McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The History of Economic Systems Chapter 3 Appendix

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Feudal Society: Rules of Tradition n Feudalism was the predominant economic system in Europe about the 8th to the 15th century. n Feudalism is an economic system in which traditions rule.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Feudal Society: Rules of Tradition n There was no central government and no unified system of law. n Most individuals lived in walled manors belonging to the manor lord.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Feudal Society: Rules of Tradition n Although the lord provided protection, tradition ruled the manor more than the lord did.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Problems of a Tradition-Based Society n By dictating who did what, tradition prevented individuals from being employed at what they did best. n Tradition doesn’t work well when society must undergo change.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Problems of a Tradition-Based Society n Serfs who fled the manor could safely escape to towns or cities. n Cities were less governed by tradition than were manors.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Problems of a Tradition-Based Society n Markets broke down tradition. n Money greatly expanded the possibilities of trading.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. From Feudalism to Mercantilism n Traders and merchants became more wealthy than feudal lords. n They threw their support to the king, enabling the king to expand his power over the lords. n Power shifted from the manors to cities and towns.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. From Feudalism to Mercantilism n The government became an active influence on economic decision making. l The government encouraged growth by legitimizing and financing a variety of activities. l The government limited growth by protecting monopolies.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. From Mercantilism to Capitalism n Industrialists competed with the guilds to change the existing system. l Craft guild members were artists in their own crafts. l Industrialists devised machines to replace hand production by craftsmen.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. From Mercantilism to Capitalism n Industrialists supported and financed democratic reform movements limiting the power of kings.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Need for Coordination in an Economy n Craftsmen argued that government needed to coordinate economic activity.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Need for Coordination in an Economy n In his book, The Wealth of Nations, Adam Smith developed the concept of the invisible hand. n He argued that markets could coordinate the economy without active government involvement.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Industrial Revolution n Beginning about 1750, technology and machines rapidly modernized industrial production. n Mass produced goods replaced handmade goods.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Industrial Revolution n By the 1800s, the Industrial Revolution, democracy, and capitalism had become Western institutions.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. From Capitalism to Welfare Capitalism n Capitalism was marked by long workdays, low wages, child labor, and dangerous working conditions.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Marx’s Analysis n The best-known critic of capitalism was Karl Marx. n Marx argued that workers would revolt and that capitalism would be replaced by a socialist economic system.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Revolution That Did Not Occur n Governments stepped in to stop the worst abuses of capitalism. n In the late 1930s and the 1940s workers dominated the political agenda.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The Revolution That Did Not Occur n Capitalism became welfare capitalism – an economic system in which the market operates but government regulates markets significantly.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. From Feudalism to Socialism n Capitalism did not evolve into socialism as Marx predicted it would. n Socialism took root instead in feudalist Russia, a society largely bypassed by the Industrial Revolution.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. From Feudalism to Socialism n Russian socialists created state socialism. l State socialism – an economic system in which government sees to it that people work for the common good. n Central planning agencies were created to coordinate economic activities.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. From Feudalism to Socialism n Since the late 1980s, Soviet-style socialism has fallen apart. l Workers lacked incentives to work. l Production was inefficient. l Consumer goods were either unavailable or of poor quality. l High Soviet officials exploited their positions.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. The History of Economic Systems End of Chapter 3 Appendix