Economic Theories

Key Terms

economics, capitalism, free market, laissez-faire, socialism, bourgeoisie, proletariat, communism, command economy

Find Out

• According to Karl Marx, what was the ultimate goal of true communism?

• In what three ways has the United States modified its free enterprise system?

Understanding Concepts

Free Enterprise What features of the American economy provide incentive for people to achieve economic goals?

Section Objective

Name the ways the United States has modified its free enterprise system.

Economic Theories

Before William F. Gates was 40 years old, he was the richest person in the United States. He made his billions as head of Microsoft Corporation. By the late 1990s, Gates was also the richest person in the world.

A. Governments provide for many different kinds of economic systems.

I. The Role of Economic Systems (page 26)

B. Economic systems make decisions about what goods and services should be produced, how they should be produced, and who gets them.

Why is some government involvement necessary for economic systems to function?

Government must provide the basic structure in which an economic system may function.

I. The Role of Economic Systems (page 26)

A. Capitalism is based on free enterprise, or individual economic choices.

II. Capitalism (pages 26–28)

B. Capitalism developed gradually from the economic and political changes in medieval and early modern Europe.

C. The United States has a capitalist economy, but government plays a role.

D. Government’s role in the U.S. economy has increased since the early 1900s.

E. Today the United States has a mixed market economy, incorporating both free enterprise and government regulation of business and industry.

II. Capitalism (pages 26–28)

II. Capitalism (pages 26–28)

What are some of the advantages and disadvantages of capitalism?

Advantages: incentives to achieve individual potential, freedom

Disadvantages: extremes of wealth and poverty

A. Under socialism, government owns the basic means of production, plans the use of resources, distributes many products and wages, and provides basic social services.

III. Socialism (page 28)

B. Socialism developed in Europe during the nineteenth century.

C. Some socialists favored taking over the government by means of revolution, while other socialists believed in democratic socialism, in which economic conditions change peacefully and people have some freedoms and rights.

III. Socialism (page 28)

D. Socialist governments have taken power in several countries; however, critics argue that this economic system fails to solve most economic problems.

III. Socialism (page 28)

What groups benefit most from socialism?

Those who use more government services, such as health care and public transportation, benefit most from socialism.

A. Communism is based on the nineteenth-century ideas of Karl Marx, who argued that capitalism exploited workers to benefit a small group of capitalists who controlled the economy.

IV.Communism (pages 29–30)

B. Marx predicted workers would eventually rise in a violent revolution, which would result in government ownership of all means of production and distribution; when all property was held in common, there would be no need for government.

C. In communist nations, government makes all economic decisions; owns the land, natural resources, industry, banks, and transportation system; and controls all mass communication.

IV.Communism (pages 29–30)

IV.Communism (pages 29–30)

Why have governments of communist nations such as China used a system of five year plans for the economy?

To show the government’s commitment to progress, elicit support, and provide a measuring unit.

1. Main Idea In a graphic organizer similar to the one below, identify three functions of economic systems.

Checking for Understanding

Economic systems decide: what is produced, how it is produced, and who gets what is produced.

___ free market

___ laissez-faire

___ proletariat

___ command economy

___ bourgeoisie

A. workers who produce the goods

B. an economic system in which the government controls the factors of production

C. economic system based on private ownership of the means of production and on individual economic freedom

D. the philosophy that government should keep its hands off the economy

E. capitalists who own the means of production

Checking for Understanding

C

D

A

B

E

Match the term with the correct definition.

3. Identify Adam Smith, Karl Marx.

Checking for Understanding

Adam Smith was a Scottish philosopher and economist who provided the basic idea of laissez-faire economics, as it applied to a free market system.

Karl Marx, a German thinker and writer, was a socialist who advocated violent revolution and wrote The Communist Manifesto.

4. What did Marx believe would happen in a true communist economy?

Checking for Understanding

There would be no need for government.

5. Making Inferences What ideas presented by Karl Marx appealed to people in nations where wealth was unevenly distributed?

Critical Thinking

Workers would revolt against capitalists, property would be held in common, and one class would evolve.

Free Enterprise Competition is an important factor in the United States economy. Find advertisements in newspapers that illustrate various kinds of competition. Display these ads on a bulletin board. Should the government regulate prices? Why or why not?