Economic Systems

The Economy

In the most simple of terms, economies consist of producing goods and exchanging them; they are fundamentally social systems.

In the most simple of terms, economies consist of producing goods and exchanging them. Economies can be divided into formal economies and informal economies. A formal economy is the legal economy of a nation-state, as measured by a government's gross national product (GNP), or the market value of all products and services produced by a country's companies in a given year. Informal economies are frequently less institutionalized and include all economic practices that are neither taxed nor monitored by a government.

Economies are fundamentally social systems. They require exchanges or transactions; it is impossible for an individual to participate in an economy entirely independent of others. One cannot think of economies as discrete entities; economic systems necessarily interact with social and political systems.

Capitalism

Capitalism is an economic and social system in which capital and non-labor factors of production, or the means of production, are privately controlled; labor, goods, and capital are traded in markets; profits are taken by owners or invested in technologies and industries; and wages are paid to laborers. Though capitalism has developed incrementally since the sixteenth century, Scottish philosopher and economist Adam Smith is largely credited with outlining the theory in its most fully-fledged form in his 1776 tome An Inquiry into the Nature and Causes of the Wealth of Nations.

The Market

A market is a central space of exchange through which people are able to buy and sell goods and services. In a capitalist economy, the prices of goods and services is mainly controlled through the principles of supply and demand and competition. "Supply and demand" refers to the balancing of the amount of a good or service produced and the amount available for sale. Prices rise when demand exceeds supply and fall when supply exceeds demand. The market coordinates itself through pricing until a new equilibrium price and quantity is reached. Competition arises when many producers are trying to sell the same or similar kinds of products to the same buyers.

The Government

Though the market is encouraged to act on its own, in any capitalist economy, the government is intimately involved in regulating the economy. This can be done through anti-trust laws or minimum wage laws. On a far more basic level, the government allows individuals to own private property and individuals to work where they please. The government generally allows businesses to set wages and prices for products without much interference. The government is responsible for issuing money, supervising public utilities, and enforcing private contracts. Laws protect competition and prohibit unfair business practices. Government agencies regulate the standards of service in many industries, such as airlines and broadcasting, and they finance a wide range of programs. Additionally, the government regulates the flow of capital and uses methods such as interest rates to control factors such as inflation and unemployment. Though the government in capitalist nations largely adheres to the basic principles of economic interference, it largely engages with the economy.

Socialism

Capitalism functions in distinction from socialism, or various theories of economic organization that advocate public or direct worker ownership and administration of the means of production. Socialism calls for public allocation of resources, creating a society characterized by equal access to resources for all individuals with a method of compensation based on the amount of labor expended. Many socialists criticize capitalism for unfairly concentrating power and wealth among a small segment of society that controls capital and derives its wealth through the exploitation of lower classes.

The Informal Economy

An informal economy is economic activity that is neither taxed nor monitored by a government. Although the informal economy is often associated with developing countries, all economic systems contain an informal economy in some proportion. Informal economic activity is a dynamic process which includes many aspects of economic and social theory: exchange, regulation, and enforcement. By its nature, the informal economy is difficult to observe, study, define, and measure. The terms "under the table" and "off the books" typically refer to this type of economy, and there are various examples for this type of economic activity, including the sale and distribution of illegal drugs or unreported payments for house cleaning or baby sitting, among others.

Capitalism

Capitalism is a system that includes private ownership of the means of production, creation of goods for profit, competitive markets, etc.

Capitalism is generally considered by scholars to be an economic system that includes private ownership of the means of production, creation of goods or services for profit or income, the accumulation of capital, competitive markets, voluntary exchange, and wage labor. The designation is applied to a variety of historical cases, which vary in time, geography, politics, and culture.

Economists, political economists and historians have taken different perspectives on the analysis of capitalism. Economists usually focus on the degree that government does not have control over markets (laissez-faire economics), and on property rights. Most political economists emphasize private property, power relations, wage labor, class and capitalism's as a unique historical formation. Capitalism is generally viewed as encouraging economic growth. The differing extents to which different markets are free, as well as the rules defining private property, are a matter of politics and policy, and many states have what are termed mixed economies. A number of political ideologies have emerged in support of various types of capitalism, the most prominent being economic liberalism.

