History of Economic Politics in America
Capitalism is an economic system that emphasizes private ownership of the factors of production, freedom of choice, and individual incentives. These freedoms and incentives apply to workers, investors, consumers, and business owners. In pure capitalism, the government does not interfere with the economy—the wages of workers, the prices of goods, what producers can make, the ways that businesses make or sell their goods and services, or any other regulations.
Capitalism assumes that the best way to serve society is to let people produce, sell, and buy as they wish. The goal of capitalism is to create what is called a free market. In economic terms, a market is not literally just a market like a grocery store. A market or marketplace is wherever all sorts of goods and services can be sold and bought. In a free market or free enterprise economy like that under capitalism, the government places no limits on the freedom of buyers and sellers to make their economic decisions.
Origins of Capitalism The basic theories about capitalism and free trade come from Adam Smith. Smith was a Scottish philosopher and economist who lived in the 1700s. In his famous book The Wealth of Nations, Smith suggested the government take a laissez-faire approach to the economy. Laissez-faire is a French term meaning “to let alone.” Smith thought the forces of the marketplace would act as an “invisible hand” guiding economic choices for the best possible results.
Competition plays a key role in a free-enterprise or free-market economy because sellers compete for resources to produce goods and services at the most reasonable price. If they are successful, they make more money. At the same time, consumers compete over limited products to buy what they want and need.
Finally, these same consumers, now in their role as workers, compete to sell their skills and labor for the best wages or salaries they can get. Pure capitalism has five characteristics: private ownership and control of property and economic resources, free enterprise, competition, freedom of choice, and the possibility of profits.
Free Enterprise in the United States A true and total capitalist system does not exist in reality. The United States, however, is a leading example of a capitalist system in which the government plays a role. Our society is deeply rooted in the value of individual initiative—that each person knows what is best for himself or herself.
We also respect the rights of all persons to own private property. Finally, our society recognizes individual freedom, including the freedom to make economic choices. However, because the U.S. government also regulates many aspects of the economy, it does not have a purely capitalistic economy.
Mixed Economies Economists describe the economies in the United States and many other nations as mixed economies. Mixed economies combine elements of capitalism and socialism.
Mexico is another example of a mixed economy. While primarily capitalistic, the government owns all natural resources and runs a giant oil company, Petrolero Mexicanos (PEMEX). In its early history, the U.S. government played a very small role in the nation’s economy. Since the early 1900s, however, the government’s role in the economy has steadily increased in at least three ways. First, as the federal government has grown, it has become the single largest buyer of goods and services.
Second, the federal government has become more involved in regulating industries to protect consumer health and product safety. The Meat Inspection Act and the Pure Food and Drug Act—both passed in the early 1900s—were responses to public outcry over investigative reports showing grotesque conditions at meat packing plants and in food production. Since then, many other industries have become more regulated as well.
Third, the Great Depression of the 1930s created an economic emergency that propelled government action. With millions of Americans out of work, the government created programs to provide basic economic security. For example, it set up the Social Security system. It even set up a public corporation, the Tennessee Valley Authority, to provide electricity. Since then, many laws have been passed giving the government a role in such areas as labor management relations, environmental regulation, and control over financial institutions.
Socialism is an economic system in which the government plays a significant role in the economy, but it does not completely control it. It owns most land, basic industries, and other means of production. Under socialism, government planners determine the use of resources and distribute the products and wages. The government also provides extensive social services such as education, health care, and welfare for its people.
The goal of socialism is an equal distribution of wealth. Early Socialism developed in the early 1800s along with the Industrial Revolution. Across Europe and the United States, industrialization resulted in modern economies that were vastly more productive and that generated a great deal of wealth for industrial leaders. However, it also created a great deal of suffering. Many workers, including children, lived in terrible poverty, working 12 hours per day, 6 days per week.
In this time, before unions, workers had little or no power to bargain with employers for better wages or working conditions. Reformers believed that no one should have to suffer or starve, especially as a few industrial leaders were making so much profit. They believed that under capitalism, there was no possible way for economic fairness. They wanted the government to take more control over the economy to distribute goods and wealth more equally.
Some socialists believed that the people who profited from capitalism would never give up part of their wealth to share it with others so only a violent revolution would bring about change. Others believed reforms could be made peacefully and gradually by organizing the working class and voters. Still others tried to build ideal communities, or communes, where people were supposed to share in all things.
Opponents of socialism say that it stifles individual initiative. They also say that under socialism, governments require very high taxes in order to pay for all their social services. These high tax rates hinder economic growth for the whole nation. Further, some people argue that because socialism requires increased governmental regulation, it helps create big government and thus can lead to dictatorship. Democratic Socialism Socialists who are committed to democracy in the political sphere but want government involvement in the distribution of wealth are called democratic socialists.
Under this kind of system, citizens have basic democratic rights like free speech and free elections, but in the economic sphere, the government may own key industries and government makes economic decisions designed to benefit everyone. For example, in 2012, France elected a president from the Socialist Party, and these democratic socialists gained a majority in parliament.
Document #2 “Invisible Hand”
Excerpt from AN INQUIRY INTO THE NATURE AND CAUSES
OF THE WEALTH OF NATIONS (1776) by Adam Smith
Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to the society.
As every individual, therefore, endeavors as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labors to render the annual revenue of the society as great as he can.
He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.
Nor is it always the worse for the society that it was no part of it. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to
trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.
What is the species of domestic industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him.
The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.
To give the monopoly of the home market to the produce of domestic industry, in any particular art or manufacture, is in some measure to direct private people in what manner they ought to employ their capitals, and must, in almost all cases, be either a useless or a hurtful regulation. If the produce of domestic can be brought there as cheap as that of foreign industry, the regulation is evidently useless.
If it cannot, it must generally be hurtful. It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy. The tailor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor. The farmer attempts to make neither the one nor the other, but employs those different artificers.
All of them find it for their interest to employ their whole industry in a way in which they have some advantage over their neighbours, and to purchase with a part of its produce, or what is the same thing, with the price of a part of it, whatever else they have occasion for.
What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage. The general industry of the country, being always in proportion to the capital which employs it, will not thereby be diminished, no more than that of the above-mentioned artificers; but only left to find out the way in which it can be employed with the greatest advantage.
Document #3: The Prophecy of Karl Marx (Concepts from the Communist Manifesto)
The capitalist mode of production is capable of tremendous growth because the capitalist can, and has an incentive to, reinvest profits in new technologies. Marx considered the capitalist class to be the most revolutionary in history, because it constantly revolutionized the means of production. But Marx argued that capitalism was prone to periodic crises.
He suggested that over time, bourgeoisie would invest more and more in new technologies, and less and less in labor. Since Marx believed that surplus value appropriated from labor is the source of profits, he concluded that the rate of profit would fall even as the economy grew.
When the rate of profit falls below a certain point, the result would be a recession or depression in which certain sectors of the economy would collapse. Marx understood that during such a crisis the price of labor would also fall, and eventually make possible the investment in new technologies and the growth of new sectors of the economy.
Marx believed that this cycle of growth, collapse, and growth would be punctuated by increasingly severe crises. Moreover, he believed that the long-term consequence of this process was necessarily the enrichment and empowerment of the capitalist class and the impoverishment of the proletariat.
He believed that were the proletariat to seize the means of production, they would encourage social relations that would benefit everyone equally, and a system of production less vulnerable to periodic crises. In general, Marx thought that peaceful negotiation of this problem was impracticable, and that a massive, well-organized and violent revolution would in general be required, because the ruling class would not give up power without violence.
He theorized that to establish the socialist system, a dictatorship of the proletariat – a period where the needs of the working-class, not of capital, will be the common deciding factor – must be created on a temporary basis. Corresponding to this is also a political transition period in which the state can be nothing but the revolutionary dictatorship of the proletariat.”
 Yet he was aware of the possibility that in some countries, with strong democratic institutional structures (e.g., Britain, the US and the Netherlands) this transformation could occur through peaceful means, while in countries with a strong centralized state-oriented traditions, like France and Germany, the upheaval will have to be violent.
Once the means of production are controlled by the dictator for the proletariat, the dictator will oversee the redistribution of the nation’s wealth, equitably. At this point, the dictator will step down and a Communist state will be formed and citizens will work for the greater good of the society and not for personal gain.