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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 competitive free market. These include factors of production such as land and other natural resources, labor and capital goods. Various theories have tried to explain what capitalism is, to justify, or critique the private ownership of capital, and to explain the operation of markets and guide the application or elimination of government regulation of property and markets. (See economics, political economy, laissez-faire.) 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. Since the Industrial Revolution, capitalism gradually spread from Europe, particularly from Britain, across global political and cultural frontiers. In the 19th and 20th centuries, capitalism provided the main, but not exclusive, means of industrialization throughout much of the world. 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." The 'head' being referred to was that of cattle. The Oxford English Dictionary cited its first use of the word capitalism in 1854, and capitalist in 1792. 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." Nevertheless, the term has been widely adopted across the political spectrum, though employed in many different ways (Burnham). 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. Moreover, the component concepts used in defining capitalism—such as private ownership, markets, and investment—have evolved along with changes in theory, in law, and in practice. 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. Contributions to this tradition are also found in the earlier work of David Hume and the Physiocrats like Richard Cantillon. Adam Smith's attack on Mercantilism and his reasoning for "the system of natural liberty" (1776) are usually taken as the beginning of classical political economy, although the Finn Anders Chydenius (1729–1803) - the leading classical liberal of Nordic history - published a book called The National Gain in 1765, in which he proposes ideas of freedom of trade and industry and explores the relationship between economy and society and lays out the principles of liberalism and capitalism, all of this eleven years before the publishing of Adam Smith's similar book, The Wealth of Nations in 1776. Adam Smith devised 3 sets of concepts that remain strongly associated with capitalism today, particularly his theory of the "invisible hand" of the market, through which the pursuit of individual interest produces a collective good for society. 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 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. 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. 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
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. Weber considered market exchange, rather than production, as the defining feature of capitalism; 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. For Weber, the 'spirit' of rational calculation eroded traditional restraints on capitalist exchange, and fostered the development of modern capitalism. This 'spirit' was gradually codified by law; rendering wage-laborers legally 'free' to sell work; encouraging the development of technology aimed at the organization of production on the basis of rational principles; and clarifying the separation of the public and private lives of workers, especially between the home and the workplace. Therefore, unlike Marx, Weber did not see capitalism as primarily the consequence of changes in the means of production. Instead, for Weber the origins of capitalism rested chiefly in the rise of a new entrepreneurial 'spirit' in the political and cultural realm. In the Protestant Ethic, Weber suggested that the origins of this 'spirit' was related to the rise of the Protestantism, particularly Calvinism. Capitalism, for Weber, is the most advanced economic system ever developed over the course of human history. Weber associated capitalism with the advance of the business corporation, public credit, and the further advance of bureaucracy of the modern world. Although Weber defended capitalism against its socialist critics of the period, he saw its rationalizing tendencies as a possible threat to traditional cultural values and institutions, and a possible 'iron cage' constraining human freedom. The German Historical School and the Austrian School
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. Essentially rejecting Say's law, he argued that some people may have a liquidity preference which 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.• 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
History of capitalism Private ownership of some means of production has existed at least since the invention of agriculture. However, in feudal society much of this property was considered to be inalienable and so capital markets were not established. Some writers see medieval guilds as forerunners of the modern capitalist concern (especially through using apprentices as a kind of paid laborer); 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. Important contribution to the theory of property is found in the work of John Locke, who argued that the right to private property is one of natural rights. 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). Much of the history of the past five hundred years is concerned with the development of capitalism in its various forms, its defense and its rejection, particularly by socialists. Mercantilism
Industrial capitalism and laissez-faire
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. This period has been defined as "finance capitalism," characterized by the subordination of process of production to the accumulation of money profits in a financial system. Major features of capitalism in this period included the establishment of huge industrial cartels or monopolies; the ownership and management of industry by financiers divorced from the production process; and the development of a complex system of banking, an equity market, and corporate holdings of capital through stock ownership. Increasingly, large industries and land became the subject of profit and loss by financial speculators. 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 last quarter of the 19th century, the emergence of large industrial trusts had provoked legislation in the U.S. to reduce the monopolistic tendencies of the period. Gradually, the U.S. federal government played a larger and larger role in passing antitrust laws and regulation of industrial standards for key industries of special public concern. By the end of the 19th century, economic depressions and boom and bust business cycles had become a recurring problem. In particular, the Long Depression of the 1870s and 1880s and the Great Depression of the 1930s affected almost the entire capitalist world, and generated discussion about capitalism’s long-term survival prospects. During 1930s, Marxist commentators often posited the possibility of capitalism’s decline or demise, often in alleged contrast to the ability of the Soviet Union to avoid suffering the effects of the global depression. 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. In 1929, for example, total U.S. government expenditures (federal, state, and local) amounted to less than one-tenth of GNP; from the 1970s they amounted to around one-third (EB). 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 phase of capitalism from the beginning of the postwar period through the 1970s has sometimes been described as “state capitalism”, especially by Marxian thinkers. 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. In particular, monetarism, a theoretical alternative to Keynesianism that is more compatible with laissez-faire, gained increasing support in the capitalist world, especially under the leadership of Ronald Reagan in the U.S. and Margaret Thatcher in the UK in the 1980s. Globalization
Proponents of capitalism
Critics of capitalism Main article: Criticisms of capitalism, Anti-capitalism Capitalism has met with strong opposition throughout its history, largely from the left, but also from the right; and from religious elements. Many 19th century conservatives were among the most strident critics of capitalism, seeing market exchange and commodity production as threats to cultural and religious traditions. Prominent leftist critics have included socialists and anarchists, such as Karl Marx, Pierre-Joseph Proudhon, Mikhail Bakunin, Franz Fanon, Vladimir Lenin, Leon Trotsky, Peter Kropotkin, Mao Zedong, Noam Chomsky, and others. Movements like the Luddites, Narodniks, Shakers, Utopian Socialists and others have opposed capitalism for various reasons. Marxism has influenced the creation of social democratic and labour parties, which seek change through existing democratic channels instead of revolution. These parties believe that capitalism should be heavily regulated instead of abolished. Many aspects of capitalism have come under attack from the relatively recent anti-globalization movement. Some religions criticize or outright oppose specific elements of capitalism. Some traditions of Judaism, Christianity, and Islam forbid lending money at interest, although methods of Islamic banking have been developed. Christianity has been the source of many criticisms of capitalism, particularly its materialist aspects. The first socialists drew many of their principles from Christian values (see Christian socialism), against the "bourgeois" values of profiteering, greed, selfishness and hoarding. 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. There are many Protestant denominations (particularly in the United States) who have reconciled with — or are ardently in favour of — capitalism, particularly in opposition to secular socialism. Some problems claimed to be associated with capitalism include: unfair and inefficient distribution of wealth and power; a tendency toward market monopoly or oligopoly (and government by oligarchy); imperialism, various forms of economic exploitation; and phenomena such as social alienation, inequality, unemployment, and economic instability. Near the start of the 20th century, Vladimir Lenin claimed that state use of military power to defend capitalist interests abroad was an inevitable corollary of monopoly capitalism.• 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. Some environmentalists, such as Murray Bookchin, have argued that capitalist production passes on environmental costs to all of society, and is unable to consider its impact upon ecosystems and the biosphere at large (see externality and social cost). 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. 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.• 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.• 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. Some peer-reviewed studies find evidence for causation. Notes See also Sources and further reading 15th - 18th Century3 vols. | |||||||||||||||||||||
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