Capitalism is an economic
system in which trade, industry, and the means of production are largely or entirely
privately owned and operated for profit.Central characteristics of capitalism
include capital accumulation, competitive markets and wage labour.
In a capitalist economy, the parties to a transaction typically determine the
prices at which assets, goods, and services are exchanged.
The degree of competition, role of intervention and regulation, and scope of
public ownership varies across different models of capitalism. Economists, political
economists, and historians have taken different perspectives in their
analysis of capitalism and recognized various forms of it in practice. These
include laissez-faire capitalism, welfare capitalism and state
capitalism; each highlighting varying degrees of dependency on markets,
public ownership, and inclusion of social
policies. The extent to which different markets are free, as well as the
rules defining private property, is a matter of politics and policy. Many states
have what are termed capitalist mixed
economies, referring to a mix between planned
and market-driven
elements. Crony capitalism is an economic system corrupted
by a close relationship between businesses and government officials. In Marxian
economics this is considered to be the normal state of mature capitalism,
while in anarcho-capitalist theory it is considered a
political distortion of capital and markets.Capitalism has existed under many forms of government, in many different times,
places, and cultures. Following the demise of feudalism,
capitalism became the dominant economic system in the Western
world.
Capitalism was carried across the world by broader processes
of globalization
such as imperialism and, by the end of the nineteenth century, became the
dominant global economic system, in turn intensifying processes of
economic and other globalization. Later, in the 20th century, capitalism
overcame a challenge by centrally-planned economies and is now the
encompassing system worldwide, with the mixed
economy being its dominant form in the industrialized Western world. Barry
Gills and Paul James write:
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The process remains uneven, but notwithstanding the
continuing importance of national and regional economies today, global
capitalism is undoubtedly the dominant framework of economics in the world.
There are many debates about what this means, but across the political
spectrum ‘capitalism’ has become the taken-for-granted way of naming the
economic pattern that weaves together the current dominant modes of
production and exchange.
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Different economic perspectives emphasize specific elements
of capitalism in their preferred definition. Laissez-faire and liberal economists emphasize the degree to
which government
does not have control over markets and the importance of property rights.Neoclassical and
Keynesian macro-economists emphasize the need for government regulation to
prevent monopolies
and to soften the effects of the boom
and bust cycle. Marxian economists emphasize the role of capital
accumulation, exploitation and wage labor.
Most political economists emphasize private property as well, in addition to power
relations, wage labor, class, and the uniqueness of capitalism as a
historical formation.
Proponents of capitalism argue that it creates more
prosperity than any other economic system, and that its benefits are mainly to
the ordinary person. Critics of capitalism variously associate it with economic
instability, an inability to provide for the well-being of all people, and an
unsustainable danger to the natural environment.Socialists
maintain that, although capitalism is superior to all previously existing
economic systems (such as feudalism or slavery), the contradiction between
class interests will only be resolved by advancing into a completely social
system of production and distribution in which all persons have an equal
relationship to the means of production.
The term capitalism, in its modern sense, is often
attributed to Karl
Marx. In his magnum opus Capital,
Marx analysed 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.
History
Economic trade for profit has existed since at least the
second millennium BC. However, capitalism in its modern form is usually traced
to the emergence of agrarian capitalism and mercantilism of the Early
Modern era.
Agrarian capitalism
The economic foundations of the feudal agricultural system
began to shift substantially in 16th century England; the manorial
system had broken down by this time, and land began to be concentrated in
the hands of fewer landlords with increasingly large estates. Instead of a serf-based system of
labor, workers were increasingly being employed as part of a broader and
expanding money economy. The system put pressure on both the landlords and the
tenants to increase the productivity of the agriculture to make profit; the
weakened coercive power of the aristocracy
to extract peasant surpluses encouraged them to try out better methods,
and the tenants also had incentive to improve their methods, in order to
flourish in an increasingly competitive labor
market. Terms of rent for the land were becoming subject to economic market
forces rather than the previous stagnant system of custom and feudal
obligation.
By the early 17th-century, England was a centralized state,
in which much of the feudal order of Medieval
Europe had been swept away. This centralization was strengthened by a good
system of roads and a disproportionately large capital city, London. The capital
acted as a central market hub for the entire country, creating a very large
internal market for goods, instead of the fragmented feudal holdings that
prevailed in most parts of the Continent.
Mercantilism
The economic doctrine that held sway between the sixteenth
and eighteenth centuries is commonly described as mercantilism.
This period, the Age of Discovery, was associated with the
geographic exploration of foreign lands by merchant traders, especially from
England and the Low Countries. Mercantilism was a system of trade for
profit, although commodities were still largely produced by non-capitalist
production methods. Most scholars consider the era of merchant capitalism and
mercantilism as the origin of modern capitalism,although Karl
Polanyi argued that the hallmark of capitalism is the establishment of
generalized markets for what he referred to as the "fictitious
commodities": land, labor, and money. Accordingly, he argued that
"not until 1834 was a competitive labor market established in England,
hence industrial capitalism as a social system cannot be said to have existed
before that date."
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.
Among the major tenets of mercantilist theory was bullionism,
a doctrine stressing the importance of accumulating precious
metals. Mercantilists argued that a state should export more goods than it
imported so that foreigners would have to pay the difference in precious
metals. Mercantilists argued that only raw materials that could not be
extracted at home should be imported; and promoted government subsidies, such
as the granting of monopolies and protective tariffs, which
mercantilists thought were necessary to encourage home production of
manufactured goods.
European merchants, backed by state controls, subsidies, and monopolies,
made most of their profits from the buying and selling of 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 ..."
The British East India Company and the Dutch East India Company inaugurated an
expansive era of commerce and trade. These companies were characterized by
their colonial
and expansionary
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.
Industrial capitalism
A new group of economic theorists, led by David Hume
and Adam Smith,
in the mid-18th century, challenged fundamental mercantilist
doctrines such as the belief that the amount of the world's wealth remained
constant and that a state could only increase its wealth at the expense of another
state.
