It’s crucial that every adult American understands the US economic system.
This plays a role in the way we vote, live, and handle finances. Every economic system has managers and entrepreneurs combining labor, resources, and technology to produce and distribute services and goods. However, the way a country organizes these different elements speaks volumes.
Keep reading to learn the who, what, and when of the US economic system.
What is the Economic System?
A capitalist economy is when a small group of people who control large amounts of capital make the most essential economic decisions. This term was often used to describe the United States economy up until recently. Today, the US has what’s considered a mixed economy.
A mixed economy allows the government and private enterprises to make decisions. Many Americans disagree on where to draw the line between the two, but there’s been a success by reorganizing the key elements of the economic system.
The first element for the economic system is the resources available. From large bodies of water to fertile soil, the US is rich in resources. Additionally, the waterways and connected states bind America together in a single economic unit.
The second element is the labor that transforms natural resources into goods. The number of workers and their productivity levels determines the health of the economy. The quality of work may be one of the most important labor factors and requires those with extensive knowledge and training to be successful.
Other resources must be organized and directed as efficiently as possible. Traditionally, the managerial system flows from the chief at through lower levels of management to the floor workers. However, more and more businesses are beginning to flatten this structure and distribute more power amongst teams.
To acquire the resources necessary for producing goods and services, corporations must first have the financial resources available. To do so, many will raise the capital by selling stocks and bonds to insurance companies, banks, investors, and others. The federal government has set rules and regulations for safety and information for investors.
Who Created the Economic System Categories?
Karl Marx and Friedrich Engels changed the world when they published their Communist Manifesto in 1848. In this, they pointed out the uneven distribution of wealth in capitalism and predicted an uprising for a more even distribution of wealth. Since then, countries have debated about the right way to construct an economic system.
Capitalism is based on private ownership of production and economic freedom. Other characteristics include free competition and supply and demand. These make it possible for private companies to give the best deals while still raising prices in accordance with the demand for them.
Communism was created by Karl Marx’s outraged by the growing gap between the poor and the rich. It was designed on principles set to eliminate this gap and correct the issues caused by capitalism. The most notable characteristic being the elimination of private ownership of property.
Socialism is similar to communism in that it gives the major means of production of the people, either directly or through the government. Additionally, the wealth should be shared more equally among the people. The goal isn’t to eliminate private ownership, but to narrow the gap between the rich and the poor.
Being a mixed economy, the US has combined characteristics from the different types of economic systems. This change encouraged other nations to do the same, ensuring there’s not a fully communist or capitalist country in the world. The categories were created to shed light on differing economic systems.
When Was the US Economic System Created?
The current US economic system took a long time to develop, and it’s still seeing changes as society progresses. It began as an agricultural economy before turning into the industrial revolution and later becoming the mixed economy we have today. This wasn’t without seeing a fair share of problems.
Alexander Hamilton was the first to believe the US should acquire economic growth through diversified shipping, banking, and manufacturing. Upon achieving congressional authority, he created the First Bank of the United States in 1791. This charter regrettably ended one year before the War of 1812, just when they would need Treasury the most.
Although it hurt the U.S. to be without banking assistance, the economy grew by replacing the cost of imports with new factories. In 1846, after the closure of the Second Bank of the U.S., the Independent Treasury began handling federal revenues.
Since the 19th century, the country has reorganized its elements multiple times and become the world’s third-largest economy. The currency is the US dollar and our economy is measured mostly by Gross Domestic Product (GDP). Banks are the exception, as they use gross national income instead.
The GDP considers all the economic input when measuring economic growth. However, when it measures the final product, not all the parts manufactured to make the product are included. Exports are incorporated because they’re made in the country, but imports aren’t because they’re made elsewhere.
GDP doesn’t include unpaid services. It also doesn’t consider the standard of living when determining economic levels. Things like the effect on the environment and other factors will only be measured once they’re valued by the country.
Countries that focus their budgets on what drives economic growth have higher tax rates. This money is used primarily to create a skilled workforce for better production quality.
Today, Americans can get a loan to begin their own business when they feel they can add to economic growth. Learn about this with a click of a button.
Final Thoughts on the Economic System
You may be surprised by some of the things you read here today, but make no mistake, knowledge is power. As you’ve learned here today, the system continues to change as society progresses and experiences pitfalls. Now that you understand the economic system and how the U.S. structures its own, you’ll be able to help change the country to value the standard of living.
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