The relationship between the state, its formal mechanisms, and capitalist societies has been debated in many fields of social and political theory, with active discussion since the 19^th century. Hernando de Soto is a contemporary economist who has argued that an important characteristic of capitalism is the functioning state protection of property rights in a formal property system where ownership and transactions are clearly recorded.

The relationship between democracy and capitalism is a contentious area in theory and popular political movements. The extension of universal adult male suffrage in 19^th century Britain occurred along with the development of industrial capitalism, and democracy became widespread at the same time as capitalism, leading many theorists to posit a causal relationship between them—claiming each affects the other. However, in the 20^th century, capitalism also accompanied a variety of political formations quite distinct from liberal democracies, including fascist regimes, absolute monarchies, and single-party states.

The Marxist Critique of Capitalism

Karl Marx saw capitalism as a progressive historical stage that would eventually be followed by socialism.

Capitalism has been the subject of criticism from many perspectives during its history. Criticisms range from people who disagree with the principles of capitalism in its entirety, to those who disagree with particular outcomes of capitalism. Among those wishing to replace capitalism with a different method of production and social organization, a distinction can be made between those believing that capitalism can only be overcome with revolution (e.g., revolutionary socialism) and those believing that structural change can come slowly through political reforms to capitalism (e.g., classic social democracy).

Karl Marx saw capitalism as a progressive historical stage that would eventually stagnate due to internal contradictions and be followed by socialism. Marxists define capital as "a social, economic relation" between people (rather than between people and things). In this sense they seek to abolish capital. They believe that private ownership of the means of production enriches capitalists (owners of capital) at the expense of workers. In brief, they argue that the owners of the means of production exploit the workforce.

In Karl Marx's view, the dynamic of capital would eventually impoverish the working class and thereby create the social conditions for a revolution. Private ownership over the means of production and distribution is seen as creating a dependence of non-owning classes on the ruling class, and ultimately as a source of restriction of human freedom.

Marxists have offered various related lines of argument claiming that capitalism is a contradiction-laden system characterized by recurring crises that have a tendency towards increasing severity. They have argued that this tendency of the system to unravel, combined with a socialization process that links workers in a worldwide market, create the objective conditions for revolutionary change. Capitalism is seen as just one stage in the evolution of the economic system.

Normative Marxism advocates for a revolutionary overthrow of capitalism that would lead to socialism, before eventually transforming into communism after class antagonisms and the state cease to exist. Marxism influenced social democratic and labor parties as well as some moderate democratic socialists, who seek change through existing democratic channels instead of revolution, and believe that capitalism should be regulated rather than abolished.

Socialism

Socialism is an economic system in which the means of production are socially owned and used to meet human needs, not to create profits.

Socialism is an economic system in which the means of production are socially owned and used to meet human needs instead of to create profits. The means of production refers to the tools, technology, buildings, and other materials used to make the goods or services in an economy. Social ownership of the means of production can take many forms. It could refer to cooperative enterprises, common ownership, direct public ownership, or autonomous state enterprises. Social ownership contrasts with capitalist ownership, in which the means of production are used to create a profit. In a socialist economic system, the means of production would instead be used to directly satisfy economic demands and human needs. Accounting would be based on physical quantities or a direct measure of labor-time instead of on profits and expenses.

Although socialism is often associated with Karl Marx, it has evolved to take a variety of forms. As a political movement, socialism includes a diverse array of political philosophies, ranging from reformism to revolutionary socialism, from a planned economy to market socialism. In a planned economy, the means of production are publicly owned and the government is in charge of coordinating and distributing production. By contrast, in market socialism, the means of production may be publicly or cooperatively owned, but they operate in a market economy. That is, market socialism uses the market and monetary prices to allocate and account for the means of production and the products they create. Just like in capitalism, the means of production generate profit; however, that profit would be used to remunerate employees or finance public institutions, not to benefit private owners.

