Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Central characteristics of capitalism include capital accumulation, competitive markets, , private property, property rights recognition, self-interest, economic freedom, meritocracy, work ethic, consumer sovereignty, profit motive, entrepreneurship, commodification, voluntary exchange, wage labor and the production of commodities.
Economists, historians, political economists, and sociologists have adopted different perspectives in their analyses of capitalism and have recognized various forms of it in practice. These include laissez-faire or free-market capitalism, anarcho-capitalism, state capitalism, and welfare capitalism. Different forms of capitalism feature varying degrees of , public ownership,
Capitalism in its modern form emerged from Agrarian society in England, as well as Mercantilism practices by European countries between the 16th and 18th centuries. The Industrial Revolution of the 18th century established capitalism as a dominant mode of production, characterized by Factory and a complex division of labor. Through the process of globalization, capitalism spread across the world in the 19th and 20th centuries, especially before World War I and after the end of the Cold War. During the 19th century, capitalism was largely unregulated by the state, but became more regulated in the post–World War II period through Keynesianism, followed by a return of more unregulated capitalism starting in the 1980s through neoliberalism.
Market economies have existed under many forms of government and in many different times, places, and . Modern industrial capitalist societies developed in Western Europe in a process that led to the Industrial Revolution. Capitalist economies promote economic growth through accumulation of capital, however a business cycle of economic growth followed by recession is a common characteristic of such economies.
Other terms sometimes used for capitalism:
|
The term "capitalist", meaning an owner of capital, appears earlier than the term "capitalism" and dates to the mid-17th century. "Capitalism" is derived from capital, which evolved from capitale, a late Latin word based on caput, meaning "head"—which is also the origin of "chattel" and "cattle" in the sense of movable property (only much later to refer only to livestock). Capitale emerged in the 12th to 13th centuries to refer to funds, stock of merchandise, sum of money or money carrying interest.James Augustus Henry Murray. "Capital". A New English Dictionary on Historical Principles. Oxford English Press. 2. p. 93. By 1283, it was used in the sense of the capital assets of a trading firm and was often interchanged with other words—wealth, money, funds, goods, assets, property and so on.
The Hollantse (holländische) Mercurius uses "capitalists" in 1633 and 1654 to refer to owners of capital. In French, Étienne Clavier referred to capitalistes in 1788,E.g., "L'Angleterre a-t-elle l'heureux privilège de n'avoir ni Agioteurs, ni Banquiers, ni Faiseurs de services, ni Capitalistes ?" in Étienne (1788) De la foi publique envers les créanciers de l'état : lettres à M. Linguet sur le n° CXVI de ses annales p. 19 four years before its first recorded English usage by Arthur Young in his work Travels in France (1792).Arthur Young. Travels in France. In his Principles of Political Economy and Taxation (1817), David Ricardo referred to "the capitalist" many times.Ricardo, David. Principles of Political Economy and Taxation. 1821. John Murray Publisher, 3rd edition. English poet Samuel Taylor Coleridge used "capitalist" in his work Table Talk (1823).Samuel Taylor Coleridge. Tabel The Complete Works of Samuel Taylor Coleridge . p. 267. Pierre-Joseph Proudhon used the term in his first work, What is Property? (1840), to refer to the owners of capital. Benjamin Disraeli used the term in his 1845 work Sybil. Alexander Hamilton used "capitalist" in his Report of Manufactures presented to the United States Congress in 1791.
The initial use of the term "capitalism" in its modern sense is attributed to Louis Blanc in 1850 ("What I call 'capitalism' that is to say the appropriation of capital by some to the exclusion of others") and Pierre-Joseph Proudhon in 1861 ("Economic and social regime in which capital, the source of income, does not generally belong to those who make it work through their labor"). Karl Marx frequently referred to the "capital" and to the "capitalist mode of production" in (1867).MEW, 23, & Das Kapital. Kritik der politischen Oekonomie. Erster Band-Verlag von Otto Meissner (1867) Marx did not use the form capitalism but instead used capital, capitalist and capitalist mode of production, which appear frequently.The use of the word "capitalism" appears in Theories of Surplus Value, volume II. ToSV was edited by Kautsky. Due to the word being coined by socialist critics of capitalism, economist and historian Robert Hessen stated that the term "capitalism" itself is a term of disparagement and a misnomer for economic individualism.Hessen, Robert (2008) "Capitalism", in Henderson, David R. (ed.) The Concise Encyclopedia of Economics p. 57 Bernard Harcourt agrees with the statement that the term is a misnomer, adding that it misleadingly suggests that there is such a thing as "capital" that inherently functions in certain ways and is governed by stable economic laws of its own.Harcourt, Bernard E. (2020) For Coöperation and the Abolition of Capital, Or, How to Get Beyond Our Extractive Punitive Society and Achieve a Just Society, Rochester, NY: Columbia Public Law Research Paper No. 14-672, p. 31
In the English language, the term "capitalism" first appears, according to the Oxford English Dictionary (OED), in 1854, in the novel The Newcomes by novelist William Makepeace Thackeray, where the word meant "having ownership of capital".James Augustus Henry Murray. "Capitalism" p. 94. Also according to the OED, Carl Adolph Douai, a German Americans Socialism and abolitionist, used the term "private capitalism" in 1863.
England began a large-scale and integrative approach to mercantilism during the Elizabethan Era (1558–1603). A systematic and coherent explanation of balance of trade was made public through Thomas Mun's argument England's Treasure by Forraign Trade, or the Balance of our Forraign Trade is The Rule of Our Treasure. It was written in the 1620s and published in 1664.
European , backed by state controls, subsidies and monopoly, made most of their profits by buying and selling goods. In the words of Francis Bacon, the purpose of mercantilism was "the opening and well-balancing of trade; the cherishing of manufacturers; the banishing of idleness; the repressing of waste and excess by sumptuary laws; the improvement and husbanding of the soil; the regulation of prices...".Quoted in
After the period of the proto-industrialization, the British East India Company and the Dutch East India Company, after massive contributions from the Mughal Bengal,Om Prakash, " Empire, Mughal", History of World Trade Since 1450, edited by John J. McCusker, vol. 1, Macmillan Reference USA, 2006, pp. 237–240, World History in Context. Retrieved 3 August 2017 inaugurated an expansive era of commerce and trade. These companies were characterized by their colonialism and Expansionism powers given to them by nation-states. During this era, merchants, who had traded under the previous stage of mercantilism, invested capital in the East India Companies and other colonies, seeking a return on investment.
During the Industrial Revolution, industrialists replaced merchants as a dominant factor in the capitalist system and effected the decline of the traditional handicraft skills of , guilds and journeyman. Industrial capitalism marked the development of the factory system of manufacturing, characterized by a complex division of labor between and within work process and the routine of work tasks; and eventually established the domination of the capitalist mode of production.
Industrial Britain eventually abandoned the protectionist policy formerly prescribed by mercantilism. In the 19th century, Richard Cobden (1804–1865) and John Bright (1811–1889), who based their beliefs on the Manchester School, initiated a movement to lower tariffs. In the 1840s Britain adopted a less protectionist policy, with the 1846 repeal of the Corn Laws and the 1849 repeal of the Navigation Acts. Britain reduced tariffs and import quota, in line with David Ricardo's advocacy of free trade.
Industrialization allowed cheap production of household items using economies of scale, while rapid population growth created sustained demand for commodities. The imperialism of the 18th-century decisively shaped globalization.
After the First and Second Opium Wars (1839–60) and the completion of the British conquest of India by 1858, vast populations of Asia became consumers of European exports. Europeans colonized areas of sub-Saharan Africa and the Pacific islands. Colonisation by Europeans, notably of sub-Saharan Africa, yielded valuable natural resources such as rubber, diamonds and coal and helped fuel trade and investment between the European imperial powers, their colonies and the United States:
From the 1870s to the early 1920s, the global financial system was mainly tied to the gold standard.
In the United States, the term "capitalist" primarily referred to powerful businessmen until the 1920s due to widespread societal skepticism and criticism of capitalism and its most ardent supporters.
Contemporary capitalist societies developed in the West from 1950 to the present and this type of system continues throughout the world—relevant examples started in the United States after the 1950s, France after the 1960s, Spanish miracle, Poland after 2015, and others. At this stage most capitalist markets are considered developed and characterized by developed private and public markets for equity and debt, a high standard of living (as characterized by the World Bank and the IMF), large institutional investors and a well-funded banking system. A significant managerial class has emerged and decides on a significant proportion of investments and other decisions. A different future than that envisioned by Marx has started to emerge—explored and described by Anthony Crosland in the United Kingdom in his 1956 book The Future of Socialism and by John Kenneth Galbraith in North America in his 1958 book The Affluent Society, 90 years after Marx's research on the state of capitalism in 1867.
The postwar boom ended in the late 1960s and early 1970s and the economic situation grew worse with the rise of stagflation. Monetarism, a modification of Keynesianism that is more compatible with laissez-faire analyses, gained increasing prominence in the capitalist world, especially under the years in office of Ronald Reagan in the United States (1981–1989) and of Margaret Thatcher in the United Kingdom (1979–1990). Public and political interest began shifting away from the so-called collectivist concerns of Keynes's managed capitalism to a focus on individual choice, called "remarketized capitalism".
The end of the Cold War and the dissolution of the Soviet Union allowed for capitalism to become a truly global system in a way not seen since before World War I. The development of the neoliberal global economy would have been impossible without the fall of communism.
Harvard Kennedy School economist Dani Rodrik distinguishes between three historical variants of capitalism:
Political scientists Torben Iversen and David Soskice see democracy and capitalism as mutually supportive. Robert Dahl argued in On Democracy that capitalism was beneficial for democracy because economic growth and a large middle class were good for democracy. He also argued that a market economy provided a substitute for government control of the economy, which reduces the risks of tyranny and authoritarianism.
In his book The Road to Serfdom (1944), Friedrich Hayek (1899–1992) asserted that the free-market understanding of economic freedom as present in capitalism is a requisite of political freedom. He argued that the market mechanism is the only way of deciding what to produce and how to distribute the items without using coercion. Milton Friedman and Ronald Reagan also promoted this view. Friedman claimed that centralized economic operations are always accompanied by political repression. In his view, transactions in a market economy are voluntary and the wide diversity that voluntary activity permits is a fundamental threat to repressive and greatly diminishes their power to coerce. Some of Friedman's views were shared by John Maynard Keynes, who believed that capitalism was vital for freedom to survive and thrive. Freedom House, an American think-tank that conducts international research on, and advocates for, democracy, political freedom and human rights, has argued that "there is a high and statistically significant correlation between the level of political freedom as measured by Freedom House and economic freedom as measured by the Wall Street Journal/Heritage Foundation survey".
In Capital in the Twenty-First Century (2013), Thomas Piketty of the Paris School of Economics asserted that inequality is the inevitable consequence of economic growth in a capitalist economy and the resulting concentration of wealth can destabilize democratic societies and undermine the ideals of social justice upon which they are built.
States with capitalistic economic systems have thrived under political regimes deemed to be authoritarian or oppressive. Singapore has a successful open market economy as a result of its competitive, business-friendly climate and robust rule of law. Nonetheless, it often comes under fire for its style of government which, though democratic and consistently one of the least corrupt, operates largely under a one-party rule. Furthermore, it does not vigorously defend freedom of expression as evidenced by its government-regulated press, and its penchant for upholding laws protecting ethnic and religious harmony, judicial dignity and personal reputation. The private (capitalist) sector in the People's Republic of China has grown exponentially and thrived since its inception, despite having an authoritarian government. Augusto Pinochet's rule in Chile led to economic growth and high levels of inequalityNaomi Klein (2008). . Picador. p. 105 . by using authoritarian means to create a safe environment for investment and capitalism. Similarly, Suharto's authoritarian reign and extirpation of the Communist Party of Indonesia allowed for the expansion of capitalism in Indonesia.
The term "capitalism" in its modern sense is often attributed to Karl Marx. In his Das Kapital, Marx analyzed the "capitalist mode of production" using a method of understanding today known as Marxism. However, Marx himself rarely used the term "capitalism" while it was used twice in the more political interpretations of his work, primarily authored by his collaborator Friedrich Engels. In the 20th century, defenders of the capitalist system often replaced the term "capitalism" with phrases such as free enterprise and private enterprise and replaced "capitalist" with rentier and investor in reaction to the negative connotations associated with capitalism.
Competition arises when more than one producer is trying to sell the same or similar products to the same buyers. Adherents of the capitalist theory believe that competition leads to innovation and more affordable prices. Monopoly or cartels can develop, especially if there is no competition. A monopoly occurs when a firm has exclusivity over a market. Hence, the firm can engage in rent seeking behaviors such as limiting output and raising prices because it has no fear of competition.
Governments have implemented legislation for the purpose of preventing the creation of monopolies and cartels. In 1890, the Sherman Antitrust Act became the first legislation passed by the United States Congress to limit monopolies.
In exchange for the money paid as wages (usual for short-term work-contracts) or salaries (in permanent employment contracts), the work product generally becomes the undifferentiated property of the employer. A wage laborer is a person whose primary means of income is from the selling of their labor in this way.
In capitalist theoretics, the profit motive is said to ensure that resources are being allocated efficiently. For instance, Austrian economist Henry Hazlitt explains: "If there is no profit in making an article, it is a sign that the labor and capital devoted to its production are misdirected: the value of the resources that must be used up in making the article is greater than the value of the article itself".Hazlitt, Henry. "The Function of Profits". Economics in One Lesson. Ludwig Von Mises Institute. Web. 22 April 2013.
Socialist theorists note that, unlike mercantilists, capitalists accumulate their profits while expecting their profit rates to remain the same. This causes problems as earnings in the rest of society do not increase in the same proportion. "What is capitalism" Australian Socialist
According to de Soto, this is the process by which physical assets are transformed into capital, which in turn may be used in many more ways and much more efficiently in the market economy. A number of Marxian economists have argued that the Enclosure Acts in England and similar legislation elsewhere were an integral part of capitalist primitive accumulation and that specific legal frameworks of private land ownership have been integral to the development of capitalism.
Private property rights are not absolute, as in many countries the state has the power to seize private property, typically for public use, under the powers of eminent domain.
In the works of Adam Smith, the idea of capitalism is made possible through competition which creates growth. Although capitalism has not entered mainstream economics at the time of Smith, it is vital to the construction of his ideal society. One of the foundational blocks of capitalism is competition. Smith believed that a prosperous society is one where "everyone should be free to enter and leave the market and change trades as often as he pleases." He believed that the freedom to act in one's self-interest is essential for the success of a capitalist society. In response to the idea that if all participants focus on their own goals, society's well-being will be water under the bridge, Smith maintains that despite the concerns of intellectuals, "global trends will hardly be altered if they refrain from pursuing their personal ends." He insisted that the actions of a few participants cannot alter the course of society. Instead, Smith maintained that they should focus on personal progress instead and that this will result in overall growth to the whole.
Competition between participants, "who are all endeavoring to justle one another out of employment, obliges every man to endeavor to execute his work" through competition towards growth.
The term capitalist mode of production is defined by Private property of the means of production, extraction of surplus value by the owning class for the purpose of capital accumulation, Wage labour and, at least as far as Commodity are concerned, being Market economy.
Capitalism in the form of money-making activity has existed in the shape of merchants and money-lenders who acted as intermediaries between consumers and producers engaging in simple commodity production (hence the reference to "merchant capitalism") since the beginnings of civilisation. What is specific about the "capitalist mode of production" is that most of the inputs and outputs of production are supplied through the market (i.e. they are commodities) and essentially all production is in this mode. By contrast, in flourishing feudalism most or all of the factors of production, including labor, are owned by the feudal ruling class outright and the products may also be consumed without a market of any kind, it is production for use within the feudal social unit and for limited trade. This has the important consequence that, under capitalism, the whole organisation of the production process is reshaped and re-organised to conform with economic rationality as bounded by capitalism, which is expressed in price relationships between inputs and outputs (wages, non-labor factor costs, sales and profits) rather than the larger rational context faced by society overall—that is, the whole process is organised and re-shaped in order to conform to "commercial logic". Essentially, capital accumulation comes to define economic rationality in capitalist production.
A society, region or nation is capitalist if the predominant source of incomes and products being distributed is capitalist activity, but even so this does not yet mean necessarily that the capitalist mode of production is dominant in that society.
Mixed economy rely on the nation they are in to provide some goods or services, while the free market produces and maintains the rest.
The "basic laws" of supply and demand, as described by David Besanko and Ronald Braeutigam, are the following four:
Just like the supply curves reflect marginal cost curves, demand curves are determined by marginal utility curves.
John Locke's 1691 work Some Considerations on the Consequences of the Lowering of Interest and the Raising of the Value of MoneyJohn Locke (1691) Some Considerations on the consequences of the Lowering of Interest and the Raising of the Value of Money includes an early and clear description of supply and demand and their relationship. In this description, demand is Economic rent: "The price of any commodity rises or falls by the proportion of the number of buyer and sellers" and "that which regulates the price... of is nothing else but their quantity in proportion to their rent".
David Ricardo titled one chapter of his 1817 work Principles of Political Economy and Taxation "On the Influence of Demand and Supply on Price".Thomas M. Humphrey, 1992. "Marshallian Cross Diagrams and Their Uses before Alfred Marshall", Economic Review, Mar/Apr, Federal Reserve Bank of Richmond, pp. 3–23 . In Principles of Political Economy and Taxation, Ricardo more rigorously laid down the idea of the assumptions that were used to build his ideas of supply and demand.
In his 1870 essay "On the Graphical Representation of Supply and Demand", Fleeming Jenkin in the course of "introducing the diagrammatic method into the English economic literature" published the first drawing of supply and demand curves therein,A.D. Brownlie and M.F. Lloyd Prichard, 1963. "Professor Fleeming Jenkin, 1833–1885 Pioneer in Engineering and Political Economy", Oxford Economic Papers, 15(3), p. 211. including comparative statics from a shift of supply or demand and application to the labor market.Fleeming Jenkin, 1870. "The Graphical Representation of the Laws of Supply and Demand, and their Application to Labour", in Alexander Grant, ed., Recess Studies, Edinburgh. Ch. VI, pp. 151–185. Edinburgh. Scroll to chapter link . The model was further developed and popularized by Alfred Marshall in the 1890 textbook Principles of Economics.
They include advanced capitalism, corporate capitalism, finance capitalism, free-market capitalism, mercantilism, social capitalism, state capitalism and welfare capitalism. Other theoretical variants of capitalism include anarcho-capitalism, community capitalism, humanistic capitalism, neo-capitalism, state monopoly capitalism, and technocapitalism.
Jürgen Habermas has been a major contributor to the analysis of advanced-capitalistic societies. Habermas observed four general features that characterise advanced capitalism:
Rudolf Hilferding is credited with first bringing the term finance capitalism into prominence through Finance Capital, his 1910 study of the links between German trusts, banks and monopolies—a study subsumed by Vladimir Lenin into Imperialism, the Highest Stage of Capitalism (1917), his analysis of the imperialist relations of the great world powers.Frederic Jameson, 'Culture and Finance Capital', in The Jameson Reader (2005) p. 257 Lenin concluded that the banks at that time operated as "the chief nerve centres of the whole capitalist system of national economy".Quoted in E.H. Carr, The Bolshevik Revolution 2 (1971) p. 137 For the Comintern (founded in 1919), the phrase "dictatorship of finance capitalism"Quoted in F.A Voight, Unto Caesar (1938) p. 22 became a regular one.
Fernand Braudel would later point to two earlier periods when finance capitalism had emerged in human history—with the Genoese in the 16th century and with the Dutch in the 17th and 18th centuries—although at those points it developed from commercial capitalism.C. J.Calhoun/G. Derluguian, Business as Usual (2011) p. 57 Giovanni Arrighi extended Braudel's analysis to suggest that a predominance of finance capitalism is a recurring, long-term phenomenon, whenever a previous phase of commercial/industrial capitalist expansion reaches a plateau.Jameson, pp. 259–260
Fernand Braudel argued that free market exchange and capitalism are to some degree opposed; free market exchange involves transparent public transactions and a large number of equal competitors, while capitalism involves a small number of participants using their capital to control the market via private transactions, control of information, and limitation of competition.
This model is prominent in Western and Northern European countries as well as Japan, albeit in slightly different configurations. The vast majority of enterprises are privately owned in this economic model.
