Chapter 2
Understanding basic
economic system
Learning Objectives








Define and contrast each of the following economic
systems: capitalism, command economies, socialism,
mixed economies.
Discuss the relative benefits of competition in the
marketplace.
Identify and define the factors of production.
Discuss the major premise of Adam Smith’s “Wealth of
Nations.”
Describe the four rights in capitalism.
Critically examine various countries by determining their
respective economic system, and discuss their relative
economic and spiritual liberty enjoyed y each.
Describe the relationship between success in business
an dserving others.
Think critically about biblical principles that support
and/or affect private ownership.
2
Defining Business
Any organization that provides goods or
services that meet the needs and wants of
its customers for a profit.
 Business is about serving others.
 Business is about risk—profits are not
guaranteed.

3
Understanding
Basic Economic Systems

Capitalism (Free Enterprise, Free Market):
An economic system based on private
ownership of the factors of production.
 Guarantees specific rights including:

 Right
of property ownership—private ownership
 Right to earn a profit
 Right to choose
 Right to compete
4
Understanding
Basic Economic Systems
The U.S. system is largely based on the premises
set forth in Adam Smith’s book, “The Wealth of
Nations” publishes in 1776.
Smith argued against government-granted
monopolies and subsidizing merchants, farmers
and manufacturers to “protect against unfair
competition.”
Smith proposed instead free trade, competition
and choice, arguing that the “invisible hand” of
competition would be self-regulatory.
5
Factors of Production

Land: all natural resources


Labor: all human effort—mental and physical—directed
to producing a good or service


e.g. factor workers, surgeons, accountants
Capital Equipment (a.k.a. Capital): human-made goods
used to produce other goods or services.


e.g. water, minerals, crude oil, timber
e.g. tools, computers, machines, office buildings, factories,
tractors, photocopiers
Entrepreneurship: calculated risk-takers and innovators
who introduce new or improved products or
methodologies into the market

e.g. Henry Ford, Harry Ferguson, Cyrus McCormick
6
Understanding
Basic Economic Systems

Command Economies
An economic system with practically all
factors of production owned by the
government and economic decision making
by centralized government planning.
 Communism is an example (consider the
former USSR and China).

7
Understanding
Basic Economic Systems

Socialism

An economic system with basic industries and
factors of production owned and controlled by
the government or by the private sector with
strong governmental oversight and control.



Typically high levels of government welfare programs,
state-managed healthcare and generous unemployment
benefits.
Massive taxation and redistribution of wealth.
Greater likelihood of government-determined business
goals, prices and workers’ rights.
8
Understanding
Basic Economic Systems

Mixed Economies

An economic system that combines several
other systems. Significant portions of the
economy are owned and controlled by private
enterprise, but some factors of production
may be owned and controlled by the
government. Government involvement may
be typified by activities such as:



Ownership of utilities or some industries
Taxation and government spending
Income redistribution
9
Understanding
Basic Economic Systems

Thought to Ponder
Capitalism and Command Economies exist in
theory but in reality, nations’ economic
systems fall between the two.
 The U.S. leans heavily toward capitalism, but
even it has some elements of governmental
regulation and control—tax policy,
regulations, monetary policy, etc.

10
Understanding
Basic Economic Systems
So, which system best characterizes the
U.S. economic system?
11
Understanding
Basic Economic Systems

Though the U.S. is largely based on the
concepts of capitalism as influenced
heavily by such works as Adam Smith’s
“The Wealth of Nations,” its economic
system is best described as a mixed
economic system.
12
A New Start
Discussion Questions








Compare and contrast a command economy and
capitalism.
Is competition in the marketplace destructive or
constructive? Is it good for consumers or businesses or
both?
What is meant by factors of production?
Give some examples in your state of industries owned or
controlled by the government.
In capitalism, are businesses and entrepreneurs
guaranteed a profit?
What was the major premise of Smith’s “Wealth of
Nations?”
Describe the four rights in capitalism as outlined in the
chapter.
Develop a metaphor for capitalism. Defend the metaphor. 13
A New Start
Activities


Write a brief paragraph describing who Adam Smith was,
when he lived and for what he is most famous. In your
opinion, how influential have his writings been on our
modern world? Specify a brief example that justifies
your opinion.
Prepare a single sheet of paper with the following
countries listed numerically from top to bottom: Belgium,
Brazil, Cuba, China, France, Germany, Israel, North
Korea, Mexico, Russia, Saudi Arabia, South Africa,
United Kingdom, United States. Identify to the right of
each country the economic system with which it is
associated.
14
A New Start
Integrating Faith and Discipline





How is capitalism consistent with a biblical worldview?
Was Adam Smith a Christian? On what do you base
your answer?
Take the list your prepared in the activities and to the
right of each country’s economic system, record “greater
freedom” or “less freedom,” to the right. Then record
“greater religious liberty” or “less religious liberty” to the
right of that. Examine your list and identify any patterns
between economic systems and religious freedom.
Business is about meeting the needs of others, about
serving others. Is that true and if so, how will that
perspective influence a Christian?
Identify an example or verse from the Bible that seems
to imply the concept of private ownership of property.
15