Ch. 4 - Economic System: Who owns and controls the factor of production?

Why Societies Form & Cooperate

• Primary Reason: For mutual benefit and protection.

  • To produce necessary products like food, clothing, and shelter.

  • For protection

Canada’s Mixed Economic System

1. For-Profit Businesses

2. Government (Public Sector)

3. Not-for-Profit Organizations

For Profit Businesses

• Purpose: To seek profit.

• Examples: Loblaw's (food), Roots (clothing), property developers (housing).

Goverment (Public Sectors)

• Purpose: To provide essential services funded by taxes.

• Examples: National defense, healthcare, police, fire services.

Not For Profit Organizations

• Purpose: To fulfill social and cultural needs.

• Examples: Neighborhood choirs, recreational hockey leagues.

A country’s system determines

• Ownership: Who owns the factors of production (resources)?

• Control: Who controls these factors?

• Production: Who decides what needs to be produced?

• Distribution: Who decides how goods and services are distributed?

 

What are the two types of economic systems?

1. Planned Economy

2. Market Economy

Planned Economy

Who owns/controls?	Government
Main goal	Equity and social welfare for all
Driver of production	A central government plan

An economic system where the government owns and controls the factors of production. What gets produced and how it gets produced is determined by a government plan.

• The state is the only entity with the power and authority to provide for all members of society.

• It aims to use rational planning by experts to ensure fairness and equity for everyone.

Market Economy

Who owns/controls?		Private individuals
Main goal		Profit & efficiency
Driver of production		Consumer demand and competition

An economic system where the factors of production are primarily owned, controlled, and directed by private individuals. Entrepreneurship and business ownership are encouraged.

• Private enterprise is better at providing the infinite variety of goods and services that people need.

What are the 4 economic systems?

System	Government involvement	Key idea	Real-world example
Communism	Most (total)	All factors owned by the state; no private property.	North Korea (closest..?)
Socialism	High (majority)	The government controls major industries for the essential needs of all.	China, Cuba, Vietnam
Mixed market	Moderate (regulator)	Private enterprise drives the economy; the government provides stability & services.	Canada, USA, Germany
Pure capitalism	None (theoretical)	No taxes, no regulations; total individual control.	None.

Main Types of Taxes in Canada

Tax type	Description	Key detail	% of federal revenue (2017-2018)
Personal income tax	A progressive tax on individual earnings	Progressive = higher earners pay a larger percentage	~49%
Corporate income tax	A tax on business profits	Most business pay ~25% of profit	~25%
Sales tax (HST)	A consumption tax added to the price of goods	EXAMPLE: $13 on a $100 purchase in Ontario.	~12%
Employment	A payroll tax to fund unemployment benefits	Workers pay ~2% of income, employers also contribute	~7%

Planned Economies: Socialism

An economic system where the government owns or controls the majority of the factors of production and directs most productive activity.

• The government plays a lead role through taxation, regulation, and direct management of key industries.

• The state often owns/controls major industries like banks, railways, airlines, utilities (gas, water, electricity), housing, and food distribution.

• Allows for some private enterprise (e.g., small restaurants, taxi cabs, retail stores).

2. Market Economies

An economic system in which individuals (not the government) make the decisions about what gets produced.

• PRO:

  • Responsiveness: Private entrepreneurs are closer to customers and can respond more quickly to local demand and changing tastes (e.g., stocking specific clothing sizes, building appropriate housing types).

• CON: 

  • Private businesses can also become large, bureaucratic, and unresponsive (e.g., cable companies, banks).

Market Economies: Pure Capitalism

• A theoretical economic system where:

  • All factors of production are owned by private individuals.

  • There are no taxes and no government regulations on business.

• Key Idea:

  • Control over production lies with those who have money ("capitalists").

  • Wealth accumulates in the hands of successful entrepreneurs.

• Controversy:

  • Pro: It rewards success, shrewdness, and hard work.

  • Con: It encourages Social Darwinism, where the strong get richer and the weak get poorer.

• Reality: No country operates a purely capitalist system. All require some government for laws, security, and public services.

Market Economies: Mixed Market (The Reality)

• Definition: A system where:

  • Primary Role (Private): Control of most factors of production is in private hands. Individuals are free to start businesses and invest.

  • Secondary Role (Government): The government provides a stable environment through taxes, public services (police, schools), laws, and regulation.

• Simple Explanation: Private individuals produce most goods and services, while the government provides the stable environment for them to thrive.

• Examples: United States, Canada, Japan, Germany, UK, France.

In a mixed market system like Canada's, the government interacts with the economy in three main ways:

1. As a Tax Collector

2. As a Regulator (pass laws which regulate the conduct of businesses)

3. As a Provider of Services (via Crown Corporations)

Government as Tax Collector

Two Main Purposes of Taxes:

• To pay for government services.

• To redistribute wealth from those who can afford it to those in need.

Personal Income Tax

Description	Key detail	% of federal revenue (2017-2018)
A progressive tax on individual earnings	Progressive = higher earners pay a larger percentage	~49%

Corporate Income Tax

A tax on business profits

Most business pay ~25% of profit

~25%

Sales Tax (HST)

A consumption tax added to the price of goods

EXAMPLE: $13 on a $100 purchase in Ontario.

~12%

Employement (Tax)

A payroll tax to fund unemployment benefits

Workers pay ~2% of income, employers also contribute

~7%

Government as a Regulator

Purpose: To ensure businesses operate fairly, safely, and efficiently.

Canadian Human Rights Act

• Prohibits discrimination based on race, gender, etc., and ensures equal pay for work of equal value.

Canada Labour Code

•  Sets minimum wage, limits work hours, and mandates minimum two weeks paid vacation.

Employment Insurance Act

• Requires employer contributions to EI and provides for maternity/paternity leave.

Competition Act

• Prohibits misleading advertising.

Consumer Packaging and Labelling Act

• Ensures consumers get accurate information to make informed choices.

Crown Corporation

An enterprise owned and operated by a government in Canada.

Rationale: The mix of public and private provision is based on history, politics, culture, and tradition.

• Canadian Broadcasting Corporation (CBC)

• Canada Post.

• Liquor Control Board of Ontario (LCBO)

• Hydro One (electricity)

• OLGC (chain of casinos)

The rise of state of control: Nationalization

The process by which a government assumes ownership and control of resources, businesses, or industries.

Motivation: The belief that only the state has the motivation and power to run the economy for the benefit of the entire nation.

Soviet Union (1917 onward)

• Following the Bolshevik Revolution, the state seized all land, banks, shipping companies, private houses, and factories.

• It implemented Five-Year Plans to set production targets for the entire economy.

United States - The New Deal (1930s):

• A response to the Great Depression.

• The government created agencies to provide employment and manage production (e.g., Works Progress Administration built infrastructure, Agricultural Adjustment Administration managed farm output).

• Result: Successfully reduced unemployment and raised farm incomes.

Europe - Mobilization for WWII

• Conscription: Governments took control of labor by compelling military service.

• Rationing: Governments controlled the distribution of essential goods like food.

• Result: Government dominance of the economy was deemed a success for achieving the wartime goal.