CAPITALISM & COMPARATIVE ECONOMICSGuided Reading Activity

Capitalism (n.) -

Capitalism an economic system which attempts to provide for all of a society’s basic needs by allowing private companies and free labor to operate for a profit. If operated fairly, both groups thrive and society’s needs are provided for.

The Factors of Production

Land

Labor

Capital

Entrepreneurship* - this term is not always listed separately; however, it is a unique quality which exists in the people who create businesses.

Land

Land may simply refer to the physical space that a company occupies; however, it’s not only that. It may also refer to the resources – water, timber, oil, iron ore, or precious metals – in the environment.

Labor

Human resources, or the men and women who work in mines, factories, offices, hospitals, schools, and other areas in order to produce goods. Laborers have physical and intellectual skills which they “sell” to employers. Depending on the scarcity of their particular skill set, labor can demand high wages.

Capital

All of the human made resources which are used to produce goods and services are capital. Physical capital may be simply buildings, machines, computers, and tools used by laborers. In general capital is an investment made by a company which allows it to produce more goods and services.

Entrepreneurs: Risk and Reward Entrepreneurs are

enterprising people who have the drive, ambition, and innovation required to turn land, labor and capital into a business that produces goods and services. Entrepreneurs assume risk – they may lose their investments if things go wrong! However, if their business plans succeed, they get to keep all the profits!

The Free Enterprise System

The phrase “Free Enterprise System” is used to describe the characteristics of capitalism. Free Enterprise means that private ownership of capital and private decision making regarding what is produced both exist. It also means that free laborers choose where they will work, and consumers have choices over what they will purchase.

Free Markets

A market where sellers are permitted to sell more or less whatever they choose, and to charge whatever prices they wish. At the same time, consumers are permitted to purchase whatever they wish, and can negotiate prices. Almost all free markets exist in democratic nations – where the rule of law protects private property rights.

The Four Fundamentals Rules and Factors in a Capitalist System:

Private Ownership of property and businesses.

Individual Initiative motivates people to invest, establish business, work, and consume goods.

The profit motive inspires entrepreneurs and workers.

Competition thrives, consumers have choices.

Private Ownership V. Public Ownership

Private ownership of companies simply means that entrepreneurs are allowed to control their own companies – sole proprietorships, partnerships, or corporations.

Public ownership of companies means that the government – or, the taxpayers, if you like – own the business. This is not very common in the United States, but one example would be Amtrak.

How the Constitution Protects Private Property Rights: Amendments

The Fifth Amendment to the Constitution stipulates that the government cannot dispossess people of their property except for the good of the public and with just compensation. This is referred to as the power of eminent domain. Infrequently, local, state, or national government agencies will take over private property – but they must compensate the owners.

The Fourteenth Amendment states, “nor shall any state deprive any person of life liberty, or property without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws. This amendment has been interpreted by the courts to protect private property rights, as well.

The Fifth Amendment The Fourteenth Amendment

Individual Initiative

All individuals are free to start and to own their own businesses; they are also free to dissolve their businesses should they choose to do so. The exchange of ideas in the marketplace and advancements in technology frequently lead to innovations and changes in business methods – and the owners of companies are free to pursue such changes in a free market system.

The Profit Motive

In a free enterprise system, people are entitled to the benefit from whatever their investment earns or gains in value. The “profit motive” is the desire to benefit financially and accumulate wealth!

Competition

Competition is the key to success for consumers in a capitalist economy. Competition means two very important things: higher quality goods and services and lower prices. Whenever businesses have competitors, they must be innovative, cut costs, and maintain high quality standards – or else, their customers will go elsewhere.

The Essential Need for Competition in a Capitalist Economic System

Without competition in a capitalist system, we have monopolies and trusts, which are predatory towards consumers. With high prices and indifferent quality of goods, they actually hurt consumers.

The Law of Supply

The Law of Supply states that if demand remains constant and the supply of a product increases, the price will drop. If the product becomes more scarce – supply drops – then the price will increase.

The Law of Demand

The Law of Demand states that if the supply remains constant and the demand increases, prices will increase. If the demand decreases, then the price will decrease.

Monopolies and Trusts

Monopolies and trusts use unfair business practices to reduce competition and maximize profits for themselves. Consumers always lose out when competition is reduced. Competition leads to higher quality products and lower prices for customers.

The Sherman Anti-Trust Act

The Sherman Anti-Trust Act was passed in 1890 in order to break up trusts and monopolies. The US Federal government began to enforce this law – and later, the Clayton Anti-Trust Act, too – so that they could protect consumers and small business rivals.

Trustbusters: Roosevelt and Taft Theodore Roosevelt

was the first President to target companies with anti-trust lawsuits. He sued the Northern Securities Trust, the Armour Meat Trust, and most famously, Standard Oil Company. William Howard Taft, TR’s successor, sued even more trusts.

Adam Smith’s The Wealth of Nations

Adam Smith was the author of The Wealth of Nations, a book which argues that free enterprise – laissez-fair economics – can solve almost of the problems in a societies economy without any government intervention. He theorized that the basic needs of the people would be satisfied by the “invisible hand” of the free markets.

The US Government and the Economy

The US government intervenes in the economy in many ways – tax policy, stimulus programs, welfare programs, and even bailouts for failing banks or corporations.

Sole Proprietorships

A single person who owns a business is called sole proprietor. He or she must invest all of the money for the business up front and invest tremendous amounts of labor; however, they get to keep all the money!

Partnerships

In a partnership, two or three people may combine assets to invest in the business and share the workload – which is still considerable – however, they have to split the profits among themselves.

Corporations

Corporations sell shares of partial ownership – stock – to shareholders. They are managed by a board of directors or a CEO, whose sole mission is to make money. This allows individuals to make money off a company without being responsible for its decisions and policies.