During the Industrial Revolution, the industrialist
replaced the merchant as a dominant factor in the capitalist system and
affected the decline of the traditional handicraft skills of artisans, guilds,
and journeymen.
Also during this period, the surplus generated by the rise of commercial
agriculture encouraged increased mechanization of agriculture. 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
finally established the global domination of the capitalist mode of production.
Britain also abandoned its protectionist
policy, as embraced by mercantilism. In the 19th century, Richard
Cobden and John Bright, 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 repeal of the Corn Laws and the Navigation
Acts.Britain reduced tariffs and quotas,
in line with David Ricardo's advocacy for free trade.
Globalization
Industrialization allowed cheap production of
household items using economies of scale, while rapid population
growth created sustained demand for commodities. Globalization in this period
was decisively shaped by nineteenth-century imperialism.
After the First
and Second Opium Wars and the completion of British
conquest of India, vast populations of these regions became ready consumers of
European exports. It was in this period that areas of sub-Saharan Africa and
the Pacific islands were incorporated into the world system. Meanwhile, the
conquest of new parts of the globe, notably sub-Saharan Africa, by Europeans
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.
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The inhabitant of London could order by telephone, sipping
his morning tea, the various products of the whole earth, and reasonably
expect their early delivery upon his doorstep. Militarism and imperialism of
racial and cultural rivalries were little more than the amusements of his
daily newspaper. What an extraordinary episode in the economic progress of
man was that age which came to an end in August 1914.
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The global financial system was mainly tied to the gold
standard in this period. The United
Kingdom first formally adopted this standard in 1821. Soon to follow was Canada in 1853, Newfoundland in 1865, and the United
States and Germany (de jure) in 1873. New technologies, such as the telegraph,
the transatlantic cable, the Radiotelephone,
the steamship
and railway
allowed goods and information to move around the world at an unprecedented
degree.
Keynesianism and Monetarism
In the period following the global depression of the 1930s,
the state played an increasingly prominent role in the capitalistic system
throughout much of the world. The post war era was greatly influenced by Keynesian
economic stabilization policies. The postwar boom ended in the late 1960s and
early 1970s, and the situation was worsened by the rise of stagflation.
Monetarism, a theoretical alternative to Keynesianism that
is more compatible with laissez-faire, gained increasing prominence in the
capitalist world, especially under the leadership of Ronald
Reagan in the US and Margaret
Thatcher in the UK in the 1980s. 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."
Economic elements
The essential feature of capitalism is the investment of
money in order to make a profit.
In a capitalist economic system capital assets can be owned
and controlled by private persons, labor is purchased for money wages, capital
gains accrue to private owners, and the price
mechanism is utilized to allocate capital goods between competing uses. The
extent to which the price mechanism is used, the degree of competitiveness, the
balance between the public sector and the private sector, and the extent of
government intervention in markets are the factors which distinguish several
forms of capitalism in the modern world.
In free-market and laissez-faire
forms of capitalism, markets are utilized most extensively with minimal or no
regulation over the pricing mechanism. In mixed economies, which are almost
universal today, markets continue to play a dominant role but are regulated to
some extent by government in order to correct market
failures, promote social welfare, conserve natural
resources, fund defense and public
safety or for other reasons. In state
capitalist systems, markets are relied upon the least, with the state
relying heavily on state-owned enterprises or indirect
economic planning to accumulate capital.
Capitalism and capitalist economics is often contrasted with
socialism,
though the meaning of the word socialism has changed over time. The
original meaning of socialism was state ownership of the means of production.
Today, the word is often used to mean any state control of economic
decision-making.
Money, capital, and accumulation
Money is primarily a standardized medium of exchange, and
final means of payment, that serves to measure the value of all goods and
commodities in a standard of value. It is an abstraction of economic value and
medium of exchange that eliminates the cumbersome system of barter by
separating the transactions involved in the exchange of products, thus greatly
facilitating specialization and trade through encouraging the exchange of
commodities. Capitalism involves the further abstraction of money into other
exchangeable assets
and the accumulation of money through ownership, exchange, interest and various
other financial instruments.
The accumulation of capital refers to the
process of "making money", or growing an initial sum of money through
investment in production. Capitalism is based around the accumulation of
capital, whereby financial capital is invested in order to realize
a profit and then reinvested into further production in a continuous process of
accumulation. In Marxian economic theory, this dynamic is called the law of
value.
Capital and financial markets
The defining feature of capitalist markets, in contrast to
markets and exchange in pre-capitalist societies like feudalism, is
the existence of a market for capital goods (the means of production), meaning
exchange-relations (business relationships) exist within the production
process. Additionally, capitalism features a market
for labor. This distinguishes the capitalist market from pre-capitalist
societies which generally only contained market exchange for final goods and
secondary goods. The "market" in capitalism refers to capital
markets and financial markets. Thus, there are three main
markets in a typical capitalistic economy: labor, goods and services, and
financial.
Wage labor and class structure
Wage labor refers to the class-structure of capitalism,
whereby workers receive either a wage or a salary, and owners receive the profits generated by the factors of production
employed in the production of economic value. Individuals who possess and
supply financial capital to productive ventures become owners, either jointly
(as shareholders)
or individually. In Marxian economics these owners of the means of production
and suppliers of capital are generally called capitalists. The
description of the role of the capitalist has shifted, first referring
to a useless intermediary between producers to an employer of producers, and
eventually came to refer to owners of the means of production. The term capitalist
is not generally used by supporters of mainstream economics.
"Workers" includes those who expend both manual
and mental (or creative) labor in production, where production does not simply
mean physical production but refers to the production of both tangible and intangible
economic value. "Capitalists" are individuals who derive income from investments.
