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Comparative Economic Systems Essay

13b. Comparing Economic Systems

Karl Marx, German philosopher, economist, and revolutionary, laid the ideological groundwork for modern socialism and communism.

Karl Marx and Friedrich Engels turned the world upside down.

Until the publication of their 1848 Communist Manifesto, much of the western world followed a course where individuals owned private property, business enterprises, and the profits that resulted from wise investments. Marx and Engels pointed out the uneven distribution of wealth in the capitalist world and predicted a worldwide popular uprising to distribute wealth evenly. Ever since, nations have wrestled with which direction to turn their economies.


  • Capitalism is based on private ownership of the means of production and on individual economic freedom. Most of the means of production, such as factories and businesses, are owned by private individuals and not by the government. Private owners make decisions about what and when to produce and how much products should cost. Other characteristics of capitalism include the following:
  • Free competition. The basic rule of capitalism is that people should compete freely without interference from government or any other outside force. Capitalism assumes that the most deserving person will usually win. In theory, prices will be kept as low as possible because consumers will seek the best product for the least amount of money.

    Image from Capitalism Magazine (http://www.CapitalismMagazine.com). Used with permission.

    The antitrust lawsuit against Microsoft is one way that the government has tried to promote competition. Supporters of Microsoft say that forcing Microsoft to allow companies to bundle arch-rival Netscape's web browser with Microsoft Windows is not unlike making Coca-Cola include a can of Pepsi in each six-pack it sells.
  • Supply and demand. In a capitalist system prices are determined by how many products there are and how many people want them. When supplies increase, prices tend to drop. If prices drop, demand usually increases until supplies run out. Then prices will rise once more, but only as long as demand is high. These laws of supply and demand work in a cycle to control prices and keep them from getting too high or too low.


Karl Marx, the 19th century father of communism, was outraged by the growing gap between rich and poor. He saw capitalism as an outmoded economic system that exploited workers, which would eventually rise against the rich because the poor were so unfairly treated. Marx thought that the economic system of communism would replace capitalism. Communism is based on principles meant to correct the problems caused by capitalism.

The most important principle of communism is that no private ownership of property should be allowed. Marx believed that private ownership encouraged greed and motivated people to knock out the competition, no matter what the consequences. Property should be shared, and the people should ultimately control the economy. The government should exercise the control in the name of the people, at least in the transition between capitalism and communism. The goals are to eliminate the gap between the rich and poor and bring about economic equality.


Socialism, like communism, calls for putting the major means of production in the hands of the people, either directly or through the government. Socialism also believes that wealth and income should be shared more equally among people. Socialists differ from communists in that they do not believe that the workers will overthrow capitalists suddenly and violently. Nor do they believe that all private property should be eliminated. Their main goal is to narrow, not totally eliminate, the gap between the rich and the poor. The government, they say, has a responsibility to redistribute wealth to make society more fair and just.

There is no purely capitalist or communist economy in the world today. The capitalist United States has a Social Security system and a government-owned postal service. Communist China now allows its citizens to keep some of the profits they earn. These categories are models designed to shed greater light on differing economic systems.

The Marx/Engels Internet Archive
Who were Karl Marx and Friedrich Engels? How did they articulate the foundations of one of the most important ideologies of the last century? Explore this exhaustive but well-organized archive of their letters, writings, and images (maintained by Marxists.org) to understand not only the theories, but the personalities behind the hammer and sickle.

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The Wealth of Nations
Eager to know how capitalism got off the ground? Scroll through the text of Adam Smith's classic work on free-market economics, An Inquiry into the Nature and Causes of the Wealth of Nations. Although his language is from 1776, the modern capitalist system is firmly entrenched in his ideals.

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The Chairman Smiles
Attention: all aspiring propagandists! This fascinating website by the International Institute of Social History provides images of many propaganda posters from China, Cuba, and the former Soviet Union. Stalin, Castro, Guevara, Mao — all the familiar faces from the history of communism are here, smiling confidently and silently urging you to join their respective revolutions.

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International Socialist Organization
Should working people run things for the good of the majority? To answer that, take a long look at the tenets of the International Socialist Organization and see what it takes to restore the production and distribution of wealth to the working class. Also, find out who they endorse (and why) for the 2000 presidential elections.

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The Center for the Moral Defense of Capitalism
Although socialists and communists would scoff at the idea, the Center for the Moral Defense of Capitalism argues that laissez-faire capitalism is the only truly moral socio-economic system. Read their essays, weigh the philosophical evidence, and decide if the free market does indeed operate on the moral ideal of individual freedom.

