The Basics of an Economic System
1. Economies can be organized according to the ownership of capital:
A. Capitalism refers to a system in which capital is owned by private citizens.
B. Socialism refers to a system in which capital (not anything else) is owned by the
society (government). In Democratic Socialism, the government is democratic,
accountable to the people. In Totalitarian Socialism (sometimes called Bureaucratic
Collectivism or Communism), it is not.
C. A Mixed Economy has some private ownership and some government ownership
of capital. Different countries have different mixes of each.
1. Nationalization refers to the government taking ownership of
previously privately-owned companies.
2. Privatization refers to the government selling to private
citizens what had been government-owned companies.
2. Economies can be organized according to the ways by which decisions are made:
A. In a market economy, decisions as to what to produce, how to produce, for whom
to produce, and how much to invest in the future are made through arms-length,
impersonal transactions involving large numbers of buyers and sellers in markets with no
B. Obligational contracting is similar to a market economy, except that sellers and
buyers expect to maintain stable relationships over time. This desire for long-term
relationships leads to decisions that are different from those that occur in pure markets.
C. In a command economy, decisions are made by government agencies. Companies
typically produce all parts of the product within the company, based on orders
from the government agencies. They operate with strict bureaucratic procedures with an
emphasis on rules, supervisory procedures, and incentives.
D. Most economies have some elements of each type. However, economies tend to
be oriented more in one direction or the other. Of the countries studied in this course:
The United States is basically a capitalist, market economy.
The Former Soviet Union was basically a socialist, command economy. Russia
is moving toward being market economy, with private ownership.
Japan is basically a capitalist economy based on obligational contracting. The
government is more involved with private owners of capital than is found in the
Most European countries are capitalist and market economies. However,
government ownership is more extensive than is true in the United States.
Interference with free markets is also more extensive. There was considerable
privatization in the 1980s and 1990s.
China was a socialist and command economy. It has been moving toward greater
use of markets and more (although little) private ownership of capital.
Mexico was a country with considerable government ownership and interference
with markets. In the 1980s, there has been privatization and less interference with