Labor includes all physical and mental human
resources, including entrepreneurial capacity and management skills, which are
needed to produce products and services. Production is the act of making goods or
services by applying labor power.
Macroeconomics
Macroeconomics keeps its eyes on things such as inflation: a
general increase in prices and fall in the purchasing value of money; growth:
how much money a government has and how quickly it accrues money; unemployment,
and rates of trade between other countries. Whereas microeconomics deals with
individual firms, people, and other institutions that work within a set frame
work of rules to balance prices and the workings of a singular government.
Both micro and macroeconomics work together to form a single
set of evolving rules and regulations. Governments (the macroeconomic side) set
both national and international regulations that keep track of prices and
corporations' (microeconomics) growth rates, set prices, and trade, while the
corporations influence what federal laws are set.
Types of capitalism
There are many variants of capitalism in existence that
differ according to country and region. They vary in their institutional makeup
and by their economic policies. The common features among all the different
forms of capitalism is that they are based on the production of goods and
services for profit, predominately market-based allocation of resources, and
they are structured upon the accumulation of capital. The major forms of
capitalism are listed below:
Mercantilism
Mercantilism is a nationalist form of early capitalism that
came into existence approximately in the late 16th century. It is characterized
by the intertwining of national business interests to state-interest and
imperialism, and consequently, the state apparatus is utilized to advance
national business interests abroad. An example of this is colonists living in
America who were only allowed to trade with and purchase goods from their
respective mother countries (Britain, France, etc.). Mercantilism holds that
the wealth of a nation is increased through a positive balance of trade with
other nations, and corresponds to the phase of capitalist development called
the Primitive accumulation of capital.
Free-market economy
Free-market economy refers to a capitalist economic system
where prices for goods and services are set freely by the forces of supply and
demand and are allowed to reach their point of equilibrium without intervention
by government policy. It typically entails support for highly competitive
markets, private ownership of productive enterprises. Laissez-faire is a
more extensive form of free-market economy where the role of the state is
limited to protecting property rights.
Social-market economy
A social-market economy is a nominally free-market system
where government intervention in price formation is kept to a minimum but the
state provides significant services in the area of social security,
unemployment benefits and recognition of labor
rights through national collective bargaining arrangements. This
model is prominent in Western and Northern European countries, and Japan,
albeit in slightly different configurations. The vast majority of enterprises
are privately owned in this economic model.
Rhine capitalism refers to the contemporary model
of capitalism and adaptation of the social market model that exists in
continental Western Europe today.
State capitalism
State capitalism consists of state ownership of
the means of production within a state, and the organization of state
enterprises as commercial, profit-seeking businesses. The debate between
proponents of private versus state capitalism is centered around questions of
managerial efficacy, productive efficiency, and fair distribution of wealth.
According to Aldo Musacchio, a professor at Harvard Business
School, it is a system in which governments, whether democratic or autocratic,
exercise a widespread influence on the economy, through either direct ownership
or various subsidies. Musacchio also emphasizes the difference between today's
state capitalism and its predecessors. Gone are the days when governments
appointed bureaucrats to run companies. The world's largest state-owned
enterprises are traded on the public markets and kept in good health by large
institutional investors.
Corporate capitalism
Corporate capitalism is a free or mixed-market economy
characterized by the dominance of hierarchical, bureaucratic corporations.
Mixed economy
A mixed economy is a largely market-based economy consisting
of both private and public ownership of the means of production and economic interventionism through
macroeconomic policies intended to correct market
failures, 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 capitalist economies are defined as "mixed
economies" to some degree.
Other
Other variants of capitalism include:
Etymology and early usage
The term capitalist as referring to an owner of
capital (rather than its meaning of someone adherent to the economic system)
shows earlier recorded use than the term capitalism, dating back to the
mid-17th century. Capitalist is derived from capital, which
evolved from capitale, a late Latin word based on caput,
meaning "head" — 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 in the sense of referring to
funds, stock of merchandise, sum of money, or money carrying interest. By 1283
it was used in the sense of the capital assets of a trading firm. It was
frequently interchanged with a number of other words — wealth, money, funds, goods,
assets, property, and so on.
The Hollandische Mercurius uses capitalists in
1633 and 1654 to refer to owners of capital. In French, Étienne
Clavier referred to capitalistes in 1788, six years before its first
recorded English usage by Arthur Young in his work Travels in France
(1792).David Ricardo, in his Principles of Political
Economy and Taxation (1817), referred to "the capitalist"
many times.Samuel Taylor Coleridge, an English poet,
used capitalist in his work Table Talk (1823). Pierre-Joseph Proudhon used the term capitalist
in his first work, What is Property? (1840) to refer to the
owners of capital. Benjamin Disraeli used the term capitalist
in his 1845 work Sybil. Karl Marx
and Friedrich Engels used the term capitalist (Kapitalist)
in The Communist Manifesto (1848) to
refer to a private owner of capital.
According to the Oxford English Dictionary (OED),
the term capitalism was first used by novelist William Makepeace Thackeray in 1854 in The
Newcomes, where he meant "having ownership of capital".[59]
Also according to the OED, Carl
Adolph Douai, a German-American socialist and
abolitionist, used the term private
capitalism in 1863.
The initial usage of the term capitalism in its
modern sense has been attributed to Louis Blanc
in 1850 and Pierre-Joseph Proudhon in 1861. Karl Marx
and Friedrich Engels referred to the capitalistic
system (kapitalistisches System) and to the capitalist mode of
production (kapitalistische Produktionsform) in Das Kapital
(1867). The use of the word "capitalism" in reference to an economic
system appears twice in Volume I of Das Kapital, p. 124 (German
edition), and in Theories of Surplus Value, tome II, p. 493 (German
edition). Marx did not extensively use the form capitalism, but instead
those of capitalist and capitalist mode of production, which
appear more than 2600 times in the trilogy Das Kapital.
