Capitalism

Overview

Capitalism is an economic system based on the private ownership of the means of production and its use for the purpose of obtaining profit. This socioeconomic system has developed historically in several stages and is defined by a number of constituent elements: private property, profit motive, capital accumulation, competitive markets, commodification, wage labor, and an emphasis on innovation and economic growth. Capitalist economies tend to experience business cycles of economic expansion followed by recessions. Economists, historians, political economists, and sociologists have adopted different perspectives in their analyses of capitalism and have recognized various forms of it in practice. These include laissez-faire capitalism, free-market capitalism, state capitalism, and welfare capitalism. Different forms of capitalism feature varying degrees of free markets, public ownership, barriers 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 markets are free and the rules defining private property are matters of politics and policy. Most of the existing economies in the world today are mixed economies that combine elements of free markets with state intervention and, in some cases, economic planning. Capitalism in its modern form emerged from agrarianism in England, as well as from mercantilist practices in European countries between the 16th and 18th centuries. The Industrial Revolution of the 18th century established capitalism as a dominant mode of production characterized by factory work and a complex division of labor. Through globalization, capitalism spread across the world in the 19th and 20th centuries, especially before World War I and again after the end of the Cold War. During the 19th century, capitalism was largely unregulated by the state but became more regulated in the post–World War II period through Keynesianism, followed by a return of more unregulated capitalism termed neoliberalism starting in the 1980s.

Etymology

The term "capitalist", meaning an owner of capital, appears earlier than the term "capitalism" and dates to the mid-17th century. "Capitalism" is derived from capital, which evolved from capitale, a late Latin word based on caput, meaning "head"—which is also the origin of "chattel" and "cattle" in the sense of movable property (only much later to refer only to livestock). Capitale emerged in the 12th to 13th centuries to refer to funds, stock of merchandise, sum of money or money carrying interest. By 1283, it was used in the sense of the capital assets of a trading firm and was often interchanged with other words—wealth, money, funds, goods, assets, property and so on. The Hollantse Mercurius (1651-1691) uses "capitalists" in 1653 and 1654 to refer to owners of capital. In French, Étienne Clavier referred to capitalistes in 1788, four 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. English poet Samuel Taylor Coleridge used "capitalist" in his work Table Talk (1823). Pierre-Joseph Proudhon used the term in his first work, What is Property? (1840), to refer to the owners of capital. Benjamin Disraeli used the term in his 1845 work Sybil. Alexander Hamilton used "capitalist" in his Report of Manufactures presented to the United States Congress in 1791. The initial use of the term "capitalism" in its modern sense is attributed to Louis Blanc in 1850 ("What I call 'capitalism' that is to say the appropriation of capital by some to the exclusion of others") and Pierre-Joseph Proudhon in 1861 ("Economic and social regime in which capital, the source of income, does not generally belong to those who make it work through their labor"). Karl Marx frequently referred to the "capital" and to the "capitalist mode of production" in Das Kapital (1867). Marx did not use the form capitalism but instead used capital, capitalist and capitalist mode of production, which appear frequently. Due to the word being coined by socialist critics of capitalism, economist and historian Robert Hessen stated that the term "capitalism" itself is a term of disparagement and a misnomer for economic individualism. Bernard Harcourt agrees with the statement that the term is a misnomer, adding that it misleadingly suggests that there is such a thing as "capital" that inherently functions in certain ways and is governed by stable economic laws of its own. In the English language, the term "capitalism" first appears, according to the Oxford English Dictionary (OED), in 1854, in the novel The Newcomes by novelist William Makepeace Thackeray, where the word meant "having ownership of capital". Also according to the OED, Carl Adolph Douai, a German American socialist and abolitionist, used the term "private capitalism" in 1863. Other terms sometimes used for capitalism are:

Capitalist mode of production Economic liberalism Free enterprise Free enterprise economy Free market Free market economy Laissez-faire Market economy Profits system Self-regulating market

Definition

There is no universally agreed upon definition of capitalism; it is unclear whether or not capitalism characterizes an entire society, a specific type of social order, or crucial components or elements of a society. Societies officially founded in opposition to capitalism, such as the Union of Soviet Socialist Republics (U.S.S.R), and the People's Republic of China, have sometimes been argued to actually exhibit characteristics of capitalism, despite the denouncement from their claimed communist ideology. Nancy Fraser describes usage of the term "capitalism" by many authors as "mainly rhetorical, functioning less as an actual concept than as a gesture toward the need for a concept". Scholars who are uncritical of capitalism rarely actually use the term "capitalism". Some doubt that the term "capitalism" possesses valid scientific dignity, and it is generally not discussed in mainstream economics, with economist Daron Acemoglu suggesting that the term "capitalism" should be abandoned entirely. Consequently, understanding of the concept of capitalism tends to be heavily influenced by opponents of capitalism and by the followers and critics of Karl Marx.

