Economic Systems

Economic Systems

1. Definition: A system of how goods, services and resources are produced, provided and allocated in a geographic area, such as the borders of a country.

2. There are many types of economic systems, but few countries run them in a pure state. Most countries use a mixed economy which incorporates facets from multiple economic systms.

   • Capitalism
     • Four Basic Rights
       • 1. The right to own property. People are allowed to own, use, purchase, share and sell assets such as land, machines and equipment.
       • 2. The right to own a business and keep all of that business’s profits. A business makes a profit when its revenues exceed its expenses.
       • 3. The right to freedom of competition. People are allowed to compete with each other and other businesses who provide goods and services within the legal limits allowed by the government.
       • 4. The right to freedom of choice. People get to choose what career to pursue as well where they want to live and what products and services to buy or sell.
     • Example: The United States economic system is based on capitalism. Not every service available in the US is privatized – some services are provided by the government. The choice of services and goods to offer and at what price are controlled by the free-market, although the government will intervene if businesses become too powerful and prevent competition such as by becoming a monopoly.
     • Pros: Capitalism drives innovation by rewarding entrepreneurs with profits for running successful businesses. Competition encourages productivity as competitors seek to meet the demands of the market while still earning profits for their stakeholders. More competition means more employment opportunities.
     • Cons: Without regulation, utilities or universal needs such as food and shelter could be priced too high or may not be offered equally to all people. Companies may also permanently deplete natural resources or damage the environment if unregulated. Capitalism also deepens the divide between the rich and the poor.
   • Communism
     • Definition: An economic and political system where the government is responsible for all decision-making regarding the goods and services provided. The government owns most, if not all resources. The goal of communism is to equally distribute land and resources to the public and ensuring an equal quality of life for everyone.
       • Example: China, North Korea and Cuba are all countries that practice Communism as both their political and economic systems. Cuba and North Korea have consistent problems with providing the basic necessities for their people such as food, clothing, shelter, clean water and medical services. While China still has a strong communist government, they have started adopting economic principles from capitalism such as the concept of private property ownership.
     • Pros: In theory, communism could result in an ideal existence that eliminates social and economic inequality.
     • Cons: Without an incentive, people are not motivated to innovate or try to improve. People with advanced skills and education will leave for countries that provide better compensation for their talents and contributions. Most communist countries have crumbled with only 5 practicing countries remaining.
   • Socialism
     • Definition: Socialism is an economic system that falls between capitalism and communism, although it falls closer towards capitalism. Rather than proposing a single central authority to control the entire economy, socialism wants the government to run major enterprises such as utilities while still allowing private individuals to own and operate smaller businesses. Socialism also has the goal of providing social services such as universal healthcare at the expense of higher taxes on individuals.
       • Example: Greece is a socialist country that is currently struggling due to overspending. The country is currently trying to recover by collecting additional taxes. Denmark is an example of a country that has balanced the costs of socialism with the cost of living and quality of life for its citizens.
     • Pros: Socialism supports social and economic equality. Everyone would have the same benefits such as education, healthcare and retirement.
     • Cons: Too much government regulation can stifle innovation. Lack of competition and financial status could cause high-performers to leave for countries that will reward them for achievements that go above and beyond their peers.