1. Magruder’s American Government
C H A P T E R 23 Comparative Economic Systems
© 2001 by Prentice Hall, Inc.

2. C H A P T E R 23 Comparative Economic Systems
SECTION 1 Capitalism
SECTION 2 Socialism
SECTION 3 Communism 1 2 3
Chapter 23

3. ~Isms
Nazism: If you have two cows, the government shoots you and keeps the cows.
Facism: If you have two cows, you keep the cows and give the milk to the government; then the government sells you the milk.
Communism: If you have two cows, you give them to the government and the government gives you some milk.
Socialism: If you have two cows, give one to your neighbor.
Capitalism: If you have two cows, you sell one and buy a bull.

4. What are the factors of production?
S E C T I O N 1 Capitalism
What are the factors of production?
How can we describe the free enterprise system and the laissez-faire theory?
What is the role of government in a mixed economy?
How are business organizations classified?
What role do profit and loss have in a free enterprise system? 2 3
Chapter 23, Section 1

5. Factors of Production
The factors of production are the basic resources which are used to make all goods and services.
Land
in economic terms, “land” includes all natural resources.
Labor
Labor is the work done by men and women to produce goods and services.
Capital
Capital includes all the human-made resources that are used to produce goods and services Someone who owns capital and puts it to productive use is called a capitalist. 2 3
Chapter 23, Section 1

6. Profit and Loss
Entrepreneurs - individuals who combine land, labor, and capital resources to produce goods or services with the goal of making a profit.
Profit = money earned > business costs.
Loss = business costs > money earned
Taking risks and making investments are an essential part of the capitalist system. 2 3
Chapter 23, Section 1

7. Free Enterprise System
Free enterprise system is an economic system in which private individuals own capital goods and make investment decisions. 2 3
Chapter 23, Section 1

8. Laissez-Faire Theory & Mixed Economies
Laissez-faire theory holds that government should play a very limited, hands-off role in society.
government should promote and protect the free play of competition and the laws of supply and demand.
A Mixed Economy
Economists usually describe an economy in which private enterprise and governmental participation coexist as a mixed economy.
The American economy is a mixed economy.
Bill Gates testifying before Congress 2 3
Chapter 23, Section 1

9. Types of Business Organizations
Sole Proprietorships
Businesses owned by a single individual are sole proprietorships.
Partnerships
Businesses owned by two or more individuals, called partners, are partnerships.
Corporations
A corporation has many owners, called shareholders. A share is a fraction of ownership in the corporation.
Corporations have the advantage of being able to draw from large pools of investor capital, but also have the disadvantage of having their earnings taxed twice. 2 3
Chapter 23, Section 1

10. Section 1 Review
1. Which of the following is NOT one of the factors of production?
(a) land
(b) labor
(c) government
(d) capital
2. Laissez-faire theory promotes the idea that
(a) government should regulate every level of the economy.
(b) government should have the least amount of involvement in society and the economy as possible.
(c) a mix of government and free enterprise is best for society.
(d) absolute control of the economy by government.
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Chapter 23, Section 1

11. What are some important characteristics of socialist economies?
S E C T I O N 2 Socialism
What is socialism?
What are some important characteristics of socialist economies?
How can we describe socialism in developing countries?
What are the pros and cons of socialism? 1 3
Chapter 23, Section 2

12. What is Socialism?
Socialism is an economic and political philosophy based on the idea that the benefits of economic activity (wealth) should be equitably distributed throughout a society.
According to Socialists, cooperation and social responsibility . . .
help achieve a more equitable distribution of both income and opportunity;
reduces major differences between rich and poor. 1 3
Chapter 23, Section 2

13. The Industrial Revolution
Socialism developed largely in reaction to the poverty and other hardships that accompanied the Industrial Revolution.
Socialists and Communists
Socialists favor more social equality and government involvement, but generally prefer that change be brought about by democratic processes.
Communists believe in a more radical form of change – total social equality - brought about by violent revolution. 1 3
Chapter 23, Section 2

14. Characteristics of Socialist Economies
Nationalization
Placing enterprises under government control often by taking over privately owned industries.
Public Welfare
Socialists aim to guarantee the public welfare through equal distribution of necessities and services.
Taxation
Because social welfare services are quite expensive, taxes tend to be high.
Centrally Planned Economy
government officials plan how an economy will develop over a period of years. A democratic socialist economy may or may not have strict central planning. 1 3
Chapter 23, Section 2