Socialists critique capitalism, arguing that it derives wealth from a system of labor exploitation and then concentrates wealth and power within a small segment of society that controls the means of production. As a result, society is stratified, split into classes according to who owns the means of production and who is forced to sell their labor; as a result, individuals do not all have the same opportunity to maximize their potential. A capitalist society, they argue, does not utilize available technology and resources to their maximum potential in the interests of the public. Instead, it focuses on satisfying market-induced wants as opposed to human needs. Socialists argue that socialism would allow for wealth to be distributed based on how much one contributes to society, as opposed to how much capital one owns. A primary goal of socialism is social equality and a distribution of wealth based on one's contribution to society, and an economic arrangement that would serve the interests of society as a whole.

The Capitalist Critique of Socialism

Critiques of socialism generally refer to its lack of efficiency and feasibility, as well as the political/social effects of such a system.

Criticism of socialism refers to a critique of socialist models of economic organization, efficiency, and feasibility, as well as the political and social implications of such a system. Some of these criticisms are not directed toward socialism as a system, but directed toward the socialist movement, socialist political parties, or existing socialist states. Some critics consider socialism to be a purely theoretical concept that should be criticized on theoretical grounds; others hold that certain historical examples exist, making it possible to criticize on practical grounds.

Economic liberals, pro-capitalist libertarians, and some classical liberals view private enterprise, private ownership of the means of production, and the market exchange as central to conceptions of freedom and liberty. Milton Friedman, an economist, argued that socialism—which he defined as state ownership over the means of production—impedes technological progress due to stifled competition. He pointed to the U.S. to see where socialism fails, observing that the most technologically backward areas are those where government owns the means of production. Some critics of socialism argue that income sharing reduces individual incentives to work; incomes should be individualized as much as possible. Critics of socialism have argued that in any society where everyone holds equal wealth there can be no material incentive to work because one does not receive rewards for a work well done.

The philosopher Friedrich Hayek argued in his book The Road to Serfdom that the more even distribution of wealth through the nationalization of the means of production advocated by certain socialists cannot be achieved without a loss of political, economic, and human rights. According to Hayek, to achieve control over means of production and distribution of wealth, it is necessary for such socialists to acquire significant powers of coercion. He argued that the road to socialism leads society to totalitarianism, and that fascism and Nazism were the inevitable outcome of socialist trends in Italy and Germany during the preceding period.

Milton Friedman argued that the absence of voluntary economic activity makes it too easy for repressive political leaders to grant themselves coercive powers. Friedman's view was shared by Friedrich Hayek and John Maynard Keynes, both of whom believed that capitalism is vital for freedom to survive and thrive.

Democratic Socialism

Democratic socialism combines the political philosophy of democracy with the economic philosophy of socialism.

Democratic socialism combines the political philosophy of democracy with the economic philosophy of socialism. The term can refer to a range of political and economic organizational schemes. On one end, democratic socialism may combine a democratic national political system with a national economy based on socialist principles. On the other end, democratic socialism may refer to a system that uses democratic principles to organize workers in a firm or community (for example, in worker cooperatives).

The term is used by socialist movements and organizations to emphasize the democratic character of their political orientation. Democratic socialism contrasts with political movements that resort to authoritarian means to achieve a transition to socialism. Rather than focus on central planning, democratic socialism advocates the immediate creation of decentralized economic democracy from the grassroots level—undertaken by and for the working class itself. Specifically, it is a term used to distinguish between socialists who favor a grassroots-level, spontaneous revolution (referred to as gradualism) from those socialists who favor Leninism (organized revolution instigated and directed by an overarching vanguard party that operates on the basis of democratic centralism).

Historical Examples

The term has also been used by various historians to describe the ideal of economic socialism in an established political democracy. Democratic socialism became a prominent movement at the end of the 19^th century. In the United States, Eugene V. Debs, one of the most famous American socialists, led a movement centered around democratic socialism. Debs made five bids for president: once in 1900 as candidate of the Social Democratic Party and then four more times on the ticket of the Socialist Party of America. In Britain, the democratic socialist tradition was represented historically by William Morris's Socialist League and, in the 1880s, by the Fabian Society.

Informal Economy

The informal economy consists of economic activity that is neither taxed nor regulated by a government.

