Comparative Economic Systems

Mercantilism, Capitalism, Mixed-Economies, Socialism and

Communism

Mercantilism

• The chief characteristics of Mercantilism include:

1. Empire, A “Mother Country” & attending colonies

2. Emphasis on gold and silver bullion.

3. A positive balance of trade

4. The Zero-Sum Game 5. Command economic

structure

Characteristics of Mercantilism

Manufactured goods

Raw materials

Mother County Mother County

ColonyColony

Cheap labor

Who Benefited Most From Who Benefited Most From Mercantilism?Mercantilism?

Who Benefited Most From Who Benefited Most From Mercantilism?Mercantilism?

£ Monarchs.Monarchs.

£ Merchant capitalists.Merchant capitalists.

£ Joint-stock companies.Joint-stock companies.

£ Government officials.Government officials.

Laissez-Faire Capitalism

• Market forces such as Supply & Demand drive the activity

• Government has a “hands off” policy in economic affairs

• Classical Economics is the domain of early laissez-faire theory

Adam Smith and The Wealth of Nations

• Smith, a Scot, was the principal architect of modern market economics.

• The metaphor he used to describe market forces was the “invisible hand.”

• He published his great work, The Wealth of Nations, in 1776.

The Wealth of Nations (1776)

The Principles of Capitalism include:

The idea that “capital”, a factor of production that is not wanted for itself but for its ability to help in producing other goods, is a worthy means of generating wealth.

A belief in “Private Property”;

Emphasis on individual initiative, entrepreneurship, innovation, and competition;

Basic Capitalist PrinciplesBasic Capitalist PrinciplesBasic Capitalist PrinciplesBasic Capitalist Principles

Goods and services are produced for Goods and services are produced for profitable exchange.profitable exchange.

Human labor power is a commodity for Human labor power is a commodity for sale sale LABOR IS THE SOURCE OF VALUE. LABOR IS THE SOURCE OF VALUE.

BusinessesBusinesses HouseholdsHouseholds

Goods & Service

Goods & Service

Labor & Investments

Labor & Investments

Consumer SpendingConsumer Spending

WagesWages

Individuals seeking success are driven by Individuals seeking success are driven by self-interest self-interest Profit MotiveProfit Motive

The The Law of Supply and DemandLaw of Supply and Demand Individuals who are free to pursue their Individuals who are free to pursue their

self-interest will produce goods and self-interest will produce goods and services that others want, at prices others services that others want, at prices others will be will be willing to willing to pay.pay.

Basic Capitalist PrinciplesBasic Capitalist PrinciplesBasic Capitalist PrinciplesBasic Capitalist Principles

Basic Capitalist PrinciplesBasic Capitalist PrinciplesBasic Capitalist PrinciplesBasic Capitalist Principles

Law of CompetitionLaw of Competition The competitive market system The competitive market system

compels producers to be increasingly compels producers to be increasingly efficient, and to respond to the desires efficient, and to respond to the desires of consumers.of consumers.

Government should interfere minimally Government should interfere minimally with the free and efficient workings of the with the free and efficient workings of the marketmarket

Laissez faireLaissez faire [“Leave things alone.”] [“Leave things alone.”]

Some of the abuses of laissez-faire capitalism such as:

Child labor

Dangerous conditions

Unfair labor practices

Extremely long hours

Resulted in calls for reform and regulation.

Pros and Cons of Capitalism

Pros• Competition to provide

goods and services keeps prices low

• Rewards hard work• Provides choice• Allows for the building up

of wealth and possessions

• Consumers regulate the market

Cons• Exploits people who

cannot compete• Uneven distribution of

wealth• Creates a money-

oriented society• Constant economic

growth may deplete the earth’s resources

Socialism

• Socialism is an economic system characterized by social ownership of the means of production and co-operative management of the economy.

• There are many variants of socialism, but because it requires collective ownership of property, the most dominant form is State Sponsored Socialism.

Socialism

• Ancient roots – Judeo-Christian belief in the common good, which takes precedence over individual desires

• Term “socialism” coined in 1827 by British socialist Robert Owen to describe his view of a cooperative new society.

Socialism’s principles

• egalitarianism or equality.  Humankind will be unified and cooperative, once wealth is owned and used for the common good. Capitalism exploits the very people who create society’s wealth.

• Moralism. Division of rich & poor is evil; capitalism is fundamentally unjust. Instead, the ideal future emphasizes peace, social justice and true liberty for all. 

Private Property and Socialism

• Private property not abolished, but the public should control the use of property and make necessities available to all.

• Individual rights not abolished but should complement other important values such as concern for others.

• Change can occur through an evolutionary process that uses democratic means.

Pros and Cons of Socialism

Pros• All members share benefits• Those who cannot contribute

may still participate (disabled, elderly)

• Each member’s survival needs are met

• Equal distribution of wealth• No socioeconomic classes

Cons• No incentive to work

harder• No competition means no

reward to be innovative• New members to the

community (immigrants) are seen as competition for limited goods and services

• Higher taxes

Communism

Communism is the most extreme expression of Socialism. It requires a violent Revolution.

The Communist Manifesto and Das Kapital, lay out the principles Marx and Engels believe justify their call to revolution

Friedrich Engels Karl Marx

Marx’s Goal:Create a utopia (an ideal state that does not exist)

• This is the symbol of Communism – The Hammer and the Sickle

Hammer for the Workers

Sickle for the Peasants – the farm

labourersThis is Karl Marx, the ‘Father of Communism’. People who believe in his ideas are called ‘Marxists’

This is his friend, Frederick Engels.

Marx’s key ideas

1. Slave system gave way to feudal economy

2. Feudal economy broke down with growth of manufacturing, towns, navigation & transportation, emergence of middle class

3. Industrial capitalism emerged, with only two classes: proletariat and bourgeoisie.

Industrial Capitalism – Negative Effects

• Destroys important human values, replacing even religious belief with naked exploitation.

• Undermines an individual’s sense of personal value in one’s work.

• Undermines human relationships; all relationships are based on cash.

• Destroys human freedom. The only freedom it protects is free trade.

Principles of Communism• Labour Theory of Value: the value of a

good is derived from how much labor went into its production.

• Alienation of Labor: Workers are separated from the fruits of their labor and alienated from the Bourgeoisie by exploitation.

• Class Struggle: In Marxist view of History, one class always exploits the others.

Ten Policy Planks of the Communist Manifesto1. Abolition of private property

in land and application of all rents of land to public purpose.

2, A heavy progressive or graduated income tax.

3. Abolition of all rights of inheritance.

4. Confiscation of the property of all emigrants and rebels.

5. Centralization of credit in the hands of the state, by means of a national bank with state capital and an exclusive monopoly.

6. Centralization of the means of communication and transportation in the hands of the state.

7. Extension of factories and instruments of production owned by the state; the bringing into cultivation of waste lands, and the improvement of the soil generally in accordance with a common plan.

8. Equal obligation of all to work.  Establishment of Industrial armies, especially for agriculture.

9. Combination of agriculture with manufacturing industries; gradual abolition of the distinction between town and country by a more equable distribution of the population over the country.

10. Free education for all children in government schools. Abolition of children's factory labor in its present form.

The Worker’s Utopia

• In the end, a classless society with no more oppression or internal contradictions.

• People will be free to choose how they labor, and can be creatively productive. They will be able to live to their fullest potential. Consider the description in Marx’s Communist Manifesto in 1845: