Comparing Economic Systems Chapter 16

Comparing Economic
Chapter 16
 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
 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
 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
 Ex.
 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
 There
have been many different forms
of socialism used throughout world
 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
 One of these adaptations became
known as market, or democratic,
 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
 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
– free health care, free dental care,
 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.
 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
 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
 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
 The only loyalty and worship goes to the