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Chapter 3 
Characteristics of 
Market  System Capitalism
and Political Economy
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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 described the beginning of capitalism.

         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.
              c. Francois Quesnay
popularized the term laissez faire.
. Creative Destruction described by 20th century sociologist and 
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. The fight between labor and management has also brought much  
         4. Let Us Now Praise Private Equity explores the application of creative destruction
             to the poor job creation during the great recession. National Review. 2/6/12

    G. Sundry
         1. Modern Capitalism has many additional features
              a. Complex Market System Setting Prices
              b. Importance of Capital Goods and Technology
              c. Specialized
                  1) Complexity requires company produce limit their product lines.
                  2) Division of Labor allows specialization by ability ad training.
        d. Unique descriptions of Modern capitalism
1. Corporate Capitalism describe a capitalist marketplace characterized by the
                     dominance of hierarchical, bureaucratic corporations.

                 2. Crony Capitalism has been around from the beginning
  a) New name is
Corporate Welfare
How crony capitalism corrupts the free market 30 minute vide 12/22/13
   c. Hunter Lewis on crony-capitalism 30 minute vide 1/25/14

             3. Money Manager Capitalism:
money managers dominate savings/investing markets impacting
                     economy's performance.
4. Patrimonial Capitalism gentry living off of inherited wealth see also

                 5. Capital in the Twenty-First Century
by Thomas Piketty a book review
Capitalism vs. Democracy editorial 1/28/14
Capitalism in the Twenty-First Century   editorial 3/25/14
                     c. Taking on Adam Smith and Karl Marx NYT 4/19/14
                     d. Capitalism is Not to Blame for Middle-Class Plight
        2. Readings
The Fall of Rome reviews the market system of the Roman empire and how the author believes
                 government failures caused its demise..
Blackstone's Byron Wien, a successful capitalist,  Discusses Lessons from his First-80-years
c. Coercive power of capitalism

             d. Hoodwinked  An Economic Hit Man Reveals Why the World Financial Markets Imploded--and
                 What We Need to Do to Remake Them
, by 
John Perkins Buy the Book
             e. Revisiting old argument about impact capitalism Economist Magazine 4/4/14
Pyramid Theory looks at capitalism as practice the US democracy.
  g. Economic system has
many concise definitions.
h. Business Isn't Capitalism 5/3/14
i. How Will Capitalism End 6/14
j. Has Capitalism Reached a Turning Point
discussions on needed reforms Forbes, 9/26/14
         3. Free Course Great Economists: Classical Economics and its Forerunners
         4. Videos
             a, The Successes and Price of Capitalism Video 1 hour
b. The End of Capitalism

Adam Smith from Wiki

A sketch of a Adam Smith facing to the right

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Professor A's Advice
for College Students


Which is Better
Two B's or an A and a C

François Quesnay






François Quesnay - Wiki








wiki on Joseph Schumpeter

II. The Circular Flow of Money 

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III. Other Economic Systems 
      A. Pure capitalism as described by Adam Smith never existed.
      B. Recent economic systems have are Mixed Economies  (a mixture of
           Capitalism and Socialism)
 Democratic Capitalism vs. Capitalistic Democracy 
          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
              d. See Social democracy
          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, a
                  planned economy sometimes called a command economy.
          4. Fabian Economics  T
he Fabian Society is a British socialist organization
              whose purpose is to advance the principles of socialism via gradualist and
               reformist, rather than revolutionary, means.[1][2]
          5.  Feudalism is a
system for structuring society around relationships derived
               from the holding of land in exchange for service or labor.
              a. New Feudalism
refers to a theorized contemporary rebirth of policies of
                  governance, economy and public life[2] reminiscent of those present in
                  feudal society
              b. Feudalism Then and Now