Marx's notion of the capitalist mode of production is
characterised as a system of primarily private ownership of the means of
production in a mainly market economy, with a legal framework on commerce and a
physical infrastructure provided by the state. He believed that
no legal framework was available to protect the laborers, and so exploitation
by the companies was rife. Engels made more frequent use of the term capitalism;
volumes II and III of Das Kapital, both edited by Engels after Marx's
death, contain the word "capitalism" four and three times,
respectively. The three combined volumes of Das Kapital (1867, 1885,
1894) contain the word capitalist more than 2,600 times.
An 1877 work entitled Better Times by Hugh Gabutt and
an 1884 article in the Pall Mall Gazette also used the term capitalism.
A later use of the term capitalism to describe the production system was
by the German economist Werner Sombart, in his 1902 book The Jews and
Modern Capitalism (Die Juden und das Wirtschaftsleben). Sombart's
close friend and colleague, Max Weber, also used capitalism in his 1904 book The Protestant
Ethic and the Spirit of Capitalism (Die protestantische Ethik und
der Geist des Kapitalismus).
Perspectives
Classical political economy
The classical school of economic thought emerged in
Britain in the late 18th century. The classical political economists Adam Smith,
David
Ricardo, Jean-Baptiste Say, and John
Stuart Mill published analyses of the production, distribution and exchange
of goods in a market that have since formed the basis of study
for most contemporary economists.
In France, 'Physiocrats' like François Quesnay promoted free trade
based on a conception that wealth originated from land. Quesnay's Tableau
Économique (1759), described the economy analytically and laid the
foundation of the Physiocrats' economic theory, followed by Anne Robert Jacques Turgot who opposed
tariffs and customs duties and advocated free trade.
Richard Cantillon defined long-run equilibrium as
the balance of flows of income, and argued that the supply
and demand mechanism around land influenced short-term prices.
Smith's attack on mercantilism
and his reasoning for "the system of natural liberty" in The Wealth of Nations (1776) are
usually taken as the beginning of classical political economy. Smith devised a
set of concepts that remain strongly associated with capitalism today. His
theories regarding the "invisible
hand" are commonly interpreted to mean individual pursuit of
self-interest unintentionally producing collective good for society. It was
necessary for Smith to be so forceful in his argument in favor of free markets
because he had to overcome the popular mercantilist sentiment of the time
period.
He criticized monopolies, tariffs, duties, and other state
enforced restrictions of his time and believed that the market is the most fair
and efficient arbitrator of resources. This view was shared by David
Ricardo, second most important of the classical political economists and
one of the most influential economists of modern times.
In On the
Principles of Political Economy and Taxation (1817), he developed the
law of comparative advantage, which explains why it
is profitable for two parties to trade, even if one of the trading partners is
more efficient in every type of economic production. This principle supports
the economic case for free trade. Ricardo was a supporter of Say's Law
and held the view that full employment is the normal equilibrium for a
competitive economy. He also argued that inflation is
closely related to changes in quantity of money and credit and was a proponent of the law of diminishing returns, which states that each
additional unit of input yields less and less additional output.
The values of classical political economy are strongly
associated with the classical liberal doctrine of minimal
government intervention in the economy, though it does not necessarily oppose
the state's provision of a few basic public
goods. Classical liberal thought has generally assumed a clear division
between the economy and other realms of social activity, such as the state.
While economic liberalism favors markets unfettered by the
government, it maintains that the state has a legitimate role in providing public
goods. For instance, Adam Smith argued that the state has a role in
providing roads, canals, schools and bridges that cannot be efficiently
implemented by private entities. However, he preferred that these goods should
be paid proportionally to their consumption (e.g. putting a toll). In
addition, he advocated retaliatory tariffs to bring about free trade, and copyrights
and patents to
encourage innovation.
Marxist political economy
Karl Marx considered capitalism to be a historically
specific mode of production (the way in which the
productive property is owned and controlled, combined with the corresponding social relations between individuals
based on their connection with the process of production) in which capitalism
has become the dominant mode of production.
The capitalist stage of development or "bourgeois
society," for Marx, represented the most advanced form of social
organization to date, but he also thought that the working classes would come
to power in a worldwide socialist or communist
transformation of human society as the end of the series of first aristocratic,
then capitalist, and finally working class rule was reached.
Following Adam Smith, Marx distinguished the use value
of commodities from their exchange value in the market. Capital, according to
Marx, is created with the purchase of commodities for the purpose of creating
new commodities with an exchange value higher than the sum of the original
purchases. For Marx, the use of labor power
had itself become a commodity under capitalism; the exchange value of labor
power, as reflected in the wage, is less than the value it produces for the
capitalist.
This difference in values, he argues, constitutes surplus
value, which the capitalists extract and accumulate. In his book Capital,
Marx argues that the capitalist mode of production is
distinguished by how the owners of capital extract this surplus from
workers—all prior class societies had extracted surplus
labor, but capitalism was new in doing so via the sale-value of produced
commodities. He argues that a core requirement of a capitalist society is that
a large portion of the population must not possess sources of self-sustenance
that would allow them to be independent, and must instead be compelled, to
survive, to sell their labor for a living wage.
In conjunction with his criticism of capitalism was Marx's
belief that the working class, due to its relationship to the means of
production and numerical superiority under capitalism, would be the driving
force behind the socialist revolution. This argument is intertwined with Marx's
version of the labor theory of value arguing that labor is
the source of all value, and thus of profit.
Vladimir Lenin, in Imperialism, the
Highest Stage of Capitalism (1916), further developed Marxist theory
and argued that capitalism necessarily led to monopoly capitalism and the export of
capital—which he also called "imperialism"—to find new markets and
resources, representing the last and highest stage of capitalism. Some
20th-century Marxian economists consider capitalism to be a
social formation where capitalist class processes dominate, but are not
exclusive.
