and competition for profit in Capitalism • TRUE equality cannot just be political equality. Economic and political equality should go hand in hand • Socialists support collective (public) ownership of the most important means of distributing goods and services. • Some private ownership still exists, especially with new industries and technology 4 CHARACTERISTICS OF SOCIALIST ECONOMIES 1. Nationalization: placing privately owned industries under government control Rarely includes ALL businesses in a country Usually just certain areas with many workers and few dominant firms Ex. Utilities (water, electricity), transportation, steel 2. Public Welfare Providing for the equal distribution of necessities and services Ex. Retirement pensions, health care, education, housing for the poor 3. Taxation All governments in capitalist and socialist economies get their $$ from taxes Socialist countries have much higher tax rates, sometimes 50%-60% 4. Centrally Planned Economy Government plans how the economy will develop, setting production goals and making investments in specific industries SOCIALISM: PROS AND CONS PROS CONS •Less gap between rich and poor •Govt complicates decisionmaking •Political equality works better when paired with economic equality •People won’t work as hard, no motivation for individual initiative •Deprives people the choice of how to use their own $ 3. COMMUNISM •Full state ownership of land and capital •Principles of Communism were first laid out by Karl Marx and Friedrich Engels in 1848 in The Communist Manifesto CHARACTERISTICS OF COMMUNIST ECONOMIES 1. Role of the Communist Party Communist Party holds all decision-making power in the govt and the economy Party leaders hold top govt positions 2. Central Planning Govt plans and supervises all production in factories, farms, and stores Often includes a 5 year plan, which shows how leaders will develop the economy and sets prices and goals for production and distribution of goods 3. Collectivization Merging small private farms into large government-owned agricultural operations 4. State ownership Industrial enterprises, transportation, etc. are state-owned.