1. Comparative Economic Systems
Ch. 23

2. 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

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

4. 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

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

6. 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

7. 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

8. 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

9. 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

10. 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

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

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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

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

23. 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

24. 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

25. 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

26. 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

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

28. 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

29. 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

30. 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

31. 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

32. 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

33. 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

34. 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”

35. 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

36. 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

37. 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

38. 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

39. 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

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

41. 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

42. 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

43. 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

44. 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

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

46. 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

47. 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

48. 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

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