2-10: Economic Systems

economic systems

Assignment 10: Economic Systems

Part 1 of 1: Answer the following questions by carefully reading the information below.

  1. Do you think Malthus was right, will people run out of food with our exponentially rising population? And if so does this excuse those with wealth from bearing any responsibility? Explain.
  2. Ricardo believes that people will have as many children as they are able given their economic situation. Is his assertion correct, incorrect or somewhere in the middle. Do you agree with his belief that the more workers the worse the pay and working conditions? Why or why not?
  3. Jeremy Bentham is widely regarded as the father of the modern welfare state. According to Bentham, what would be the perfect welfare state?
  4. Anarchists are like the broccoli of history, nobody really likes them. From the late 1800’s to early 1900’s they were responsible for the deaths of a Russian Czar (AlexII), French President (Carnot), American President (McKinley), Italian King (Humbert), and an Austrian Archduke (Ferdinand). So it is easy to understand why nobody liked them but why did they not like anybody?
  5. Socialists received a large following during the 1800’s and into the 1900’s. What are 3 reasons that people would support a socialist state.
  6. Put the following economic systems/beliefs on a spectrum from less government control (on the left) to more government control (right) with 3 characteristics of each. Capitalism, Communism, Socialism and Anarchism.


  1. Create another spectrum matching at least 10 nations with the corresponding economic systems we’ve studied so far from less government control (on the left) to more government control (right). Have a 1 sentence explanation for each nation justifying its placement.

Capitalism, Utilitarianism, Socialism, Communism, Anarchism


Classical Economics — Free-market Capitalism

 Adam Smith’s initial conviction in a free-market Capitalist system had been severely battered by the Industrial Revolution. The poverty and suffering of so many seemed to be a direct result of his lassez-faire policies. It seemed that the idea of the invisible hand regulating the economy was one that sentenced millions to dangerous working conditions, poverty and hunger while others grew fantastically wealthy. However not everyone agreed that Smith’s ideas had lost their merit, in the early 1800’s a number of economists came to the defense of his ideas. Thomas Malthus (1766-1834) and David Ricardo (1772-1823): were two classical economists who further developed the laissez-faire doctrine.


Malthus on Population

In An Essay on the Principle of Population (1798), Malthus contended that the population was increasing in a geometric ratio, while the food supply was increasing only in an arithmetic ratio.  The inevitable result of population outstripping the food supply would be misery for most of humanity.  Some slowing of population growth might result from war, famine, and disease.  Malthus believed, however, that “moral restraint”-postponing marriage and practicing chastity until marriage would serve as the most effective way of limiting population growth. This belief that the food supply was limited meant that some people were going to be hungry and potentially starve. That took blame off of Smith’s Capitalist lassez-faire doctrine since the hunger and suffering of the poor was a natural phenomenon and not a result of Capitalism.


Ricardo on Wages

Influenced by Malthus’s work, Ricardo set forth what came to be known as the Iron Law of Wages.  In The Principles of Political Economy and Taxation (1817), he argued that wages would tend to hover around the subsistence level. This meant people would have little more money than required to survive on a day to day basis.  In Ricardo’s view, labor should be regarded like any other commodity whose price changed in accordance with supply and demand.  If the supply of labor was less than the demand for it, wages would increase.  When wages rose above the subsistence level, workers would be encouraged to have more children, thereby enlarging the labor supply.  In turn, if the supply of labor exceeded the demand, wages would decrease, causing workers to have fewer children, thus reducing the labor supply.  Ricardo concluded that it was useless to raise wages in an effort to improve workers’ lives, since higher wages would serve only to encourage them to have more children, thereby increasing the labor supply and forcing wages down once again.


The Retreat from Laissez-Faire

Jeremy Bentham (1748-1832)

Even with the defense of Malthus and Ricardo, many people knew the current socio-economic system was unfair and change was needed. The retreat from laissez-faire Capitalism began in earnest with Bentham.  Although Bentham believed in laissez-faire, he argued that in some instances the government should not be merely a passive policeman but should intervene on behalf of the poor.


Bentham developed the doctrine of utilitarianism in his Principles of Morals and Legislation (1789) and other writings.  Central to this doctrine was the belief that every human practice and institution should be evaluated in terms of its utility, which Bentham defined as the amount of happiness it provides.  In turn, he defined happiness as the presence of pleasure and the absence of pain.


For the most part, Bentham believed, the government could assure happiness (the most pleasure and the least pain) for the greatest number of people by permitting them the maximum possible amount of individual freedom.  If, however, the pains suffered by the many exceeded the pleasures enjoyed by the few, then the government could justifiably intervene to redress the balance.  In this way, Bentham began to develop the ideas that ultimately led to the creation of the twentieth-century welfare state.



Socialists urged that private ownership of the means of production, and perhaps also of the means of distribution, should be replaced by some form of community or state ownership.  This social ownership of property, the socialists argued, would insure that property would serve the interests of all the people.  The socialists also believed that people were–or could be educated to be-cooperative, rather than competitive, and that they should work together to promote their mutual well being. This then would combine the best of capitalism (private wealth and goods) with the best of communism (workers owning the means of production). Many socialists agreed on these general principles but varied widely in their  proposals outlining their conceptions of what a socialist society would be like and how it could be created.


Robert Owen (I771-1858)

Owen was one of the first Utopian Socialists to gain wide attention, After achieving an early success in the cotton textile industry; in 1799 Owen acquired part ownership of several textile mills at New Lanark in Scotland.  He improved the conditions of health and safety in the mills, increased the workers’ wages and reduced their hours, and provided them with decent housing.  Owen made a substantial profit, thereby demonstrating that successful industrial capitalism did not require the exploitation of labor.


Owen’s great dream, however, was to establish a socialist community.  Selling his interest in the New Lanark mills, he went to America where he bought land in Indiana.  In 1826, he established his community of New Harmony, where people would share both the ownership of property and the fruits of their labor.  Within a few years, New Harmony failed.  Owen returned to England and devoted the remaining years of his life to other reform projects.


The Count of Saint-Simon (1760-1825)

France produced a number of prominent Utopian Socialists.  Saint-Simon expressed his ideas in a number of works, including The New Christianity (1825).  Modern society, he believed, was shaped primarily by the nature of its industrial economy.  Therefore, the focus of government should be on economic, rather than political, issues.  Government should be directed by scientists and technicians who understood the operation of the modem industrial economy.  This managerial elite would direct the economy so it would serve the interests of all the people.  In this new society, all would willingly work for the benefit of society and all would be rewarded according to what they produced, although all workers would be assured that their needs would be met.



Like the socialists, the anarchists denounced capitalism for its exploitation of labor and favored the abolition of private property.  The anarchists went further, however, and demanded the destruction of the state itself, which they regarded as an instrument of exploitation and oppression. Only when the organized state was gone would people truly be free and the oppressive socio-economic system would collapse.