LECTURE 2 An Overview of Capitalism and the American Economy

OBJECTIVES Describe the five major characteristics of capitalism. Have a working knowledge of the following terms: Law of Accumulation. Market economy. Market failure. Capitalism. Mixed economic system.

CAPITALISM DEFINED TWO WAYS Capitalism is a social system based on the principle of individual rights. In order to have an economic system in which "production and distribution are privately or corporately owned", you must have individual rights and specifically property rights.individual rightsproperty rights The only way to have an economic system fitting the first definition is to have a political system fitting the second definition.

The U.S. Economy From $103 billion – 1923 Over $6,000 billion Explosive growth in only 72 years!

HOW MUCH IS ONE TRILLION? 12 Zeros = Trillion $5,000,000,000,000. That’s a lot of anything!!!!!!!!

THE LAW OF ACCUMULATION Deals in capitalism. Money (profits) are accumulated by a businessperson and reinvested or retained back into the system. The Law of Accumulation is a primary reason for growth in the U.S. economy.

CHARACTERISTICS OF CAPITALISM There are five. (5) 1.Market Efficiency. 2.Role of Government. 3.Market Failure. 4.Self-interest. 5.Private Ownership.

ROLE OF GOVERNMENT & MARKET FAILURE The role of government should be minimal. The philosophy of Adam Smith. The First Capitalist Economist. Government protects: National Defense. Private Property. Legal System.

MARKET FAILURE Occurs when one or more of three conditions exist: – 1. Absence of competition. – 2. Costs not properly assigned by the market. – 3. Market fails to provide a good or service that consumers demand.

PRIVATE OWNERSHIP Socialist; means of production are owned by the state. (Cuba) Capitalist; citizens own the means of production. (USA)

WHICH SYSTEM IS THE U.S. ? Capitalistic. YES! Socialistic. YES! Communistic. NO!

U.S. SYSTEM (continued) We are in theory a “Mixed Economic System” The term mixed capitalism, a combination of capitalism and socialism. The predominant element is capitalism.

KARL MARX Who was he? Why do we study him today? affect the 20 th century? How did he

KARL MARX (continued) Marx was a German economist. Marx is studied because he is considered a major influence on economic theory. Marx’s impact on the 20 th century was the rise of communism.

COMMUNISM A system of social organization in which all economic and social activity is controlled by a totalitarian state dominated by a single and self-perpetuating political party.

KARL MARX (continued) Marx’s major work published was the “Communist Manifesto”. Established Marx as an economic radical. Marx was wrong in his belief that worker domination not free enterprise would prevail. Capitalism can solve problems without violence. Socialism deters the human spirit.

PRODUCTION All economic goods are scarce. A free good is any good or service that is not scarce! Choices have to be made. The increase in production of one good will mean the decrease in production of another.

OPPORTUNITY COST The most desirable alternative which must be relinquished in order to acquire or produce a good or supply.

PRODUCTION POSSIBILITIES The main point of the production-possibilities concept is to reinforce the concepts of scarcity and opportunity cost, which illustrate why nations and individuals must economize.

KEY TERMS Law of Accumulation. Market economy. Market failure. Capitalism. Mixed economic system.

MACROECONOMICS THE END