Document #1: History of the Economic Systems and Theories

Capitalism Capitalism is an economic system that emphasizes private ownership of the factors of production, freedom of choice, and individual incentives. These freedoms and incentives apply to workers, investors, consumers, and business owners. In pure capitalism, the government does not interfere with the economy—the wages of workers, the prices of goods, what producers can make, the ways that businesses make or sell their goods and services, or any other regulations. Capitalism assumes that the best way to serve society is to let people produce, sell, and buy as they wish. The goal of capitalism is to create what is called a free market. In economic terms, a market is not literally just a market like a grocery store. A market or marketplace is wherever all sorts of goods and services can be sold and bought. In a free market or free enterprise economy like that under capitalism, the government places no limits on the freedom of buyers and sellers to make their economic decisions.

Origins of Capitalism The basic theories about capitalism and free trade come from Adam Smith. Smith was a Scottish philosopher and economist who lived in the 1700s. In his famous book The Wealth of Nations, Smith suggested the government take a laissez-faire approach to the economy. Laissez-faire is a French term meaning “to let alone.” Smith thought the forces of the marketplace would act as an “invisible hand” guiding economic choices for the best possible results. Competition plays a key role in a free-enterprise or free-market economy because sellers compete for resources to produce goods and services at the most reasonable price. If they are successful, they make more money. At the same time, consumers compete over limited products to buy what they want and need. Finally, these same consumers, now in their role as workers, compete to sell their skills and labor for the best wages or salaries they can get. Pure capitalism has five characteristics: private ownership and control of property and economic resources, free enterprise, competition, freedom of choice, and the possibility of profits.

Free Enterprise in the United States A true and total capitalist system does not exist in reality. The United States, however, is a leading example of a capitalist system in which the government plays a role. Our society is deeply rooted in the value of individual initiative—that each person knows what is best for himself or herself. We also respect the rights of all persons to own private property. Finally, our society recognizes individual freedom, including the freedom to make economic choices. However, because the U.S. government also regulates many aspects of the economy, it does not have a purely capitalistic economy.

Mixed Economies Economists describe the economies in the United States and many other nations as mixed economies. Mixed economies combine elements of capitalism and socialism.

Mexico is another example of a mixed economy. While primarily capitalistic, the government owns all natural resources and runs a giant oil company, Petrolero Mexicanos (PEMEX). In its early history, the U.S. government played a very small role in the nation’s economy. Since the early 1900s, however, the government’s role in the economy has steadily increased in at least three ways. First, as the federal government has grown, it has become the single largest buyer of goods and services. Second, the federal government has become more involved in regulating industries to protect consumer health and product safety. The Meat Inspection Act and the Pure Food and Drug Act—both passed in the early 1900s—were responses to public outcry over investigative reports showing grotesque conditions at meat packing plants and in food production. Since then, many other industries have become more regulated as well. Third, the Great Depression of the 1930s created an economic emergency that propelled government action. With millions of Americans out of work, the government created programs to provide basic economic security. For example, it set up the Social Security system. It even set up a public corporation, the Tennessee Valley Authority, to provide electricity. Since then, many laws have been passed giving the government a role in such areas as labor management relations, environmental regulation, and control over financial institutions.

Socialism Socialism is an economic system in which the government plays a significant role in the economy, but it does not completely control it. It owns most land, basic industries, and other means of p