Political and Economic Systems

In most of the world's countries, national power and authority are allocated to various individuals
and groups through politics, usually by means of compromises between conflicting interests.
Through politics, governments are elected or appointed, or, in some cases, created by armed
force. Governments have the power to make, interpret, and enforce the rules and decisions that
determine how countries are run.

The rules that governments make encompass a wide range of human affairs, including
commerce, education, marriage, medical care, employment, military service, religion, travel,
scientific research, and the exchange of ideas. A national government—or, in some cases, a state
or local government—is usually given responsibility for services that individuals or private
organizations are believed not to be able to perform well themselves. The U.S. Constitution, for
example, requires the federal government to perform only a few such functions: the delivery of
mail, the taking of the census, the minting of money, and military defense. However, the
increasing size and complexity of U.S. society has led to a vast expansion of government
activities.

Today, the federal government is directly involved in such areas as education, welfare, civil
rights, scientific research, weather prediction, transportation, preservation of national resources
such as national parks, and much more. Decisions about the responsibilities that national, state,
and local governments should have are negotiated among government officials, who are
influenced by their constituencies and by centers of power such as corporations, the military,
agricultural interests, and labor unions.

The political and economic systems of nations differ in many ways, including the means of
pricing goods and services; the sources of capital for new ventures; government-regulated limits
on profits; the collecting, spending, and controlling of money; and the relationships of managers
and workers to each other and to government. The political system of a nation is closely
intertwined with its economic system, refereeing the economic activity of individuals and groups
at every level.

It is useful to think of the economy of a nation as tending toward one or the other of two major
theoretical models. At one theoretical extreme is the purely capitalist system, which assumes that
free competition produces the best allocation of scarce resources, the greatest productivity and
efficiency, and the lowest costs. Decisions about who does what and who gets what are made
naturally as consumers and businesses interact in the marketplace, where prices are strongly
influenced by how much something costs to make or do and how much people are willing to pay
for it. Most enterprises are initiated by individuals or voluntary groups of people. When more
resources are needed than are available to any one person (such as to build a factory), they may
be obtained from other people, either by taking out loans from banks or by selling ownership
shares of the business to other people. High personal motivation to compete requires private
ownership of productive resources (such as land, factories, and ships) and minimal government
interference with production or trade. According to capitalist theory, individual initiative, talent,
and hard work are rewarded with success and wealth, and individual political and economic
rights are protected.

At the other theoretical extreme is the purely socialist system, which assumes that the wisest and
fairest allocation of resources is achieved through government planning of what is produced and
who gets it at what cost. Most enterprises are initiated and financed by the government. All
resources of production are owned by the state, on the assumption that private ownership causes
greed and leads to the exploitation of workers by owners. According to socialist theory, people
contribute their work and talents to society not for personal gain but for the social good; and the
government provides benefits for people fairly, on the basis of their relative needs, not their
talent and effort. The welfare of the society as a whole is regarded as being more important than
the rights of any individuals.

There are, however, no nations with economic systems at either the capitalist or the socialist
extreme; rather, the world's countries have at least some elements of both. Such a mixture is
understandable in practical terms.

In a purely capitalist system, on the one hand, competition is seldom free because for any one
resource, product, or service, a few large corporations or unions tend to monopolize the market
and charge more than open competition would allow. Discrimination based on economically
irrelevant social attitudes (for example, against minorities and women, in favor of friends and
relatives) further distorts the ideal of free competition. And even if the system is efficient, it
tends to make some individuals very rich and some very poor. Thus, the United States, for
example, tries to limit the extreme effects of its basically capitalist economic system by mean of
selective government intervention in the free-market system. This intervention includes tax rates
that increase with wealth; unemployment insurance; health insurance; welfare support for the
poor; laws that limit the economic power of any one corporation; regulation of trade among the
states; government restrictions on unfair advertising, unsafe products, and discriminatory
employment; and government subsidization of agriculture and industry.

On the other hand, a purely socialist economy, even though it may be more equitable, tends
toward inefficiency by neglecting individual initiative and by trying to plan every detail of the
entire national economy. Without some advantages in benefits to motivate people's efforts,
productivity tends to be low. And without individuals having the freedom to make decisions on
their own, short-term variations in supply and demand are difficult to respond to. Moreover,
underground economies spring up to match realities of supply and demand for consumer
products. Therefore, many socialist systems allow some measure of open competition and
acknowledge the importance of individual initiative and ownership. Most economies throughout
the world today are undergoing change—some adopting more capitalist policies and practices,
and others adopting more socialist ones.