CAPITALISM & COMPARATIVE
ECONOMICS
Guided Reading Activity
Capitalism (n.) -
Capitalism an economic system which attempts to provide for
all of a society’s basic needs by allowing private companies
and free labor to operate for a profit. If operated fairly,
both groups thrive and society’s needs are provided for.
The Factors of Production

Land

Labor

Capital

Entrepreneurship* - this term is not always listed
separately; however, it is a unique quality which
exists in the people who create businesses.
Land

Land may simply refer
to the physical space
that a company
occupies; however, it’s
not only that. It may
also refer to the
resources – water,
timber, oil, iron ore, or
precious metals – in
the environment.
Labor

Human resources, or the
men and women who work
in mines, factories, offices,
hospitals, schools, and
other areas in order to
produce goods. Laborers
have physical and
intellectual skills which
they “sell” to employers.
Depending on the scarcity
of their particular skill set,
labor can demand high
wages.
Capital

All of the human made
resources which are used
to produce goods and
services are capital.
Physical capital may be
simply buildings, machines,
computers, and tools used
by laborers. In general
capital is an investment
made by a company
which allows it to produce
more goods and services.
Entrepreneurs: Risk and Reward

Entrepreneurs are
enterprising people who
have the drive, ambition,
and innovation required to
turn land, labor and
capital into a business that
produces goods and
services. Entrepreneurs
assume risk – they may
lose their investments if
things go wrong!
However, if their business
plans succeed, they get to
keep all the profits!
The Free Enterprise System

The phrase “Free Enterprise
System” is used to describe
the characteristics of
capitalism. Free Enterprise
means that private
ownership of capital and
private decision making
regarding what is produced
both exist. It also means
that free laborers choose
where they will work, and
consumers have choices
over what they will
purchase.
Free Markets

A market where
sellers are permitted
to sell more or less
whatever they choose,
and to charge
whatever prices they
wish. At the same
time, consumers are
permitted to purchase
whatever they wish,
and can negotiate
prices. Almost all
free markets exist in
democratic nations –
where the rule of law
protects private
property rights.
The Four Fundamentals Rules and
Factors in a Capitalist System:




Private Ownership of property and businesses.
Individual Initiative motivates people to invest,
establish business, work, and consume goods.
The profit motive inspires entrepreneurs and
workers.
Competition thrives, consumers have choices.
Private Ownership V. Public Ownership


Private ownership of companies simply means that
entrepreneurs are allowed to control their own
companies – sole proprietorships, partnerships, or
corporations.
Public ownership of companies means that the
government – or, the taxpayers, if you like – own
the business. This is not very common in the United
States, but one example would be Amtrak.
How the Constitution Protects Private
Property Rights: Amendments
The Fifth Amendment

The Fifth Amendment to the
Constitution stipulates that the
government cannot dispossess
people of their property except
for the good of the public and
with just compensation. This is
referred to as the power of
eminent domain. Infrequently,
local, state, or national
government agencies will take
over private property – but they
must compensate the owners.
The Fourteenth Amendment

The Fourteenth Amendment
states, “nor shall any state
deprive any person of life
liberty, or property without due
process of law; nor deny to any
person within its jurisdiction the
equal protection of the laws.
This amendment has been
interpreted by the courts to
protect private property rights,
as well.
Individual Initiative

All individuals are free to
start and to own their own
businesses; they are also
free to dissolve their
businesses should they
choose to do so. The
exchange of ideas in the
marketplace and
advancements in technology
frequently lead to
innovations and changes in
business methods – and the
owners of companies are
free to pursue such changes
in a free market system.
The Profit Motive

In a free enterprise
system, people are
entitled to the benefit
from whatever their
investment earns or
gains in value. The
“profit motive” is the
desire to benefit
financially and
accumulate wealth!
Competition

Competition is the key to
success for consumers in a
capitalist economy.
Competition means two
very important things:
higher quality goods and
services and lower prices.
Whenever businesses have
competitors, they must be
innovative, cut costs, and
maintain high quality
standards – or else, their
customers will go
elsewhere.
The Essential Need for Competition in a
Capitalist Economic System

Without competition in
a capitalist system, we
have monopolies and
trusts, which are
predatory towards
consumers. With high
prices and indifferent
quality of goods, they
actually hurt
consumers.
The Law of Supply

The Law of Supply
states that if demand
remains constant and
the supply of a
product increases, the
price will drop. If the
product becomes more
scarce – supply drops
– then the price will
increase.
The Law of Demand

The Law of Demand
states that if the
supply remains
constant and the
demand increases,
prices will increase. If
the demand
decreases, then the
price will decrease.
Monopolies and Trusts
Monopolies and trusts use unfair business practices to reduce
competition and maximize profits for themselves. Consumers always
lose out when competition is reduced. Competition leads to higher
quality products and lower prices for customers.
The Sherman Anti-Trust Act

The Sherman Anti-Trust
Act was passed in 1890
in order to break up
trusts and monopolies.
The US Federal
government began to
enforce this law – and
later, the Clayton AntiTrust Act, too – so that
they could protect
consumers and small
business rivals.
Trustbusters: Roosevelt and Taft

Theodore Roosevelt was
the first President to
target companies with
anti-trust lawsuits. He
sued the Northern
Securities Trust, the
Armour Meat Trust, and
most famously, Standard
Oil Company. William
Howard Taft, TR’s
successor, sued even
more trusts.
Adam Smith’s The Wealth of Nations

Adam Smith was the author
of The Wealth of Nations, a
book which argues that
free enterprise – laissezfair economics – can solve
almost of the problems in a
societies economy without
any government
intervention. He theorized
that the basic needs of the
people would be satisfied
by the “invisible hand” of
the free markets.
The US Government and the Economy

The US government intervenes in the economy in many
ways – tax policy, stimulus programs, welfare programs,
and even bailouts for failing banks or corporations.
Sole Proprietorships

A single person who
owns a business is
called sole proprietor.
He or she must invest
all of the money for
the business up front
and invest tremendous
amounts of labor;
however, they get to
keep all the money!
Partnerships

In a partnership, two
or three people may
combine assets to
invest in the business
and share the
workload – which is
still considerable –
however, they have to
split the profits among
themselves.
Corporations

Corporations sell shares
of partial ownership –
stock – to shareholders.
They are managed by a
board of directors or a
CEO, whose sole mission
is to make money. This
allows individuals to
make money off a
company without being
responsible for its
decisions and policies.