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Mr. Cryzters
American Government
C H A P T E R 23
Comparative Economic Systems
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Section:
C H A P T E R 23
Comparative Economic Systems
SECTION 1 Capitalism
SECTION 2 Socialism
SECTION 3 Communism

Chapter 23
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Section:
Chapter 23, Section 1
S E C T I O N 1
Capitalism
What are the factors of production?
How can we describe the free enterprise
system and the laissez-faire theory?
What is the role of government in a mixed
economy?
How are business organizations classified?
What role do profit and loss have in a free
enterprise system?
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Section:

Factors of Production
Chapter 23, Section 1
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The factors of production are the basic resources which
are used to make all goods and services.
Land
One factor of production is land, which in economic terms includes all natural resources.
Labor
Labor is the work done by men and women to produce goods and services.
Capital
Capital includes all the human-made resources that are used to produce goods and
services. Someone who owns capital and puts it to productive use is called a capitalist.
The Role of the Entrepreneur
An entrepreneurliterally, an enterpriseris an individual with the drive and ambition
to combine land, labor, and capital resources to produce goods or offer services.
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Section:
Free Enterprise System
Chapter 23, Section 1
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Private Ownership
The resources used to produce goods or services are owned by private
individuals or corporations.
Profit
The profit motive is the desire to
gain from business dealings.
Individual Initiative
All individuals are free to start and
run their own businesses.
Competition
Competition is a situation in which a number of companies offer the
same product or service. Under competitive conditions, prices are
determined by the laws of supply and demand.
The free enterprise system is an economic system characterized by
private or corporate ownership of capital goods and investments that
are determined by private decision rather than by state control.
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Chapter 23, Section 1
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Laissez-Faire Theory and Mixed
Economies
Laissez-Faire Theory
Laissez-faire theory holds
that government should play
a very limited, hands-off role
in society.
The proper role of
government in economic
affairs should be restricted to
functions intended to promote
and protect the free play of
competition and the operation
of the laws of supply and
demand.
A Mixed Economy
Economists usually describe
an economy in which private
enterprise and governmental
participation coexist as a
mixed economy.
The American economy is a
mixed economy.
Government at all levels in
American society has some
influence on the economy.

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Types of Business Organizations
Sole Proprietorships
Businesses owned by a single individual are sole proprietorships.
Partnerships
Businesses owned by two or more individuals, called partners, are
partnerships.
Corporations
A corporation has many owners, called shareholders. A share is a
fraction of ownership in the corporation.
Corporations have the advantage of being able to draw from large pools
of investor capital, but also have the disadvantage of having their
earnings taxed twice.
Chapter 23, Section 1
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Section:
Profit and Loss
Profit is the amount of money you earn from
the business once costs incurred running the
business have been subtracted.
If earnings are less than the costs, the
business has not made a profit; instead, it
has taken a loss.
Taking risks and making investments are an
essential part of the capitalist system.
Chapter 23, Section 1
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Section:
Section 1 Review
1. Which of the following is NOT one of the factors of production?
(a) land
(b) labor
(c) government
(d) capital

2. Laissez-faire theory promotes the idea that
(a) government should regulate every level of the economy.
(b) government should have the least amount of involvement in society and the
economy as possible.
(c) a mix of government and free enterprise is best for society.
(d) absolute control of the economy by government.
Chapter 23, Section 1
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S E C T I O N 2
Socialism
What is socialism?
What are some important characteristics of
socialist economies?
How can we describe socialism in
developing countries?
What are the pros and cons of socialism?
Chapter 23, Section 2
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Section:
Chapter 23, Section 2
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What is Socialism?
Socialism is an economic and political
philosophy based on the idea that the
benefits of economic activitywealth
should be equitably distributed throughout a
society.
Socialists emphasize cooperation and social
responsibility as ways to achieve a more
equitable distribution of both income and
opportunity, thus reducing great differences
between rich and poor.
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The Industrial Revolution
Chapter 23, Section 2
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Karl Marx
Karl Marxs theories, mostly
worked on with Friedrich Engels,
criticized capitalism.
To Marx, the proletariatthe
workerswere being so badly
abused by the bourgeoisie
the capitaliststhat they were
certain to rise up and overthrow
the capitalistic system.
Socialists and Communists
The socialist movement was
split during the nineteenth
century: those who believed
socialism could only be attained
by a violent revolution became
communists, and those who
believed democratic processes
could be used became todays
modern socialists.
Socialism developed largely in reaction to the
poverty and other hardships that accompanied the
Industrial Revolution.
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Characteristics of Socialist Economies
Nationalization
Placing enterprises under government control, often by taking over
privately owned industries, is called nationalization.
Public Welfare
Socialists aim to guarantee the public welfare by providing for the equal
distribution of necessities and services.
Taxation
Because social welfare services are quite expensive, taxes in socialist
countries tend to be high.
Centrally Planned Economy
In a centrally planned economy, government officials plan how an
economy will develop over a period of years. A democratic socialist
economy may or may not have strict central planning.
Chapter 23, Section 2
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Section:
Socialism in Developing Countries
Chapter 23, Section 2
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Socialism has won a large following in developing
countries.
One reason for socialisms appeal is that most
developing nations are starting from scratch at
building industry, often having no local tradition for
large-scale industry.
However, social unrest and political instability are
persistent problems in developing nations, and
socialist governments often become authoritarian
in nature.
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Section:
Pros and Cons of Socialism
Chapter 23, Section 2
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Cons
Critics say socialistic countries
have a tendency to develop too
many layers of bureaucracy.
In the eyes of socialisms critics,
the smooth running of an
economy is too complex to be
directed by central planners.
Another criticism is that
socialism deprives people of the
freedom to decide for
themselves how to use their
income.
Pros
Socialists say that it is fairer to
supply everyone with basic
needs, such as medical care.
Socialists argue that it is morally
superior to capitalism because it
evens out inequalities.
Defenders of socialism also
argue that it gives workers and
ordinary citizens greater control
of their everyday lives.
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Section 2 Review
1. Modern socialism began as a response to
(a) the French Revolution.
(b) the American Revolution.
(c) the Industrial Revolution.
(d) the New England Revolution.

