economic-systems Terms
Adam Smith
The author of An Inquiry into the Nature and Causes of the Wealth of Nations (1776), the book considered by many the philosophical handbook for free market economies. Smith, a British economist, argued that economies function most efficiently and fairly when individuals are allowed to pursue their own interests. The private decisions, made by rational, self-interested individuals combine to produce a healthy, growing economy. Government intervention distorted the natural and rational exercise of free, prudent choice. When left to their own natural operation, the private decisions made by thousands of rational economic players were tied into prosperous harmony by the “invisible hand” of the market.
Alexander Hamilton
The United States’ first Secretary of the Treasury and an early advocate for a stronger government presence in the economy. In a 1791 report he called for a federal program of internal improvements (roads, bridges, ferries, and harbors), the stabilization of the nation’s currency through the creation of a national bank, and the steering of capital toward certain sectors of the economy through the careful management of the national debt.
Command Economic System or Planned Economy
One of the four basic economic systems identified by economists. In a command or planned economy the government controls the economy. The government decides how to use and distribute resources. The government regulates prices and wages; it may even determine what sorts of work individuals do. Socialism is a type of command economic system.
Great Society
A set of programs legislated during the presidency of Lyndon Johnson followed that advanced even broader economic responsibilities for the federal government. Under the Great Society, Johnson pledged to produce “abundance and liberty for all. . . . an end to poverty and racial injustice.” America’s safety net of social services was expanded through the introduction of food stamps and low-income rent subsidies. The Office of Economic Opportunity was created to assist in training and placing the unemployed. Increased federal aid to education was complemented by the creation of a program for high school dropouts—the Job Corps.
Market Economic System
One of the four basic economic systems identified by economists. In market economies economic decisions are made by individuals. The unfettered interaction of individuals and companies in the marketplace determines how resources are allocated and goods are distributed. Individuals choose how to invest their personal resources—what training to pursue, what jobs to take, what goods or services to produce. And individuals decide what to consume. Within a pure market economy the government is entirely absent from the economy.
Mixed Economic System
One of the four basic economic systems identified by economists. A mixed economy combines elements of the market and command economy. Many economic decisions are made in the market by individuals. But the government also plays a role in the allocation and distribution of resources. The United States has a mixed economy.
New Deal
A set of experimental government programs and reforms instituted by President Franklin D. Roosevelt in the 1930s. The New Deal, through federal spending, price regulations, job placement, the expansion of unions, greater access to home loans, and social security for the elderly and disabled, was meant to bring relief to a population reeling from the Great Depression. It did transform the nation in some significant ways but did not succeed in ending the Great Depression.
Progressive Era
A period of reform during the early twentieth century in which the federal and state governments assumed a much larger role in the economy. Policymakers like President Theodore Roosevelt argued that the economic playing field had been distorted by the growth of large corporations. He was not opposed to these new large industries, but he believed that their behavior needed to be supervised by an institution of equal size—the federal government. Following his lead, Congress passed the Pure Food and Drug Act and the Meat Inspection Act to protect consumers. To protect workers, the federal and state government passed a series of workplace safety and minimum wage laws. Congress attempted to restrain the power of corporations with the Clayton Antitrust Act and to expand its oversight of business through the creation of the Federal Trade Commission. And to ensure a more careful use of natural resources, Congress passed a series of conservation measures and created the National Forest Service.
Pure Market Economy
Term used to describe a market economy in which there is absolutely no government involvement.
Reagan Revolution
Label applied to the economic policies of President Ronald Reagan during the 1980s. Reagan pledged to reduce the size of government and eliminate many of the regulations that he believed stifled entrepreneurial initiative and inhibited economic growth.
Scarcity
A shortage or lack of something
Socialism
A type of command economic system. Historically, the government has assumed varying degrees of control over the economy in socialist countries. In some, only major industries have been subjected to government management; in others, the government has exercised far more extensive control over the economy.
Traditional Economic System
One of the four basic economic systems identified by economists. The sort of work that people do, the sorts of goods and services they provide, how they use and exchange resources are all shaped by tradition. These sorts of economic systems are not very dynamic—things don’t change very much. Standards of living are static; individuals don’t enjoy much financial or occupational mobility. But economic behaviors and relationships are predictable. You know what you are supposed to do, who you trade with, and what to expect from others.
In many traditional economies, community interests take precedence over individual. Individuals may be expected to combine their efforts and share equally in the proceeds of their labor. In other traditional economies, some sort of private property is respected, but it is restrained by a strong set of obligations that individuals owe their community.
Wealth of Nations
A book published by Adam Smith in 1776 that many consider the philosophical handbook for free market economies. Smith, a British economist, argued that economies function most efficiently and fairly when individuals are allowed to pursue their own interests. The private decisions, made by rational, self-interested individuals combine to produce a healthy, growing economy. Government intervention distorted the natural and rational exercise of free, prudent choice. When left to their own natural operation, the private decisions made by thousands of rational economic players were tied into prosperous harmony by the “invisible hand” of the market.