The informal economy consists of economic activity that is neither taxed nor regulated by a government. This is in contrast to the formal economy; a formal economy includes economic activity that is legal according to national law. Formal economy goods may be taxed and are included in the calculation of a government's gross national product (GNP), which is the market value of all products and services produced by a country's companies in a given year. Informal economies are frequently less institutionalized and include all economic practices that are not included in the calculation of GNP. Informal economies therefore include such disparate practices as the drug trade and babysitting—anything that isn't reported to the government or factored into the nation's GNP. All economies have informal elements.

The original use of the term ‘informal sector' is attributed to the economic development model put forward by W. Arthur Lewis, used to describe employment or livelihood creation and sustainability primarily within the developing world. It was used to describe a type of employment that was viewed as falling outside of the modern industrial sector. Participation in the informal economy may result from lack of other options (e.g. people may buy goods on the black market because these goods are unavailable through conventional means). Participation may also be driven by a wish to avoid regulation or taxation. This may manifest as unreported employment, hidden from the state for tax, social security or labor law purposes, but legal in all other aspects.

The growth of the informal economy is often attributed to changing social or economic environments. For example, with the adoption of more technologically intensive forms of production, many workers have been forced out of formal sector work and into informal employment. Arguably the most influential book on informal economy is Hernando de Soto's The Other Path. De Soto and his team argue that excessive regulation in the Peruvian (and other Latin American) economies force a large part of the economy into informality and thus prevent economic development. In a widely cited experiment, his team tried to legally register a small garment factory in Lima. This took more than one hundred administrative steps and almost a year of full-time work. Whereas de Soto's work is popular with policymakers and champions of free market policies, many scholars of the informal economy have criticized it both for methodological flaws and normative bias.

The informal economy accounts for about 15 percent of employment in developed countries such as the United States. By contrast, it makes up 48 percent of non-agricultural employment in North Africa, 51 percent in Latin America, 65 percent in Asia, and 72 percent in sub-Saharan Africa. If agricultural employment is included, the percentages rise—beyond 90 percent in places like India and many sub-Saharan African countries.

Welfare State Capitalism

Welfare capitalism refers to a welfare state in a capitalist economic system or to businesses providing welfare-like services to employees.

Welfare capitalism refers either to the combination of a capitalist economic system with a welfare state or, in the American context, to the practice of private businesses providing welfare-like services to employees. In this second form of welfare capitalism, also known as industrial paternalism, companies have a two-fold interest in providing these services. First, the companies act in a paternalistic manner, giving employees what managers think is best for them. Second, the companies recognize that providing workers with some minor benefits can forestall complaints about larger structural issues, such as unsafe conditions and long hours.

Following this logic, in the nineteenth century, some manufacturing companies began offering new benefits for their employees. Companies sponsored sports teams, established social clubs, and provided educational and cultural activities for workers. Some companies even provided housing, such as the boarding houses provided for female employees of textile manufacturers in Lowell, Massachusetts. The mid-twentieth century marked the height of business provisions for employees, including benefits such as more generous retirement packages and health care.

However, even at the peak of this form of welfare capitalism, not all workers enjoyed the same benefits. Business-led welfare capitalism was only common in American industries that employed skilled labor. Not all companies freely choose to provide even minor benefits to workers. As workers became frustrated with meager or nonexistent benefits, they appealed to government for help, giving rise to the first form of welfare capitalism: welfare provisions provided by the state within the context of a capitalist economy. In the United States, workers formed labor unions to gain greater collective bargaining power. In addition to directly challenging businesses, they lobbied the government to enact basic standards of labor. In the United States, the first two decades of the twentieth century—the Progressive Era—saw an increase in the number of protections the government was able to extend to workers. Yet by mid-century, many of these protections had been pushed back through the court system.

Today, the government provides very basic standards by which employers must abide, such as minimum wage standards. Anything above the minimum required by the government is at the employer's discretion. Recently, companies have begun to invest even more in the perks provided by the business in an effort to satisfy employees. Companies have found that employees make fewer demands and are more productive when they are happier, so companies such as Google have spent millions of dollars making their businesses enjoyable places to work.