Chapter 19 Converging Economic Systems
Chapter 19section 1 Comparing Capitalism and Socialism
American Capitalism • Some government intervention occurs in the American economy but generally the market controls the economy using supply and demand. • The system the US uses is known as market capitalism. • The opposite of this system is pure command socialism.
Pure Market Capitalism • Operates on the basis of the three P’s: • Prices • Profits • Private property • A government in a pure capitalist system provides only public goods such as national defense and police protection.
Pure Socialism • An economic system with little private property, where virtually all factors of production are owned and controlled by the state • Few countries practice pure socialism but North Korea and Cuba are close to the system.
Marxian View of Socialism • Karl Marx saw history as a struggle between capitalists and the proletariat, or workers. • He believed a product’s value should be based on the labor used to produce it, therefore selling something for a profit is a form of stealing money from the worker who made it.
Marxian View of Socialism • Marx believed capitalists took advantage of the proletariat. • Proletariat: Marx’s term for workers • Marx predicted the fall of capitalism and the evolution of socialism into communism, or an ideal economic system with no need for government.
Socialism Since Marx • The communist economies of today are very different from Marx’s theory as communists governments are thought of as authoritarian with great control over the nation. • In the twentieth century socialism split into two trends. • Democratic Socialism • Authoritarian Socialism
Socialims • Democratic socialism is where the government controls only parts of the economy. • Authoritarian Socialism is where the central government controls the entire economy.
Benefits of Capitalism • Individual values play a major role in comparing advantages and disadvantages of capitalism and socialism. • Capitalism allows more freedom and personal initiative. • Capitalism provides for more efficiency in economy and greater rates of growth.
Benefits of Capitalism • Both capitalism and socialism require planning, the difference is who does the planning. • Capitalism does lead to inequities in distribution. • Also, capitalist countries often do not have enough social programs such as schools and museums (as compared to socialist countries).
Chapter 19section 2 Changing Authoritarian Socialism- The Case of China
Development of China’s Economic System • Communists won the civil war following World War II, and the government started an economic system based on five-year plans. • Five Year Plans: centralized planning system that was the basis for China’s economic system • These plans were unsuccessful, so the government began to implement reforms.
Development of China’s Economic System • In 1978, people were given ability to rent land and be fully responsible for that plot. • Farm productivity increased dramatically. • The mid-1980s brought further reforms, allowing managers of state-owned businesses much more control.
The Transition Toward a Mixed Economy • In mid-1980s, 70 percent of industrial production was by state-owned businesses. • Today it is less than 40 percent. • Pure capitalism cannot be achieved because China still owns most industries and farmland. • Farmers rent the land in 15-year increments.
The Transition Toward a Mixed Economy • Without property rights, corruption is unavoidable. • China must establish a rule of law if it wants to work toward capitalism.
Prospects for China’s Economic Future • China was admitted to the World Trade Organization in 2000, opening it to the world market. • China represents a large market for foreign businesses. • China has many products that Americans see every day including: McDonald’s, Levi’s, Head and Shoulders, and Hienz.
Chapter 19Section 3 Nations Move Toward the Market System
Privatization in Russia • Privatization: the change from state ownership of a business, land, and buildings to private ownership. • Since privatization leads to increased unemployment and other economic difficulties, some people protest the change (some even want to go back to the old system). • Often state run enterprises are inefficient and new companies bringing new ways of business sometimes require fewer workers.
Privatization in Russia • Prices in Russia are now determined by supply and demand (instead of by government officials). • Many Russian factories are still quite inefficient. • Many government-owned businesses were sold to “friends of government.” • People are bartering because they do not have faith in Russian currency and in order to avoid paying taxes.
Changes in Sweden • Sweden is called a welfare state • Welfare State: blends capitalism and socialism by combining private ownership of the means of production and competitive allocation of resources with the goal of social equality for all citizens. • The country has one of the highest per-capita incomes in the world.
Changes in Sweden • Sweden’s government practically guaranteed life-long employment. • An unemployment security bill passed in the 1970s makes it difficult for businesses to get rid of bad employees. • Government spending and taxes represented about 54 percent of the country’s annual economic activity.
Changes in Sweden • In a move toward free enterprise, the government is: • cutting taxes • doing away with some government jobs • easing regulations on businesses • privatizing some previously government-owned businesses.
Changes in Latin America • Many of these countries are capitalist but have large government sectors. • Since 1985, many government ventures are being privatized. • Many of these countries are trying to follow the model of Mexico but are limited by political disputes. • Chile and Argentina have successfully privatized many sectors.