Etymology: derived from

Greek oikonomos
Economy "household manager,"
from oikos "house" and
nemein "to manage"
 ECONOMY
 The production, distribution, and
consumption of things you can buy

Production:
Distribution:
Consumption:
Private vs. Public

 What’s the
difference?
 Can you think of
an example?
Private vs. Public
Private
Controlled
by the
people

Public
Controlled
by the
gov’t
Laissez faire – hands off

Whose
hands?
Off
what?
The Free Market
 In a free market economy, people are free to buy
and sell whatever they want.

 Obviously, we do not live in a completely free

market economy.

 There are some restrictions on what we can buy and

sell.

E. Napp
In the United States today, there are some
products that we cannot legally buy. We
can buy a rifle but not this gun.
E. Napp
Laissez-faire
 Laissez-faire is the doctrine that states that the
government should not intervene in the marketplace.

 It means “let them do (as they please)”.

 In a free market, the government does not regulate

the economy.

E. Napp
Adam Smith believed that an Invisible Hand
existed or that the market would always fix
itself. E. Napp
 The Invisible Hand is the idea that the
economy fixes itself. If there is demand
for a good that currently does not exist in
the market, some enterprising entrepreneur
will eventually produce it.
E. Napp
Competition and self-interest allow markets
to function effectively.
E. Napp
Competition and Self-Interest
 Competition is the struggle among producers for the
dollars of consumers.

 Self-interest is acting on behalf of one’s personal

gain.

 Competition and self-interest make markets work.

E. Napp
Competition leads to lower prices and
better quality. When consumers have
choices, producers must offer
worthwhile products.
E. Napp
 Adam Smith
Wrote: The Wealth of Nations
British economist Adam Smith
promoted “laissez faire” capitalism
•The #1 economic system during
the Industrial Revolution
Capitalism – economic system in
which the means of production are
privately owned and operated for
profit.
Laissez Faire (hands off) – policy
allowing businesses to operate with
Smith little or no government interference.
Private Ownership Profit Motive

Capitalism
Free Enterprise Market Economy

Competition
 Adam Smith
Smith’s Argument:
•Free market forces (supply and
demand) would produce more
goods at lower prices
•This would encourage capitalists to
invest their money in new ideas
• Claimed that the “invisible hand” of
capitalism led individuals who
worked for their own good to
promote the good of the community
• “The Father of Economics”
Smith
 Thomas Malthus
• 1798 Wrote: Essay on the
Principle of Population
• Predicted that population
growth would outpace food
supply

Malthus
 Thomas Malthus
• Warned that the poor would
suffer from starvation
• Only option= people must have
fewer children

Malthus
 Thomas Malthus
• Predictions did NOT come true
because food supply grew
even faster than population

Malthus
 David Ricardo
• British economist that
agreed with Malthus
• The poor were having too
many children
• “Iron law of wages” stated
that population and wages
are connected and go
through a cycle…
• When wages are high
families have more children
• When wages are low
families have less children
Ricardo
 David Ricardo’s Iron Law of Wages

High Wages 
Workers have
more Children

Shortage of Workers Surplus of Workers

 Higher Wages  Lower Wages

Lower Wages 
Workers have
fewer Children
 David Ricardo

• Believed that laissez

faire was the best cure
for poverty (Malthus,
Smith)
• NOT business
regulation or
government
intervention
• Advised families to be
hard workers, thrifty,
and have a small
family Ricardo
Socialism – system in which the people as a whole rather than
private individuals own all property and operate all businesses.

• Claim that
industrial capitalism
had created a large
gap between the
rich and poor
• Cared less about
individual
ownership rights
and more about the
interests of society
 Utopian Socialism

• Sought to create self-sufficient

communities
• All property and work would
be shared
• Wealth would be equal
• Fighting would end
Scotland: Robert Owen set up
a Utopian factory community
•Supplied good housing,
education, and fair wages

Owen
 Karl Marx
German philosopher Karl Marx
promoted “scientific socialism”
•claimed it was more realistic than
utopian socialism

• 1848: teamed up
with German
economist
Friedrich Engels
and published
The Communist
Manifesto
Engels Marx
 Communism
Communism – a form of socialism
that sees class struggle between
employers and employees as
inevitable.

Marx
 Communism

In The Communist Manifesto

Marx argues:
• History was a class struggle
between the bourgeoisie (wealthy
capitalists), and the proletariat
(working class)

• To make profits, the bourgeoisie

exploited the proletariat (how???)

• Capitalism created prosperity for

a few and poverty for many
 Communism

In The Communist Manifesto

Marx argues:
• The Proletariat will eventually
revolt and overthrow the
capitalists to make a new society
• The P would take control of the
means of production and create a
classless communist society where
wealth and power would be shared

• With communism, all the evils of

the industrial revolution would end
Marx’s Industrial Age Social Pyramid

Bourgeoisie
(capitalists,
the “haves,”
the oppressors)

Proletariat
(workers, the “have-nots,”
the oppressed)
 Communism
• Called for an international struggle
to bring down capitalism
• Slogan = “workers of the world
unite!”
• Socialist political
parties formed in
Western Europe
• By 1900: the
standard of living
for the working
class improved
and communism
lost popularity
 • 1917: revolutionaries toppled
Communism
Czar Nicholas II in Russia and
• 1900s: most people still felt set up the first communist
stronger ties to their state
nationality and county rather
than their economic class
• No worldwide communist
revolution