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Chapter 3 Characteristics of Market System Capitalism
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Editors Note: McConnell Economics Books, including the 18th edition, are one of many sources of material included in this chapter.

I. Basic characteristics of capitalism (market economy)

     A. Economic systems determine what to produce, how to produce, and who will receive production. 
     B. An economic system must also have the ability to adapt to changing economic environments. For example,
         How will America's economic system adapt to changes caused by September 11?
      C. Adam Smith
          1. His book, The Wealth of Nations, was the first description of capitalism. 
         2. Published in 1776, it described capitalism as it was practiced in 18th century England.
         3. For more visit
    D. Basic characteristics described by Adam Smith
         1. Private property-the right to own resources and bequeath property
         2. Freedom of enterprise-own a business
         3. Freedom of economic choice-work/not work, spend/not spend
         4. Role of self-interest
             a. People are by nature economic creatures
             b. Self-interest is a fundamental characteristic of people
        5. Competitive market system
            a. Many buyers and sellers
            b. Market participants, buyers and sellers, have little control over price
            c. Competition performs the organizing and controlling functions for a market economy
        6. Limited government ("Laissez-faire ")
            a. Government should let markets be with a hands-off philosophy)
            b. Acceptable government involvement has become an important political question in the United States during the last few decades.
    E. Modern Capitalism has additional features
       1. Complex Market System Setting Prices
       2 . Importance of Capital Goods and Technology
       3. Specialized
           a. Complexity requires company produce limit their product lines
           b. Division of Labor allows specialization by ability ad training.
   F. Creative Destruction described by 20th century sociologist/economist Joseph Schumpeter, was an important addition 
       to the idea of capitalism. 
       1. Change involves the creation of improved economic structures based on technology and the destruction of inefficient 
           economic structures.
       2. Capitalism allows this destruction to take place.
       3. Joseph Schumpeter's biography

 
II. The Circular Flow of Money

 

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III. Economic Systems

      A. Pure capitalism as described by Adam Smith never existed.
       B. Recent economic systems have been Mixed Economies (a mixture of Capitalism  and Socialism)
           1. Socialism emphasizes collective ownership and management of economic resources that are equally distributed.
           2. Democratic Socialism, as practiced in Western Europe, has public ownership of key industries such as 
              transportation and communication 
              a. The economic systems of Europe began moving away from socialism toward capitalism in the late 1970's
              b. Margaret Thatcher, former prime minister of England, started this trend.
              c. Ronald Reagan agreed and stressed the market system during his presidency (1981-89).
          3. Communism is the ideal of those practicing a "Marxian system." 
              a. Named after 19th century philosopher Karl Marx 
              b. The public owns almost all wealth which is centrally managed, i.e., a Planned Economy
              c. Harvey - Is Marxism Relevant Today? Video
      C. A Traditional Economy, one in which customs determine the operation of the economy, is practiced by many 
             developing countries.

  IV. 5 Key Economic Questions an Economic System Must Answer are the topic of chapter 5.

   V. Sundry Information
       A. For a somewhat conservative view of capitalism, visit Capitalism.org.
       B. For a somewhat liberal view of capitalism, visit  The Shared Capitalism Institute.
       C. Interesting Links from Reference.com
            1. reference.com on Capitalism
            2. Why Do Intellectuals Oppose Capitalism? by Robert Nozick
       D. Current Events Internet Library has an interesting economics section.
       E. The Book Summaries Internet Library political section reviews Hoodwinked, a book by John Perkins who feel international corporations are altering capitalism as practiced today.

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