Economic System And The Role Of Factors

Of Production In Its Operation Essay, Research Paper

1. Discuss the concept of an economic system and the role of factors of production in its operation.

In theory, at least, there are three basic economic systems’ socialism, communism, and capitalism. In modern reality, however the distinctions between these alternative systems have become blurred. It is safe to say that no pure system exists today. The U.S. capitalist economy exhibits certain socialist characteristics and the Soviet Union’s and China’s communist economies are being restructured to include a number of capitalist practices. To prepare for what lies ahead, each basic type of economic system requires a closer look.


Described by Karl Marx (1818 – 1883) as a forerunner of communism, socialism is an economic system in which the state owns the principal means of production but private property of some sort still exists. What distinguishes communism from socialism is the disappearance of private property in the later stage, communism.

Marx’s view of the process from socialism to communism by means of the class struggle was neither universally accepted in his own time nor today. In fact, many saw non-revolutionary socialism as an end in itself. These so-called utopian socialists dreamed of ideal societies in which all worked according to their abilities and received what they needed. Today, in countries like Sweden, France, and Britain, Marxist and utopian socialists coexist. Their coexistence with parties advocating free enterprise has produced mixed economic systems. Between World War 11 and the late 1970s, these countries and others nationalised such major industries as airlines, steel, coal mining, and banking. Heavy taxation of profits usually accompanied the more serious efforts at socialist economies. These taxes were used to pay for government services, such as health care, that free-enterprise systems leave largely to the private sector.

Beginning in 1980, however, the pendulum began to swing the other way as a wave of privatisation, the selling of government-controlled companies and industries to private investors, swept the mixed economies. In this decade private shareholders have purchased, in part or completely, almost sixty state-owned businesses around the world, valued at more than $90 billion. By the 1990s, some 2,000 more-including companies owned by countries such as Britain, France, Mexico, and Bangladesh-will share the same fate.

A term often used to describe the mixed economies of Western Europe is democratic socialism. These countries have governments selected in free, open elections. Though their legal systems are often quite different from ours, they are designed to protect individual rights.


More than half the world’s population lives under political systems that claim to be organised according to principles developed by Karl Marx. A great scholar and fierce political writer, Marx viewed history as a series of struggles between social classes. He foresaw conflict between the working class and the capitalist class for control over the means of production, the factories in which the workers toiled and the capital needed to organise and build the plants. Marx also advocated a labour theory of value, which holds that labour is what gives value to goods and services and labour therefore deserves to be rewarded for this production.

According to Marx, the working class would ultimately triumph. From that victory would emerge communism, a classless, propertyless society whose banners would read “From each according to his ability, to each according to his need !116AIthough many planned economies have been based on Marxist doctrine with all property owned by the state, pure communism has never been a reality. Indeed, Mikhail Gorbachev’s attempt to revitalise the stagnant Soviet economy is reversing cherished Marxist principles.

Within Russia’s still state-owned industrial sector, managers are being encouraged to pay more attention to customers and less to central planners. By the early 1990s, all but a thousand or so of the more than 500,000 prices currently fixed by Moscow are meant to be set by negotiations among individual enterprises…. As he vigorously peddles his perestroika (restructuring), Gorbachev doesn’t want to hear the old Marxist dictum, “from each according to his ability, to each according to his need(s).” He lambastes past tendencies to “level off” incomes and hails reliance on performance-based pay, insisting that “no limit be set”


Capitalism is an economic ideal based on the belief that private citizens should be free to produce and sell goods and services for profit, without government interference. This model traces back to a book written in 1776 by an obscure Scottish professor and bureaucrat. The book was titled The Wealth of Nations and its author was Adam Smith (1723-1790). Smith envisioned the free marketplace as the appropriate mechanism for determining wages, prices, and profits. The key to societal well-being, according to Smith, was guaranteeing the individual maximum freedom of economic action. In Smith’s words, the pursuit of economic self-interest

improves society as a whole as if by “an invisible hand.

If Adam Smith were alive today, he would certainly be shocked at what we call capitalism. He would see minimum wage laws, price supports for farm goods, and antitrust laws that restrict profits. He would see markets that are somewhat free but subject to considerable government intervention. In fact, an estimated 50 percent of the decisions made by American businesses are in response to government decisions and actions. Consequently, a more appropriate label for American capitalism is modified capitalism, reflecting a relatively free marketplace constrained by governmental rules and regulations. Those rules and regulations cover a mind-boggling array of public.

The development of The American Economic System

Since the Revolution, the face of American business has completely changed. We have passed from a primarily agricultural and natural-resource-based economy through industrialisation to a service-oriented, information-based economy.

The early years

As early as the 1630s, American colonists residing in the richer, more established colonies lived as well as their European counterparts. Unlike their European cousins, however, the colonists achieved their standard of living largely by barter, trading goods for goods or services rather than for money. Throughout the colonial period, money in the form of gold or silver was in critically short supply. This shortage made accumulating the capital required for large-scale enterprises very difficult.

Before the start of the nineteenth century, most American businesses were small, owned either by individuals or partners who ran them. Between 1700 and 1776, only seven business corporations came into existence in the American colonies. By 1800 there were 335 corporations, over half of which had been created since 1796.

The Industrial Revolution

The Industrial Revolution began in about 1750 in Great Britain and about 1800 in the United States. It had three distinct characteristics:

Newly invented machines came to replace human labour.

Work became centred in the factory, not the home.

A division of labour in producing goods replaced the single artisan who had made a product from start to finish.

The Industrial Revolution began as a textile revolution. Cloth, when it could be bought, was extremely expensive. The process of making clothes- from converting raw cotton or wool into a dress, a shirt, or a pair of pants- was highly labour intensive. Factory production of cloth began in the late eighteenth century, and ready-to-wear apparel eventually appeared in the mid-nineteenth century. One of the earliest ready-to-wear producers was Levi Strauss. In the early 1850s, he invented blue jeans to sell to rniners in the California gold rush.

The Production Era

The period from the Civil War until just after World War I might be characterised as a production era. During this period, the demand for products exceeded many manufacturers’ production abilities. Manufacturers thus focused on improving production capacity and efficiency and on lowering costs.

Production, regarded as the key to success, dominated all other business functions. In many industries competition was limited because only a few firms were capable of consistent, efficient production. Marketing’s main jobs in these industries were simply the taking and filling of orders. Other marketing activities were not required when firms with arnple production capacity and robust product demand could sell all they could make.

The production era nurtured Thomas Edison, Alexander Graham Bell, and dozens of other innovative entrepreneurs who reshaped communications and transportation. Others built gigantic industrial empires. The names of many of their founders are still familiar: Philip Armour (meats); Frederick Weyerhaeuser (lumber); Ell Remington (arms); John D. Rockefeller (oil); Andrew Carnegie (steel); Gail Borden (dairy products); and Marshall Field (general merchandise)

The ready availability of capital and the irresistible urge to generate ever- greater profits led men like Collis P. Huntington (1821-1900) to attempt to control entire business sectors. His career began when he helped found the Central Pacific Railroad, the western half of the first transcontinental rail line, completed in 1869. The construction of that government-subsidised line made his fortune. By the time of his death, he and his associates controlled most western rail transportation.


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