This article is about the economic system. For the racehorse, see Capitalist (horse). For other uses, see Capitalism (disambiguation).
Capitalism is an economic system based upon private ownership of the means of production and their operation for profit. Characteristics central to capitalism include private property, capital accumulation, wage labor, voluntary exchange, a price system and competitive markets. In a capitalist market economy, decision-making and investment are determined by every owner of wealth, property or production ability in financial and capital markets, whereas prices and the distribution of goods and services are mainly determined by competition in goods and services markets.
Economists, political economists, sociologists, and historians have adopted different perspectives in their analyses of capitalism and have recognized various forms of it in practice. These include laissez-faire or free market capitalism, welfare capitalism and state capitalism. Different forms of capitalism feature varying degrees of free markets, public ownership, obstacles to free competition and state-sanctioned social policies. The degree of competition in markets, the role of intervention and regulation and the scope of state ownership vary across different models of capitalism. The extent to which different markets are free, as well as the rules defining private property, are matters of politics and policy. Most existing capitalist economies are mixed economies, which combine elements of free markets with state intervention and in some cases economic planning.
Market economies have existed under many forms of government, in many different times, places and cultures. Modern capitalist societies – marked by a universalization of money-based social relations, a consistently large and system-wide class of workers who must work for wages, and a capitalist class which owns the means of production – developed in Western Europe in a process that led to the Industrial Revolution. Capitalist systems with varying degrees of direct government intervention have since become dominant in the Western world and continue to spread. Over time, capitalist countries have experienced consistent economic growth and an increase in the standard of living.
Critics of capitalism argue that it establishes power in the hands of a minority capitalist class that exists through the exploitation of the majority working class; prioritizes profit over social good, natural resources and the environment; and is an engine of inequality and economic instabilities. Supporters argue that it provides better products through competition, creates strong economic growth, yields productivity and prosperity that greatly benefits society, as well as being the most efficient system known for allocation of resources.
The term "capitalist", meaning an owner of capital, appears earlier than the term "capitalism" and it dates back to the mid-17th century. "Capitalism" 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 and 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). In his Principles of Political Economy and Taxation (1817), David Ricardo 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.
The initial usage of the term "capitalism" in its modern sense has been attributed to Louis Blanc in 1850 ("What I call 'capitalism' that is to say the appropriation of capital by some to the exclusion of others") and Pierre-Joseph Proudhon in 1861 ("Economic and social regime in which capital, the source of income, does not generally belong to those who make it work through their labour").Karl Marx and Friedrich Engels referred to the "capitalistic system" and to the "capitalist mode of production" in Capital (1867). The use of the word "capitalism" in reference to an economic system appears twice in Volume I of Capital, 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 2,600 times in the trilogy The Capital. According to the Oxford English Dictionary (OED), the term "capitalism" first appeared in English in 1854 in the novel The Newcomes by novelist William Makepeace Thackeray, where he meant "having ownership of capital". Also according to the OED, Carl Adolph Douai, a German-Americansocialist and abolitionist, used the phrase "private capitalism" in 1863.
Main article: History of capitalism
Capital has existed incipiently on a small scale for centuries, in the form of merchant, renting and lending activities, and occasionally as small-scale industry with some wage labour. Simple commodity exchange, and consequently simple commodity production, which are the initial basis for the growth of capital from trade, have a very long history. The "capitalistic era" according to Karl Marx dates from 16th century merchants and small urban workshops. Marx knew that wage labour existed on a modest scale for centuries before capitalist industry. Early Islam promulgated capitalist economic policies, which migrated to Europe through trade partners from cities such as Venice. Capitalism in its modern form can be traced to the emergence of agrarian capitalism and mercantilism in the Renaissance.
Thus for much of history, capital and commercial trade existed, but it did not lead to industrialisation or dominate the production process of society. That required a set of conditions, including specific technologies of mass production, the ability to independently and privately own and trade in means of production, a class of workers willing to sell their labour power for a living, a legal framework promoting commerce, a physical infrastructure allowing the circulation of goods on a large scale, and security for private accumulation. Many of these conditions do not currently exist in many Third World countries, although there is plenty of capital and labour. Thus, the obstacles for the development of capitalist markets are less technical and more social, cultural and political.
The economic foundations of the feudal agricultural system began to shift substantially in 16th-century England; the manorial system had broken down, and land began to become concentrated in the hands of fewer landlords with increasingly large estates. Instead of a serf-based system of labor, workers were increasingly employed as part of a broader and expanding money-based economy. The system put pressure on both landlords and tenants to increase the productivity of agriculture to make profit; the weakened coercive power of the aristocracy to extract peasant surpluses encouraged them to try better methods, and the tenants also had incentive to improve their methods, in order to flourish in a competitive labor market. Terms of rent for land were becoming subject to economic market forces rather than to 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 by 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, contrasting with the fragmented feudal holdings that prevailed in most parts of the Continent.