Capitalist class processes, to these thinkers, are simply
those in which surplus labor takes the form of surplus
value, usable as capital; other tendencies for utilization of labor
nonetheless exist simultaneously in existing societies where capitalist
processes are predominant. However, other late Marxian thinkers argue that a
social formation as a whole may be classed as capitalist if capitalism is the
mode by which a surplus is extracted, even if this surplus is not produced
by capitalist activity, as when an absolute majority of the population is
engaged in non-capitalist economic activity.
In Limits to Capital (1982), David
Harvey outlines an overdetermined, "spatially restless"
capitalism coupled with the spatiality of crisis formation and resolution.
Harvey used Marx's theory of crisis to aid his argument that capitalism must
have its "fixes" but that we cannot predetermine what fixes will be
implemented, nor in what form they will be. His work on contractions of capital
accumulation and international movements of capitalist modes of production and
money flows has been influential.According to Harvey, capitalism creates the
conditions for volatile and geographically uneven development
Weberian political sociology
In social science, the understanding of the defining
characteristics of capitalism has been strongly influenced by the German
sociologist, Max
Weber. Weber considered market exchange, a voluntary
supply of labor and a planned division of labor within the enterprises as
defining features of capitalism. Capitalist enterprises, in contrast to their
counterparts in prior modes of economic activity, were directed toward the
rationalization of production, maximizing efficiency and productivity – a tendency embedded in a
sociological process of enveloping rationalization that formed modern
legal bureaucracies in both public
and private
spheres. According to Weber, workers in pre-capitalist economies understood
work in terms of a personal relationship between master
and journeyman
in a guild, or
between lord and peasant in a manor.
For these developments of capitalism to emerge, Weber
argued, it was necessary the development of a "capitalist spirit";
that is, ideas and habits that favor a rational pursuit of economic gain. These
ideas, in order to propagate a certain manner of life and come to dominate
others, "had to originate somewhere ... as a way of life common to
whole groups of men". In his book The Protestant
Ethic and the Spirit of Capitalism (1904–1905), Weber sought to trace
how a particular form of religious spirit, infused into traditional modes of
economic activity, was a condition of possibility of modern western capitalism.
For Weber, the 'spirit of capitalism' was, in general, that of ascetic
Protestantism; this ideology was able to motivate extreme rationalization of
daily life, a propensity to accumulate capital by a religious ethic to advance
economically through hard and diligent work, and thus also the propensity to
reinvest capital. This was sufficient, then, to create "self-mediating
capital" as conceived by Marx.
This is pictured in the Protestant understanding of beruf
– whose meaning encompass at the same
time profession, vocation, and calling – as exemplified in Proverbs 22:29,
"Seest thou a man diligent in his calling? He shall stand before
kings". In the Protestant Ethic, Weber describes the developments
of this idea of calling from its religious roots, through the understanding of
someone's economic success as a sign of his salvation, until the conception
that moneymaking is, within the modern economic order, the result and the
expression of diligence in one's calling.
Finally, as the social mores critical for its development
became no longer necessary for its maintenance, modern western capitalism came
to represent the order "now bound to the technical and economic conditions
of machine production which today determine the lives of all the individuals
who are born into this mechanism, not only those directly concerned with
economic acquisition, with irresistible force. Perhaps it will so determine
them until the last ton of fossilized coal is burnt" (p. 123). This
is further seen in his criticism of "specialists without spirit, hedonists
without a heart" that were developing, in his opinion, with the fading of
the original Puritan
"spirit" associated with capitalism.
Institutional economics
Institutional economics, once the main school of economic
thought in the United States, holds that capitalism cannot be separated from
the political and social system within which it is embedded. It emphasizes the
legal foundations of capitalism (see John
R. Commons) and the evolutionary, habituated, and volitional processes by
which institutions are erected and then changed.
One key figure in institutional economics was Thorstein
Veblen who in his book, The Theory of the Leisure Class
(1899), analyzed the motivations of wealthy people in capitalism who conspicuously consumed their riches as a
way of demonstrating success. The concept of conspicuous consumption was in direct
contradiction to the neoclassical view that capitalism was efficient.
In The Theory of Business Enterprise
(1904) Veblen distinguished the motivations of industrial production for people
to use things from business motivations that used, or misused, industrial
infrastructure for profit, arguing that the former often is hindered because
businesses pursue the latter. Output and technological advance are restricted
by business practices and the creation of monopolies. Businesses protect their
existing capital investments and employ excessive credit, leading to
depressions and increasing military expenditure and war through business
control of political power.
German Historical School and Austrian School
From the perspective of the German Historical School, capitalism
is primarily identified in terms of the organization of production for markets. Although this perspective shares
similar theoretical roots with that of Weber, its emphasis on markets and money
lends it different focus. For followers of the German Historical School, the
key shift from traditional modes of economic activity to capitalism involved
the shift from medieval restrictions on credit and money to the modern monetary
economy combined with an emphasis on the profit motive.
In the late 19th century, the German Historical School of
economics diverged, with the emerging Austrian
School of economics, led at the time by Carl Menger.
Later generations of followers of the Austrian School continued to be
influential in Western economic thought in the early part of the 20th century.
Austrian-born economist Joseph
Schumpeter, sometimes associated with the School, emphasized the "creative destruction" of capitalism—the
fact that market economies undergo constant change. Schumpeter argued that at
any moment in time there are rising industries and declining industries.
Schumpeter, and many contemporary economists influenced by his work, argue that
resources should flow from the declining to the expanding industries for an
economy to grow, but they recognized that sometimes resources are slow to
withdraw from the declining industries because of various forms of
institutional resistance to change.
The Austrian economists Ludwig
von Mises and Friedrich Hayek were among the leading defenders of
market
economy against 20th century proponents of socialist planned
economies. Mises and Hayek argued that only market capitalism could manage
a complex, modern economy.
