Develop an understanding of capitalism, communism, socialism, and mixed economic systems.

Not all economic systems in the world are like the one found in the United States. While there are a wide variety of economic philosophies and approaches to economic regulation practices around the globe, economic systems can generally be categorized as capitalist, socialist, communist, or mixed economies.

A capitalist economy is one in which means of production, or capital, (raw materials, factories, equipment, land, etc.) are owned primarily by private individuals or firms, not by the government. Furthermore, under capitalism, private owners of capital are generally free to use their capital how they see fit to maximize the realization of their own interests. Capitalism is essentially the same as the free market system described above. Government intervention in a capitalist economy is limited to making sure that the rules of exchange are fair; for example, contracts are binding and responding to market failures (see objective 6). The United States’ economic system is deeply rooted in capitalist ideals.

In a socialist economy, the means of production are owned or controlled collectively or by government, not by individuals. Workers, not capitalists, control the government and its decisions about the allocation and use of capital. Individuals are provided income, food, housing, and other goods and services based on need, not on their economic contributions to society. A socialist economy is sometimes characterized as an economy in transition from a capitalist to a communist economic system. Many European nations and, to a lesser extent, Canada, are examples of socialist economies.

Communism is, at least in theory, an economic system in which all property is owned collectively and nothing is owned by an individual. Consequently, there is no distinction between individuals on the basis of class, wealth, or ownership of capital. All income and other resources are distributed entirely on the basis of need rather than on the basis of the economic value of an individual’s work. In an ideal communist society, every individual contributes to the common good as best as he or she can. Ultimately, there is no need for government. In practice, every country that has attempted to implement a communist economic system has had to rely on significant, centralized planning and control of the economy, including price controls and government ownership of almost all industry and capital. Such an economic system is most accurately labeled a “command economy” (one in which a central government controls the means of production as well as the goods and services that are provided through them). China and the former Soviet Union are examples of communist economies. Developed and promoted by Karl Marx, communism is also sometimes referred to as Marxism.

A mixed economy is one in which there are free market as well as government-controlled or socialist forces at work. Theoretically, there could be pure capitalist, pure communist, or pure command economies in the world. However, in reality, all economic systems are mixed. In other words, every economy in the world has at least some aspects of capitalism and some aspects of communism or socialism. Economic systems differ according to their tendencies toward free or centrally-planned markets. While the United States has a clear foundation in capitalism, there are several socialistic or collective elements in the American economy, making it a mixed system. These will be discussed at length later in this lesson.