. 3
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allocation of scarce resources, and nearly all other
economic activity, stems from ritual, habit, or cus-
tom. Habit and custom also dictate most social
behavior. Individuals are not free to make deci- Student Web Activity Visit the Economics: Principles
sions based on what they want or would like to and Practices Web site at epp.glencoe.com and click
on Chapter 2”Student Web Activities for an activity
have. Instead, their roles are defined by the cus-
on the role of tradition in Inuit society.
toms of their elders and ancestors.

taught these skills to the next generation. The
Many societies”such as the central African
Inuit hunted, and it was traditional to share the
Mbuti, the Australian Aborigines, and other
spoils of the hunt with other families. If a walrus
indigenous peoples around the world”are exam-
or bear was taken, hunters divided the kill evenly
ples of traditional economies. The Inuits of north-
into as many portions as there were heads of fam-
ern Canada in the 1800s provide an especially
ilies in the hunting party. The hunter most
interesting case of a traditional economy.
responsible for the kill had first choice, the second
For generations, Inuit parents taught their chil-
hunter to help with the kill chose next, and so on.
dren how to survive in a harsh climate, make
Later, members of the hunting party shared
tools, fish, and hunt. Their children, in turn,
their portions with other families, because the
Inuit shared freely and generously with one
another. The hunter had the honor of the kill and
Traditional Economy
the respect of the village, rather than a physical
claim to the entire kill. Because of this tradition of
sharing, and as long as skilled hunters lived in the
community, a village could survive the long harsh
winters. This custom was partially responsible for
the Inuit™s survival for thousands of years.

The main strength of a traditional economy is
that everyone knows which role to play. Little
uncertainty exists over WHAT to produce. If you
are born into a family of hunters, you hunt. If you
are born into a family of farmers, you farm.
Likewise, little uncertainty exists over HOW to
produce, because you do everything the same way
your parents did.
Finally, the FOR WHOM question is deter-
mined by the customs and traditions of the society.
Life is generally stable, predictable, and continuous.

The main drawback of the traditional economy
Way of Life This woman uses the methods for is that it tends to discourage new ideas and new
weaving passed on by her ancestors. What drives
ways of doing things. The strict roles in a tradi-
economic activity in a traditional economy?
tional society have the effect of punishing people

Ten years ago, this kind of aggressive attempt to
plant a seed of capitalism in her young students
TEACHING CAPITALISM would have landed Miss Shilyayeva in the gulag

[Soviet labor camp]. Today she is among a growing
number of elementary school teachers in Russia
who have seen the future and know that in order to
In Nadeshda Shilyayeva™s first-grade class, the
survive, her students will need to be able to com-
words of the day are “profit” and “inventory.” As
pute interest rates.
the kindly teacher bounces her pointer along the
“If we don™t teach children about the market
curly blackboard script, her 26 students at School
economy from an early age,” said Miss Shilyayeva,
139 sing the syllables in unison.
57, “they will end up like us. The older generation
“Now what do we call the money left over in
knew nothing about economics. We never gave it a
Misha™s wallet after all his expenses are paid?”
thought. As a result, we are like blind kittens,
asked Miss Shilyayeva. “Profit!” shouted a pig-
bumping into walls, looking for a way out.”
tailed 7-year-old girl named Dasha. The teacher
”The New York Times, Feb. 9, 1997
continued, “And why does Misha need this
Critical Thinking
Silence. Then a small voice ventured, “So he
can””a pause”“expand his store?”
1. Analyzing Information What topics are the
“Excellent, Andrushka!” boomed the teacher™s
first graders studying?
2. Finding the Main Idea Why does the
teacher believe it is important for her stu-
dents to learn about the market economy?

who act differently or break rules. The lack of aspect of the Soviet economy. It determined needs,
progress leads to a lower standard of living than in decided goals, and set production quotas for major
other types of economic societies. industries. If the State Planning Commission wanted
growth in heavy manufacturing, it shifted resources
from consumer goods to that sector. If it wanted to
Command Economies strengthen national defense, it directed resources to
the production of military equipment and supplies.
Other societies have a command economy,
one in which a central authority makes most
of the WHAT, HOW, and FOR WHOM decisions.
Economic decisions are made by the government: The main strength of a command system is
the people have little, if any, influence over how the that it can change direction drastically in a rela-
basic economic questions are answered. tively short time. The former Soviet Union went
from a rural (or primitive) agricultural society to
Examples a leading industrial nation in just a few decades.
It did so by emphasizing heavy industry and
There are few command economies in the world
industrial growth rather than the production of
today, but they still can be found in North Korea
consumer goods.
and Cuba. Until recently, the People™s Republic of
During this period, the central planning agency
China, the communist bloc countries of Eastern
shifted resources around on a massive scale.
Europe, and the former Soviet Union also had
Consumer goods were virtually ignored, and
command economies.
when the country faced a shortage of male work-
In the former Soviet Union, for example, the gov-
ers on construction projects, the government put
ernment made the major economic decisions. The
women to work with picks and shovels.
State Planning Commission directed nearly every

Another advantage is that there is little uncer- discourages even the smallest adjustments. As a
tainty in this type of economy. People do not result, command economies tend to lurch from
have to worry about what they will study, or one crisis to the next”or collapse completely as in
where they will work, or if they might lose their the case of the former Soviet Union.
job because these decisions are made for them. Finally, people with new or unique ideas find it
Most command economies tend to provide mini- difficult to get ahead in a command economy.
mum levels of education, health, and other pub- Rewards for individual initiative are rare. Each per-
lic services at little or no cost to its people. son is expected to perform a job in a factory, in the
bureaucracy, or on a farm, according to the eco-
Disadvantages nomic decisions made by central planners.
One disadvantage of a command system is that
it is not designed to meet the wants of consumers,
Market Economies
even though many basic needs are provided. In the
case of Soviet industrial development, generations In a market economy, people and firms act
were forced to do without such consumer goods as in their own best interests to answer the
cars, home appliances, and adequate housing. WHAT, HOW, and FOR WHOM questions. In
People often were told to sacrifice for the good of economic terms, a market is an arrangement that
the state and the benefit of future generations. allows buyers and sellers to come together in order to
A second disadvantage is that the system does exchange goods and services. A market might be in a
not give people the incentive to work hard. In specific location, such as a farmers™ market or a flea
most command economies, workers with different market. A list of phone numbers for lawn-mowing
skills and responsibilities receive similar wages. In services posted on a local bulletin board also acts as
addition, people seldom lose their jobs, regardless a market. As long as a mechanism exists for buyers
of the quality of their work. As a result, many peo- and sellers to get together, a market can exist.
ple work just hard enough to fill the production In a market economy, people™s decisions act as
quotas set by planners. votes. When consumers buy a particular product,
This can have unexpected results. At one time in they are casting their dollar “votes” for that product.
the former Soviet Union, central planners set pro- After the “votes” are counted, producers know what
duction quotas for electrical motors to be measured people want. Because producers are always looking
in tons of output per year. Workers soon discovered for goods and services that consumers will buy, the
that the easiest way to fill the quota was to add consumer plays a key role in determining WHAT to
weight to the motors. As a result, Soviet workers produce.
made some of the heaviest electrical motors in the
world. They also produced some of the heaviest Examples
chandeliers in the world for the same reason. Some
Many of the largest and most prosperous
were so heavy that they fell from ceilings.
economies in the world, such as the United States,
A third weakness is that the command econ-
Canada, Japan, South Korea, Singapore, Germany,
omy requires a large decision-making bureaucracy.
France, Great Britain, and other parts of Western
Many clerks, planners, and other administrators
Europe, are based on the concept of a market econ-
are needed to operate the system. Most decisions
omy. While there are also many significant differ-
cannot be made until after consulting a number
ences among these countries, the common thread of
of people and processing a large amount of paper-
the market binds them together.
work. These procedures slow decision making and
raise the costs of production.
Yet a fourth weakness of a command economy is
One advantage of a market economy is that,
that it does not have the flexibility to deal with
over time, it can adjust to change. During the gaso-
minor, day-to-day problems. Even when some
line shortage of the 1970s, for example, consumers
change is needed, the sheer size of the bureaucracy

reduced their demand for large, gas-guzzling auto- on the other hand, spend their money on the
mobiles and increased their demand for smaller, goods and services they prefer. Meanwhile, indi-
fuel-efficient ones. Because auto makers still viduals are free to choose where and when they
wanted to sell cars, they moved resources from the want to work, and if they should invest further in
production of large cars to small ones. their own education and training.
When gas prices finally declined in the mid- A third strength is the relatively small degree of
1980s, the trend slowly began to reverse. government interference. Except for certain impor-
Consumers wanted to buy large cars again, so auto tant concerns, such as national defense and envi-
makers began making large, although more fuel- ronmental protection, the government tries to stay
efficient, vehicles again. Changes in a market econ- out of the way so that buyers and sellers can go
omy, then, tend to be gradual. Unlike the about their business. As long as competition exists,
traditional economy, change is neither prohibited the market economy tends to take care of itself.
nor discouraged. Unlike the command economy, A fourth advantage is that decision making is
change is neither delayed because of bureaucracy, decentralized, or not concentrated in the hands of
nor suddenly forced on people by others. a few. Literally billions”if not trillions”of individ-
A second major strength of the market economy ual economic decisions are made daily.
is its high degree of individual freedom. Producers Collectively, these decisions direct scarce resources
may make whatever they think will sell. They also into uses that consumers favor. Because individuals
decide the HOW question by producing their make these decisions, everyone has a voice in the
products in the most efficient manner. Consumers, way the economy runs.

Command Economy

Economic Choices Consumers line up to buy scarce goods at a marketplace in the western Ukraine. In a
command economy, like the former Soviet Union, many products are unavailable or in short supply, while
other overproduced goods sit in warehouses. Who is responsible for making the basic economic
decisions in a command economy?

A fifth strength of the market economy is the A sixth strength is the high degree of consumer
incredible variety of goods and services available satisfaction. In a market economy, almost every-
to consumers. Almost any product can and will be one can satisfy his or her wants because the choice
produced if a buyer for it exists. Recent products one group makes does not mean that another
include everything from Internet bookstores to 24- group cannot have what it wants. To illustrate, if
hour cable television cartoon and comedy net- 51 percent of the people want blue shirts, and 49
works to ultrasound devices that keep the percent want white ones, people in both groups
neighbor™s dog out of your yard. In short, if a can still get what they want. Unlike an election,
product can be imagined, it can be produced in the minority does not have to live with choices the
hopes that people are willing to buy it. majority makes.

Figure 2.1

Comparing Economic Systems

• Sets forth certain economic roles • Capable of dramatic change in a • Able to adjust to change gradually
for all members of the community short time
• Individual freedom for everyone
• Stable, predictable, and • Little uncertainty over choice
• Lack of government interference

continuous life of career, where to work, or
• Decentralized decision making
losing job
• Incredible variety of goods
• Many basic education, public
and services
health, and other public services
available at little or no cost
• High degree of consumer

• Discourages new ideas and new • Does not meet wants and needs • Rewards only productive resources;
ways of doing things of consumers does not provide for people too
young, too old, or too sick to
• Stagnation and lack of progress • Lacks effective incentives to get
people to work

• Lower standard of living
• Workers and businesses face
• Requires large bureaucracy, which
uncertainty as a result of
consumes resources
competition and change
• Has little flexibility to deal with
• Does not produce enough public
small, day-to-day changes
goods such as defense, universal
• New and different ideas education, or health care
discouraged, no room for
• Must guard against market failures

Using Charts Every society has an economic system. The type of system that is best for a society
depends on the ability of that system to satisfy people™s wants and needs, and to fulfill its economic
goals. What conditions must be met for a market economy to be effective?

Disadvantages competitive, allowing producers to compete with
one another to offer the best value for the price.
One of the disadvantages of the market econ-
Second, resources must be reasonably free to move
omy is that it does not provide for the basic needs
from one activity to another. Workers, for example,
of everyone in the society”some members of the
need the freedom to change jobs if they have a bet-
society may be too young, too old, or too sick to
ter opportunity elsewhere. Producers need the free-
care for themselves. These people would have diffi-
dom to produce goods and services in the best way
culty surviving in a pure market economy without
they know how. Third, consumers need access to
assistance from government or private groups.
adequate information so that they can weigh the
Another disadvantage of a market economy is
alternatives and make wise choices.
that it does not provide enough of the services that
When markets fail, some businesses become too
people value highly. For example, private markets
powerful and some individuals receive incomes
cannot adequately supply a system of justice,
much larger than that justified by their productivity.
national defense, universal education, or compre-
Because of this, we often have to rely on government
hensive health care. This is because private produc-
to ensure that sufficient competition, freedom of
ers concentrate on providing products they can
resource movement, and adequate information exist.
sell. Therefore, government must provide these
services, paid for with tax dollars.
A third disadvantage of a market economy is the
relatively high degree of uncertainty that workers
and businesses face as the result of change.
Workers, for example, worry that their company Worth Its Weight Many currencies get their names
will move to another city or country in order to from words meaning “weight” because merchants
lower the cost of production. Employers worry that in ancient times would weigh coins made from pre-
cious metals to assess their value. Among these cur-
another company will produce a better and less
rencies are the Spanish peseta, the Mexican peso,
expensive product, thereby taking their customers.
and the Italian lira.
Finally, market economies can fail if three condi-
tions are not met. First, markets must be reasonably

Checking for Understanding Applying Economic Concepts
1. Main Idea Using your notes from the graphic 6. Tradition Give an example of an economic
organizer activity on page 33, explain how a activity from a traditional economy that is
market economy determines who will receive seen in today™s market economy. Describe how
the benefits from what is produced and sold. important this activity is for the economy.
2. Key Terms Define economy, economic system,
traditional economy, command economy,
market economy.
3. Describe the characteristics of a traditional 7. Analyzing Information How are roles
economy. defined in a traditional economy?
4. Identify the advantages and disadvantages of 8. Making Comparisons How are the WHAT,
a command economy. HOW, and FOR WHOM questions answered
in the command and market economies?
5. Identify the advantages and disadvantages of
a market economy. Practice and assess key social studies skills with
the Glencoe Skillbuilder Interactive Workbook,
Level 2.

Making Comparisons
When you make comparisons, you determine similarities and differences
among ideas, objects, or events. Making comparisons is an important skill
because it helps you choose among alternatives.

Learning the Skill “The West supports Russia, despite the corruption there,
because of the former Soviet state™s economic and military stature
Follow these steps to make comparisons:
on the world stage,” said a World Bank spokesperson. “The
• Identify or decide what will be compared. reason we need to help is that the whole of the former Soviet Union
represents not only an economic threat or economic opportunity,
• Determine the common area or areas in which
but politically it does have a somewhat different weight than some
comparisons can be drawn.
other countries because of its defense and offensive capabilities.”
• Look for similarities and differences within these The spokesperson also noted, “I don™t doubt that there has been
areas. corrupt practice . . . but the
overall question of global
Practicing the Skill stability is also an issue.”
Read the passages below, then answer the questions 1. What is the topic of
that follow. these passages?
2. How are the passages
Viewpoint A similar? Different?
Russians are readily embracing the middle-class lifestyle
3. What conclusions
of Western democracies. Nothing better symbolizes the
can you draw about
changes sweeping this nation than the flea market that has
the opinions of the
taken over Moscow™s Exhibition of Economic Achievements
park. Built as a shrine to the Soviet system, it is now the
center of free enterprise in the city. Muscovites swarm here to
get deals on all sorts of goods. A park pavilion once housed
an exhibit celebrating the Soviet space program. It has now
become an auto showroom. A few space capsules remain,
scattered among the used cars. But the crowds are here to see
the new Fords and Jeeps.
Statue of farm workers at the
Viewpoint B Exhibition of Economic
Besides the inefficiency of many Russian factories,
capitalism there is not yet the same as it is in the United
States. Private capital apparently is steered into projects
controlled by small groups in power. There is a strong
criminal organization in Russia that imposes serious costs
Survey your classmates about an issue in the news.
on anybody wishing to do business.
Summarize the opinions and write a paragraph
comparing the different opinions.
Practice and assess key social studies skills with the
Glencoe Skillbuilder Interactive Workbook, Level 2.
Evaluating Economic Performance
Main Idea Key Terms
The social and economic goals of the United States Social Security, inflation, fixed income
include economic freedom, economic security, and
economic equity. Objectives
After studying this section, you will be able to:
Reading Strategy
1. Describe the basic economic and social goals used
Graphic Organizer As you read the section, indentify
to evaluate economic performance.
seven major economic and social goals by completing
2. Evaluate the trade-offs among economic and social
a graphic organizer like the one below.

Applying Economic Concepts
Economic and social goals Freedom and Equity Read to find out how freedom
and equity are related to the level of satisfaction
people have with their economic system.

very economic system has goals such as
Cover Stor y financial security and freedom to carry out
economic choices. Goals are important
Minimum Wage Bill Spark
because they serve as benchmarks that help us
determine if the system meets most”if not all”of
a Division our needs. If the system falls short, then we may
demand laws to change the system until the needs
Democrats and Repub-
are met.
licans in Congress are fig
ing over a $1 increase in
federal minimum wage
Economic and Social Goals
to $6.15 an hour from $5
The bill is backed In the United States, people share many
President Clinton. It broad social and economic goals. While it
opposed by many Repu
might be difficult to find them listed in any one
cans and business grou
place, they are repeated many times in the state-
including the U.S. Cham
the ments that friends, relatives, community leaders,
of Commerce and Minimum-wage workers
n of might get a raise.
National Federatio and elected officials make. We can categorize those
Independent Busines statements into seven major economic and social
age increase . . . would
ents say a minimum-w goals.
d would hurt busi-
in the loss of jobs an
med the fight as a
. . . . [Proponents] fra
nesses g
. . . “The overwhelmin
en™s and family issue. Economic Freedom
wom .”
imum wage are women
rity who receive the min
majo In the United States, people place a high
ril 8, 1999
”The Boston Globe, Ap
value on the freedom to make their own eco-
nomic decisions. People like to choose their

Economic Security
Economic and Social Goals
Americans desire protection from such adverse
economic events as layoffs and illnesses. States
have set up funds to help workers who lose their
jobs. Many employers have insurance plans to
cover the injuries and illnesses of their workers.
On the national level, Congress has set up Social
Security”a federal program of disability and
retirement benefits that covers most working
More than 90 percent of American workers par-
ticipate in the Social Security system. Retirees,
survivors, disabled persons, and medicare recipi-
ents are eligible for benefits. Survivors are spouses
and children of deceased persons covered by
Social Security. Medicare provides health insur-
Economic Equity Our nation values the ideal ance for persons 65 or older.
of equal pay for equal work. What legislation
safeguards economic equity?
Full Employment
When people work, they earn income for them-
own occupations, employers, and uses for their
selves while they produce goods and services for oth-
money. Business owners like the freedom to
ers. If people do not have jobs, however, they cannot
choose where and how they produce. The belief in
support themselves or their families, nor can they
economic freedom, like political freedom, is one
produce output for others. As a result, people want
of the cornerstones of American society.
their economic system to provide as many jobs as
Economic Efficiency
Most people recognize that resources are scarce
and that factors of production must be used wisely.
If resources are wasted, fewer goods and services
can be produced and fewer wants and needs can be
satisfied. Economic decision making must be effi-
cient so that benefits gained are greater than costs
incurred. Economic Indicators Economic indicators are
economic statistics reflecting the general direction
of the economy. Some indicators are termed lead-
Economic Equity ing indicators because they tend to lead or fore-
cast the direction of the economy or business
Americans have a strong sense of justice, impar-
cycle; the stock market is known as a leading indi-
tiality, and fairness. Many people, for example,
cator. Another important indicator is the U.S.
believe in equal pay for equal work. As a result, it
Department of Labor™s quarterly Employment Cost
is illegal to discriminate on the basis of age, sex, Index, which measures the rate of change in
race, religion, or disability in employment. When employee compensation. Like the average hourly
it comes to selling products, most people feel that earnings data, it allows economists to keep a beat
advertisers should not be allowed to make false on wage inflation, which is often seen as a catalyst
claims about their products. Many states even to overall inflation.
have “lemon laws” that allow new car buyers to
return their cars if they have too many repairs.

Price Stability Future Goals
Another goal is to have stable prices. If inflation” These goals are ones on which most people seem
a rise in the general level of prices”occurs, work- to agree. As our society evolves, however, it is
ers need more money to pay for food, clothing, entirely possible that new goals will be added. Do
and shelter. People who live on a fixed income” people feel that a cleaner environment is important
an income that does not increase even though enough to be added to the list of goals? Should we
prices go up”find that bills are harder to pay and add the preservation of an endangered species, such
that planning for the future is more difficult. as the timber wolf and the wild tiger, to the list? In
High rates of inflation can discourage business the end, Americans must decide on the goals impor-
activity. When there is inflation, interest rates tant to them.
tend to increase. High interest rates discourage Other countries and their leaders and citizens
businesses both from borrowing and spending. must also make important choices regarding their
Price stability makes budgeting easier and adds a goals. For example, an economic goal for many
degree of certainty to the future. developing nations from the 1950s through the mid-
1970s was to increase the goods and services they
produced. The idea was that big gains in production
Economic Growth would “trickle down” to the poorest people.
The last major goal of most Americans is eco- By the mid-1990s, many developing nations had
nomic growth. Most people hope to have a better achieved regular increases in their production.
job, a newer car, better clothes, their own home, Living conditions for the poor in most countries,
and a number of other things in the future. Growth however, did not improve much. Today, basic
is needed so that people can have more goods and human needs have become a focus of development
services. Because the nation™s population is likely policies. These needs include food, shelter, health,
to grow, economic growth is necessary to meet protection, and the freedom to make choices about
everyone™s needs. one™s life.

Economic and Social Goals

Economic Security One as-
pect of economic security is
protecting people against the
economic loss of natural disas-
ters. What federal program
protects economic security for
working people?

a highway may stimulate economic growth in one
area of a community. At the same time, it could
threaten the stability and security of merchants
Job Outlook who run stores in the downtown area.
The freedom to make our own economic deci-
Even an increase in the minimum wage involves
sions”including choosing our occupations and
a conflict of goals. On one hand, supporters of the
where to work”is a cherished right for many
increase might argue that an increase is the equi-
people. Information available on the World
table, or “right,” thing to do. Opponents might
Wide Web can provide help with making those
argue that increasing the minimum wage would do
decisions. One useful online source is the
more harm than good. A higher minimum wage
Occupational Outlook Handbook from the U.S.
increases costs of production for firms that pay
Bureau of Labor Statistics. It provides job
this wage. In addition, it restricts the freedom of
descriptions, earnings, job outlooks, and educa-
employers to pay wages that they think are fair.
tional requirements about hundreds of occupa-
So, how are trade-offs among goals resolved? In
tions”from “able seamen” to “zoologists.”
the case of the minimum wage, people compare
their estimates of the costs against their estimates
of benefits”and then exercise their right to vote
for political candidates that support their posi-
Trade-Offs Among Goals tion. If the majority of people feel that it is too
People sometimes have different ideas about low, then it will be raised. The minimum wage
how to reach a goal. At other times, the then tends to stay at a higher level for a while
goals themselves might conflict with one another until the majority of people feel that it again
because even economic policies have opportunity needs changed.
costs. For example, a policy that keeps foreign- For the most part, people, businesses, and gov-
made shoes out of the United States could help the ernment usually are able to resolve conflicts
goal of full employment in the local shoe industry. among goals. Fortunately, the economic system of
This policy might work against individual freedom, the United States is flexible enough to allow
however, if people ended up with fewer choices of choices, accommodate compromises, and still sat-
shoes to buy. Or, a new shopping center built near isfy the majority of Americans most of the time.

Checking for Understanding Applying Economic Concepts
1. Main Idea Using your notes from the graphic 6. Freedom and Equity How do laws against
organizer activity on page 41, explain why it false advertising promote the goal of
is important to set economic goals. economic equity?
2. Key Terms Define Social Security, inflation,
fixed income.
3. Describe the seven major goals of the United 7. Analyzing Information Why is economic
States economy. growth an important goal?
4. Explain how an increase in the minimum 8. Making Generalizations What characteris-
wage might involve a conflict of goals. tics does the United States economy have
that allow it to resolve conflicts among
5. Describe some of the economic choices peo-
ple and producers in the United Stales are
free to make. Practice and assess key social studies skills with
the Glencoe Skillbuilder Interactive Workbook,
Level 2.

APRIL 5, 1999
number whenever the user visits a Web site. The
The Internet provides millions with quick
idea of consumers unknowingly leaving behind an
access to information. There are trade-offs,
ID number when on-line set off howls of protest,
however. One is privacy. Powerful database
and Intel promised to ship the Pentium III with
technologies have made it possible to
the identifier in the “off” position.
quickly gather personal information on What™s happening is that people are worried
millions of Americans who cruise the Web. that their essential democratic right to privacy is
being surreptitiously eroded. The idea of the Net
building “dossiers” without customers™ knowledge
The Internet and conjures up images of secret files, police states, and
the loss of freedom. That will create a backlash
the Right of that can only injure Internet commerce. . . .
Equally germane is a truism of the Information

Privacy Age: Information is a hugely valuable good in its
own right. From that perspective, Net companies
have been appropriating information that right-
fully does not belong to them. It is akin to stealing
Like all new technologies, the Internet is cre-
for Net companies to gather, use, and resell infor-
ating undreamed-of conflicts. Case in point: The
mation on consumers without asking permission.
very nature of the Web makes it easy to collect
Net companies have to realize that individu-
and collate information about people who shop
als have the right of first refusal on the informa-
at or even simply visit a Web site, without their
tion of their lives. For companies to use it, they
knowledge. Indeed, using such informa-
have to say “please” and exchange something for
tion is an important part of the busi-
the information. The Net marketplace has made
ness model of many Net companies.
progress in posting privacy policies on Web sites
But Net companies are discover-
and curbing intrusions. But time is running out
ing that consumers also care about
for companies to agree on rules of the game to
their privacy. Examples of a grow-
protect privacy before the backlash does perma-
ing concern are [evident] every-
nent damage to the future of E-commerce.
where. GeoCities had to settle with
the Federal Trade Commission ”Reprinted from April 5, 1999 issue of Business Week, by special
permission, copyright © 1999 by The McGraw-Hill Companies, Inc.
when it sold personal data collected
from children without parents™ con-
sent. Microsoft Corp. was red-faced
Examining the Newsclip
and apologetic when it was discovered
that the Windows 98 operating system 1. Analyzing Information What issue is the article
could be used to create a giant database of addressing?
information about Microsoft customers. Perhaps 2. Drawing Conclusions What solution to protecting the
most notable was the response to Intel Corp.™s right of privacy does the article present? In your opinion
plans to ship its new Pentium III microprocessor is this a good solution, or should others be suggested?
with a component that could transmit a serial

Capitalism and Economic Freedom
Key Terms
Main Idea capitalism, free enterprise, voluntary exchange, private
Under capitalism, the basic economic decisions are
property rights, profit, profit motive, competition, con-
made through the free interaction of individuals
sumer sovereignty, mixed economy, modified private
looking out for their own best interests.
enterprise economy
Reading Strategy Objectives
Graphic Organizer As you read the section, complete
After studying this section, you will be able to:
a graphic organizer like the one below to identify
1. Explore the characteristics of a free enterprise system.
the five characteristics of a free enterprise economy.
2. Describe the role of the entrepreneur, the consumer,
Then provide an example of each.
and government in a free enterprise economy.
Characteristic Example Applying Economic Concepts
Voluntary Exchange Read to find out why voluntary
exchange is one of the most popular features of a
market economy.

Cover Stor y market economy is normally based on a sys-
tem of capitalism, where private citizens,
many of whom are entrepreneurs, own the
Madame C.J. Walker factors of production. Free enterprise is another term
rah Breedlove”was a used to describe the American economy. In a free
adame C.J. Walker”Sa
r, widely considered to be enterprise economy, competition is allowed to flour-
ly successful entrepreneu
high s
millionairess. Walker wa ish with a minimum of government interference.
first African-American
for her business acumen
n and respected not only
know cy
litical and social advoca
t for her inspirational po
Competition and Free Enterprise
and her philanthropy. rmer
The daughter of fo
slaves, Walker worked A free enterprise economy has five important
til she
as a washerwoman un characteristics”economic freedom, voluntary
devised a hair care and exchange, private property rights, the profit motive,
needs of
ing system to meet the and competition.
men in
African-American wo
1905. Supervising the m
ucts, she Economic Freedom
ture of a variety of prod
also developed an en Individuals as well as businesses enjoy economic
marketing network, he
Madame C.J. Walker
freedom, the first characteristic of capitalism.
s of
at employed thousand
red in Indianapolis, th
te People, for example, have the freedom to choose
men and was the la
African-American wo tion. their occupation and their employer. To a lesser
d business in the na
African-American owne train-
men™s independence by extent, they can choose to work where and when
Walker encouraged wo el.
g as a powerful role mod they want. They may work on the west coast, east
ing others and by servin
coast, or in Alaska. They may work days, nights,
ll of Fame, ©1998
”National Women™s Ha
indoors, outdoors, in offices, or in their homes.

With economic freedom, people can choose to can deposit it in the bank, hide it under a mattress,
have their own business or to work for someone else. or exchange it for goods or services. If they spend
They can apply for jobs, and they have the right to their money on a product, they must believe that
accept or reject employment if offered. Economic the item being purchased is of greater value to
freedom also means that people can leave jobs and them than the money they gave up.
move on to others that offer greater opportunity. With voluntary exchange, sellers also have many
Businesses also enjoy economic freedom. They opportunities to sell their products. If they
are free to hire the best workers, and they have the exchange their goods and services for cash, they
freedom to produce the goods and services they must feel that the money received is more valuable
feel will be the most profitable. Businesses can than the product being sold, or they would not sell
make as many or as few goods and services as they in the first place. In the end, the transaction bene-
want, and they can sell them wherever they fits both buyer and seller or it would not have
please. They have the right to charge whatever taken place. Both the buyer and the seller obtained
price they feel is profitable, and they are free to something they believed had more value than the
risk success or failure. money or products they gave up.

Private Property Rights
Voluntary Exchange
A second characteristic of capitalism is voluntary Another major feature of capitalism is the concept
exchange”the act of buyers and sellers freely and of private property rights, the privilege that entitles
willingly engaging in market transactions. people to own and control their possessions as they
Moreover, transactions are made in such a way that wish. Private property includes both tangible items
both the buyer and the seller are better off after the such as houses and cars, and intangible items such
exchange than before it occurred. Buyers, for exam- as skills and talents. People are free to make deci-
ple, can do many things with their money. They sions about their property and their own abilities.

Figure 2.2

Characteristics of Free Enterprise and Capitalism
Economic Freedom Voluntary Exchange
People may choose their jobs, employers, Buyers and sellers may engage freely and
and how to spend their money. willingly in market transactions.
Businesses may choose what
products to sell and what
Producers and sellers compete with one another
to charge for them.
to attract consumers, while lowering costs.
Consumers compete with one another
Private Property Profit Motive
to obtain the best products
Rights People and organizations

at the lowest prices.
may improve their
People may control
$ material well-being by
their possessions
making money.
as they wish. SOLD

Using Charts The terms “free enterprise” and “capitalism” describe a market system in which
the factors of production are owned by private citizens, and businesses are allowed to compete
for profits with minimal governmental interference. What items are included under the
category of private property?

What, however, is profit? Consider the earlier
Free Enterprise
case of voluntary exchange. Remember that the
buyer gives up money to obtain a product, and the
seller gives up the product to obtain money. Unless
both parties believe they will be better off afterward
than before, neither will make the exchange. When
exchange takes place, it does so only because both
parties feel they will make a profit.
Profit, then, is the extent to which persons or
organizations are better off at the end of a period
than they were at the beginning. The profit motive”
the driving force that encourages people and organ-
izations to improve their material well-being”is
largely responsible for the growth of a free enterprise
system based on capitalism.

Finally, capitalism thrives on competition”the
struggle among sellers to attract consumers while
lowering costs. Competition is possible because pri-
vate individuals, acting as entrepreneurs, own the fac-
tors of production and have the freedom to produce
Economic Freedom The freedom to own a the products they think will be the most profitable.
business is a hallmark of free enterprise. What
Because capitalism is based on freedom and vol-
other characteristics does a free enterprise
untary exchange, buyers compete to find the best
economy have?
products at the lowest prices. The result is that
goods and services are produced at the lowest cost
and are allocated to those who are willing and able
They have the right to use or abuse their property as
to pay for them.
long as they do not interfere with the rights of others.
Private property gives people the incentive to
The Role of the Entrepreneur
work, save, and invest. When people are free to do
as they wish with their property, they are not afraid
The entrepreneur is one of the most impor-
to use, accumulate, or lend it. Private property
tant people in the economy. The entrepre-
gives people the incentive to be successful; they
neur organizes and manages land, capital, and
know that if they succeed they will be able to keep
labor in order to seek the reward called profit.
any rewards they might earn.
Entrepreneurs are the ones who start up new
businesses such as restaurants, automobile repair
Profit Motive shops, Internet stores, and video arcades. They
include people who may have worked for others at
Under free enterprise and capitalism, people are
one time, but have decided to quit and start their
free to risk their savings or any part of their wealth
own businesses. Entrepreneurs want to “be their
in a business venture. If the venture goes well for
own boss” and are willing to risk everything to
them, they will earn rewards for their efforts. If
make their dreams come true.
things go poorly, they could lose part or all of their
Many entrepreneurs fail. Of course, others sur-
investment. The very possibility of financial gain,
vive and manage to stay in business with varying
however, encourages many people to become entre-
degrees of success. A few, and only a very few, man-
preneurs, or those who risk entering business in
age to become fantastically wealthy and famous.
hopes of earning a profit.

Well-known entrepreneurs include Bill Gates, who and stay in business, the original entrepreneur may
founded Microsoft, John Johnson of Johnson have to improve the quality or cut prices, which
Publishing Co., and Mary Kay Ash, who founded means that customers can buy more for less. In the
Mary Kay Cosmetics. end, the entrepreneur™s search for profits can lead
Despite the high rate of failure among entrepre- to a chain of events that involves new products,
neurs, the dream of success is often too great to greater competition, more production, higher qual-
resist. The entrepreneur is both the sparkplug and ity, and lower prices for consumers.
the catalyst of the free enterprise economy. When
an entrepreneur is successful, everybody benefits.
The Role of the Consumer
The entrepreneur is rewarded with profits, a grow-
ing business, and the satisfaction of a job well
In the United States, consumers often are
done. Workers are rewarded with more and better-
thought of as having power in the economy
paying jobs. Consumers are rewarded with new and
because they determine which products are ulti-
better products. The government is rewarded with
mately produced. For example, a company may try
a higher level of economic activity and larger tax
to sell a certain item to the public. If consumers
receipts. These receipts can be used to build roads,
like the product, it will sell and the producer will be
schools, and libraries for people not even con-
rewarded for his or her efforts. If consumers reject
nected with the original entrepreneur.
the product and refuse to purchase it, the firm may
Nor does it stop there. Successful entrepreneurs
attract other firms to the industry who rush in to
“grab a share” of the profits. To remain competitive

The Role of the Entrepreneur Law Enforcement Officer

Law enforcement work can range
from keeping order in public places
and investigating crimes to control-
ling traffic and lecturing the public
on safety.
The Work
Every level of government needs
law enforcement officers. In small
communities, officers may be called
on to do many tasks. In larger cities,
work may be highly specialized,
including chemical and firearms
analysis, fingerprint identification, and harbor and bor-
der patrol. The challenges of the work are numerous.
Working long hours, risking injury, and taking the
chances involved in pursuing and apprehending law-
breakers demands dedication to the job.
Building a Business John Johnson started his
publishing business in 1942 with a $500 loan on
his mother™s furniture. Today, Johnson Most law enforcement jobs are covered by civil service
Publishing is the world™s largest African regulations. Usually candidates must be at least 21 years
American“owned publishing company. What
old and must be U.S. citizens. Most jobs require a high
aspects of the economy benefit when an entre-
school education or more. The more specialized jobs
preneur succeeds?
require college training.

even though computers were barely known just 20
The Role of the Consumer
years ago. Consumers buy products from all over
the world, and more and more often they use the
Internet to find product reviews and other infor-
mation about the goods before they purchase.
Consumers, then, play an important role in the
American free enterprise economy. They have a say
in what is”and what is not”produced when they
express their wants in the form of purchases in the
marketplace. The dollars they spend are the “votes”
used to select the most popular products.

The Role of Government
Government”whether national, state, or
local”has an economic role to play that
reflects the desires, goals, and aspirations of its cit-
izens. Government has become involved in the
economy because Americans want its involvement.
Consequently, it has become a protector, provider
of goods and services, consumer, regulator, and
promoter of national goals. The role of govern-
ment is normally justified whenever its benefits
outweigh its costs.
Consumer Sovereignty The principle of con-
sumer sovereignty says that in a competitive
economy, customers determine what is pro-
duced by choosing what they will buy. Why do As protector, the United States government
firms have to sell products customers want in
enforces laws such as those against false and mis-
order to earn a profit?
leading advertising, unsafe food and drugs, envi-
ronmental hazards, and unsafe automobiles. It
also enforces laws against abuses of individual
go out of business. Consumer sovereignty freedoms. Employers, for example, cannot dis-
describes the role of the consumer as sovereign, or criminate against workers because of their age,
ruler, of the market. More commonly, this is gender, race, or religion. In short, the government
expressed in a different way by saying that “the cus- protects property rights, enforces contracts, and
tomer is always right.” generally tries to make sure that everyone follows
In recent years, producers have had outstanding the “rules of the game” to ensure an efficient and
successes with various products, including home fair economy.
video games, sport utility vehicles, and personal
computers. Many other products”including “New”
Provider and Consumer
Coke, celery flavored Jell-O, chewable toothpaste
in tablet form, and bacon you cook in your All levels of government provide goods and serv-
toaster”were promptly rejected by consumers. ices for citizens. The national government, for
Consumers™ wants change constantly as modern example, supplies defense services. State govern-
communications and travel expose people to new ments provide education and public welfare. Local
ideas and products. Today, Americans purchase governments provide, among other things, parks,
more home computers every year than TV sets, libraries, and bus services.

In the process of providing, government con- consumers usually think that the government is in
sumes factors of production just like any other a better position to monitor and regulate such
form of business. In recent years the government activities.
has grown so large that it is now the second largest
consuming unit in the economy, trailing only the
Promoter of National Goals
consumer sector.
Government reflects the will of a majority of its
people. As a result, many government functions
Regulator reflect people™s desire to modify the economic sys-
In its role as a regulator, the national govern- tem to achieve the economic goals of freedom, effi-
ment is charged with preserving competition in ciency, equity, security, full employment, price
the marketplace. It also oversees interstate com- stability, and economic growth. A government pro-
merce, communications, and even entire indus- gram such as Social Security, as well as laws dealing
tries such as banking and nuclear power. Many with child labor and the minimum wage, reveal
state governments regulate insurance rates and how Americans have modified their free enterprise
automobile registrations. Local governments even economy.
regulate business activity with building and zoning Because of these modifications, and because
permits. there are some elements of tradition in our econ-
The regulatory role of government is often con- omy, the United States is said to have a mixed
troversial. Most businesses do not like to be told economy, or a modified private enterprise
how to run their affairs, and they argue that con- economy. In a mixed economy people carry on
sumers can always sue in court if there are prob- their economic affairs freely, but are subject to
lems. On the other hand, many consumers feel some government intervention and regulation.
that they do not always know when they are at This system most likely will undergo further change
risk”as in the case of potential food poisoning as the goals and objectives of the American people
from unsafe food preparation practices. As a result, change.

Checking for Understanding 6. Identify the role of the government in a free
1. Main Idea Using your notes from the graphic enterprise economy.
organizer activity on page 46, explain how
Applying Economic Concepts
basic economic decisions are made under
7. Voluntary Exchange Cite at least three exam-
ples of voluntary exchanges you made this
2. Key Terms Define capitalism, free enterprise, week. How are you better off by having
voluntary exchange, private property rights, made the exchanges? Did the person with
profit, profit motive, competition, consumer whom you exchanged gain too? How?
sovereignty, mixed economy, modified private
enterprise economy.
3. List the five major characteristics of a free
8. Understanding Cause and Effect Americans
enterprise system.
have varying economic goals. How have
4. Describe the role of the entrepreneur. these often-competing goals modified our
5. Explain the importance of the consumer in a free enterprise economy?
free enterprise economy. Practice and assess key social studies skills with
the Glencoe Skillbuilder Interactive Workbook,
Level 2.

include many of the Disney and his workers made full
world™s best-known use of . . . new technologies.
films, including the Today, Walt Disney Company is
Indiana Jones series, and, a business giant. With income from
his most famous work, four motion-picture units (Walt
the Star Wars series. Disney Pictures, Touchstone
Lucas has won many awards, Pictures, Hollywood Pictures, and
the most prestigious of which is Miramax Films), television (Disney
the Irving G. Thalberg Award, owns ABC), videocassettes, record-
given by the Academy of Motion ings, theme parks, resorts, publica-
Pictures. Lucas seems, indeed, to tions, and merchandise based on
have found his purpose. Disney characters, “Disney” is prac-
tically an industry unto itself. This
huge media presence has brought
A Household Name: Disney characters to millions of
people around the world. Walt
Walt Disney
More Than Star Wars: Disney combined economic suc-
cess with a cultural impact that
George Lucas (1901“1966)
few, if any, others have achieved.
The name Disney is
known around the world.
“The crossroad in my career,” Yet as a young man, Walt
filmmaker giant George Lucas Disney was a failed film-
recalls, “happened very early on. maker operating out of a
I was in an automobile accident. makeshift studio in a
Before that I wasn™t really a very garage in Los Angeles.
good student. I wasn™t really Disney had moved there
focused in my life. I came through from Kansas City, where he
an automobile accident that I had helped create cartoon
should never have survived. And, advertisements for showings
in the process of that, I realized in movie theaters. Dreaming
that there must be some purpose of making full-scale movies,
for me to be here and I™d better fig- he headed to Los Angeles”
ure out what it is. . . . That really then, as now, the film industry
motivated me in a very direct way capital”to pursue his dream.
which sent me off, ultimately, For five years, he struggled to
searching for the things I loved and make ends meet. Then he
winding up in the film business.” released an animated film featuring
Examining the Profiles
George Lucas did more than a character that would soon become
1. Making Comparisons What similari-
just “wind up” in the film busi- a household name: Mickey Mouse.
ties are there in the early lives of Lucas
ness: he conquered it. Lucas, as a The year was 1928, and the film
and Disney?
writer, director, producer, and film industry was about to explode: the
business owner, has had a hand in ability to add sound to movies had 2. Evaluating Information Both Lucas
more than half of the top 20 box just been developed; color movies and Disney have influenced millions of
people through their films. Do you view
office hits of all time. His credits would emerge in just a few years.
this as something positive or something
negative? Explain your answer.

Section 1 • When goals conflict, society
evaluates the costs and benefits
Economic Systems (pages 33“39) of each in order to pro-
mote one goal over
• Every society has an economy or economic system, another; many election
a way of allocating goods and services to satisfy the issues reflect these conflicts
WHAT, HOW, and FOR WHOM questions. and choices.
• In a traditional economy, the major economic deci- • People™s goals are likely to
sions are made according to custom and habit. Life change in the future, as our
in these economies tends to be stable, predictable, economy evolves.
and continuous.
• In a command economy, government makes the
Section 3
major economic decisions. Command economies
can change direction drastically in a short time,
Capitalism and
focusing on whatever the government chooses to
Economic Freedom (pages 46“51)
• Command economies tend to have little economic
• Capitalism is a competitive economic system in
freedom, few consumer goods, and little uncertainty.
which private citizens own the factors of production.
• A market economy features decentralized decision
• The five characteristics of capitalism are economic
making with people and firms operating in their own
freedom, voluntary exchange, private property
rights, profit motive, and competition.
• A market economy adjusts gradually to change, has a
• The entrepreneur is the individual who organizes
high degree of individual freedom and little govern-
land, capital, and labor for production in hopes of
ment interference, is highly decentralized, and offers
earning a profit: the profit motive is the driving
a wide variety of goods and services that help to sat-
force in capitalism.
isfy consumers™ wants and needs.
• In capitalism, firms are in business to make a profit.
To do this they must offer products consumers want
Section 2 at competitive prices.
• Consumer sovereignty states that the consumer is
Evaluating Economic Performance the one who decides WHAT goods and services to
(pages 41“44)
• The national government plays the role of protector,
• The social and economic
provider and consumer, regulator, and promoter of
goals of U.S. society
economic goals.
include economic free-

dom, economic effi- The United States has a mixed economy, or a
ciency, economic equity, modified private enterprise economy, in which its
economic security, full citizens carry on their economic affairs freely but
employment, price stabil- are subject to some government intervention and
ity, and economic regulation.

Reviewing the Facts
Section 1 (pages 33“39)
1. Describe the main strength and weakness of a
Self-Check Quiz Visit the Economics: Principles
traditional economy.
and Practices Web site at epp.glencoe.com and
click on Chapter 2”Self-Check Quizzes to prepare 2. List the five major weaknesses of the command
for the chapter test. economy.
3. Describe how a market economy, a traditional
economy, and a command economy adapt to
Identifying Key Terms change.
On a separate sheet of paper, write the letter of the key term
Section 2 (pages 41“44)
that best matches each statement below.
4. Describe the seven major economic goals which
a. capitalism f. inflation
most Americans agree on.
b. command economy g. private property rights
c. consumer sovereignty h. profit motive 5. Explain how society resolves the conflict among
d. economic system i. traditional economy goals which conflict.
e. fixed income j. voluntary exchange
Section 3 (pages 46“51)
1. the idea that people rule the market
6. State how people and businesses benefit from eco-
2. a society™s organized way of providing for its
nomic freedom.
people™s wants and needs
7. Explain the importance of the entrepreneur in a
3. the driving force that encourages people
free enterprise economy.
and organizations to try to improve their
material well-being 8. Provide examples of how the government acts as
protector, provider and consumer of goods and
4. a rise in the general level of prices
services, regulator, and promoter of national goals.
5. a system in which the factors of production
are owned by private citizens
Thinking Critically
6. the right and privilege to control one™s own
1. Drawing Conclusions Some people believe the
7. an economic system in which ritual, habit, and profit motive conflicts with the goals of economic
custom dictate most economic and social security and equity. Do you agree or disagree? Why
behavior or why not?
8. an economic system in which a central authority 2. Understanding Cause and Effect How can
makes economic decisions the movement of people and the communication
9. the situation in which the money an individual of ideas affect the type of economic system a
receives does not increase even though prices go up society has?
10. the act of buyers and sellers freely conducting 3. Making Inferences What incentive does owning
business in a market private property give people?

4. Making Comparisons Reproduce the following of incremental reasoning and cost-benefit analysis in
diagram on a separate sheet of paper. Then, in the Chapter 1 on pages 22 and 23 to explain why you
spaces indicated, identify several elements of com- would or would not like to live in a society with a
mand and tradition in the U.S. economy that make different economic system.
it a mixed, or modified private enterprise, economy.

Technology Skill
economy Using the Internet Search for information on the
Internet about the Russian economy. Use a search
engine. Type in the word Russia. After typing in
Russia, enter words like the following to focus your
search: goods and services, government controls, competi-
tion, economic freedom, and transition economy.
As you analyze the information that you find,
economy answer these questions: What progress has Russia
achieved in its transition to a market economy?
What problems remain? Write a one-page paper that
Applying Economic Concepts describes your findings.
1. Tradition Most people tip for service in restau-
rants, but not for service at clothing stores or gas
stations. Explain how this illustrates economic
Making Comparisons Compare the figures
behavior by tradition rather than by market or
below and then answer the questions that
2. Freedom and Equity Explain the role you as a
Figure 1 Figure 2
consumer must play in obtaining economic equity
Economic Economic
for yourself. security equity
3. Voluntary Exchange How does the principle of A B C
voluntary exchange operate in a market economy?

Math Practice 1. If the diagram in Figure 1 represents
“needs” and “wants,” how would you
If the typical minimum-wage employee works 40 hours label the two diagrams in the figure?
a week and takes two weeks off for vacation, how Explain your choice.
much will that person earn annually if the minimum 2. If the two circles in Figure 2 represent the
wage is $5.15/hour? How much extra will that person goals of economic security and economic
equity, where would you place a federal
earn for every $0.25 increase per hour in the wage?
policy such as the minimum wage law”in
area A, B, or C? Explain your choice.
Thinking Like an Economist 3. If you were to change economic security
to economic efficiency in Figure 2, how
Not all societies have market economies. Some have would this change your placement of the
command or traditional economies. Use the discussion minimum wage policy? Or, would it?
Practice and assess key social studies skills with
the Glencoe Skillbuilder Interactive Workbook,
Level 2.

Do you work at a
business? Belong to a
church? Participate in a club?
Chances are these institutions
play a significant role in your
life. To learn more about how
business organizations and
economic institutions operate,
view the Chapter 4 video lesson:
Business Organizations

Chapter Overview Visit the Economics: Principles
and Practices Web site at epp.glencoe.com and


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