Since a modern economy produces such a large array of
distinct goods and services, and consists of such a large array of consumers
and enterprises, argued Mises and Hayek, the information problems facing any
other form of economic organization other than market capitalism would exceed
its capacity to handle information. Thinkers within Supply-side economics built on the work of
the Austrian School, and particularly emphasize Say's Law:
"supply creates its own demand." Capitalism, to this school, is
defined by lack of state restraint on the decisions of producers.
Keynesian economics
In his 1937 The General
Theory of Employment, Interest and Money, the British economist John Maynard Keynes argued that capitalism
suffered a basic problem in its ability to recover from periods of slowdowns in
investment. Keynes argued that a capitalist economy could remain in an
indefinite equilibrium despite high unemployment.
Essentially rejecting Say's law,
he argued that some people may have a liquidity preference that would see them
rather hold money than buy new goods or services, which therefore raised the
prospect that the Great Depression would not end without what he
termed in the General Theory "a somewhat comprehensive
socialization of investment."
Keynesian economics challenged the notion that laissez-faire
capitalist economics could operate well on their own, without state
intervention used to promote aggregate
demand, fighting high unemployment and deflation of the sort seen during the 1930s.
He and his followers recommended "pump-priming"
the economy to avoid recession: cutting taxes, increasing government borrowing,
and spending during an economic down-turn. This was to be accompanied by trying
to control wages nationally partly through the use of inflation to
cut real wages and to deter people from holding money.
John Maynard Keynes tried to provide solutions to many of
Marx's problems without completely abandoning the classical understanding of
capitalism. His work attempted to show that regulation can be effective, and
that economic stabilizers can rein in the aggressive expansions and recessions
that Marx disliked. These changes sought to create more stability in the
business cycle, and reduce the abuses of laborers. Keynesian economists argue
that Keynesian policies were one of the primary reasons capitalism was able to
recover following the Great Depression.The premises of Keynes's work have,
however, since been challenged by neoclassical and supply-side economics and the Austrian
School.
Another challenge to Keynesian thinking came from his
colleague Piero Sraffa, and subsequently from the Neo-Ricardian
school that followed Sraffa. In Sraffa's highly technical analysis,
capitalism is defined by an entire system of social relations among both
producers and consumers, but with a primary emphasis on the demands of
production. According to Sraffa, the tendency of capital to seek its highest rate
of profit causes a dynamic instability in social and economic relations.
Neoclassical economics and the Chicago School
Today, the majority of academic research on capitalism in
the English-speaking world draws on neoclassical economic thought. It favors
extensive market coordination and relatively neutral patterns of governmental
market regulation aimed at maintaining property rights; deregulated labor
markets; corporate governance dominated by financial owners of firms; and
financial systems depending chiefly on capital
market-based financing rather than state financing.
Milton Friedman took many of the basic principles
set forth by Adam Smith and the classical economists and gave them a new twist.
One example of this is his article in the September 1970 issue of The New
York Times Magazine, where he argues that the social responsibility of
business is "to use its resources and engage in activities designed to
increase its profits ... (through) open and free competition without
deception or fraud." This is similar to Smith's argument that
self-interest in turn benefits the whole of society. Work like this helped lay
the foundations for the coming marketization
(or privatization)
of state enterprises and the supply-side economics of Ronald
Reagan and Margaret Thatcher.
The Chicago School of economics is best
known for its free market advocacy and monetarist
ideas. According to Friedman and other monetarists, market economies are
inherently stable if left to themselves and depressions result only from
government intervention.
Friedman, for example, argued that the Great
Depression was result of a contraction of the money supply, controlled by
the Federal Reserve, and not by the lack of
investment as John Maynard Keynes had argued. Ben
Bernanke, former Chairman of the Federal
Reserve, is among the economists today generally accepting Friedman's
analysis of the causes of the Great Depression.
Neoclassical economists, who by 1998 constituted a majority
of academic economists, subscribe to a subjective theory of value, according to
which the value derived from consumption of a good, rather than being objective
and static, varies widely from person to person and for the same person at
different times. Adherence to a subjective theory of value compels Neoclassical
thinkers to reject the labor theory of value upheld by Adam Smith
and other classical liberal thinkers, which was grounded upon a conception of
objective value.
Neoclassical models typically adopt the assumptions of Marginalism,
according to which economic value results from marginal utility and marginal
cost (the marginal concepts). Marginalist theory implies
that capitalists earn profits not by exploiting workers, but by forgoing
current consumption, taking risks, and organizing production.
Neoclassical economic theory
Neoclassical economics explain capitalism as made up of
individuals, enterprises, markets and government. According to their theories,
individuals engage in a capitalist economy as consumers, laborers, and investors. As
laborers, individuals may decide which jobs to prepare for, and in which
markets to look for work. As investors they decide how much of their income to
save and how to invest their savings. These savings, which become investments,
provide much of the money that businesses need to grow.
Business firms decide what to produce and where this
production should occur. They also purchase inputs (materials, labor, and
capital). Businesses try to influence consumer purchase decisions through
marketing and advertisement, as well as the creation of new and improved
products. Driving the capitalist economy is the search for profits (revenues
minus expenses). This is known as the profit
motive, and it helps ensure that companies produce the goods and services
that consumers desire and are able to buy. To be profitable, firms must sell a
quantity of their product at a certain price to yield a profit. A business may
lose money if sales fall too low or if its costs become too high. The profit
motive encourages firms to operate more efficiently. By using less materials,
labor or capital, a firm can cut its production costs, which can lead to
increased profits.
An economy grows when the total value of goods and services
produced rises. This growth requires investment in infrastructure, capital and
other resources necessary in production. In a capitalist system, businesses
decide when and how much they want to invest.
Income in a capitalist economy depends primarily on what
skills are in demand and what skills are being supplied. Skills that are in
scarce supply are worth more in the market and can attract higher incomes.
