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Comparative Economic Systems Essay

13b. Comparing Economic Systems

Karl Marx, German philosopher, economist, and revolutionary, laid the ideological groundwork for modern socialism and communism.

Karl Marx and Friedrich Engels turned the world upside down.

Until the publication of their 1848 Communist Manifesto, much of the western world followed a course where individuals owned private property, business enterprises, and the profits that resulted from wise investments. Marx and Engels pointed out the uneven distribution of wealth in the capitalist world and predicted a worldwide popular uprising to distribute wealth evenly. Ever since, nations have wrestled with which direction to turn their economies.


  • Capitalism is based on private ownership of the means of production and on individual economic freedom. Most of the means of production, such as factories and businesses, are owned by private individuals and not by the government. Private owners make decisions about what and when to produce and how much products should cost. Other characteristics of capitalism include the following:
  • Free competition. The basic rule of capitalism is that people should compete freely without interference from government or any other outside force. Capitalism assumes that the most deserving person will usually win. In theory, prices will be kept as low as possible because consumers will seek the best product for the least amount of money.

    Image from Capitalism Magazine (http://www.CapitalismMagazine.com). Used with permission.

    The antitrust lawsuit against Microsoft is one way that the government has tried to promote competition. Supporters of Microsoft say that forcing Microsoft to allow companies to bundle arch-rival Netscape's web browser with Microsoft Windows is not unlike making Coca-Cola include a can of Pepsi in each six-pack it sells.
  • Supply and demand. In a capitalist system prices are determined by how many products there are and how many people want them. When supplies increase, prices tend to drop. If prices drop, demand usually increases until supplies run out. Then prices will rise once more, but only as long as demand is high. These laws of supply and demand work in a cycle to control prices and keep them from getting too high or too low.


Karl Marx, the 19th century father of communism, was outraged by the growing gap between rich and poor. He saw capitalism as an outmoded economic system that exploited workers, which would eventually rise against the rich because the poor were so unfairly treated. Marx thought that the economic system of communism would replace capitalism. Communism is based on principles meant to correct the problems caused by capitalism.

The most important principle of communism is that no private ownership of property should be allowed. Marx believed that private ownership encouraged greed and motivated people to knock out the competition, no matter what the consequences. Property should be shared, and the people should ultimately control the economy. The government should exercise the control in the name of the people, at least in the transition between capitalism and communism. The goals are to eliminate the gap between the rich and poor and bring about economic equality.


Socialism, like communism, calls for putting the major means of production in the hands of the people, either directly or through the government. Socialism also believes that wealth and income should be shared more equally among people. Socialists differ from communists in that they do not believe that the workers will overthrow capitalists suddenly and violently. Nor do they believe that all private property should be eliminated. Their main goal is to narrow, not totally eliminate, the gap between the rich and the poor. The government, they say, has a responsibility to redistribute wealth to make society more fair and just.

There is no purely capitalist or communist economy in the world today. The capitalist United States has a Social Security system and a government-owned postal service. Communist China now allows its citizens to keep some of the profits they earn. These categories are models designed to shed greater light on differing economic systems.

The Marx/Engels Internet Archive
Who were Karl Marx and Friedrich Engels? How did they articulate the foundations of one of the most important ideologies of the last century? Explore this exhaustive but well-organized archive of their letters, writings, and images (maintained by Marxists.org) to understand not only the theories, but the personalities behind the hammer and sickle.

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The Wealth of Nations
Eager to know how capitalism got off the ground? Scroll through the text of Adam Smith's classic work on free-market economics, An Inquiry into the Nature and Causes of the Wealth of Nations. Although his language is from 1776, the modern capitalist system is firmly entrenched in his ideals.

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The Chairman Smiles
Attention: all aspiring propagandists! This fascinating website by the International Institute of Social History provides images of many propaganda posters from China, Cuba, and the former Soviet Union. Stalin, Castro, Guevara, Mao — all the familiar faces from the history of communism are here, smiling confidently and silently urging you to join their respective revolutions.

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International Socialist Organization
Should working people run things for the good of the majority? To answer that, take a long look at the tenets of the International Socialist Organization and see what it takes to restore the production and distribution of wealth to the working class. Also, find out who they endorse (and why) for the 2000 presidential elections.

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The Center for the Moral Defense of Capitalism
Although socialists and communists would scoff at the idea, the Center for the Moral Defense of Capitalism argues that laissez-faire capitalism is the only truly moral socio-economic system. Read their essays, weigh the philosophical evidence, and decide if the free market does indeed operate on the moral ideal of individual freedom.

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The New York Stock Exchange
See capitalism in action at the New York Stock Exchange. At their official website, you can get stock quotes, find out about who has a seat on the Exchange, and feel the excitement of what it's like to be on the trading floor. This extensive website offers a glimpse into the inner workings of the stock market, with pictures and explanations of how money can work to make even more money.

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Ron Wise's World Paper Money Homepage
Not all money is green. This comprehensive website run by an avid collector of banknotes from around the world provides high-quality scanned samples of notes from nearly all of the world's currencies. Check out currency from CuraÇao or Mongolian money, as well as information on watermarks, holograms, and fibers that make cash across the globe hard to counterfeit.

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The Great Pokémon Crash of 2000
What happened to the value of Pokémon cards in 2000 after the company released so many cards for the Christmas season? This site teaches the law of supply and demand using the popular trading cards as an example. Pikachus and Squirtles are used to demonstrate the concepts of equilibrium and inflation that drive the basic theories of economics.

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This article examines the defining features of the world's three major economic systems: Traditional, free market and command. Each system addresses the fundamental problem of how to allocate scarce resources in a different way. In all three cases, the decision revolves around what and how much to produce, for whom to produce and to whose benefit. Kinship, custom and religion enter into these decisions in a traditional economy. In a free-market economy, self interest alone matters; buyers and sellers bid freely and openly on goods and services, and the price of purchases directly affects supply and demand. Unlike both traditional and free market systems, orthodox command economies ban all forms of private ownership; the state employs everyone and resources are allocated by central planners.

Keywords Allocation of Resources; Command Economy; Division of Labor; Distribution of Wealth; Economic System; Free-Market Economy; Mixed Economy; Traditional Economy

Economics: Comparative Economic Systems


At its most basic level, Economics concerns itself with the complex ways we rely upon each other to meet our material needs. Writ large, this pursuit gives rise to hundreds of millions of people engaging in trillions of exchanges (i.e. transactions) on a daily basis. Nothing remotely approaching the sheer scale of this activity could ever be sustained purely randomly. It takes structure to coordinate the innumerable elements that go into the production and distribution of goods and services that respond dynamically to changing conditions and needs. A system, in other words, made up of institutions, both formal and informal, following mutually agreed upon rules and practices is required to harness divergent individual interests to serve a common good (Dallago, 2002).

In any economic system, the be all and end all is the efficient allocation of resources. This lofty term boils down to the answers of three fundamental questions: What to produce, how to produce it and for whom? Five thousand years ago, the answers to these questions were moot as early humans were only concerned with food and shelter. But as human populations grew from the small, informal groups where the goal was simple survival, a division of labor along functional lines became necessary. How this division was organized and to what ends was and is the preeminent concern of an economic system. Three major models have since emerged: Traditional, free-market and command.

The most long-lived of the major economic systems is the traditional model. It has shaped economic decision-making to one degree or another for over two thousand years. Rooted in custom and often re-enforced by clan, tribal and sectional ties, supply and demand in traditional economies can be governed as much by socio-cultural norms and obligations as by questions of supply and demand. Free-market economies employ a more computational signalling mechanism — Pricing. Here suppliers are free to charge whatever they want. Those who prosper provide goods and services people find useful, desirable and affordable enough to buy. The sum of a given item's purchases over time signals that item's relative economic importance. On the other hand, command economies completely disavow the role of tradition or of a self-regulating marketplace. Here the state decides what and how much will be produced and orders state-owned enterprises to meet specific quotas. These quotas are set based partly on statistical forecasts of existing consumption patterns and partly on economic development plans and ideological agendas.

Such are the broad outlines of each major economic system. Ask any practitioner of comparative economics if such and such a system exists in the real world and he or she will most likely say 'no,' 'not really' or, at best, 'not quite.' This is so because these 'systems' are only conceptual models; clear-cut and idealized versions of much hazier real-world processes. This notwithstanding, they are of value precisely because of the general principles they reveal about the underlying dynamics of supply and demand. Moreover, elements of each system moreover operate to one degree or another somewhere in today's global economy, in many instances cheek by jowl in a mixed economy. Even in the freest of market economies, governments regulate some forms of business. Social, cultural and even religious mores subtly shape the contours of local and regional commerce in developing and advanced nations alike. Vestiges of the command economies of the last century linger in such emerging world powers as Brazil, Russia, India and China.

A lot of 'isms' quickly surface in any comparison of economic systems: Capitalism, Socialism, Marxism, Colonialism (Economy: 4, 2001). Free-market economies can be laissez-faire, corporate or neo-liberal in disposition. Socialism, where the state owns and operates major industries and utilities, is a form of command economy that has had several real-world incarnations: The dirigisme of France and the Social Market system of Post-War Germany, and a number of other variations adopted by developing countries at the advent of the post-colonial era. Marxism, of course, is synonymous with Communism, a system where the state literally owns everything and virtually all economic activity is planned. In its twentieth century heyday, Lenin, Stalin and Mao each sought to shape their national economies in his own decidedly ideological mold. Colonialism, which dominated the global economy in the first half of the twentieth century. Here the major industrial powers occupied and then administered much of the third world for the express purpose of securing access to raw materials and closed markets for their exports.

What matters here is not the distinguishing traits of each off shoot but rather how each major system deals differently with the question of ownership. Private property is a major pillar of the free market economy; it is what people compete to acquire. But, there is always just a fixed amount of land, stocks, savings and the like. One person adds to his or her wealth (property) at the expense, theoretically-speaking, of another. This Scarcity of Resources inevitably leads to an unequal distribution of wealth. Free market enthusiasts believe this imbalance is not only natural but morally just. In their view, the rich achieved their wealth by dent of hard work and business acumen. More importantly, they reinvest a portion of their wealth, thus stimulating economic growth. That investment, in turn, creates jobs and provides additional goods and services and, so, furthers the common good. Proponents of command economies reject these arguments outright. The only cure for a grossly unfair and exploitive economic system, they argue, is collective ownership. And the fairest arbiter of the subsequent egalitarian redistribution of income and investment capital is the state.


Economic systems are complex, multidimensional entities where decisions about what is produced, how to produce and for whose benefit have a moral and political context. An economy and the society it serves are inseparable. What differentiates one from the other is the nature of the basic problem being addressed. Social cohesion and regeneration are society's most pressing perennial concerns. Capital formation, productive capacity and full employment are necessary for a healthy economy. For, without adequate levels of investment, an efficient manufacturing base and enough wage earners to buy the goods produced, economies fail. If this happens, the social order itself has the potential to unravel. More often, though, economies simply under perform, and tight credit, high prices, and low wages thwart the average person's aspirations for 'the good life.' Even when an economy performs well, the prosperity created may be far from universally enjoyed and come with very real social costs. Traditional, free-market and command economies approach each of these problems...

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