Rhine capitalism is the contemporary model of capitalism and adaptation of the social market model that exists in continental Western Europe today.
In Socialism: Utopian and Scientific, Friedrich Engels argued that state-owned enterprises would characterize the final stage of capitalism, consisting of ownership and management of large-scale production and communication by the Capitalist state. In his writings, Vladimir Lenin characterized the economy of Soviet Russia as state capitalist, believing state capitalism to be an early step toward the development of socialism.V.I. Lenin. The Tax in Kind . Lenin's Collected Works, 1st English ed., Progress Publishers, Moscow, 1965, vol. 32, pp. 329–365.V.I. Lenin. To the Russian Colony in North America . Lenin Collected Works, Progress Publishers, 1971, Moscow, vol. 42, pp. 425c–427a.
Some economists and left-wing academics including Richard D. Wolff and Noam Chomsky, as well as many Marxist philosophers and revolutionaries such as Raya Dunayevskaya and C.L.R. James, argue that the economies of the former Soviet Union and Eastern Bloc represented a form of state capitalism because their internal organization within enterprises and the system of wage labor remained intact. "State capitalism" in the Soviet Union , M.C. Howard and J.E. KingNoam Chomsky (1986). The Soviet Union Versus Socialism . Our Generation. Retrieved 9 July 2015.Richard D. Wolff (27 June 2015). Socialism Means Abolishing the Distinction Between Bosses and Employees . Truthout. Retrieved 9 July 2015.
The term is not used by Austrian School economists to describe state ownership of the means of production. The economist Ludwig von Mises argued that the designation of state capitalism was a new label for the old labels of state socialism and planned economy and differed only in non-essentials from these earlier designations.
A mixed economy is a largely market-based capitalist economy consisting of both private and public ownership of the means of production and economic interventionism through macroeconomic policies intended to correct , reduce unemployment and keep inflation low. The degree of intervention in markets varies among different countries. Some mixed economies such as France under dirigisme also featured a degree of indirect economic planning over a largely capitalist-based economy.
Most modern capitalist economies are defined as mixed economies to some degree, however French economist Thomas Piketty state that capitalist economies might shift to a much more laissez-faire approach in the near future.
The term "Blue Greens" is often applied to those who espouse eco-capitalism. Eco-capitalism can be thought of as the right-wing equivalent to Eco-socialism.
The importance of sustainable capitalism has been more recently recognized, but the concept is not new. Changes to the current economic model would have heavy social environmental and economic implications and require the efforts of individuals, as well as compliance of local, state and federal governments. Controversy surrounds the concept as it requires an increase in sustainable practices and a marked decrease in current consumptive behaviors.
This is a concept of capitalism described in Al Gore and David Blood's manifesto for the Generation Investment Management to describe a long-term political, economic and social structure which would mitigate current threats to the planet and society. According to their manifesto, sustainable capitalism would integrate the environmental, social and governance (ESG) aspects into risk assessment in attempt to limit externalities. Most of the ideas they list are related to economic changes, and social aspects, but strikingly few are explicitly related to any environmental policy change.
In mainstream economics, accounting and Marxian economics, capital accumulation is often equated with investment of profit income or savings, especially in real capital goods. The concentration and centralisation of capital are two of the results of such accumulation. In modern macroeconomics and econometrics, the phrase "capital formation" is often used in preference to "accumulation", though the United Nations Conference on Trade and Development (UNCTAD) refers nowadays to "accumulation". The term "accumulation" is occasionally used in national accounts.
Prominent critiques of capitalism allege that it is inherently exploitative, alienating,"Alienation." Pp. 10. in A Dictionary of Philosophy (rev. 2nd ed.). 1984. unstable, unsustainable, and economically inefficient—and that it creates massive economic inequality,
Other critics argue that such inequities are not due to the ethic-neutral construct of the economic system commonly known as capitalism, but to the ethics of those who shape and execute the system. For example, some contend that Milton Friedman's (human) ethic of 'maximizing shareholder value' creates a harmful form of capitalism, while a Millard Fuller or John Bogle (human) ethic of 'enough' creates a sustainable form. Equitable ethics and unified ethical decision-making is theorized to create a less damaging form of capitalism.
|
|