Name ___________________________
Day 41
CAPITALISM
Capitalism is an economic theory that is based on the French term laissez
faire, or “let people do as they please.” Capitalists want the owners of
businesses and industries to set prices, working conditions, and salaries
without any interference by the government. Capitalism is a system in which
private individuals (NOT the government) own businesses and all of the
factors of production.
The idea of capitalism is that if the government doesn’t regulate businesses
with taxes, minimum wage laws, and setting standards for working conditions
(all of these are called government regulations), then the economy will prosper and companies
will make more profit.
In his 1776 book The Wealth of Nations, Adam Smith defended this idea of a free economy, or free
markets. He said that if government keeps its hands out of the economy, then the economy will
regulate itself. He called this idea the invisible hand of free market economies. Businesses will
compete with each other for customers, and this competition will force them to make better products.
Because individuals and companies will be motivated by making the most profit, they won’t overproduce or under-produce goods. Smith called this the law of supply and demand, that enough
goods will be produced at the lowest possible price to meet customers’ demand for that product. The
government doesn’t have to tell companies what to produce and how to distribute it.
Because individuals and business owners are motivated by profit in capitalism, entrepreneurs will
want to start new businesses, and investors will want to give them the capital (investment money &
means of production) to do so.
SOCIALISM
In contrast to laissez-faire capitalism, which advised governments to leave business alone, socialists
believed that wealthy people or the government must take action to improve people’s lives. In the
1700s, Jeremy Bentham introduced his philosophy of utilitarianism, which stated that
governments should try to promote the greatest good for the greatest number of people.
In the 1800s, John Stuart Mill led a utilitarian movement. He questioned what he saw as the
unregulated capitalism of the Industrial Revolution. He believed it was wrong that workers were
forced to work in harsh conditions and lead deprived lives that sometimes bordered on starvation.
Mill wanted the government to help working people with policies that would lead to a more equal
division of profits.
In socialism, businesses and all of the factors of production would be owned by the government, or
“the public,” and they would operate for the welfare of all. Socialists say that capitalism’s intense focus
on profit leads to economic inequality: there are “winners” and “losers” in
capitalism, rich people that succeed and poor people that do not. Instead
of the focus being on profit, then, socialists believe that the government
(NOT private individuals) should control businesses and industries. The
government, then, would distribute goods and resources equally to
everyone!
Marxism/Communism
In the 1800s, a German journalist named Karl Marx introduced the
world to a radical type of socialism called Marxism. Marx and
Friedrich Engels outlined their ideas in a 23-page pamphlet called The
Communist Manifesto.
In The Communist Manifesto, Marx & Engels argued that society has
always been divided into warring classes. During the Industrial
Revolution, they called these classes the bourgeoisie (middle class
“haves” & employers) and the proletariat (“have-nots” or workers).
Marx & Engels said that the wealthy bourgeoisie controlled the factories
and made all the profit while the poor proletariat workers performed
backbreaking labor under terrible conditions.
At the heart of Marx’s theory of communism is a prediction that a
class struggle between the haves and the have-nots would lead to
the proletariat overthrowing the capitalist bourgeoisie and taking over
the means of production. In The Communist Manifesto, Marx and
Engels state, “The proletarians have nothing to lose but their chains.
They have a world to win. Workingmen of all countries, unite.”
Once the proletariats overthrow the wealthy capitalists, Marx believed that the workers would share
in the profits and bring about economic equality for all people. (This sounds like the economic system
called _______________!) The workers would control the factories and all means of production in
a “dictatorship of the proletariat,” meaning that the workers were in charge.
The final phase in Marx’s theory was pure communism (which is today known as “Marxism” or
“communism”). In communism, Marx said that after a period of cooperative living and working where
all profits were shared equally and a classless society was achieved, the need for government would all
together fade away. Everyone would be happy being equal and working for the common good, and
there would be no need to have a government that told people what to do.
In each word bank below, write all of the people and terms that you should now associate with each
economic theory.
CAPITALISM
SOCIALISM
MARXISM/COMMUNISM
Capitalism vs. Socialism vs. Marxism/communism:
For each item, write whether it is most associated with capitalism, socialism, or
Marxism/communism.
1. You sell a candy bar for $1 more than what you bought it for: ____________________
2. A public high school: _______________________
3. Adam Smith: ____________________________
4. A child’s lemonade stand: _______________________
5. A government that provides healthcare for all citizens: ________________________
6. Karl Marx: ________________________
7. The Nike corporation: __________________________
8. Economy with no government regulations: ___________________________
9. Your local fire department: ___________________________
10. The roads you drive on: ______________________________
11. Class struggle: ___________________________
12. The stock market: ________________________________
13. A government owning & running the public water supply: _______________________
14. Supply and Demand: ________________________
15. Classless society with a government that owns means of production: __________________
16. Classless society with no need for a government: _____________________________