The History of Economic Systems pptx

© 2003 McGraw-Hill Ryerson Limited
The History of
The History of
Economic Systems
Economic Systems
Chapter 2 Appendix
Chapter 2 Appendix
© 2003 McGraw-Hill Ryerson Limited
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Laugher curve
Laugher curve
◆
Socialism is the longest path from
capitalism to capitalism.
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Evolving Economic
Evolving Economic
Systems
Systems
◆
Capitalism and socialism have not
existed forever.
◆
Capitalism came into widespread
existence in the mid-1700s; socialism
came into existence in the early 1900s.
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Evolving Economic
Evolving Economic

Systems
Systems
◆
Before capitalism and socialism other
forms of economic systems existed:
◆
Feudalism dominated the Western world
from about the 8th to the 15th century.
●
Feudalism is an economic system in
which traditions rule.
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Evolving Economic
Evolving Economic
Systems
Systems
◆
Feudalism gave way to mercantilism.
●
Mercantilism is an economic system in which
government determines the what, how, and for whom
decisions by doling out the rights to undertake certain
economic activities.
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Evolving Economic
Evolving Economic
Systems
Systems

◆
Mercantilism remained the dominant
economic system until the Industrial
Revolution.
●
Industrial revolution – a time when
technology and machines rapidly
modernized industrial production and
mass produced goods replaced
handmade goods.
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Evolving Economic
Evolving Economic
Systems
Systems
◆
Capitalism evolved from the Industrial
Revolution in 1700s.
◆
Industrial revolution led to a decrease in
power of small producers and increase
in power of capitalists.
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The Need for
The Need for
Coordination in an
Coordination in an
Economic System

Economic System
◆
Every economic system needs
coordination.
◆
In his 1776 classic, Wealth of Nations,
Adam Smith argued that markets could
coordinate the economy without the
active involvement of government.
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The Need for
The Need for
Coordination in an
Coordination in an
Economic System
Economic System
◆
Markets coordinate economic activity by
using the price mechanism to direct
individuals' self-interest into society's
interest.
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Evolutionary Changes
Evolutionary Changes
Within Systems
Within Systems
◆
Both capitalism and socialism are

constantly evolving with changes in
social customs, political forces, and the
strength of markets.
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Evolutionary Changes
Evolutionary Changes
Within Systems
Within Systems
◆
Capitalism evolved into welfare
capitalism—an economic system in
which the market operates but
government regulates markets
significantly.
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Evolutionary Changes
Evolutionary Changes
Within Systems
Within Systems
◆
The opposite took place in some
socialist nations in the 1980s—
socialism integrated capitalist
institutions into its existing institutions.
◆
In the 1990s, most of the former
socialist countries have undergone
transition to market oriented economies

based on private property.
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A Blurring of the
A Blurring of the
Distinction Between
Distinction Between
Capitalism and
Capitalism and
Socialism
Socialism
◆
Recent events point to a blending of
economic systems.
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A Blurring of the
A Blurring of the
Distinction Between
Distinction Between
Capitalism and
Capitalism and
Socialism
Socialism
◆
If this trend continues, the 21st century
will see the emergence of a single
general type of economic structure; it
will be a mix of socialist and capitalist
institutions.

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Feudal Society: Rule of
Feudal Society: Rule of
Tradition
Tradition
◆
Feudalism developed in the 8
th
and 9
th

century.
◆
The Lord of the manor was the
protector; serfs were working the land.

Feudalism was a tradition based society
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From Feudalism to
From Feudalism to
Mercantilism
Mercantilism
◆
Mercantilism developed with the
development of trade and markets in
the 15
th
century.

◆
The power of the society shifted from
manors to towns.
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From Feudalism to
From Feudalism to
Mercantilism
Mercantilism
◆
In mercantilism, traders supported the
king, who in turn protected their
interests.
◆
The role of government increased
during this period.
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From Mercantilism to
From Mercantilism to
Capitalism
Capitalism
◆
Industrialists or capitalists were the
business people who have acquired
large amounts of money and use it to
invest in business.
◆
Craft guild members were artists in their
own crafts.

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From Mercantilism to
From Mercantilism to
Capitalism
Capitalism
◆
The economic power base shifted from
the guilds to industrialists.
◆
Coordination of the economy by
government was deemed necessary by
the craftsmen.
◆
Industrialists considered the market
capable of coordination on its own – no
government was needed.
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From Mercantilism to
From Mercantilism to
Capitalism
Capitalism
◆
Laissez-faire policy is an economic
policy of leaving coordination of
individuals’ wants to be controlled by
the market.
◆
Adam Smith’s invisible hand theory

supported the industrialists’ view.
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The Industrial
The Industrial
Revolution
Revolution
◆
The invisible hand worked; capitalism
thrived.
◆
Machine production began to increase
enormously in the late 18
th
century,
almost totally replacing hand
production.
◆
This phenomenon has been termed the
Industrial Revolution.
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The Industrial
The Industrial
Revolution
Revolution
◆
Eventually, modern economic
institutions replaced guilds.
◆

Modern capitalism evolved by the 19
th

century.
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From Capitalism to
From Capitalism to
Socialism
Socialism
◆
Capitalism was marked by significant
economic growth but also by human
abuses of the working class who were
producing for the elite few.
◆
This led to criticism of the capitalist
market economic system.
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From Capitalism to
From Capitalism to
Socialism
Socialism
◆
The best known critic of capitalism was
Karl Marx, a German philosopher,
economist and sociologist.
◆
Marx developed an analysis of the

dynamics of change in economic
systems, in the 19
th
century.
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From Capitalism to
From Capitalism to
Socialism
Socialism
◆
Marx saw an economy marked by
tensions between economic classes
●
The proletariat class – the working
class and
●
The capitalist class (businessmen)