History

Capitalism, in its modern form, can be traced to the emergence of agrarian capitalism and mercantilism in the early Renaissance, in city-states like Florence. 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 labor. Simple commodity exchange and consequently simple commodity production, which is the initial basis for the growth of capital from trade, have a very long history. During the Islamic Golden Age, Arabs promulgated capitalist economic policies such as free trade and banking. Their use of Indo-Arabic numerals facilitated bookkeeping. These innovations migrated to Europe through trade partners in cities such as Venice and Pisa. Italian mathematicians traveled the Mediterranean talking to Arab traders and returned to popularize the use of Indo-Arabic numerals in Europe.

Agrarianism

The economic foundations of the feudal agricultural system began to shift substantially in 16th-century England as 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.

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 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", i.e. 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...". After the period of the proto-industrialization, the British East India Company and the Dutch East India Company, after massive contributions from the Mughal Bengal, 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 Revolution

In the mid-18th century a group of economic theorists, led by David Hume (1711–1776) and Adam Smith (1723–1790), 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 effected the decline of the traditional handicraft skills of artisans, guilds, and journeymen. Industrial capitalism marked the development of the factory system of manufacturing, characterized by a complex division of labor between and within work process and the routine of work tasks; and eventually established the domination of the capitalist mode of production. Industrial Britain eventually abandoned the protectionist policy formerly prescribed by mercantilism. In the 19th century, Richard Cobden (1804–1865) and John Bright (1811–1889), who based their beliefs on the Manchester School, initiated a movement to lower tariffs. In the 1840s Britain adopted a less protectionist policy, with the 1846 repeal of the Corn Laws and the 1849 repeal of the Navigation Acts. Britain reduced tariffs and quotas, in line with David Ricardo's advocacy of free trade.

Modernity

Broader processes of globalization carried capitalism across the world. By the beginning of the nineteenth century, a series of loosely connected market systems had come together as a relatively integrated global system, in turn intensifying processes of economic and other globalization. Late in the 20th century, capitalism overcame a challenge by centrally-planned economies and is now the encompassing system worldwide, with the mixed economy as 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. The imperialism of the 18th-century decisively shaped globalization. After the First and Second Opium Wars (1839–1860) by Britain and France and the completion of the British conquest of India by 1858 and the French conquest of Africa, Polynesia and Indochina by 1887, vast populations of Asia became consumers of European exports. Europeans colonized areas of Africa and the Pacific islands. Colonisation by Europeans, notably of Africa by the British and French, 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. From the 1870s to the early 1920s, 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, transatlantic cable, radiotelephone, steamships, and railways allowed goods and information to move around the world to an unprecedented degree. In the United States, until the 1920s, the term "capitalist" primarily referred to powerful businessmen due to widespread societal skepticism and criticism of capitalism and its most ardent supporters.

Contemporary capitalist societies developed in the West from 1950 to the present and this type of system continues throughout the world—relevant examples started in the United States after the 1950s, France after the 1960s, Spain after the 1970s, Poland after 2015, and others. At this stage most capitalist markets are considered developed and characterized by developed private and public markets for equity and debt, a high standard of living (as characterized by the World Bank and the IMF), large institutional investors and a well-funded banking system. A significant managerial class has emerged and decides on a significant proportion of investments and other decisions. A different future than that envisioned by Marx has started to emerge—explored and described by Anthony Crosland in the United Kingdom in his 1956 book The Future of Socialism and by John Kenneth Galbraith in North America in his 1958 book The Affluent Society, 90 years after Marx's research on the state of capitalism in 1867. The postwar boom ended in the late 1960s and early 1970s and the economic situation grew worse with the rise of stagflation. Monetarism, a modification of Keynesianism that is more compatible with laissez-faire analyses, gained increasing prominence in the capitalist world, especially under the years in office of Ronald Reagan in the United States (1981–1989) and of Margaret Thatcher in the United Kingdom (1979–1990). Public and political interest began shifting away from the so-called collectivist concerns of Keynes's managed capitalism to a focus on individual choice, called "remarketized capitalism". The end of the Cold War and the dissolution of the Soviet Union allowed for capitalism to become a truly global system in a way not seen since before World War I. The development of the neoliberal global economy would have been impossible without the fall of communism. Harvard Kennedy School economist Dani Rodrik distinguishes between three historical variants of capitalism:

