CHAPTER 19Converging 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 2Changing 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 3Nations 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.