Economic Systems

Economic Systems

1. Capitalism

   • Definition: Private ownership of land an business. Liberty and the pursuit of happiness. Free trade. Emphasis on freedom and the profit motive for economic growth.
     • Advantages: Capitalism results in the best products for the best prices. That's because consumers will pay more for what they want the most. Businesses provide what customers want at the highest prices they’ll pay. Prices are kept low by competition among businesses. They make their products as efficient as possible to maximize profit. Most important for economic growth is capitalism's intrinsic reward for innovation. This includes innovation in more efficient production methods. It also means innovation of new products. As Steve Jobs said, "You can't just ask customers what they want and then try to give that to them. By the time you get it built, they'll want something new."
       • Disadvantages: Capitalism doesn't provide for those who lack competitive skills. This includes the elderly, children, the developmentally disabled, and caretakers. To keep society functioning, capitalism requires government policies that value the family unit. Despite the idea of a “level playing field,” capitalism does not promote equality of opportunity. Those without the proper nutrition, support, and education may never make it to the playing field. Society will never benefit from their valuable skills. In the short term, inequality may seem to be in the best interest of capitalism's winners. They have fewer competitive threats. They may also use their power to "rig the system" by creating barriers to entry. For example, they will donate to elected officials who sponsor laws that benefit their industry. They could send their children to private schools while supporting lower taxes for public schools.
     • Example of Capitalism: Japan today, much like the united States today, is a mixed economy, with some elements of capitalism existing within a general structure of control and regulation by government. For example, Japanese citizens can own property, choose their careers, and marry whom they like. These are capitalist elements. But the government intensely regulates economic and much social activity. These are statist elements.

2. Socialism

   • Definition: Public ownership of major businesses. Some private ownership of smaller businesses and shops. Government control of education, health care, utilities, mining, transportation, and media. Very high taxation. Emphasis on equality.
     • Advantages: The major benefit of socialism is supposed to be social equality. Ideally it comes about because the government takes income from wealthier people, in the form of taxes, and redistributes it to poorer people through various government programs. Free education through college, free health care, and free child care are some of the benefits socialist governments, using the money from taxes, may provide to their people. Workers in socialist countries usually get longer vacations, work fewer hours per week, and have more employee benefits (e.g., generous sick leave) than those in countries where free-market capitalism prevails.
       • Disadvantages: Socialism may create more equality than capitalism, but it takes away some of businesspeople's incentives. For example, tax rates in some socialist nations once reached 83 percent. Today, doctors, lawyers, business owners, and others who earn a lot of money pay very high tax rates. As a consequence, many of them leave socialist countries for capitalistic countries with lower taxes, such as the United States. This loss of the best and brightest people to other countries is called a brain drain.
     • Examples of Socialism: The former Soviet Union is an example of a socialist system. Cuba is an example of a socialist nation. Its economy is state run and it lacks a stock exchange. ... The country of North Korea is a socialist state, lacking a stock exchange, supporting many social programs, and the economy is state-run.

3. Communism

   • Definition: Public ownership of all businesses. Government run education and health care. Emphasis on equality. Many limitations on freedom, including freedom to own businesses and to assemble to protest government actions.
     • Advantages: Everyone gets the same chance, almost everyone is employed, almost everyone is educated. Agriculture and manufacturing are emphasized.
       • Disadvantages: One problem with communism is that the government has no way of knowing what to produce, because prices don't reflect supply and demand as they do in free markets. The government must guess what the people need. As a result, shortages of many items, including food and clothing, may develop. Another problem is that communism doesn't inspire businesspeople to work hard because the incentives are not there. Therefore, communism is slowly disappearing as an economic form.
     • Examples of Communism: Communist countries are China, Cuba, Laos, North Korea, and Vietnam. They aren't pure communism but are transitioning from socialism. That's where the state owns the components of supply.

4. Why is it important to have an economic system: Businesses can contribute to an economic system by inventing products that greatly increase available resources. For example, they can discover new energy sources (natural gas for autos), new ways of growing food (hydroponics), and new ways of creating needed goods and services

5. Identify the Economic system we have in the US the United States has a mixed economy. The U.S. government has now become the largest employer in the country, which means there are more workers in the public sector (government) than in any of the major businesses in the United States.