A set of economic arrangements which developed in the 19th-c in Western societies following the Industrial Revolution, though with antecedents in other societies, notably 11th-c China. The concept derives from the writings of Marx, and rests upon the private ownership of the means of production by the capitalist class, or bourgeoisie. The workers, or proletariat, own nothing but their labour, and although free to sell their labour in the market, they are dependent upon the capitalist class which exploits them by appropriating the surplus value created by their labour. Non-Marxist economists define capitalism as an economic system in which most property is privately owned and goods are sold freely in a competitive market, but without reference to exploitation, except where monopoly situations occur. Capitalism may be an ideological stance: Marx saw it as one stage in a historical process, finally being replaced by socialism. It has been the most productive economic system to date, although it has brought with it massive environmental (eg pollution) and social (eg unemployment) problems.
Capitalism is an economic system in which the means of production are mostly privately owned, and capital is invested in the production, distribution, and other trade of goods and services for profit in a market. Various theories have tried to explain what capitalism is, to justify or critique the private ownership of capital, to explain the operation of markets, and to guide the application or elimination of government regulation of property and markets. (See economics, political economy, laissez-faire.)
| Economies | ||
| Sectors and Systems | ||
| Closed economy | ||
| Dual economy | ||
| Gift economy | ||
| Informal economy | ||
| Market economy | ||
| Mixed economy | ||
| Open economy | ||
| Participatory economy | ||
| Planned economy | ||
| Subsistence economy | ||
| Underground economy | ||
| Real-World Examples and Models | ||
| Anglo-Saxon economy | ||
| American School | ||
| Global economy | ||
| Hunter-gatherer economy | ||
| Information economy | ||
| New industrial economy | ||
| Palace economy | ||
| Plantation economy | ||
| Social market economy | ||
| Transition economy | ||
| Virtual economy | ||
| Ideologies and Theories | ||
| Capitalist economy | ||
| Corporate economy | ||
| Natural economy | ||
| Socialist economy | ||
| Token economy | ||
|
||
| This box: view • talk • edit |
Capitalist economic practices became institutionalized in Europe between the 16th and 19th centuries, although some features of capitalist organization existed in the ancient world. Capitalism has emerged as the Western world's dominant economic system since the decline of feudalism, which eroded traditional political and religious restraints on capitalist exchange.
The concept of capitalism has limited analytic value, given the great variety of historical cases over which it is applied, varying in time, geography, politics and culture. Some economists have specified a variety of different types of capitalism, depending on specifics of concentration of economic power and wealth, and methods of capital accumulation (Scott 2005). During the last century capitalism has been contrasted with centrally planned economies. Most developed countries are usually regarded as capitalist, but some are also often called mixed economies due to government ownership and regulation of production, trade, commerce, taxation, money-supply, and physical infrastructure.
Etymology
See also: Definitions of capitalism
According to Webster's Third New International Dictionary, the root word, capital, derives from the Latin word capitalis, which ultimately comes from caput, meaning "head." Marxist writers originally popularized the term "capitalism" (or its equivalents in other languages, such as Kapitalismus) although Marx tended to speak of the "capitalist mode of production" or "bourgeois society."
Perspectives on the characteristics of capitalism
The concept of capitalism has evolved over time, with later thinkers often building on the analyses of earlier thinkers. The following subsections describe several schools of thought in which the thinkers involved do not necessarily agree on all analytic points, but participate in a common general approach to understanding what capitalism is.
Classical political economy
The "classical" tradition in 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 capitalist economy that have since formed the basis of study for most contemporary economists.
Adam 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. In The Principles of Political Economy and Taxation (1817) he developed 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 view that full employment is the normal equilibrium for a competitive economy.
The values of classical political economy are strongly associated with the classical liberal doctrine of minimal government intervention in the economy. Liberal capitalist thought has generally assumed a clear division between the economy and other realms of social activity, such as the state.
Marxian political economy
Karl Marx considered capitalism to be an 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 capital has become the dominant means of production (Burnham).
Following Adam Smith, Marx distinguished the use value of commodities from their exchange value in the market. 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 societies had extracted surplus labor, but capitalism was new in doing so via the sale-value of produced commodities.
For Marx, this cycle the extraction of the surplus value by the owners of capital or the bourgeoisie becomes the basis of class struggle. One line of subsequent Marxian thinking sees the centrally-planned economic systems of existing "communist" societies that were still based on exploitation of labor as "state capitalism."
