Economic Systems and Theorists

Objective Students will identify how Karl Marx and Adam Smith believed the problems of capitalism caused by the industrial revolution would be resolved

Remember? The industrial revolution brought with it many problems in three areas: Factory system: labor issues and safety issues Urbanization: living standards, social classes Pollution: rivers, chemicals, air

Economic Theorists Economic theorists around the world began theorizing how to solve these problems Economy is the allocation of resources. An economist studies how to do that. We must allocate resources because of the issue of scarcity. Scarcity: unlimited wants yet limited resources Allocate: To distribute

Economic Systems The economic theorists considered each of the following economic systems and identified what they thought was best and why They also offered their ideas for improvements The Industrial revolution was an example of a massive shift from a traditional economy to a market economy

Economic Systems Traditional Market Command Mixed Barter Self Sufficient Products made based on history, customs, tradition Ex: manorialism in Europe, Pygmies in Africa, Inuits in Alaska Currency Products made based on consumer wants and needs Private property, choice, competition, no govt regs Ex: GB after IR Everyone contributes what they can and receives what they need Products made based on what the government deems is necessary Ex: Soviet Union, Cuba Consumers choose what they want and need Government has some regulatory power Tradition dictates some production Ex: United States

Traditional Advantages Disadvantages No unemployment No recession/depression Disadvantages No new ideas Creativity discouraged Lower standard of living

Market Advantages Disadvantages Total consumer freedom Incredible variety Lots of new ideas/creativity Disadvantages Only productive people rewarded Unemployment Competition Depression/recessions Public needs sacrificed

Very little unemployment Command Advantages Public needs met Very little unemployment Everyone equal Disadvantages Wants not considered No incentives New ideas discouraged

Mixed Advantages Disadvantages Consumers drive economy Producers respond Gov’t intervenes when necessary Disadvantages Public needs lacking unemployment Depressions/recessions

Check for Understanding Explain each type of economic system to your partner and identify one advantage/one disadvantage of each Be prepared to share

Karl Marx

Karl Marx and Friedrich Engels Karl Marx and Freidrich Engels witnessed the treatment of workers in factories during the industrial revolution They heard the working class people complaining about the upper class They suspected that at some point, the workers will have had enough and will revolt against their bosses and steal their wealth to distribute amongst themselves

Karl Marx and Friedrich Engels They wrote their ideas down in a pamphlet called “Communist Manifesto” Bourgeoisie: upper and middle class people Proletariat: working class and poor people The Bourgeoisie controlled the factors of production, while the proletariat labored in terrible conditions and controlled nothing

Karl Marx and Friedrich Engels When the proletariat revolted against the bourgeoisie, they redistribute wealth amongst themselves This would eliminate class struggle – everyone would be equal This new world and government would be called “dictatorship of proletariat”

Communism This control of wealth and factors of production by the proletariat is what Marx and Engels referred to as Communism Communism: all factors of production will be owned by the people. No private property. In the 1900’s we will see many of these communist revolutions…

Communism Communism = Command economy = Karl Marx

Index Card Please create a new index card for Karl Marx and Friedrich Engels

Karl Marx and Friedrich Engels “Communism Manifest” Created idea of communism (command economy) Proletariat: poor/working class; Bourgeoisie: upper/middle class No private property, no social classes

Adam Smith “Father of Economics”

Adam Smith Wrote “Wealth of Nations” Laissez-Faire: The government should not interfere with the economy in any way UNLESS the factors of production are compromised

Adam Smith Three principles of free-market economics Law of self-interest: people will work for their own good Law of competition: competition amongst people makes better products Law of supply and demand: goods will be produced to meet demand which will equalize prices

Adam Smith The principle of supply and demand is also known as the “invisible hand” Invisible hand: consumer demand and producer response will self-regulate the economy This is called capitalism

Adam Smith Capitalism = Market economy = Adam Smith