Competition among workers for jobs — and among employers for skilled workers —
help determine wage rates. Firms need to pay high enough wages to attract the
appropriate workers; when jobs are scarce, workers may accept lower wages than
they would when jobs are plentiful. Trade union
and governments influence wages in capitalist systems. Unions act to represent
their members in negotiations with employers over such things as wage rates and
acceptable working conditions.
The market
The price (P) of a product is determined by a balance
between production at each price (supply, S) and the desires of those with purchasing
power at each price (demand, D). This results in a market equilibrium, with
a given quantity (Q) sold of the product. A rise in demand would result in an
increase in price and an increase in output.
Supply is the amount of a good or service produced by a firm
and which is available for sale. Demand is the amount that people are willing
to buy at a specific price. Prices tend to rise when demand exceeds supply, and
fall when supply exceeds demand. In theory, the market is able to coordinate
itself when a new equilibrium price and quantity is reached.
Competition arises when more than one producer is trying to
sell the same or similar products to the same buyers. In capitalist theory,
competition leads to innovation and more affordable prices. Without
competition, a monopoly or cartel may develop. A monopoly occurs when a firm supplies the
total output in the market; the firm can therefore limit output and raise
prices because it has no fear of competition. A cartel is a group of firms that
act together in a monopolistic manner to control output and raise prices.
Role of government
In a capitalist system, the government does not prohibit
private property or prevent individuals from working where they please. The
government does not prevent firms from determining what wages they will pay and
what prices they will charge for their products. Many countries, however, have minimum
wage laws and minimum safety standards.
Under some versions of capitalism, the government carries
out a number of economic functions, such as issuing money, supervising public
utilities and enforcing private contracts. Many countries have competition
laws that prohibit monopolies and cartels from forming. Despite
anti-monopoly laws, large corporations can form near-monopolies in some
industries. Such firms can temporarily drop prices and accept losses to prevent
competition from entering the market, and then raise them again once the threat
of entry is reduced. In many countries, public utilities (e.g. electricity,
heating fuel, communications) are able to operate as a monopoly under
government regulation, due to high economies of scale.
Government agencies regulate the standards of service in
many industries, such as airlines and broadcasting, as well as financing a wide
range of programs. In addition, the government regulates the flow of capital
and uses financial tools such as the interest rate to control factors such as
inflation and unemployment.
Democracy, the state, and legal frameworks
Private property
The relationship between the state,
its formal mechanisms, and capitalist societies has been debated in many fields
of social and political theory, with active discussion since the 19th century. Hernando de Soto is a contemporary
economist who has argued that an important characteristic of capitalism is the
functioning state protection of property rights in a formal property system
where ownership and transactions are clearly recorded.
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.
Institutions
New institutional economics, a field
pioneered by Douglass North, stresses the need of a legal
framework in order for capitalism to function optimally, and focuses on the
relationship between the historical development of capitalism and the creation
and maintenance of political and economic institutions.In new institutional
economics and other fields focusing on public policy, economists seek to judge
when and whether governmental intervention (such as taxes, welfare, and government regulation) can result in potential
gains in efficiency. According to Gregory
Mankiw, a New Keynesian economist, governmental
intervention can improve on market outcomes under conditions of "market
failure", or situations in which the market on its own does not
allocate resources efficiently.
Market failure occurs when an externality
is present and a market will either under-produce a product with a positive
externalization or overproduce a product that generates a negative
externalization. Air pollution, for instance, is a negative externalization
that cannot be incorporated into markets as the world's air is not owned and
then sold for use to polluters. So, too much pollution could be emitted and
people not involved in the production pay the cost of the pollution instead of
the firm that initially emitted the air pollution. Critics of market failure
theory, like Ronald Coase, Harold
Demsetz, and James M. Buchanan argue that government programs
and policies also fall short of absolute perfection. Market failures are often
small, and government failures are sometimes large. It is therefore the case
that imperfect markets are often better than imperfect governmental
alternatives. While all nations currently have some kind of market regulations,
the desirable degree of regulation is disputed.
Democracy
The relationship between democracy and
capitalism is a contentious area in theory and popular political movements. The
extension of universal adult male suffrage in
19th century Britain occurred along with the development of industrial
capitalism, and democracy became widespread at the same time as capitalism,
leading many theorists to posit a causal relationship between them, or that
each affects the other. However, in the 20th century, according to some
authors, capitalism also accompanied a variety of political formations quite
distinct from liberal democracies, including fascist regimes,
absolute monarchies, and single-party states.
While some thinkers argue that capitalist development
more-or-less inevitably eventually leads to the emergence of democracy, others
dispute this claim. Research on the democratic peace theory indicates that
capitalist democracies rarely make war with one another and have little
internal violence. However, critics of the democratic peace theory note that
democratic capitalist states may fight infrequently and or never with other
democratic capitalist states because of political similarity or stability
rather than because they are democratic or capitalist.
Some commentators argue that though economic growth under
capitalism has led to democratization in the past, it may not do so in the
future, as authoritarian regimes have been able to manage economic
growth without making concessions to greater political freedom. States that
have highly capitalistic economic systems have thrived under authoritarian or
oppressive political systems. Singapore, which maintains a highly open market
economy and attracts lots of foreign investment, does not protect civil
liberties such as freedom of speech and expression. 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
inequality by using authoritarian means to create a safe environment for
investment and capitalism. Thomas Piketty of the Paris School of Economics asserts that
rising economic inequality is a natural consequence of
capitalist activity, and is destabilizing to democratic societies and
undermines the ideals of social justice upon which they are built.
In response to criticism of the system, some proponents of
capitalism have argued that its advantages are supported by empirical research.
Indices of Economic Freedom show a
correlation between nations with more economic freedom (as defined by the
indices) and higher scores on variables such as income and life expectancy,
including the poor, in these nations.