         6. Traditional economy, is where customs determines the economy activity
         7. Oligarchy is when a few
people distinguished by royalty, wealth, family ties,
             education, corporate, or military have control. U.S. ?
Plutocracy is rule by the wealthy is practiced by many developing countries.
              a. plutocrats vs. populist is a controversial topic.
              b. American Dynasty summarizes
the plutocratic nature of the Bush family.
         9. Kleptocracy
government exists to increase the personal wealth and political
             power of its officials. Russia?
       10. Readings
              a. Using Two Cows to explore using resources, Infographic 3/1/13
Harvey - Is Marxism Relevant Today? takes a while to load
 c. Presidential Courage explores how Ronald Reagan deplored
        11. Videos
                a. Economic Systems Capitalism vs. Communism, 13 minutes
Capitalism and Socialism is more of an editorial  14 minutes 
When-Capitalism- s Great and Not So Great
                d. Milton Friedman Versus A Socialist     4 minutes   


Karl Mark and
John Keynes




Editors Note: Most unbiased observers would feel uncomfortable calling Democratic Socialism radical. Followed by many of the great countries of Europe after WWII, it did very well but some would feel it drifted toward communism and the people M. Thatcher pushed it toward capitalism by selling many large state owned industries.  By 2012, some 30y years after Thatcher, it appears Europe politicians have allowed government spending and borrowing to get out of hand. Conservatives in America feel they must stop U.S. politicians from doing the same thing.

James Keir Hardie was an early democratic socialist, who founded the Independent Labor Party in the United  Kingdom

IV. Political Systems

     A. Republics are a form of government in which power resides in the people 
          1. It may be a direct democracy also known as pure democracy in which
              people decide (e.g. vote on, form consensus on) policy initiatives directly
              or an indirect democracy or representative democracy link the U.S. where
             citizens elect officials to make laws on their behalf
          2. Officials of states are not granted primarily based upon family, military,
              or business connections.
In United States v. Cruikshank (1875), the court ruled that the "equal
               rights of citizens" were inherent to the idea of a republic

      B. Democracy 
1. All eligible citizens have an equal say in the political decisions that
              affect their lives and majority’s power is absolute and unlimited
 2. In a
Parliamentary Democracy as practiced in Great Brittan,
              the executive branch derives its legitimacy from and is held
              accountable to the legislature (parliament).
a. The executive and legislative branches are thus interconnected. 
              b. The head of state is normally a different person from the
                  head of government
Woodrow Wilson Contrasts U.S. Democratic Republic & British Parliamentary System
           3. Presidential Democracy has a president and the legislative
               body and their functions are separated providing checks and
               balances to limit the power
               of both the chief executive and the legislature. 
           4. History of Democracy and U.S  Voting Rights Timeline
5. The End Game for Democracy
Bill Moyers 3 minute video
           6. 10 American Misconceptions about Democracy from econintersect
7. Money in U.S. Politics Using 40 charts.