Main article: Mercantilism
The economic doctrine prevailing from the 16th to the 18th centuries is commonly called mercantilism. This period, the Age of Discovery, was associated with the geographic exploration of the 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 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 called 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.
European merchants, backed by state controls, subsidies, and monopolies, made most of their profits by buying and selling goods. In the words of Francis Bacon, the purpose of mercantilism was "the opening and well-balancing of trade; the cherishing of manufacturers; the banishing of idleness; the repressing of waste and excess by sumptuary laws; the improvement and husbanding of the soil; the regulation of prices ..."
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.
In the mid-18th century, a new group of economic theorists, led by David Hume and Adam Smith, challenged fundamental mercantilist doctrines such as the belief that 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, industrialists replaced merchants 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.
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Capitalism was carried across the world by broader processes of globalization and, by the end of the 18th 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.
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 18th-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. Also in this period, 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.
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.
In this period, the global financial system was mainly tied to the gold standard. The United Kingdom first formally adopted this standard in 1821. Soon to follow were Canada in 1853, Newfoundland in 1865, 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.
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 postwar boom ended in the late 1960s and early 1970s, and the situation was worsened by the rise of stagflation.Monetarism, a modification of Keynesianism that is more compatible with laissez-faire, gained increasing prominence in the capitalist world, especially under the leadership of Ronald Reagan in the U.S. 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".
According to Harvard academic Shoshana Zuboff a new genus of capitalism, surveillance capitalism monetizes data acquired through surveillance. She states it was first discovered and consolidated at Google, emerged due to the "coupling of the vast powers of the digital with the radical indifference and intrinsic narcissism of the financial capitalism and its neoliberal vision that have dominated commerce for at least three decades, especially in the Anglo economies" and depends on the global architecture of computer mediation which produces a distributed and largely uncontested new expression of power she calls "Big Other".
Relationship to democracy
The relationship between democracy and capitalism is a contentious area in theory and in 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 capitalists to posit a causal or mutual relationship between them. 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. Democratic peace theory asserts that democracies seldom fight other democracies, but critics of that theory suggest that this may be because of political similarity or stability rather than because they are democratic or capitalist.
Moderate critics argue that though economic growth under capitalism has led to democracy 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.
One of the biggest supporters of the idea that capitalism promotes political freedom, Milton Friedman, argues that competitive capitalism allows economic and political power to be separate, ensuring that they do not clash with one another. This idea has been challenged given the current influence capitalist lobbying has had on policy in the United States. The approval of Citizens United (organization), has led people to question the very idea that competitive capitalism promotes political freedom. The ruling on Citizens United allows corporations to spend undisclosed and unregulated amounts of money on political campaigns, shifting outcomes to the interests and undermining true democracy. As explained in Robin Hahnel’s writings, the centerpiece of the ideological defense of the free market system is the concept of economic freedom, and that supporters equate economic democracy with economic freedom and claim that only the free market system can provide economic freedom. According to Hahnel, there are a few objections to the premise that capitalism offers freedom through economic freedom. These objections are guided by critical questions about who or what decides whose freedoms are more protected. Often, the question of inequality is brought up when discussing how well capitalism promotes democracy. An argument that could stand is that economic growth can lead to inequality given that capital can be acquired at different rates by different people. In Capital in the Twenty-First Century, Thomas Piketty of the Paris School of Economics asserts that inequality is the inevitable consequence of economic growth in a capitalist economy and the resulting concentration of wealth can destabilize democratic societies and undermine the ideals of social justice upon which they are built.Marxists, anarchists (except for anarcho-capitalists), and other leftists argue that capitalism is incompatible with democracy since capitalism according to Marx entails "dictatorship of the bourgeoisie" (owners of the means of production) while democracy entails rule by the people.
States with capitalistic economic systems have thrived under political regimes deemed to be authoritarian or oppressive. Singapore has a successful open market economy as a result of its competitive, business-friendly climate and robust rule of law; nonetheless, it often comes under fire for (1) its brand of government, which, though democratic and consistently one of the least corrupt, operates largely under a one-party rule, and (2) not vigorously defending freedom of expression, given its government-regulated press, as well as penchant for upholding laws protecting ethnic and religious harmony, judicial dignity and personal reputation. The private (capitalist) sector in the People's Republic of China has grown exponentially and thrived since its inception, despite having an authoritarian government. Augusto Pinochet's rule in Chile led to economic growth and high levels of inequality by using authoritarian means to create a safe environment for investment and capitalism.
