Economic Systems: Capitalism vs Socialism

Flashcards cover key concepts from the lecture on economic systems, including definitions of capitalism, socialism, planning vs markets, property rights, incentives, and measures of economic freedom.

Economic System

The rules and methods a society uses to determine what goods are produced, how they are produced, and for whom they are produced; the mechanism by which an economy answers the Three Fundamental Economic Questions.

Three Fundamental Economic Questions

The questions of what to produce, how to produce, and for whom to produce.

Comparative Economic Systems

The study of how different economic systems differ in structure and outcomes across societies.

Primary Institutions

The four core components of almost all economic systems: households, firms, markets, and government.

Households

The most fundamental part of an economic system; the ultimate consumers and major suppliers of factors of production; rational decision makers.

Firms

Institutions that transform factors of production into finished goods and services.

Factors of Production

Scarce resources used to produce goods and services, including natural assets, produced assets, and human capital.

Natural Assets

Natural resources such as minerals, fossil fuels, vegetation, water, and land.

Produced Assets

Machines, factories, inventories, and infrastructure that support production.

Human Capital

The skills, education, and training of workers.

Markets

The collection of all potential buyers and sellers of a good/service; interaction space where prices are determined; not a decision-maker.

Government

The decision-making institution with the legal authority to impose restrictions and to enforce contracts and property rights; often provides or regulates goods/services.

Capitalism

An economic system in which the means of production are privately owned and operated for profit; decision-making is decentralized and owners keep the surplus.

Socialism

An economic system in which the means of production are owned by the government and allocation is centralized.

Private Ownership of Property

Property rights consisting of the right to control, transfer, and restitution.

Right to Control

The right to decide how to use your property.

Right to Transfer

The right to obtain ownership from others or relinquish ownership to others.

Right to Restitution

The right to be compensated when your property is damaged or your rights are infringed.

Consumer Sovereignty

The freedom for individuals to purchase or not purchase a good or service at a market price.

Invisible Hand

The idea that self-interested decision-makers in free markets can lead to outcomes that are efficient and beneficial for society.

Feudalism

An earlier economic system with land owned by nobles and serfs/peasants; a precursor to capitalism.

Mixed Economy

An economic system that combines private ownership with some government ownership or control; resources allocated by both markets and the state.

Command Planning

Government directly controls nearly all economic activity; production often carried out by state-owned enterprises.

Indicative Planning

Government guides economic decisions through policies, subsidies, and taxes without direct compulsion.

Alec Nove

Described indicative planning as state influence guiding economic decisions without forcing them.

Economic Incentives

Tools that influence behavior: material rewards, moral suasion, and coercion.

Material Rewards

Monetary rewards or increases in consumption used to motivate action.

Moral Suasion

Encouraging behavior because it is the right thing to do.

Coercion

Use of force or intimidation to obtain compliance.

Free Market

Markets where buyers and sellers freely interact; prices emerge from supply and demand; not a single decision-maker.

Capitalism vs Socialism

Capitalism emphasizes private ownership and markets; Socialism emphasizes government ownership and centralized planning.

Adam Smith

18th-century economist who argued private ownership and free markets can yield efficient outcomes.

Wealth of Nations

Adam Smith's 1776 work outlining private property and free-market arguments.

New Soviet Man

An ideal of selfless benevolence used in socialist theory; contrasted with Economic Man.

Economic Man (Homo Economicus)

The assumption that individuals act rationally and in self-interest in economic decisions.

Communism

An economic system where the means of production are collectively owned; stateless and classless, with distribution according to need.

Karl Marx

Influential socialist thinker who linked socialism and later communism, and who analyzed capitalism's tensions.

Marx’s View of Evolution from Socialism to Communism

Marx described a progression from socialism to communism, where the state would wither away.

Private Property Rights

Rights to control, transfer, and restitution of property; essential for functioning markets.

Capitalism vs Socialism (Key Distinction)

Capitalism relies on private ownership and decentralized decisions; Socialism relies on government ownership and centralized planning.

Adam Smith and the Invisible Hand

Smith argued self-interested behavior in free markets can lead to overall societal benefit through an invisible hand.

Economic Freedom of the World (EFWI)

A ranking of countries by economic freedom across dimensions like personal choice, open markets, and property rights.

International Property Rights Index (IPRI)

A ranking measuring private property rights protection across legal/political environment, physical rights, and intellectual property rights.

Ease of Doing Business (DBS)

World Bank measure of regulatory burden and the costs of complying with regulations.