Page 245 - Encyclopedia of Business and Finance

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Economic Systems

place. These critics argue that private individuals, guided Typically the economies of Canada, the United States, and
by rising and falling prices and by the desire to earn prof- Western Europe are considered to be capitalist.
its, are better at satisfying consumer demand.
SOCIALISM
CAPITALISM Under a socialist economic system, individuals own their
Under a capitalist economic system, individuals own all own human capital and the government owns most other,
resources, both human and non-human. Governments non-human resources—that is, most of the major factors
intervene only minimally in the operation of markets, pri- of production are owned by the state. Land, factories, and
marily to protect the private-property rights of individu- major machinery are publicly owned.
als. Free markets in which suppliers and demanders can
enter and exit the market at their own discretion are fun- What and how much will be produced? How will it be
damental to the capitalist economic system. The concept produced? For whom will it be produced? A socialist sys-
of laissez-faire, that is, leaving the coordination of individ- tem is a form of command economy in which prices and
uals’ wants to be controlled by the market, is also a tenet
production are set by the state. Movement of resources,
of capitalism. including the movement of labor, is strictly controlled.
Resources can only move at the direction of the central-
What and how much will be produced? How will it be ized planning authority. Economic decisions about what
produced? For whom will it be produced? In a capitalist and how much, how, and for whom are all made by the
system, individuals own resources, either through inheri- state through its central planning agencies.
tance or through industry. The individual receives com- In theory, socialism is an economic system based
pensation for the use of resources by others. This,
upon the individual’s good will toward others, rather than
combined with inherited wealth of the person, determines a function of his or her own self-interest. Socialism
an individual’s spending power. The accumulated spend-
attempts to influence individuals to take other people’s
ing power and the willingness of individuals to allocate
needs into account and to adjust their own needs in accor-
resources to consumption determine demand. The avail- dance with what is available. In socialist economies, indi-
ability and costs of resources, together with the potential
viduals are urged to consider the well-being of others. If
for profits of firms, determine supply. In a market system individuals do not behave in a socially desirable manner,
the demand of consumers combined with the supply of
the government will intervene. In practice, socialism has
producers determine what and how much will be pro-
duced. become an economic system based on government owner-
ship of the means of production, with economic activity
Because of the economic competitiveness of the mar-
governed by central planning. The economies of Sweden
ket system, the lowest-cost production method will be
and France are examples of a socialist economic system.
used. If anything other than the lowest-cost production
method was being used, a competing firm would have an
incentive to enter production to earn a greater profit and COMMUNISM
could afford to sell at a lower price, thus driving the orig- Under a communist economic system, all resources, both
inal firm out of production. Consumers could then pur- human and non-human, are owned by the state. The gov-
chase more of the product at a lower price, allowing their ernment takes on a central planning role directing both
limited resources to purchase more. production and consumption in a socially desirable man-
Production will be allocated to those with available ner.
resources and a willingness to purchase the output of pro-
duction. These purchases then become information for What and how much will be produced? How will it be
suppliers in determining what and how much to produce produced? For whom will it be produced? Central plan-
in the future. ners forecast a socially beneficial future and determine the
Thus, pure capitalism is an economic system based production needed to obtain that outcome. The central
upon private property and the market in which, in princi- planners make all decisions, guided by what they believe
ple, individuals decide how, what, and for whom to pro- to be good for the country. The central planners also allo-
duce. Under capitalism, individuals are encouraged to cate the production to consumers based on their assess-
follow their own self-interests, while the market forces of ment of the individual’s need. Basic human needs and
supply and demand are relied upon to coordinate eco- wants would be met according to the Marxist principle,
nomic activity. Distribution to each individual is accord- “From each according to his ability to produce, to each
ing to his or her ability, effort, and inherited property. according to his need.”

222 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION