Types of Economic Systems
essentially three basic kinds of economic systems. If
people do things because "it's always been done that way,"
that is a traditional economy. You do it that way
because people in the past did it that way. If the government
tells businesses what to do, that is a command economy.
If people make whatever they want, and buy whatever they can
afford, often with some government regulation of business,
that is a market economy.
Who or what
done that way...
"it's always been done that way."
regime in charge.
the government said so.
market forces of supply and demand.
the incentive to make a profit drives business.
The Economic Transformation
of the United States
The history of
business in American is a story of the transformation of an
agricultural economy, or one based primarily on farming, to an
economy where capitalism, or private ownership of businesses,
In the beginning, the English saw the colonies as a business
investment. In short, the colonies existed for the betterment
of the mother country. To the colonists in America, business was
much more important than it was to those who lived back
In England, one simply could not be both engaged in business,
and call oneself a gentleman. To the aristocracy, the two were
mutually exclusive. In America, however, business was the
catalyst for the revolutionary changes that would come later.
From the time of settlement to the Revolution, the
political and social ideals that later spurred the Revolution
-democracy, independence and equality- grew
from American involvement in business.
Business in England
and the American Colonies
||Early stages of
agricultural in focus
|| Nobles and peasants
did not engage in business. Merchants were generally
considered lower class.
||Nearly everyone was involved in business
to some degree. Cash crops were necessary to help
||Land was inherited.
||Land was a commodity.
||Titles of nobility and
status were inherited.
||Trade could earn you
power and a gentleman's status.
||Slavery was outlawed.
||The slave trade was a
very profitable business.
||Finished goods for sale
in colonies and foreign nations.
||Raw materials (e.g.
timber, furs) and farm produce.
From Revolution to
During the 1800s
business and industry developed in America in different ways,
and much depended on geography. Because of the easy
natural power sources, the northern states were inclined to
develop manufacturing and other factory-related businesses. The Erie Canal
further helped factory-made goods, and people travel westward,
and eventually, railroads followed its path. With industry,
came wealth, and power. In comparison, the
southern states tended to rely upon farming, creating an
agricultural economy. As a result, cultural differences between northern
and southern states increased, as ways of life diverged.
in the 19th-century officially endorsed a laissez-faire
policy. They kept their "hands off" of business, letting
it run itself. The U.S. Government also tried to protect
American manufacturers by passing protective tariffs,
or taxes on imported goods. This made American goods seem
cheaper, more affordable. The government also issued
patents for new inventions, protecting the inventor from
having ideas stolen.
Following the Civil
War, industrialization in the United States advanced rapidly.
One reason for the dramatic economic transformation was that
rural workers and immigrants moved into the cities at an
amazing rate. By 1880, over 25% of the entire population
lived in cities. But railroad expansion was the key to
the rapid industrialization following the Civil War.
The first railroad
to connect the coasts was completed in 1869. It
connected the formerly remote rural settlements to distant
urban markets, and brought settlers west in search of land.
With the country linked together like this, some businesses
saw an opportunity to develop a national market emerge.
Nationwide department stores and mail-order catalog companies
grew to accommodate the increased demand for finished goods
across the nation.
Before the Civil
War, most business was owned by individuals or were
partnerships. After the war, corporations became more
popular. To build capital, a corporation
sells partial ownership in itself to investors, called
stockholders, and shares profits with them. The advantage
of a corporation, is that accountability is limited,
because a corporation is recognized by state law
as a separate person. So, if a corporation goes
bankrupt, it doesn't ruin the actual people involved, it just
As similar business
grew, they realized that they were competing with each other,
and lowering everyone's profits. Many of these companies
formed agreements to join together and control their industry.
These cartels, as the trade groups became known,
artificially lowered production to increase prices, and, with
them, profits. Sometimes, though, the cartels couldn't
stand up to deep recessions, or downturns in the economy.
Thieves or Great Leaders?
With the incredible
success of large corporations and trust, several crafty
businessmen became unbelievably wealthy. These
ultra-rich capitalists gave the time period its name, the
Gilded Age, because of their extravagant lifestyles.
thought they were the "Captains of Industry" because the men
helped create the modern economy based on business and
industry. Critics called them "Robber Barons" because of
the ruthless way these corporate executives tried to destroy
all competition and keep wages low. After the depression
of 1873, many large manufacturers began to drive smaller
companies out of business and take over those companies.
Sometimes corporations would join together, instead, forming a
trust, completely controlling the production and
sale of a product. Gaining
complete control of a market is known as having a monopoly.
To illustrate this,
consider that Andrew Carnegie emigrated to America with
almost nothing. He ended up one of the richest men ever,
controlling most of American steel production in the early
1900s. John D. Rockefeller controlled almost 90% of
oil-related business in the nation. He was so powerful,
he was able to force even the huge railroad companies to give him special
rates. John Pierpont "J.P." Morgan, an investment
banker worked with Rockefeller to accomplish such amazing
exploits. As an example of their success, Morgan and
Rockefeller, together in 1912, controlled over 100 corporations worth
over $22 billion . They would be worth over $400 billion
in 2003 money.
The Federal Government generally allowed business to operate
freely. Some of the abuses of big business, though, soon
called for government intervention. At first, states
tried to regulate the railroads. Then the Supreme Court
ruled in Wabash v. Illinois (1886) that only the
federal government has the authority to regulate railroads.
A year later, Congress passed the Interstate Commerce Act
the first federal regulatory agency, and tried to stop
railroad abuses and discrimination. Change continued,
and in 1890 Congress passed the Sherman Anti-Trust Act.
It allowed federal prosecution against any "combination in the
form of trusts or otherwise, or conspiracy, in restraint of
trade." Ironically, this law was used more against unions in
its early days, than against "big business."
It wasn't until the administration of Teddy Roosevelt that the
federal government was successful in combating the growing
power of trusts. Roosevelt argued that "trust-busting" would
protect the farmers, workers and consumers being taken
advantage of by huge mega-corporations. He hoped that by
regulating the offending companies, the economy of the entire
country would benefit.