Converging Economic
Systems
Comparing Capitalism and
Socialism
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Some government intervention occurs in the
American economy but generally the market
controls the economy using supply and
demand.
The system the US uses is known as market
capitalism.
The opposite of this system is pure command
socialism.
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Operates on the basis of the three P’s:
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Prices
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Profits
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Private property
A government in a pure capitalist system
provides only public goods such as national
defense and police protection.
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An economic system with little private
property, where virtually all factors of
production are owned and controlled by the
state
Few countries practice pure socialism but
North Korea and Cuba are close to the system.
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Karl Marx saw history as a struggle between
capitalists and the proletariat, or workers.
He believed a product’s value should be based
on the labor used to produce it, therefore
selling something for a profit is a form of
stealing money from the worker who made it.
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Marx believed capitalists took advantage of the
proletariat.
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
Proletariat: Marx’s term for workers
Marx predicted the fall of capitalism and the
evolution of socialism into communism, or an
ideal economic system with no need for
government.
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The communist economies of today are very
different from Marx’s theory as communists
governments are thought of as authoritarian
with great control over the nation.
In the twentieth century socialism split into
two trends.
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Democratic Socialism
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Authoritarian Socialism
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Democratic socialism is where the government
controls only parts of the economy.
Authoritarian Socialism is where the central
government controls the entire economy.
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Individual values play a major role in
comparing advantages and disadvantages of
capitalism and socialism.
Capitalism allows more freedom and personal
initiative.
Capitalism provides for more efficiency in
economy and greater rates of growth.
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Both capitalism and socialism require planning,
the difference is who does the planning.
Capitalism does lead to inequities in
distribution.
Also, capitalist countries often do not have
enough social programs such as schools and
museums (as compared to socialist countries).
Changing Authoritarian
Socialism- The Case of China
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Communists won the civil war following
World War II, and the government started an
economic system based on five-year plans.
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Five Year Plans: centralized planning system that was
the basis for China’s economic system
These plans were unsuccessful, so the
government began to implement reforms.
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In 1978, people were given ability to rent land
and be fully responsible for that plot.
Farm productivity increased dramatically.
The mid-1980s brought further reforms,
allowing managers of state-owned businesses
much more control.
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In mid-1980s, 70 percent of industrial
production was by state-owned businesses.
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Today it is less than 40 percent.
Pure capitalism cannot be achieved because
China still owns most industries and farmland.
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Farmers rent the land in 15-year increments.
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Without property rights, corruption is
unavoidable.
China must establish a rule of law if it wants to
work toward capitalism.
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China was admitted to the World Trade
Organization in 2000, opening it to the world
market.
China represents a large market for foreign
businesses.
China has many products that Americans see
every day including: McDonald’s, Levi’s, Head
and Shoulders, and Hienz.
Nations Move Toward the
Market System
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Privatization: the change from state ownership
of a business, land, and buildings to private
ownership.
Since privatization leads to increased
unemployment and other economic difficulties,
some people protest the change (some even
want to go back to the old system).
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Often state run enterprises are inefficient and new
companies bringing new ways of business
sometimes require fewer workers.
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Prices in Russia are now determined by supply
and demand (instead of by government officials).
Many Russian factories are still quite inefficient.
Many government-owned businesses were sold to
“friends of government.”
People are bartering because they do not have faith
in Russian currency and in order to avoid paying
taxes.
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Sweden is called a welfare state
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Welfare State: blends capitalism and socialism by
combining private ownership of the means of
production and competitive allocation of resources
with the goal of social equality for all citizens.
The country has one of the highest per-capita
incomes in the world.
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Sweden’s government practically guaranteed
life-long employment.
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An unemployment security bill passed in the 1970s
makes it difficult for businesses to get rid of bad
employees.
Government spending and taxes represented
about 54 percent of the country’s annual
economic activity.
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In a move toward free enterprise, the
government is:

cutting taxes

doing away with some government jobs

easing regulations on businesses
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privatizing some previously government-owned
businesses.
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Many of these countries are capitalist but have
large government sectors.
Since 1985, many government ventures are being
privatized.
Many of these countries are trying to follow the
model of Mexico but are limited by political
disputes.
Chile and Argentina have successfully privatized
many sectors.