Comparing Economic
Systems
Chapter 16
Capitalism
 An
economic system in which
individuals own and control the factors
of production.
 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.
 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.
 Population
growth encouraged the
expansion of trade.
 As trade increased, people began to
invest money in businesses to make a
profit.
 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.
 Between
1500 and 1800, the
governments of major European nations
used the theory on mercantilism to
direct their economics.
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.

 By
the mid 1700’s, many Europeans
believed that mercantilism interfered
with economic growth.
 Some economists encouraged
governments to grant individuals more
economic freedom.
 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.
 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.

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.
 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.
– Japan, Germany, France, South
Korea
 Ex.
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.
 There
have been many different forms
of socialism used throughout world
history.
 Socialism
developed during the 1800’s
in response to conditions created during
the industrial revolution.
– Long working hours, low wages,
unhealthy working conditions, child labor.
 Ex.
 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.
 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.
 Under
market socialism, the people
retain basic human rights and elect
government officials.
 Ex.
- Sweden
 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.
 A socialist
country has both a public and
a private sector:
Sector – industries, businesses, etc.
owned and controlled by the government.
 Private Sector – businesses that
individuals own.
 Public
 Some
socialist countries are referred to
as “welfare states” because they
provide many free services to their
citizens.
– free health care, free dental care,
retirement
 Ex.
 How
are all these free services paid for
by the government?
 Taxes are very high, especially on the
middle and upper classes.
– some of the wealthy pay as much as
60% of their income in taxes
 Ex.
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.
 Fredrick
Engels and Karl Marx wrote a
pamphlet entitled “Communist Manifest”
which explained the economic system
of communism.
 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.
 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.
 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.
 The
communist would guide them in
setting up their system and then would
disappear.
 This was a lie.
 Goals
of Communism
 Equal
distribution of wealth.
 No socio-economic class.
 In
1917, the Bolsheviks (later called
communist) overthrew the existing
government in Russia and proclaimed
Russia the world’s first communist
nation.
 Communist
countries are usually
totalitarian dictatorships where the top
communist leader or leaders run the
government and forces every citizen to
obey communist ideas.
 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).
 In
communist countries, no religion is
allowed.
 The only loyalty and worship goes to the
state.