15. Pros and Cons of Socialism
Socialists say that it is fairer to supply everyone with basic needs, such as medical care.
Socialists argue that it evens out inequalities.
Socialists also argue that it gives workers and ordinary citizens greater control of their everyday lives.
Socialism has won a large following in developing countries.
Cons
Critics say socialistic countries tend to have too many layers of bureaucracy.
Critics argue the smooth running of an economy is too complex to be directed by central planners.
They also say socialism deprives people of the freedom to decide for themselves how to use their income.
Socialist governments in developing countries often become authoritarian because of social unrest and political instability. 1 3
Chapter 23, Section 2

16. Section 2 Review 1 3 1. Modern socialism began as a response to
(a) the French Revolution.
(b) the American Revolution.
(c) the Industrial Revolution.
(d) the New England Revolution.
2. Critics of socialism support all of the following themes EXCEPT
(a) that socialism takes away an individual’s freedom to make economic choices.
(b) that socialism creates a more equitable society.
(c) that an economy is too complex to be run by government officials.
(d) that socialism takes away from individual initiative and is slower to take advantage of new technologies.
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Chapter 23, Section 2

17. What do the theories of Karl Marx describe?
S E C T I O N 3 Communism
What do the theories of Karl Marx describe?
What characteristics do communist economies have?
How did communism operate in the Soviet Union, China, and other nations? 1 2
Chapter 23, Section 3

18. Communism and Karl Marx
Karl Marx’s theories, mostly worked on with Friedrich Engels, criticized capitalism.
To Marx, the proletariat—the workers—were so badly abused by the bourgeoisie— the capitalists—that they would rise up and overthrow the capitalistic system.
Communism calls for the collective, or state, ownership of land and other productive property.
proletariat
bourgeoisie 1 2
Chapter 23, Section 3

19. Karl Marx’s Theory
1. Marx’s view of history - all of history is a struggle between social classes competing for control of productive property.
2. The Labor Theory of Value - the value of a commodity is set by the amount of labor put into it.
3. The Nature of the State - government is a tool by which the capitalists maintained their order and privileges.
4. The Dictatorship of the Proletariat An authoritarian state would represent and enforce the interest of the masses until a “free, classless society” emerged. 1 2
Chapter 23, Section 3

20. Characteristics of Communist Economies
Role of the Communist Party
The Communist Party holds all the power in both the government and the economy.
Central Planning
Government officials plan and supervise production in factories, farms, and stores.
Collectivization
Merging small private farms into large government-owned agricultural enterprises.
State Ownership
Industry, transportation, and other parts of the economy are state-owned. 1 2
Chapter 23, Section 3

21. Fall of the Soviet Union
The disintegration of the world’s most powerful communist nation was caused in part by . . .
Mikhail Gorbachev initiating perestroika in the 1980s, which reformed the economy on capitalistic lines such as profit incentives;
privatization, or the return of nationalized enterprises to private ownership;.
the USSR’s inability to keep up with the USA in defense spending;
the collapse of Soviet-controlled Communist governments in Eastern Europe. 1 2
Chapter 23, Section 3

22. Five Remaining Communist Countries
China
Cuba
North Korea
Vietnam
Laos 1 2
Chapter 23, Section 3

23. China 1 2 Communist-controlled Capitalism?
Chinese communists, led by Mao Dedong, took control of China in 1949 made several serious blunders that led to poverty, starvation, and isolation
In 1979, Deng Xiaoping introduced perestroika-style reforms that has developed officially into “Socialism with Chinese Characteristics.”
“Socialism with Chinese Characteristics”
The Chinese economy can best be described as state-controlled capitalism: a relatively free market economy but with strict monitoring and regulation by the Communist Party.
The government can regulate, censor, or seize land or industry whenever it wants.
Deng Xiaoping 1 2
Chapter 23, Section 3

24. Section 3 Review 1 2 1. In a communist system, the government
(a) owns all the factors of production.
(b) plays a minimal role in the economy.
(c) favors laissez-faire policies.
(d) permits individuals to make independent economic decisions.
2. One of the key aspects of Russia’s transition to a free market economy has been
(a) the nationalization of privately owned businesses.
(b) the regulation of all economic sectors by the government.
(c) the privatization of state-owned enterprises.
(d) none of the above.
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Chapter 23, Section 3