Chapter 26: Development of Economic Systems

The world's people function in a variety of economic systems. Chapter 26 focuses on the development of these systems in different parts of the world.

Section 1 describes capitalist and mixed economies. Capitalism requires four factors of production—land, labor, capital, and entrepreneurs—and has the following characteristics: private ownership, individual initiative, competition, freedom of choice, and profit or loss. Mixed economies share the same factors and characteristics as pure capitalism, but also include government regulation.

Section 2 examines emerging economies. Newly developed nations such as those in Eastern Europe, the Middle East, Asia, and South America have had rapid industrial growth in recent years. On the other hand, developing nations have little or no industry and are largely agricultural. Many developing and newly developed nations have adopted communism and socialism as economic systems because they viewed western capitalism as another form of colonialism. Today, however, some socialist nations encourage free enterprise to break their reliance on foreign countries.

Section 3 narrates the collapse of Soviet communism. Beginning in the mid-1980s, the Soviet economy faced major problems—a gross national product (GNP) that grew only 2 or 3 percent each year, products that failed to compete in world markets, and a huge oppressive state bureaucracy that slowed the economy to the point of stagnation. Under Mikhail Gorbachev's perestroika program, Soviet officials allowed greater freedom in the economy. After six years of economic reforms, the Soviet Union fell apart and several independent Soviet republics formed a confederation called the Commonwealth of Independent States.

Section 4 examines the global economy. When nations specialize in the goods that they can produce most efficiently, the total world production is greater, the total cost of all products is less, the average cost of any product is less, and all consumers benefit. Supporters of unrestricted international trade claim that it promotes this kind of efficient production. Obstacles to successful international trade in developing nations include lack of national unity, lack of capital, military rule, rapid population growth, and poor health care.