Comparative Economic Systems Ch. 23

Section 1: Capitalism Objectives Identify the factors of production Describe the free enterprise system and the laissez-faire theory Analyze the role of government in a mixed economy Compare and Contrast 3 types of business organizations Explain the role of profit and loss in a free enterprise system

Factors of Production Factors of Production – Basic resources used to make all goods and services Land Labor Capital Role of the entrepreneur

Factors of Production - Land Includes all natural resources Variety of economic uses Agriculture Mining Forestry Water and resources under the ground are part of the land

Factors of Production - Labor Men and women who work Individuals own their labor and sell it to the employer Miners Nurses Office Workers

Factors of Production - Capital Capital – Human made resources used to produce goods and services Physical Capital – “capital goods” – Money, buildings, machines, etc. needed to turn labor and land into goods Human Capital – knowledge and skills people learn from experience – self investment Capital is a product of the economy and is re-invested into the economy

Factors of Production - Capital Capitalist – Person who owns capital and puts it to use Large scale businesses Small investors Economy depends on the energy and drive of individuals

Factors of Production – Role of the Entrepreneur Entrepreneur – person with the drive and ambition to combine land, labor and capital to produce goods or offer service Start business Employ people Drives the economy Contributes to standard of living

Free Enterprise System Free Enterprise System – economic system with private or corporate ownership of capital Owners, consumers and workers are free to choose 4 fundamentals Private ownership Individual initiative Profit Competition

Free Enterprise – Private Ownership Individuals and companies own the means of production Use capital to their liking Decide how to use property Own their labor – take new job, decide pay etc Protected by 4th and 5th Amendment Due Process Just payment

Free Enterprise – Individual Initiative Free to start or dissolve businesses Decide the production of their goods Some exceptions where the government can step in

Free Enterprise – Profit Profit Motive – desire to gain from business dealins Reason people take risks Free to benefit as much as possible

Free Enterprise – Competition Helps keep costs low to consumer Promotes efficiency Quality product at a low price Supply and demand Too much, price drops Not enough, price goes up Demand falls, price falls Demand goes up, price goes up

Free Enterprise – Competition Monopoly – Total control of a source of product or service No competition = set your own price Trust – several corporations combining to eliminate competition Sherman Anti-Trust Act of 1890 Prohibits monopolies and trusts Regulates business mergers Standard oil 1911 AT&T Microsoft

Free Enterprise – Laissez-Faire Theory Laissez-Faire Theory – gov’t should play a limited hands off role in society Limited to: Foreign relations and national defense Maintenance of police and courts to protect property, health, safety and morals Functions that cannot be performed by private enterprise at a profit Adam Smith – Wealth of Nations (1776) Individuals are free to pursue their own private interest while the gov’t promotes the general welfare

Mixed Economy Mixed Economy – Private ownership and government coexist Gov’t Role Regulates business – Trusts, food quality, protect environment Public roads, weather service, postal service, Subsidies and loans Transportation, Education, Could be done privately

Types of Business Organizations Sole Proprietorship Owned by a single person Most flexible All on the owner, no partners Partnership More resources – expansion, larger business Split decisions – could lead to conflict

Types of Business Organizations Corporations Large or small Shareholders – same legal status as a person Brings more capital Less liability – only responsible for the share you own Taxed twice Business is taxed and the shareholder

Profit and Loss Investment – The money or capital you put in Physical – car, computers, etc Human – employees, payroll Profit – The money you earn after you subtract your investment Investment > earnings = Loss Investment < earnings = Profit

Section 2: Socialism Socialism – The wealth of the economy should be equitably distributed Equity – giving everyone what they need Equality – how people are treated Public ownership of the means by which goods and services are produced and distributed Can still be a democracy Emphasize cooperation and social responsibility Reduces great differences in class

Socialism Political equality and Economic equality go hand in hand Economic equality only when public controls centers of economic power If everyone has a basic standard of living then society benefits as a whole Healthcare, education, jobs etc

Industrial Revolution Long work hours Low wages Unsafe conditions Child labor Search for social and economic reform

Industrial Revolution - Karl Marx Father of modern day socialism The Communist Manifesto – with Friedrich Engels Pointed out the misery of the Ind. Rev. “Capitalist enslavement” Proletariat – workers Bourgeoisie – capitalists

Industrial Revolution – Socialists and Communists How to achieve socialism Communists – violent and bloody revolution Socialists – peaceful resolution through democratic process “Third Way” – moving away from socialism Some programs too expensive to maintain