Some 20th century Marxian economists consider capitalism to be a social formation where capitalist class processes dominate, but are not exclusive (Resnick &
Weberian political sociology
In some social sciences, the understanding of the defining characteristics of capitalism have been strongly influenced by 19th century German social theorist Max Weber. capitalist enterprises, in contrast to their counterparts in prior modes of economic activity, was their rationalization of production, directed toward maximizing efficiency and productivity. According to Weber, workers in pre-capitalist economic institutions understood work in term of a personal relationship between master and journeyman in a guild, or between lord and peasant in a manor.
In his book The Protestant Ethic and the Spirit of Capitalism (1904-1905), Weber sought to trace how capitalism transformed traditional modes of economic activity.
Capitalism, for Weber, is the most advanced economic system ever developed over the course of human history.
The German Historical School and the Austrian School
From the perspective of the German Historical School, capitalism is primarily identified in terms of the organization of production for markets. 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 through much of the 20th century. The Austrian economist Joseph Schumpeter, a forerunner of the Austrian School of economics, emphasized the "creative destruction" of capitalism—the fact that market economies undergo constant change. 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 capitalism 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, asserted Mises and Hayek, the information problems facing any other form of economic organization other than market capitalism would exceed its capacity to handle information.
Austrian economics has been a major influence on the ideology of libertarianism, which considers laissez-faire capitalism to be the ideal economic system.
Keynesian economics
In his 1936 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.
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. 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, most academic research on capitalism in the English-speaking world draws on neoclassical economic thought. According to Friedman and monetarists, market economies are inherently stable if left to itself and depressions result only from a government interventions.
Neoclassical economists, which today are the majority of economists, consider value to be subjective, varying from person to person and for the same person at different times, and thus reject the labor theory of value. Marginalism is the theory that economic value results from marginal utility and marginal cost (the marginal concepts).
History of capitalism
Private ownership of some means of production has existed at least since the invention of agriculture. but economic activity was bound by customs and controls which, along with the rule of the aristocracy which would expropriate wealth through arbitrary fines, taxes and enforced loans, meant that profits were difficult to accumulate. By the 18th century, however, these barriers to profit were overcome and capitalism became the dominant economic system of much of the world.
In the period between the late 15th century and the late 18th century the institution of private property was brought into existence in the full, legal meaning of the term. Since the Industrial Revolution much of Europe underwent a thoroughgoing economic transformation associated with the rise of capitalism and levels of wealth and economic output in the Western world have risen dramatically.
Over the course of the past five hundred years, capital has been accumulated by a variety of different methods, in a variety of scales, and associated with a great deal of variation in the concentration of economic power and wealth (Scott 2005).
Mercantilism
The earliest stages of modern capitalism, arising in the period between the 16th and 18th centuries, are commonly described as merchant capitalism and mercantilism (Burnham;
Mercantilism was a system of trade for profit, although commodities were still largely produced by non-capitalist production methods (Scott 2005). However, under mercantilism, given the contemporaneous rise of the absolutism, the state superseded the local guilds as the regulator of the economy.
Proponents of mercantilism emphasized state power and overseas conquest as the principal aim of economic policy.
Industrial capitalism and laissez-faire
Mercantilism declined in Great Britain in the mid-18th century, when a new group of economic theorists, led by Adam Smith, challenged fundamental mercantilist doctrines 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. However, in more undeveloped economies, such as Prussia and Russia, with their much younger manufacturing bases, mercantilism continued to find favor after other states had turned to newer doctrines.
The mid-18th century gave rise to industrial capitalism, made possible by the accumulation of vast amounts of capital under the merchant phase of capitalism and its investment in machinery. Industrial capitalism, which Marx dated from the last third of the 18th century, marked the development of the factory system of manufacturing, characterized by a complex division of labor between and within work process and the routinization of work tasks;
During the resulting Industrial Revolution, the industrialist replaced the merchant as a dominant actor in the capitalist system and affected the decline of the traditional handicraft skills of artisans, guilds, and journeymen.
The rise of industrial capitalism was also associated with the decline of mercantilism. In line with the teachings of the classical political economists, led by Adam Smith and David Ricardo, Britain embraced liberalism, encouraging competition and the development of a market economy.
Finance capitalism and monopoly capitalism
In the late 19th century, the control and direction of large areas of industry came into the hands of financiers.
Late 19th and early 20th century capitalism has also been described as an era of "monopoly capitalism," marked by the movement from the laissez-faire phase of capitalism to the concentration of capital into large monopolistic or oligopolistic holdings by banks and financiers, and characterized by the growth of large corporations and a division of labor separating shareholders, owners, and managers (Scott 2005). By the end of the 19th century, economic depressions and boom and bust business cycles had become a recurring problem.
