Converging Economic Systems

Comparing Capitalism and Socialism

 Some government intervention occurs in the American economy but generally the market controls the economy using supply and demand.  The system the US uses is known as market capitalism.  The opposite of this system is pure command socialism.

 Operates on the basis of the three P’s:  Prices  Profits  Private property  A government in a pure capitalist system provides only public goods such as national defense and police protection.

 An economic system with little private property, where virtually all factors of production are owned and controlled by the state  Few countries practice pure socialism but North Korea and Cuba are close to the system.

 Karl Marx saw history as a struggle between capitalists and the proletariat, or workers.  He believed a product’s value should be based on the labor used to produce it, therefore selling something for a profit is a form of stealing money from the worker who made it.

 Marx believed capitalists took advantage of the proletariat.  Proletariat : Marx’s term for workers  Marx predicted the fall of capitalism and the evolution of socialism into communism, or an ideal economic system with no need for government.

 The communist economies of today are very different from Marx’s theory as communists governments are thought of as authoritarian with great control over the nation.  In the twentieth century socialism split into two trends.  Democratic Socialism  Authoritarian Socialism

 Democratic socialism is where the government controls only parts of the economy.  Authoritarian Socialism is where the central government controls the entire economy.

 Individual values play a major role in comparing advantages and disadvantages of capitalism and socialism.  Capitalism allows more freedom and personal initiative.  Capitalism provides for more efficiency in economy and greater rates of growth.

 Both capitalism and socialism require planning, the difference is who does the planning.  Capitalism does lead to inequities in distribution.  Also, capitalist countries often do not have enough social programs such as schools and museums (as compared to socialist countries).

Changing Authoritarian Socialism- The Case of China

 Communists won the civil war following World War II, and the government started an economic system based on five-year plans.  Five Year Plans : centralized planning system that was the basis for China’s economic system  These plans were unsuccessful, so the government began to implement reforms.

 In 1978, people were given ability to rent land and be fully responsible for that plot.  Farm productivity increased dramatically.  The mid-1980s brought further reforms, allowing managers of state-owned businesses much more control.

 In mid-1980s, 70 percent of industrial production was by state-owned businesses.  Today it is less than 40 percent.  Pure capitalism cannot be achieved because China still owns most industries and farmland.  Farmers rent the land in 15-year increments.

 Without property rights, corruption is unavoidable.  China must establish a rule of law if it wants to work toward capitalism.

 China was admitted to the World Trade Organization in 2000, opening it to the world market.  China represents a large market for foreign businesses.  China has many products that Americans see every day including: McDonald’s, Levi’s, Head and Shoulders, and Hienz.

Nations Move Toward the Market System

 Privatization : the change from state ownership of a business, land, and buildings to private ownership.  Since privatization leads to increased unemployment and other economic difficulties, some people protest the change (some even want to go back to the old system).  Often state run enterprises are inefficient and new companies bringing new ways of business sometimes require fewer workers.

 Prices in Russia are now determined by supply and demand (instead of by government officials).  Many Russian factories are still quite inefficient.  Many government-owned businesses were sold to “friends of government.”  People are bartering because they do not have faith in Russian currency and in order to avoid paying taxes.

 Sweden is called a welfare state  Welfare State : blends capitalism and socialism by combining private ownership of the means of production and competitive allocation of resources with the goal of social equality for all citizens.  The country has one of the highest per-capita incomes in the world.

 Sweden’s government practically guaranteed life-long employment.  An unemployment security bill passed in the 1970s makes it difficult for businesses to get rid of bad employees.  Government spending and taxes represented about 54 percent of the country’s annual economic activity.

 In a move toward free enterprise, the government is:  cutting taxes  doing away with some government jobs  easing regulations on businesses  privatizing some previously government-owned businesses.

 Many of these countries are capitalist but have large government sectors.  Since 1985, many government ventures are being privatized.  Many of these countries are trying to follow the model of Mexico but are limited by political disputes.  Chile and Argentina have successfully privatized many sectors.