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The New York Stock Exchange
See capitalism in action at the New York Stock Exchange. At their official website, you can get stock quotes, find out about who has a seat on the Exchange, and feel the excitement of what it's like to be on the trading floor. This extensive website offers a glimpse into the inner workings of the stock market, with pictures and explanations of how money can work to make even more money.

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Ron Wise's World Paper Money Homepage
Not all money is green. This comprehensive website run by an avid collector of banknotes from around the world provides high-quality scanned samples of notes from nearly all of the world's currencies. Check out currency from CuraÇao or Mongolian money, as well as information on watermarks, holograms, and fibers that make cash across the globe hard to counterfeit.

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The Great Pokémon Crash of 2000
What happened to the value of Pokémon cards in 2000 after the company released so many cards for the Christmas season? This site teaches the law of supply and demand using the popular trading cards as an example. Pikachus and Squirtles are used to demonstrate the concepts of equilibrium and inflation that drive the basic theories of economics.

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As we have said, all nations must answer the question of scarcity. All nations and societies must alocate their resources in order to meet their needs. This is where the essential dilemma between unlimited wants and limited needs comes into play. We have also noted that all nations must make choices. This is a matter of resource allocation. When we allocate limited resources we make choices. The cost of these choices is known as opportunity cost. When making these choices and dealing with rscarcity, resource allocation and opportrunity cost nations are answering what we have previosly referred to as the three basic economic questions. These are are the questions all nations must ask when dealing with scarcity and effcientlly allocating their resources. They are:

  • What to produce?
  • How to produce?
  • For whom to produce?

Each nation and society thus must make choices and deciiosn based upon there own values. If a society values meeting more wants and needs at the expense of freedom of choice then they may choose a system radically different then our own. Thus we have seen the creation of a variety of economic systems.

Economic systems are divided up into three basic types. These types are:

  • Traditional Economic Systems
  • Market Economic Systems
  • Command Economic Systems


Traditional Economic System

A traditional economic system is one in which people's economic roles are the same as those of their parents and grandparents. Societies that produce goods and services in traditional ways are found today in some parts of South America, Asia, and Africa. There, people living in an agricultural village still plant and harvest their own food on their own land. And the ways they produce clothing and shelter are almost exactly the same as those used in the past. Tradition decides what these people do for a living and how their work is performed.


Market Economic System

A market economic system is one in which a nation's economic decisions are the result of individual decisions by buyers and sellers in the marketplace. The U.S. has a market economic system. When you finish school, you may go to work where you choose, if a job is open. You are also free to go into business on your own. Suppose that you decide to open a business. You will risk the money that you have saved or borrowed in the hope that you will be successful. The price that you charge for your goods or services will be influenced by the prices charged by your competitors (other businesses selling the same items). The success that you have will depend on the demand by consumers for your goods. You may do extremely well. But if people do not want what you are selling, you will go out of business.


Command Economic System

In a command economic system, the main decision maker is the government. No person may independently decide to open and run any kind of business. The government decides what goods and services are to be produced. And the government sells these goods and services. The government also decides how the talents and skills of its workers are to be used.




We have classified economic systems according to the way they answer three basic questions of what, how, and who. A fourth question that should be asked is, "Who owns the means of production?" An economy's means of production are its capital: factories, farms, shops, mines, and machinery. The means of production are used to produce other goods and services.

If the government owns and operates almost all of the nation's means of production, then that nation's economic system is called communism. China has a communist economic system. Almost all of the means of production are publicly owned-that is, owned by the government. Government planners decide the answers to the basic economic questions. Farming on private plots of land is sometimes allowed. In recent years, the Chinese government has been allowing more and more private businesses to operate.

If the government owns and operates many of the nation's major industries-such as banks, airlines, railroads, and power plants-but allows individuals to own other businesses, including stores, farms, and factories, that nation's economic system is called socialism.

Sweden is an example of a country whose economic system is often described as socialist. Most of its major industries, such as coal mining, electric power, gas, telephone, and railroads, are owned by the government. Under Sweden's national health insurance system, the people receive free medical services all their lives.

If almost all the stores, factories, and farms in a nation are owned and operated by private individuals or businesses, then its system is called free enterprise, or capitalism. The U.S. has a free enterprise, or capitalist, economic system.

No country has an economic system that is 100 percent communism, socialism, or capitalism. All countries today have mixed economic systems or mixed economies, with some free enterprise and some government ownership.

In the U.S., as in most capitalist countries, there are many examples of government ownership. Public colleges, high schools, and elementary schools, for example, are owned and operated by state or local governments. Other publicly owned enterprises are the postal service, many municipal bus lines and trains, a few electric power plants, and housing projects.

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