Varieties of capitalism
Peter A. Hall and David Soskice argued that modern economies have developed two different forms of capitalism: liberal market economies (or LME) (e.g. US, UK, Canada, New Zealand, Ireland) and coordinated market economies (CME) (e.g. Germany, Japan, Sweden, Austria). Those two types can be distinguished by the primary way in which firms coordinate with each other and other actors, such as trade unions. In LMEs firms primarily coordinate their endeavors by way of hierarchies and market mechanisms. Coordinated market economies more heavily rely on non-market forms of interaction in the coordination of their relationship with other actors (for a detailed description see Varieties of Capitalism). These two forms of capitalisms developed different industrial relations, vocational training and education, corporate governance, inter-firm relations and relations with employees. The existence of these different forms of capitalism has important societal effects, especially in periods of crisis and instability. Since the early 2000s the number of labor market outsiders has rapidly grown in Europe, especially among the youth, potentially influencing social and political participation. Using varieties of capitalism theory it is possible to disentangle the different effects on social and political participation that an increase of labor market outsiders has in liberal and coordinated market economies (Ferragina et al. 2016). The social and political disaffection, especially among the youth, seems to be more pronounced in liberal than coordinated market economies. This signals an important problem for liberal market economies in a period of crisis. If the market does not provide consistent job opportunities (as it has in previous decades), the shortcomings of liberal social security systems may depress social and political participation even further than in other capitalist economies.
Further information: Academic perspectives on capitalism
Capitalism is "production for exchange" driven by the desire for personal accumulation of money receipts in such exchanges, mediated by free markets. The markets themselves are driven by the needs and wants of consumers and those of society as a whole. Contemporary mainstream economics holds that the market, by an "invisible hand" and through little more than free trade, is able to match social production to these needs and desires.
In general, capitalism as an economic system and mode of production can be summarised by the following:
In free-market and laissez-faire forms of capitalism, markets are used 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.
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 engage in rent seeking behaviors such as limiting output and raising 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 prices.
Efforts are made by government to prevent the creation of monopolies and cartels. In 1890, the Sherman Anti-Trust Act became the first legislation passed by the U.S. Congress to limit monopolies.
The moth was more of a threat to global capitalism. Times, Sunday Times (2016)If his existentialenemy is modern capitalism, his intellectualfoe is the liberalapologist. Times, Sunday Times (2017)Most feel that there is something profoundly wrong with global capitalism - but no one offers an easyalternative. Times, Sunday Times (2016)It should strike a chord with all who wish to see modern capitalism servingbroader human ends. Times, Sunday Times (2009)It is part of the cycle of capitalism that businesses collapse. Times, Sunday Times (2016)And he valued the great stability and freedom of democratic capitalism more than any theory or idea. Times, Sunday Times (2012)Socialism was not just an aesthetic but an alternative economic system to capitalism. Times, Sunday Times (2014)The nature of capitalism in its competitive stagepromoted such a compromise.Henry, John F The Making of Neoclassical Economics (1990)Note that the same charge could not have been made under conditions of competitive capitalism.Henry, John F The Making of Neoclassical Economics (1990)It mustremain a competitive centre of capitalism. Times, Sunday Times (2012)This perspectiveemphasizes the production of housing and its integration into the financial and economic system of capitalism.Forrest, Ray & Murie, Alan & Williams, Peter Home-ownership - differentiation and fragmentation (1990)Western capitalism may be lookingsickly. Times, Sunday Times (2014)Most economistsagree that massive government spending is largelyresponsible for this improvedperformance of American capitalism.Hunt, E. K. Property and Prophets: The Evolution of Economic Institutions and Ideologies (1995)Such are the murkyorigins of modern Russian capitalism. Times, Sunday Times (2012)Thanksalso to global capitalism, that freedom is not goingaway. Christianity Today (2000)The rise of global capitalism continues apace, in the strangest of places. Times, Sunday Times (2007)It was based on a restructuring of American capitalism.John Cassidy DOT.CON (2001)But he also had it in for Western capitalism. Times, Sunday Times (2011)It is not a crisis of global capitalism, but a failure of one sector within it. Times, Sunday Times (2009)This book is concerned primarily with our present economic system, capitalism.Hunt, E. K. Property and Prophets: The Evolution of Economic Institutions and Ideologies (1995)I am appalled that so few serious business leadersstand up to defend business and capitalism in a coherent way. Times, Sunday Times (2015)And it has consistently championed business success and capitalism in an enthusiastic way, which was always a recipe to appeal to the self-made. Times, Sunday Times (2016)
private enterprise, free enterprise, private ownership, laissez faire or laisser faire
More Synonyms of capitalism