Characteristics of Socialist Economies Nationalization – placing industries under gov’t control May pay for it or not Usually targeting certain sectors Utilities, transportation, steel Want to encourage more growth Not all businesses are taken over Some countries allow the workers to take over private companies

Characteristics of Socialist Economies Public Welfare Providing a basic standard of living Fully funded or partially funded Housing, education, healthcare Welfare States – Provide extensive social services at little to no cost Unemployment Healthcare Retirement Parents Holiday

Characteristics of Socialist Economies Taxation More services = more expense 50%-60% taxed income Rich could be up to 90%

Characteristics of Socialist Economies Centrally Planned Economy – “Command Economy” Government plan how economy will develop Direct production and investments Some more control than others Democratic socialist countries still allow private industry to control part of economy Market economy – capitalist economy

Socialism in Developing Countries Helps keep local control of large scale industry Grow parts that are most essential If not done right then food or consumer goods could be neglected Civil unrest Taxes Usually stems around authoritarian leaders Few have established dem-socialism

Pros and Cons Pros Cons Fair Helps democracy Morally better Helps democracy More control/stability for the worker Sit on the company boards Individuals don’t make the decision for the whole like capitalism Cons Bureaucracy Complicates decisions Kills individual initiative/choice Not much left after taxes Too complicated for 1 agency

Section 3: Communism Communism – State ownership of land and other productive property Marx’s Theory – 4 related concepts History Labor theory of value Nature of the State Dictatorship of the proletariat

Communism - Marx’s Theory Theory of History Constant struggle between oppressors and oppressed Only getting worse – Oppressors eventually overthrown Communism will speed up the process

Communism - Marx’s Theory Labor Theory of Value Value of commodity is set by amount of labor put into it Not based on scarcity, use or pleasure Socially moral Rejects profit and competition

Communism - Marx’s Theory Nature of the State Gov’t helps capitalist maintain power and privilege Keep their power over the masses Religion is the “opiate of the people” Tolerate your harsh life for the “afterlife”

Communism - Marx’s Theory Dictatorship of the Proletariat Phase where an authoritarian would represent the masses Achieve classlessness State will wither away No exploitation Goods for all – no ownership No national loyalties – nationalism No war

Characteristics of Communist Economies Different forms but same characteristics Role of the Communist Party Holds gov’t and economic decision making power Control over social, intellectual and religion Party leaders hold top gov’t positions

Characteristics of Communist Economies Central Planning 5 year plan Economic goals Where to grow What each individual factory and farm must produce Set prices Decide how to distribute

Characteristics of Communist Economies Collectivization Merger of small private farms into large gov’t enterprises Make it seem voluntary Many peasants have died trying to keep their lands

Characteristics of Communist Economies State Ownership State owns all enterprises Transportations, media, etc Varies by country Run by local gov’t Run by one central gov’t

Soviet Union 1917 Lenin took over By 1924 one party controlled social, political and economic institutions Josef Stalin turns it into an authoritarian dictatorship

Soviet Union Five-year Plans Gosplan – agency assigned to running the plan Focused on heavy industry Collectivization of agriculture Chemicals Petroleum steel Other goods became scarce Consumer goods Housing Food water

Soviet Union Social Policies Provided medical care, education, summer camps Incentives to party officials, athletes and artists Elite class was created with loyalties to the party

Soviet Union Gorbachev’s Reforms Inherited an old system More authority to local farmers Loosened price control Linked salary to performance Bad harvests and resistance from the elite made conditions worse

Soviet Union Transition to a Free Market 1991-1992 Boris Yelstin Privatization – returned nationalized enterprises back to private owners Lifted price control Bad leadership has lead to many becoming poorer

China 1949 Mao Zedong takes over Lack of skilled workers Gov’t improved technical and scientific education Assigned workers to state run jobs

China The Great Leap Forward 5 year plan of 1958 Attempt to modernize Rural markets eliminated Commune – collective farms Run by party officials Workers paid the same no matter how much was produced

China Deng Xiaoping’s Reforms 1977 – “Four Modernizations” Agriculture Industry Science Technology More practical than predecessors Move to market economy Invited foreign investors in Allows for small private enterprises

Other Communist Nations Mostly in Asia Allowing some aspects of free market Satellite nations of Soviet Union Fell in late 80’s early 90’s Cuba Nationalized US businesses US broke ties Relied on Soviets Soviet Union crashed so did Cuba

Other Communist Nations Southeast Asia Vietnam Laos and Cambodia North Korea Not much growth Sanctions and Planning have not helped the citizens