3. +
Learning Goals
Identify the three characteristics of pure
market capitalism.
Explain the key characteristics of
socialism.
Explain how socialism developed.
Identify the benefits of capitalism.
4. + Characteristics of Pure Capitalism
1. Pure capitalism is a system in which
prices seek their own level as determined
by the forces of supply and demand.
2. Resources, including labor, are free to
move in and out of industries in competing
geographic locations. The movement of
resources follows the lure of profits- higher
expected profits create an incentive for
more resources to go where those profits
are expected to occur.
5. +
Continued…
3. Private property rights exist, are legal, and
are enforced by the government, or the rule of
law.
4. Those who take risks may be rewarded by
higher profits. When those risks turn out to be
bad business decisions, the risk takers lose
money.
5. the 3 basic economic questions are all
decided in a decentralized way by individuals
6. +
Characteristics of Pure Socialism
1. Most prices are set by the state, rather than
by forces of supply & demand.
2. The movement of resources, particularly
labor, is strictly controlled. The central planning
authority makes all the decisions.
3. Most of the major factors of production are
owned by the state. Private property rights are
strictly limited to small tools that an individual
needs for an occupation.
7. +
Continued…
4. Individual risk taking is now allowed. The
state takes all of the risk when it decides
which new companies shall be formed. All
citizens pay for unsuccessful risk taking.
5. Economic decisions about what, how, and
for whom to produce are all made by state
officials through central planning agencies
and other administrative units.
6. Taxation is often used to redistribute
income.
8. +
Capitalism vs. Socialism
Capitalism = 3P’s [Prices, Profits, and Private
Property]
Government limited to providing public
goods [national defense police protection]
Socialism = little private property, state owns
virtually ALL factors of production
Example- North Korea and Cuba
9. +
Review
What are the three characteristics
of pure market capitalism?
Prices, profits, and private property; prices set by forces of supply &
demand; free movement of resources go to where profits are highest,
and the risk takers may be rewarded; private property rights exist due to
decentralized decision making.
What the are key characteristics of
pure socialism?
prices set by government, most resources owned
and controlled by government, private property rights
strictly limited, no individual risk taking, decision
making centralized in the hands of government
10. +
The Marxian View of
Socialism
• Socialism grew out of protests
against the problems caused by the
Industrial Revolution of the 1800s.
• Marx viewed hist. as a continuing
struggle b/w various groups, or
classes in society.
• Struggle b/w: capitalists [owners of
the land], machines, factories and
the proletariat [workers]
11. +
The Change from Capitalism to
Socialism* [*according to Marx]
1- Capitalism would suffer
extreme recessions and
depression that would harm
workers. A Few rich
capitalists would have all
industrial power.
3- The victorious workers
would establish a new
socialist system. Workers,
through the state would own
and control the means of
production.
2- The wide gap between
the rich and the poor would
cause workers to unite and
overthrow capitalism.
4- the system would evolve
into pure communism.
Workers would contribute to
society to their full abilities
and, in return, take only
what they needed
12. +
Step 1
Capitalism would
suffer extreme
recessions and
depression that
would harm
workers. A Few
rich capitalists
would have all
industrial power.
13. +
Step 2
The wide gap between
the rich and the poor
would cause workers
to unite and overthrow
capitalism.
14. +
Step 3
The victorious workers would establish a new
socialist system. Workers, through the state would
own and control the means of production.
15. +
Step 4
the system would evolve
into pure communism.
Workers would
contribute to society to
their full abilities and, in
return, take only what
they needed
16. +
The Evolution of Communism
Marx accurately predicted the evolution of
socialism into communism [term used by
Marx for his ideal society in which no
government is necessary]
Today Communism means any authoritarian
socialist system that supports revolution as a
means to overthrow capitalism and bring
about socialist goals.
Instead of “no government”, communist
systems have demonstrated that a central
government controls the entire economy
17. +
Socialism since Marx
20th century-
socialism split into
2 major trends:
democratic
socialism/
authoritarian
socialism
18. +
Democratic Socialism
System that works
within the constitutional
frameowrk of a nation
to elect socialists to
office; the government
usually controls only
some areas of the
economy
19. +
Authoritarian Socialism
System that supports
revolution as a
means to overthrow
capitalism and bring
about socialist goals;
the entire economy
is controlled by a
central government;
also called
communism.
20. +
What the Critics say…
Those who place a high value on
personal freedom, initiative, and
individuality prefer capitalism.
