Economic Systems - Capitalism Versus Socialism

Contemporary Economic Issues “Economic Systems: Capitalism versus Socialism” Relevant Readings from the Required Textbooks:  Economic Systems: Capitalism versus Socialism Definitions and Concepts:  economic system – the rules and methods put in place by a society to answer the three fundamental economic questions of “What to produce?,” “How to produce it?,” and “For whom to produce it?”  comparative economic systems – the subfield of economics that compares and contrasts the structure and the performance of different types of economic organization (i.e., different economic systems).  four primary economic institutions: households, firms, markets, and government  households – the most fundamental part of any economic system; ultimate consumers of most finished goods/services; primary suppliers of labor  firms – the institutions which transform factors of production into finished goods/services  economic resources or factors of production – the inputs such as factories, farms, stores, trucks, and equipment used to produce goods and services.  natural assets – natural resources, including minerals, naturally occurring vegetation, water resources, topographical features, and available agriculturally productive land  produced assets – the currently available machines, factories, and inventories of finished goods available as industrial capital, as well as social capital such as transportation and communications infrastructure, and educational institutions  human capital – the skills, education, and training which individuals in the labor force possess  market – the collection of all potential buyers and all potential sellers of a good or service.  government – a decision-making institution with the legal authority to impose restrictions or mandates on the behavior of other decision-makers (i.e., the ability to use legal coercion).  contract – a legal document which specifies what different parties must do, whatever the external circumstances, and provides enforcement or compensation for nonperformance  capitalism – economic system in which the means of production are privately owned and operated for a profit.  socialism – economic system in which the means of production are owned by the government.  feudalism – economic system in which land ownership is restricted to an aristocratic nobility.  three dimensions of Private Ownership of Property: (i) “right to control,” (ii) “right to transfer,” and (iii) “right to restitution.”  right to control – the right to decide how to use your property.                   right to transfer – the right to obtain ownership of property from or relinquish ownership of property to another person. right to restitution – the right to be compensated by another person when he damages your property or infringe upon your rights. consumer sovereignty – the freedom for an individual to choose to purchase (or to not purchase) a good or services at a price determined in a free, unfettered market Adam Smith – 18th century (1721-1790) Scottish economist, who wrote “An Inquiry into the Nature and Causes of the Wealth of Nations,” in which he laid out the central arguments for why private ownership/control of resources and trade in free markets often result in desirable outcomes Invisible Hand – Smith’s recognition that under certain conditions, the behavior of self-interested decision makers interacting in free markets leads to outcomes which are better for all parties.  when the “invisible hand” is applicable, any possible alternative to the market outcome would be less desirable for some individuals in society.  “free market forces” are the “invisible hand” that leads us to an outcome that is “efficient” (in that “total social surplus” is maximized). Karl Marx – 19th century (1818-1883) German philosopher, economist, and revolutionary, who wrote “Das Kapital” (1867, 1884, 1885) and co-wrote (with Friedrich Engels) “The Communist Manifesto” (1848) Bourgeoisie – the term which Karl Marx used to refer to business owners. Proletariat – the term which Karl Marx used to refer to the working class. Communism – economic system in which the means of production are collectively owned by all people in a society (without intervention by a government or state)  A stateless, classless economic system in which all the factors of production are owned by the workers and people share in production according to their needs: “From each according to his ability, to each according to his need” (Louis Blanc in “The Organization of Work,” 1839) New Soviet Man – a person motivated primarily by selfless benevolence. Economic Man (or homo economicus) – a person who is both self-interested and rational (this is the standard assumption within mainstream economics) command planning – an environment in which the government directly controls nearly all economic activity, and almost all production takes place within enterprises owned/controlled by the government. indicative planning – an environment in which the government guides the behavior of individuals in regards to economic decisions by establishing policies which alter costs and benefits. three primary types of economic incentives: material rewards, moral suasion, and coercion. material rewards – monetary rewards or direct increases in consumption from engaging in an activity. moral suasion – attempts to convince individuals to behave in a certain manner because doing so is the right thing to do. coercion – the use or threat of force or incarceration in order to obtain compliance. mixed economy – an economic system in which some factors of production are owned and controlled by individuals, while some factors of production are owned and