Advocacy for capitalism
Economic growth
Capitalism and the economy of the People's Republic of
China
Many theorists and policymakers in predominantly
capitalist nations have emphasized capitalism's ability to promote economic
growth, as measured by Gross Domestic Product (GDP), capacity utilization or standard of living. This argument was
central, for example, to Adam Smith's advocacy of letting a free market control
production and price, and allocate resources. Many theorists have noted that
this increase in global GDP over time coincides with the emergence of the
modern world capitalist system.
Between 1000 and 1820, the world economy grew sixfold, a
faster rate than the population growth, so each individual enjoyed, on the
average, a 50% increase in wealth. Between 1820 and 1998, world economy grew
50-fold, a much faster rate than the population growth, so each individual
enjoyed, on the average, a 9-fold increase in wealth. In most capitalist
economic regions such as Europe, the United States, Canada, Australia and New
Zealand, the economy grew 19-fold per person, even though these countries
already had a higher starting level, and in Japan, which was poor in 1820, the
increase per person was 31-fold. In the third
world there was an increase, but only 5-fold per person.
Proponents argue that increasing GDP (per capita) is
empirically shown to bring about improved standards of living, such as better
availability of food, housing, clothing, and health care. The decrease in the number
of hours worked per week and the decreased participation of children and the
elderly in the workforce have been attributed to capitalism.
Proponents also believe that a capitalist economy offers
far more opportunities for individuals to raise their income through new
professions or business ventures than do other economic forms. To their thinking,
this potential is much greater than in either traditional feudal or
tribal
societies or in socialist societies.
Political freedom
In his book The Road to Serfdom, Freidrich
Hayek asserts that the economic
freedom of capitalism is a requisite of political
freedom. He argues that the market mechanism is the only way of
deciding what to produce and how to distribute the items without using
coercion. Milton Friedman, Andrew
Brennan 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 that the wide diversity
that voluntary activity permits is a fundamental threat to repressive political
leaders and greatly diminish their power to coerce. Some of Friedman's views
were shared by John Maynard Keynes, who believed
that capitalism is vital for freedom to survive and thrive.
The novelist and philosopher Ayn Rand
made positive moral defences of laissez-faire capitalism, most notably
in her 1957 novel Atlas Shrugged, and in her 1966
collection of essays Capitalism: The Unknown Ideal.
She argued that capitalism should be supported on moral grounds, not just on
the basis of practical benefits. She has significantly influenced conservative
and libertarian supporters of capitalism,
especially in the American Tea Party movement.
Self-organization
Austrian School economists have argued that capitalism
can organize itself into a complex system without an external guidance or
central planning mechanism. Friedrich Hayek considered the phenomenon of self-organization
as underpinning capitalism. Prices serve as a signal as to the urgent and
unfilled wants of people, and the opportunity to earn profits if successful, or
absorb losses if resources are used poorly or left idle, gives entrepreneurs incentive
to use their knowledge and resources to satisfy
those wants. Thus the activities of millions of people, each seeking his own
interest, are coordinated.
Criticism
Critics of capitalism associate the economic system with social
inequality; unfair distribution of wealth and power;
a tendency toward market monopoly or oligopoly
(and government by oligarchy); imperialism;
counter-revolutionary wars; various
forms of economic and cultural exploitation;
materialism; repression of workers and
trade
unionists; social
alienation; economic inequality; unemployment;
and economic instability. Notable critics of capitalism have included: socialists,
anarchists,
communists,
national
socialists, social
democrats, technocrats, some types of conservatives,
Luddites,
Narodniks,
Shakers,
and some types of nationalists.
Many socialists consider capitalism to be irrational, in
that production and the direction of the economy are unplanned, creating many
inconsistencies and internal contradictions.[124]
Capitalism and individual property rights have been associated with the tragedy of the anticommons. Marxian
economist Richard D. Wolff postulates that
capitalist economies prioritize profits and capital accumulation over the
social needs of communities, and capitalist enterprises rarely include the
workers in the basic decisions of the enterprise. Following the banking crisis
of 2007, Alan Greenspan told the United States
Congress on October 23, 2008, "The whole intellectual edifice collapsed. I
made a mistake in presuming that the self-interests of organizations,
specifically banks and others, were such that they were best capable of
protecting their own shareholders. ... I was shocked."
Some labor historians and scholars
have argued that unfree labor — by slaves,
indentured servants, prisoners or
other coerced persons — is compatible with capitalist relations. Tom Brass
argued that unfree labor is acceptable to capital.Historian Greg
Grandin argues that capitalism has its origins in slavery:
"when historians talk about the Atlantic market revolution, they are
talking about capitalism. And when they are talking about capitalism, they are
talking about slavery."
According to Immanuel Wallerstein, institutional
racism has been "one of the most significant pillars" of the
capitalist system and serves as "the ideological justification for the
hierarchization of the work-force and its highly unequal distributions of
reward."
Many aspects of capitalism have come under attack from
the anti-globalization movement,
which is primarily opposed to corporate capitalism. Environmentalists
have argued that capitalism requires continual economic growth, and that it
will inevitably deplete the finite natural resources of the Earth. Such critics
argue that while this neoliberalism or contemporary capitalism has
indeed increased global trade, it has also destroyed traditional ways of life,
exacerbated inequality and increased global poverty
- with more living today in abject poverty than before neoliberalism, and that
environmental indicators indicate massive environmental degradation since the
late 1970s.
Many religions have criticized or opposed specific
elements of capitalism. Traditional Judaism,
Christianity,
and Islam forbid lending
money at interest,although alternative methods of banking have been
developed. Some Christians have criticized capitalism for its materialist aspects and its inability
to account for the wellbeing of all people.Many of Jesus' parables deal with
economic concerns: farming, shepherding, being in debt, doing hard labor, being
excluded from banquets and the houses of the rich, and have implications for
wealth and power distribution. In his 84-page apostolic exhortation Evangelii
Gaudium, Pope
Francis described unfettered capitalism as "a new tyranny"
and called upon world leaders to fight rising poverty and inequality.
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