2. Critics of socialism support all of the following themes EXCEPT
(a) that socialism takes away an individuals freedom to make economic choices.
(b) that socialism creates a more equitable society.
(c) that an economy is too complex to be run by government officials.
(d) that socialism takes away from individual initiative and is slower to take
advantage of new technologies.
Chapter 23, Section 2
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Chapter 23, Section 3
S E C T I O N 3
Communism
What do the theories of Karl Marx describe?
What characteristics do communist
economies have?
How did communism operate in the Soviet
Union, China, and other nations?
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Section:
Karl Marxs Theory
Chapter 23, Section 3
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1. Marxs view of history
To Marx, all of history was a struggle between social classes competing for control of
productive property.
2. The Labor Theory of Value
In Marxs view, the value of a commodity was set by the amount of labor put into it.
3. The Nature of the State
Marx saw the state and its government as tools by which the capitalists maintained their
order and privileges.
4. The Dictatorship of the Proletariat
Marx did not believe a free, classless society would initially be formed, but rather, in the
transition an authoritarian state would represent and enforce the interest of the masses.
Communism is often called a collectivist ideology, which calls for the
collective, or state, ownership of land and other productive property.
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Characteristics of Communist Economies
Chapter 23, Section 3
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Role of the Communist Party
In any communist-run nation, the
Communist Party holds the decision-
making power in both the
government and the economy.
Central Planning
Government officials plan and
supervise production in factories,
farms, and stores.
Collectivization
Collective or state ownership of the
means of production is one pillar of
communism. Collectivization is the
process of merging small private
farms into large government-owned
agricultural enterprises.
State Ownership
Industrial enterprises, transportation,
and other parts of the economy are
also state-owned.
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The Soviet Union
Chapter 23, Section 3
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The Five-Year Plans
A series of five-year plans were used to organize and run the Soviet
economy, all under the supervision of one large economic planning
agency called Gosplan.
Gorbachevs Reforms
Mikhail Gorbachev initiated perestroika, a reform which placed more
authority in local management, linked salaries to performance, loosened
price controls, and allowed some profit incentives.
Transition to a Free Market
With the fall of the Soviet Union in 1991, Russia has been in a constant
transition to a free market. A key component of this transition has been
privatization, or the return of nationalized enterprises to private
ownership.
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Section:
China and Other Communist Nations
Cuba
Fidel Castro led a revolution in Cuba
in 1959 to overthrow a corrupt
government. In 1961, Castro
declared himself a Marxist and the
country became communist in
nature.
Asia
North Korea is one of the few
remaining communist countries in
the world.
Communism also spread in the
Southeast Asian countries of
Vietnam, Laos, and Cambodia
during the mid-1970s.
Chapter 23, Section 3
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China
When Mao Zedong took control of
China in 1949, the country
developed its own version of central
planning.
The Chinese economy today,
however, has evolved into a mix of
state-controlled enterprises and a
growing class of private enterprises.
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Section:
Section 3 Review
1. In a communist system, the government
(a) owns all the factors of production.
(b) plays a minimal role in the economy.
(c) favors laissez-faire policies.
(d) permits individuals to make independent economic decisions.

2. One of the key aspects of Russias transition to a free market
economy has been
(a) the nationalization of privately owned businesses.
(b) the regulation of all economic sectors by the government.
(c) the privatization of state-owned enterprises.
(d) none of the above.
Chapter 23, Section 3
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