Capitalism following the Great Depression
The economic recovery of the world's leading capitalist economies in the period following the end of the Great Depression and the Second World War — a period of unusually rapid growth by historical standards — eased discussion of capitalism's eventual decline or demise (Engerman 2001).
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. Similar increases were seen in all industrialized capitalist economies, some of which, such as France, have reached even higher ratios of government expenditures to GNP than the United States. These economies have since been widely described as "mixed economies."
During the postwar boom, a broad array of new analytical tools in the social sciences were developed to explain the social and economic trends of the period, including the concepts of post-industrial society and welfare statism (Burnham).
The long postwar boom ended in the 1970s, amid the economic crises experienced following the 1973 oil crisis. The “stagflation” of the 1970s led many economic commentators politicians to embrace neoliberal policy prescriptions inspired by the laissez-faire capitalism and classical liberalism of the 19th century, particularly under the influence of Friedrich Hayek and Milton Friedman.
Globalization
Although overseas trade has been associated with the development of capitalism for over five hundred years, some thinkers argue that a number of trends associated with globalization have acted to increase the mobility of people and capital since the last quarter of the 20th century, combining to circumscribe the room to maneuver of states in choosing non-capitalist models of development.
After the abandonment of the Bretton Woods system and the strict state control of foreign exchange rates, the total value of transactions in foreign exchange was estimated to be at least twenty times greater than that of all foreign movements of goods and services (EB).
Economic growth in the last half-century has been relatively strong.
Political advocacy
Proponents of capitalism
Many theorists and policy makers 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. Proponents argue that the rapid, and largely consistent, worldwide increase in economic measures since the industrial revolution is due to the emergence of the modern capitalist. Proponents also believe that a capitalist economy for more opportunities for individuals raise their income through new professions or business venture than do other economic forms.
Milton Friedman has argued that economic freedom of competitive capitalism, while itself an extremely important component of total freedom, is necessary mean for attaining political freedom; pointing out that centralized control of economic activity was always accompanied with political oppression. In his view, voluntary character of all transactions in a free market economy and wide diversity that it permits are fundamental threats to any political autocrat and greatly diminish power to coerce.
Some supporters of capitalism believe that it can organize itself into a complex system without an external guidance or planning mechanism.
This decentralized system of coordination is viewed by some supporters of capitalism as one of its greatest strengths. However, in all existing modern economies, the state conducts some degree of centralized economic planning (using such tools as allowing the country's central bank to set base interest rates), ostensibly as an attempt to improve efficiency, attenuate cyclical volatility, and further particular social goals. Proponent who follow the Austrian School argue that even this limited control creates inefficiencies because we cannot predict the long-term activity of the economy.
Critics of capitalism
Capitalism has met with strong opposition throughout its history, largely from the left, but also from the right;
Some religions criticize or outright oppose specific elements of capitalism. Many Christians do not oppose capitalism entirely, but support a mixed economy in order to ensure adequate labour standards and relations, as well as economic justice.
Some problems claimed to be associated with capitalism include: unfair and inefficient distribution of wealth and power; imperialism, various forms of economic exploitation; and phenomena such as social alienation, inequality, unemployment, and economic instability. Some environmentalists claim that capitalism requires continual economic growth, and will invevitably deplete the finite natural resources of the earth, and other resources utilized broadly.
Democracy, the state and legal frameworks
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. This is the process which transforms physical assets into capital which may be then be used in many more ways and much more efficiently in the economy. A number of 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 developement of capitalism.
Many theorist of capitalism say that capitalism needs a legal framework for optimal function, and that monopoly, pollution and other perceived market failures can be prevented by regulations, such as different tax and welfare policies.
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 become widespread at the same time as capitalism, leading many theorists to posit a causal relationship between them, or that each affects the other.
Some commentators argue that though economic growth under capitalism has led to democratization in the past, it may not do so in the future. Under this line of thinking, authoritarian regimes have been able to manage economic growth without making concessions to greater political freedom.
In response to criticism of the system, some proponents of capitalism have argued that its advantages are supported by empirical research. For example, advocates of different Index of Economic Freedom point to a statistical 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. "Democracy and Economic Growth: A meta-analysis". Ludwig von Mises, Capitalism versus Socialism – chapter from Money, Method, and the Market Process Ludwig von Mises, The Noneconomic Objections to Capitalism – excerpted from The Anti-Capitalistic Mentality George Reisman (1996). The Stages of Economic Growth: A Non-Communist Manifesto.
User Comments Add a comment…