Modern Economic Systems Quiz

Smith's key ideas and beliefs around capitalism and communism:

Adam Smith laid the groundwork for capitalism, advocating self-interest, free markets, competition, and division of labor guided by an "invisible hand" to create societal wealth, advocating for minimal government (laissez-faire) except for defense and justice. He didn't directly address communism.

Marx's key ideas and beliefs around capitalism and communism:

Karl Marx viewed capitalism as a system of exploitation where the bourgeoisie (owners) profit from the proletariat (workers) by taking surplus value (unpaid labor), leading to alienation and class struggle, while envisioning communism as the inevitable, classless, stateless final stage where the workers seize the means of production for collective ownership and shared benefit, ending exploitation and achieving true human freedom

Definition of Economic System:

The ways a society organizes the production, distribution, and consumption of goods and services to "meet" the needs of its citizens.

Manorialism:

An economic system based on LAND ownership.

King owned all the land, tithed it over to Nobles who exchanged their loyalty. ( political governors/ raise the army)

Functions of Manorialism:

Manors were mostly self-sufficient.

Production of goods (agricultural subsistence farming done by peasants)

Distribution- Tithe/rent system % given to everyone above (Knights/ Church/king)

Peasants also worked the demesne (portion of the manor that was the nobles')

Consumption: subsistence

Right to commons (forests for hunting, gathering/ collection of firewood.

Right to glean- after the main harvest, people could glean the produce that was left.

Mercantilism:

Economic system of colonialism 16th-18th century

West/East India Company (Merchants backed by the Crown)

British in India, Asia, and the Americas

State driven economy based on the accumulation of wealth to the "mother" country.

Sought a Favorable balance of trade (tariffs on imports- outside of the empire).

Functions of Mercantilism:

The domestic system is transitioning to a state-driven market economy fueled by the early Industrial Revolution.

The Enclosure movement- the process of consolidating landholdings into a few hands, kicking peasants off the land, forcing them to move to the cities (eliminating the commons, obligations of protection).

Rise of Factories- owned by individuals

Labor becomes "free," not tied to any land, but free from owning any tools. - Only have their labor to sell.

Both international/domestic means of PRIMITIVE ACCUMULATION.

Enclosure Movement:

The Enclosure Movement was a historical shift in England, peaking in the 18th-19th centuries, that converted communal open fields to privately fenced-off land.

From Common to Private: Replaced medieval "open field" systems, where villagers shared land, with privately owned, fenced plots for individual farming.

Foundation for Capitalism: Helped create private property rights and a mobile workforce essential for industrial capitalism.

Definition of Money:

Money is anything widely accepted as payment, defined by its three core functions

3 functions of money:

medium of exchange (simplifies buying/selling), a unit of account (measures value), and a store of value (transfers purchasing power to the future)

Fiat currency:

Fiat currency is government-issued money, like the US dollar or Euro, that isn't backed by a physical commodity (like gold) but derives its value from public trust in the issuing government and the central bank, plus supply and demand.

Inflation:

Inflation is the general increase in the prices of goods and services in an economy over time, which means your money buys less than it used to, reducing its purchasing power.

Capital definition: 

Wealth in the form of money or other assets owned by a person or organization or available or contributed for a particular purpose, such as starting a company or investing.

Adam Smith:

Scottish economist in the 1700's

Key ideas in Wealth of Nations: 

Invisible Hand: Individuals pursuing their own gain in competitive markets unintentionally promote the common good, as if guided by an unseen force.

Division of Labor: Specializing tasks (like in a pin factory) dramatically increases output and efficiency, making economies richer.

Free Markets & Competition: Unrestricted markets with competition force producers to offer better goods at lower prices, benefiting consumers and society.

Limited Government (Laissez-Faire): Government should focus on defense, justice, and public works, not controlling the economy, allowing markets to self-regulate.

Free Trade: Nations should trade freely, specializing in what they produce best, rather than relying on protectionist mercantilist policies.

Labor theory of value:

The labor theory of value says that the value of a product is determined by the amount of socially necessary labor required to produce it.

Key points:

Labor creates value- The more labor time and effort it takes (on average, using normal technology and skills), the more value a good has.

“Socially necessary” labor- This means the average amount of labor needed under normal conditions, not extra time from being inefficient.

Use value vs. exchange value:

Use value: how useful something is

Exchange value: how much it can be traded or sold for. Labor determines exchange value, not usefulness alone.

5 Core Principles of Capitalism (Market Economies):

Private Property Ownership (private ownership of the means of production)

Supply and demand- prices and distribution of resources are determined by the interaction of supply and demand

Competition- competition between businesses determines prices, efficiency, and innovation

Freedom of choice- people are free to choose their job (employees), what they want to buy. Profit motive- businesses are driven to maximize profit. (measure of success and means of expansion).

Karl Marx:

German economist in the 1800's

Key ideas in the Communist Manifesto:

Historical Materialism: History is a series of class struggles, currently between the bourgeoisie (owners) and the proletariat (workers).

Capitalist Exploitation: Capitalism inherently exploits workers by extracting surplus value from their labor, creating vast wealth for owners but poverty for the many, leading to alienation and recurring crises.

Inevitable Revolution: Capitalism's internal contradictions will inevitably lead to its collapse, unifying the proletariat for revolution

Historical materialism (historical epochs leading to communism):

Historical materialism is a theory developed by Karl Marx that explains how societies change over time based on their material conditions, especially economic systems and class relationships.

In simple terms, it argues that how people produce and distribute goods (food, tools, labor, technology) is the main force shaping:

- Social classes

- Politics and laws

- Culture, religion, and ideas

Marx’s 5 core critiques of Capitalism: 

Marx agreed with Smith that: 

Labor was the source of all value 

Challenges Smith's claim of Freedom of choice- For Marx, he agrees that “Free” labor was necessary for capitalism.. However, he also thought that 

Capitalism is inherently exploitative because the worker does not receive all of the fruits of their labor. (surplus value)

The requirement to exchange labor for subsistence limits one’s choice. 

Capitalism claims to be premised on competition, but has a tendency towards consolidation (monopoly).

Challenges the idea that the profit motive is primarily what drives productivity. 

Division of labor leads to alienation- lack of identity with a thing, person, or community. (isolation). 

Core principles of Communism:

1. Community ownership of the Means of Production (abolition of bourgeois property)

2. Leads to the dissolution of classes (oppressor and oppressed)

3. All community members are equal

"From each according to their abilities, to each according to their needs."

4. (production and distribution principle- by the community.)

Without classes, the state can "wither away."