Lesson 20: Economic Theories

Attention

While we might feel that the focus of our government should be on own economic troubles...can we really separate ourselves out from the larger global economy?

Learning Outcomes

Upon completion of this lesson's material, students will be able to:

• Explain Capitalism
• Explain Socialism
• Explain Mixed Economies

Teaching

Economics is the social institution that ensures the maintenance of society through the production, distribution, and consumption of goods and services.

This is another topic that we cannot avoid hearing about on the news.  The Economy is a vital aspect of our social structure that dictates conditions in nearly every aspect of our lives.  This is particularly true in complex societies such as ours where goods and services trading and commerce dominate almost  every interaction.

Over the history of a society, the economic conditions change in response to a changing complexity and changes in technology.

Capitalism is an economic structure that is dominant in the US and spreading throughout the world.  Characteristics of a Capitalist economy include:

·      Private ownership of the means of production

·      Pursuit of personal profit

·      Competition

·      Lack of government intervention

Forms of Ownership

·      Sole Proprietorship

·      Partnership

·      Corporation

·      Transnational Corporation

Ownership of the Means of Production is a core component of Capitalist economies, which distinguish it form other Socialist (lots of centralized control and ownership) and Communist (total state ownership) economic structures.

The goal of business in the economy is to deliver a product or service to the buyers market and have the interaction of the buyer and seller determine the price on the open market.

You want to sell a car and you place it on your yard.  A person comes by and makes an offer.  You have in your mind what it cost to get the car and approximately how much you want to sell it for but the ultimate price is a deal made between you and the buyer.

On a large scale this is how capitalist economies function as well.  We sell our labor to our employer for a negotiated amount of money.  We then spend the earnings into the same economy by purchasing goods and services at market value (the market value being determined by the demand for the product and the aggregate ability for people to pay a certain price for it).

If we look at particular goods and services we can sometimes see some trends in how these powers are distributed.

·      Oligopolies: several companies control an entire industry.  This is very much indicated in the American auto industry.

·      Monopolies: if a company produces a product and it is the only producer of that product it is said to have a monopoly on that sector of the market.  Due to the fact that companies in this position can dictate price without fair competition from other producers there are "anti-trust laws" enacted in the US.  These laws were the center behind the breakup of such large monopolistic companies as Standard Oil, Bell Telephone, and eventually, Microsoft.

·      Shared monopolies (4 or less owning 50% of the market)

·      Interlocking corporate directorates (shared board of directors membership between companies)

Socialism

Characteristics of Socialism include:

·      Public ownership of the means of production

·      Pursuit of collective goals

·      Centralized decision making

Socialism implies that the means of production are owned and controlled centrally in the society.  This enables the government to control pricing on products, manage all aspects of commerce, etc.  

Mixed Economy and Democratic Socialism

·      Combination of both

·      Some view the US as actually being closer to Democratic Socialism than to pure Capitalism.

In the US, there are some industries managed by the government through subsidies and regulations and there are in existence "natural monopolies" such as suppliers of electricity and phone service (these are called Natural Monopolies because it makes little sense for there to be competing wires on the poles)

The government in mixed economies plays a large role in the setting of rules, policies and objectives.

Communism

·      Central Ownership of the Means of Production

Most families and small organizations are organized this way...communal living. Probably does not work on a large scale.

Assessment

Possible Class Discussion

Describe ways in which American economy expresses both capitalist values and socialist values to produce a mixed economy. What are the advantages and disadvantages of both approaches? (Be sure to identify advantages AND disadvantages of BOTH)

Lesson 20 Quiz

1. Provide an example of an economic situation that you feel works best through a "capitalist" system.
2. Provide an example of an economic situation that you feel works best through a "socialist" system.