Economic Systems of Government

1. Economic Systems of Government Capitalism, Socialism, and Communism (Obj.7)

2. Politics and economics • Economics: study of the production, distribution, and consumption of goods and services • i.e. The study of buying, selling, and trading goods and services • Many political questions are also economic ones: • Who should decide what goods will be produced? • How should goods and services be distributed and exchanged within a nation? • What types of income or property should be taxed? • What social services should a government provide? • 3 Economic Systems of Government: Capitalism, Socialism, and Communism

3. 1. Capitalism • AKA “The free enterprise system” • An economic system in which the factors of production (land, labor, capital, entrepreneurship) are privately owned • Private ownership of goods • Individuals – not the government - decide how to use capital (resources) • Consumers, business owners, and workers all have freedom of choice

4. 4 fundamental factors of capitalism • Private Ownership • Of resources used to produce goods and services • Of your own labor (i.e. you sell your labor by taking a job) • Of your property • Individual Initiative • All individuals are free to start and run their own businesses • Entrepreneurs are essential. They start businesses and make them grow • Profit • Individuals are entitled to benefit from their labor and investments • “profit motive” – the desire to gain from business dealings • Competition • When a number of companies offer the same product or service • Keeps prices low and quality high

5. 2. Socialism • says that the benefits of economic activity (wealth) should be distributed evenly in a society • Rejects the emphasis on individualism and competition for profit in Capitalism • TRUE equality cannot just be political equality. Economic and political equality should go hand in hand • Socialists support collective (public) ownership of the most important means of distributing goods and services. • Some private ownership still exists, especially with new industries and technology

6. 4 characteristics of socialist economies • Nationalization: placing privately owned industries under government control • Rarely includes ALL businesses in a country • Usually just certain areas with many workers and few dominant firms • Ex. Utilities (water, electricity), transportation, steel • Public Welfare • Providing for the equal distribution of necessities and services • Ex. Retirement pensions, health care, education, housing for the poor • Taxation • All governments in capitalist and socialist economies get their $$ from taxes • Socialist countries have much higher tax rates, sometimes 50%-60% • Centrally Planned Economy • Government plans how the economy will develop, setting production goals and making investments in specific industries

7. Socialism: pros and cons • CONS • Govt complicates decision-making • People won’t work as hard, no motivation for individual initiative • Deprives people the choice of how to use their own $ • PROS • Less gap between rich and poor • Political equality works better when paired with economic equality

8. 3. Communism • Full state ownership of land and capital • Principles of Communism were first laid out by Karl Marx and Friedrich Engels in 1848 in The Communist Manifesto

9. Characteristics of communist economies • Role of the Communist Party • Communist Party holds all decision-making power in the govt and the economy • Party leaders hold top govt positions • Central Planning • Govt plans and supervises all production in factories, farms, and stores • Often includes a 5 year plan, which shows how leaders will develop the economy and sets prices and goals for production and distribution of goods • Collectivization • Merging small private farms into large government-owned agricultural operations • State ownership • Industrial enterprises, transportation, etc. are state-owned.