Critics of socialism point out that it
brings extendsive government
intervention in all parts of the economy
& in personal lives
21. +
The benefits of Capitalism
Allows for more
efficient in the
marketplace
Greater rates of
economic growth
Unregulated
economic systems
have much higher
rates of economic
growth
22. +
All Economies are PLANNED
U.S. has a highly planned
economy
Difference b/w economic
planning here vs. socialist
countries is who does the
planning
Private firms, individuals, and
elected government officials do
the planning in the American
economy.
In pure socialist systems,
central planners make
decisions on behalf of
everyone
23. +
Problems w/ Capitalism
Income is unequally
distributed throughout the
economy
Have enough government
provided foods such as
highways, they are
insufficient when it comes to
schools and museums for
the general public
24. +
Critical Thinking Activity
Create a table that compares how each of
the following functions is handled under
capitalism and democratic socialism:
Setting price of goods
Ownership of production
Economic planning
Business failures
25. +
Applying Economic Concepts
Imagine that you live in an authoritarian
socialist nation. What arguments might you
make to change the economic and political
systems?
Economic comparisons of your nation with
living standards in free market systems,
emigration of people from your nation, lack of
political freedoms
26. +
Trace China’s economic development following WW II
Section 2
Changing
Authoritarian
Socialism-
The Case of
CHINA
Describe 2 major problems in China’s attempt
to move to capitalism
28. +
Development of China’s Economic System
Communists won China’s civil war post WWII
Started economic system on five-year plan
Centralized planning system that was the basis for China’s
economic system; eventually was transformed to a regional
planning system leading to limited free enterprise
Implemented in 1953- failed; mid-50s altered strict
planning
1958 gave some decision-making powers to local
government rather than restricted them to the central
government
Became a regional planning system
29. +
1970s * Agriculture
After the failure of reforms in 1958, in 1978 Chinese
leaders designed a reform to increase individuals
work ethic
Private individuals were permitted to rent land for up
to 15 years, each peasant household became
responsible for its own plot of land.
Whatever it produced in excess of a minimum
amount required by the state remained the property
of the household.
Between 1979 and 1984- overall farm productivity
increased dramatically
30. + mid-1980s- Business Reforms
Continuing today
Managers in state-owned businesses are
allowed much more decision-making power
than ever
After they fulfill state production
requirements, they can set production
according to market demand
Also allowed to sell part of their output to
whomever they choose at market prices
31. + Transition to a Mixed Economy
Well-defined private property rights is the most
important aspect of pure capitalism
China- state still owns large parts of the economy
[especially urban industries]
Provincial govenors still held accountable for
ensuring each province grows as much grain as it
consumers
Government leases land for 15-year intervals to
farmers
w/out complete property rights, farmers are therefore not
interesting in investing in farm equipment and making
improvements to the land.
32. +
Establishing the Rule of Law
How to establish the rule of law is the biggest
question facing a country converting to
capitalism.
With no private property the possibility of
corruption is extreme
China- lawlessness & unpredictability
Especially for foreign investors
Army/government control – bribes
Gradually getting laws
33. +
Case Study: CDs
CD factories in China notorious
for pirating
Chinese government supported
this
One point shut them down due
to international pressure
Pirating resumed soon enough
Ignored by Chinese government
Lack of understanding for
singer/musician royalties
34. +
Prospect for China’s future
Beijin/Shanghai- McDonald’s, cell phones, pagers,
ads for fashion, Heinz, 7Up, Head & Shoulders
1999 foreign presence began expanding
U.S. allowed China to join the World Trade
Organization (WTO) an organization that regulates
trade among 141 of the world’s nations
Enormous market w/ 1.2 billion people
Inefficient state-owned industries draining China’s
economy forced to reform
35. +
Review- Complete the table to
explain 2 major problems China is
facing in its move to capitalism
Problem Cause Effect
Incomplete
property rights
The state still
owns large parts
of urban
industries and the
land
Little incentive to
work hard or for
farmers to
improve the land
Establishing the
rule of law
No specific
property rights
exist
corruption
36. Problem Cause Effect
Incomplete
property rights
The state still owns
large parts of urban
industries and the
land
Little incentive to
work hard or for
farmers to improve
the land
Establishing the
rule of law
No specific
property rights
exist
corruption
38. +
Critical Thinking
Explain how government involvement
in setting production quotas for
industries could lead to either a surplus
or shortage of goods and services.
Incorporate real-world examples in your
explanation.
Quotas ignore market forces, which
alleviate surpluses and shortages