           8. The Expansion of the Vote: A White Man's Democracy
Is democracy, like communism, a failed human doctrine?
               a. Towards An Ideal Form of Government
               b. We, the Intelligent People of the United States ...
               c. Three New Kingdoms.
       C. A  Polyarchy has decentralized rule where many smaller  governments
            tailored to the needs and desires of the local populations.
       D. Federalism divides powers between member units so that federal political
            order is non-centralized, often constitutionally, between at least two levels so
            that units at each level have some final authority and can be self governing
            in some issue area.
            1. Federalism in the United States
2. States' Rights Controversy
3. Federalism: National vs. State Government
            4. A conservative look at Federalism video
            5. A liberal look at Federalism
            6. Revolution of 1800 began a 200 plus year battle concerning
                Federal Government power.
Editors Note: Secretary of the Treasury
                Alexander Hamilton orchestrated the first federal tax (on imports in 1789)
                to pay Revolutionary War debt piled up by both state and federal
                governments. Relative to GDP, it was the largest federal debt to exist until
                1933 when a revenue collapse caused D3 (deep-do-do). Hamilton began
                the practices of increasing taxes (though not enough) to pay for war, paying
                interest and paying principle over a number of years. The practice of
                refinancing principal began after WWI.  The practice of not increasing taxes
                to pay for war started with  Bush II when he cut taxes while starting two wars
                and increasing Medicare. Hamilton (to the dismay of Jefferson) also began
                the practices of the federal government paying state debt with many states
                showing their appreciation by telling the federal government to stay out of
                state business.
E. Commonwealth is a political community founded for the common good
      F. Political Systems have to do with control.
           1. Tenth Amendment (Amendment X) to the United States Constitution
               which is part of the Bill of Rights was ratified on December 15, 1791.[1] 
           2. The Tenth Amendment states the Constitution's principle of federalism by 
               providing that powers not granted to the federal government nor prohibited
               to the States by the Constitution are reserved to the States or the people.
           3. The Civil War was a power struggle over federal power and the 2000 federal
               election is a good example of the struggle over power.
       G. Republic vs. Democracy
            1. In a republic the sovereign is the individual, in a democracy, the sovereign is
                 the group, the majority.
            2. Republic vs. Democracy and other forms of government video 10.35
 3. An Important Distinction: Democracy vs. Republic
            4. Republic vs. Democracy
5. Why faster growth with democratic presidents-timing is everything
       H. Sundry Reading Concerning Political Systems
            1. Relationship between Rights vs. Freedoms 9/1/14
We the Intelligent People of the United States provides insight into
                American democracy. by Frank Li, Ph.D.4/23/14
            3, U.S. Disputed Electionsl

 V. Supplemental materials Concerning Capitalism
      A. Crises Capitalism video contains ideas about capitalism resulting from 
           the Great Recession of 2008-2009.
      B. Why is Chinese Capitalism Better than American Capitalism? 1/2/11

      C. Alexis_de_Tocqueville wrote about capitalism and democracy in 19th
          century America. See Democracy in America-Vol_1
      D. Sequester Capitalism, Democracy and Money Theories 3/1/13
Democratic Capitalism vs. Capitalistic Democracy 
. American Misconceptions about Capitalism 6/13
G. The Predator State Video Part 1     Part 2   1/14
      H. American Politics Are we a Democracy? A Republic? A Polyarchy?
           Noam Chomsky breaks down American Politics today and American
           Politics that our founders envisioned.
       I. This summary of Presidential Courage depicts great presidents saving

VI. Four Horsemen
video is a collection of today's greatest sociological,
      political and economic voices that analyze and put into historical
      perspective the decisions and results of our economic and political systems.


Free Book Summaries- 3 New York Times Bestsellers

Universal male suffrage began in 1884 France and was an important milestone in the history of democracy. 

Thoughts of our Founding Fathers toward a
Democracy varied dramatically.
Federalist George Cabot of Massachusetts feared ..."the terrible evils of democracy," and felt Jefferson was unstoppable, From p368 of Thomas Jefferson The Art of Power, 2012, by Jon Meacham an 8 page summary


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Presidential Courage Brave Leaders and How They Changed America 1789-1989, by Michael Beschloss, read an 8 page summary or Buy this Book

Generations and The Fourth Turning William Strauss and Neil Howe read an 2 page summary or Buy the Book

Second Chance Three Presidents and the Crisis of America Superpower, by Zbigniew Brzezinski, read an 6 page summary, or Buy this Book

American Dynasty Aristocracy, Fortune, and the Politics of Deceit in the House of Bushby Kevin Phillips, read an 6 page summary or  Buy the Book See also Welcome the Hackocracy, a look at Bush 2's appointments that made a difference.

Don't Know Much About History Everything You Need To Know About American History But Never Learned, by Kenneth C. Davis, read an 6 page summary or  Buy the Book






  Alexis de Tocqueville

                          Alexis de Tocqueville
                       On Majority Rule
and Mediocrity


VII. Sundry Information oncerning Capitalism
 A. For a somewhat conservative view of capitalism visit
B. For a somewhat liberal view of capitalism visit  The Shared Capitalism Institute.
      C. Interesting Links from
 1. Capitalism
Why- Intellectuals Hate Capitalism by Robert Nozick
D. Current Events Internet Library has an interesting economics section.
E. The Book Summaries Internet Library's political section reviews Hoodwinked, 
            a book by John Perkins who feel international corporations are altering capitalism
            as practiced today.

