Economic Systems and Theories

Key vocabulary terms and definitions covering early mercantilism, laissez-faire liberalism, various forms of capitalism, and types of socialism.

Mercantilism

An early economic system that promoted the acquisition of precious metals and considered the stockpiling of money as equivalent to accumulating wealth.

Favorable balance of trade

A component of mercantilism characterized by increasing exports and decreasing imports.

Laissez-faire

A doctrine meaning 'to let alone,' arguing that monarchs and governments should leave people to seek their own profit and self-interest while enforcing laws to prevent theft and fraud.

The 'invisible hand'

Adam Smith's concept that society is better served when individuals are allowed to pursue their own self-interest, because people rarely work as hard for others as they do for themselves.

Radical capitalism

An impractical form of capitalism in which private citizens own everything and make all economic decisions without government, regulation, or outside interference.

Classic liberal capitalism

The form of capitalism outlined by Adam Smith where government is limited to three major duties: foreign defense, protecting citizen rights from infringements, and providing public goods.

Public goods

Goods and services that benefit all or nearly all of a nation's people and that private firms or individuals would not choose to produce because they could not do so profitably.

State capitalism

A form of capitalism in which private citizens own most things, but the government freely intervenes to carry out its economic and social goals.

Welfare state

An extreme example of state capitalism that typically features very high taxes to support government intervention.

Social democracy

A form of socialism where the state takes possession of cornerstone industries (such as transportation, communications, energy, financial markets, and healthcare) while highly regulating smaller, nonessential businesses.

Centralized socialism

A system based on Karl Marx's Communist Manifesto where the national government is the central owner and decision maker in all economic affairs, operating the nation's economy like one large company.

Communism

The most extreme form of socialism that exists only in theory and is considered impossible to achieve because man is sinful.