      F. Capitalism and Inequality (Jerry Z. Miller, Foreign Affairs)  Without social safety
          nets capitalism is doomed through social disorder. Editor's Note: I've seen a lot of
          verbiage blaming Capitalism for the inequality in the U.S. Inequality is a political
          question. It is the responsibility of voters through politicians to fairly distribute
          production without substantially limiting the productive capabilities of capitalism which
          have coped the Balance Sheet Recession known as with  the Great Recession
. 3/12/13
          See People Not Voting Their Pocketbook is Literally Killing the Poor
Economic Report of the President 2014
      H. BBC audio on the History of Capitalism

       I.  Center on Capitalism Columbia University is a great source of information
      J. Is Capitalism Moral? A Commonwealth Club Podcast Debate – 10/ 22, 12
      K. Strange Rebels  1979 and the Birth of the 21st Century is political economics
L. Libertarianism

VIII. Quiz on Economic Systems with answers from steponicseconomics

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

  X. Class Discussion Question. Has President Obama been a Democratic Socialist?
       Begin with a nominal definition of Democratic Socialism. U. S. Manhood suffrage
       occurred in 1868. When did the ladies get to vote?


"We can see that while China has overtaken Germany and Japan to become the world's second-largest economy (i.e., total area of the rectangle) its citizens are nowhere near being as rich as those of those countries or even Mexico."  Source

Editors Note: It Is the Political Part of "Political Economy that is the problem.

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York Times Best Sellers

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XI. More discussion questions.
      A. Something happened about 30 years ago to disconnected wage growth from productivity
          1. Competition from Japan put the squeeze on corporate profits.
               a. "... the expansion of Japanese car companies into foreign markets in the 1970s further
                   accelerated [Japanese] growth. Passenger car exports rose from 100,000 in 1965 to
                   1,827,000 in 1975."  Automotive industry in Japan 1960s to today
From 1955 to 1965, Japan experienced a nominal growth rate of 10–20% annually
                   and real growth rates (adjusted for inflation) of 5–12%. In 1968, it surpassed the
                   Federal Republic of Germany  (FRG) to stand second after the United States among
                   non-Communist nations in total value of GNP.  [Editor's note] One of the few major
                   failings of U.S. industry was its slow response to the Japanese miracle, but like
                   politicians, they didn't act until there job was on the line.    
               c. Industrial sunset making north America's rust belt-1969-1984 
. Energy prices increased dramatically and companies that could not pass the higher
               cost to customers felt a profit squeeze.
           3. Companies affected had three choices.
                a. Going out of business was the last choice.
                b. Lower profits mean lower returns and was the next-to-last choice.
                b. Cutting cost was the only choice as higher revenue, due to competition,
                   was off the table.           
           4. Cutting cost comes from higher productivity and lower wages
                a. Germany and Japan also could and did increased productivity
b. Wages stagnated and a political problem emerged.
           5. New Normal  for wages because of the Competitive Adjustment from chapter 23. 
Wrong: Nine Economic Policy Disasters and What We Can Learn from Them 2013by Richard
          Grossman explores what we can learn from an historical look at  government's fail economic policy


To solve the problem of not enough income for the middle classes in the 1980's, capitalism changed the name of Home Improvement Loans to Home Equity Loans and people were allowed to what had been a retirement nest egg before they retired. There is nothing wrong with this as long as people realize that they are delaying retirement.



 C. For many years, Americans have work hard, produce more, and voted to give
      more and more of the income gains to the rich.

Editors Note: A closer look would reveal that these same voters allowed governments to build up debt,  governments and businesses to have large unfunded pension liabilities, and individuals to spend unrealized home equity  using home equity loans.


Editor's Note: The recent large decrease in the Household resulted because people defaulted on mortgage debt and the Federal Reserve picked up the tap by printing money.


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