Capitalism 1.0 during the 19th century entailed largely unregulated markets with a minimal role for the state (aside from national defense, and protecting property rights); Capitalism 2.0 during the post-World War II years entailed Keynesianism, a substantial role for the state in regulating markets, and strong welfare states; Capitalism 2.1 entailed a combination of unregulated markets, globalization, and various national obligations by states.

Relationship to democracy

The relationship between democracy and capitalism is a contentious area in theory and in popular political movements. The extension of adult-male suffrage in 19th-century Britain occurred along with the development of industrial capitalism and representative democracy became widespread at the same time as capitalism, leading capitalists to posit a causal or mutual relationship between them. However, according to some authors in the 20th-century, 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 others suggest this may be because of political similarity or stability, rather than because they are "democratic" or "capitalist". Critics argue that though economic growth under capitalism has led to democracy, it may not do so in the future as authoritarian régimes have been able to manage economic growth using some of capitalism's competitive principles without making concessions to greater political freedom. Political scientists Torben Iversen and David Soskice see democracy and capitalism as mutually supportive. Robert Dahl argued in On Democracy that capitalism was beneficial for democracy because economic growth and a large middle class were good for democracy. He also argued that a market economy provided a substitute for government control of the economy, which reduces the risks of tyranny and authoritarianism. In his book The Road to Serfdom (1944), Friedrich Hayek (1899–1992) asserted that the free-market understanding of economic freedom as present in capitalism is a requisite of political freedom. He argued that the market mechanism is the only way of deciding what to produce and how to distribute the items without using coercion. Milton Friedman and Ronald Reagan also promoted this view. Friedman claimed that centralized economic operations are always accompanied by political repression. In his view, transactions in a market economy are voluntary and the wide diversity that voluntary activity permits is a fundamental threat to repressive political leaders and greatly diminishes their power to coerce. Some of Friedman's views were shared by John Maynard Keynes, who believed that capitalism was vital for freedom to survive and thrive. Freedom House, an American think-tank that conducts international research on, and advocates for, democracy, political freedom and human rights, has argued that "there is a high and statistically significant correlation between the level of political freedom as measured by Freedom House and economic freedom as measured by the Wall Street Journal/Heritage Foundation survey". In Capital in the Twenty-First Century (2013), Thomas Piketty of the Paris School of Economics asserted that inequality is the inevitable consequence of economic growth in a capitalist economy and the resulting concentration of wealth can destabilize democratic societies and undermine the ideals of social justice upon which they are built. According to Clara Mattei, capitalism and democracy are "fundamentally incompatible" as real democracy requires a modicum of economic agency, which capitalism can undermine by making the majority of people dependent on selling their labor for survival. States with capitalistic economic systems include political regimes deemed to be authoritarian or oppressive. Singapore has a successful open market economy as a result of its competitive, business-friendly climate and robust rule of law. Nonetheless, it often comes under fire for its style of government which, though democratic and consistently one of the least corrupt, operates largely under a one-party rule. Furthermore, it does not vigorously defend freedom of expression as evidenced by its government-regulated press, and its penchant for upholding laws protecting ethnic and religious harmony, judicial dignity and personal reputation. The private (capitalist) sector in the People's Republic of China has grown exponentially and thrived since its inception, despite having an authoritarian government. Augusto Pinochet's rule in Chile led to economic growth and high levels of inequality by using authoritarian means to create a safe environment for investment and capitalism. Similarly, Suharto's authoritarian reign and extirpation of the Communist Party of Indonesia allowed for the expansion of capitalism in Indonesia. The term "capitalism" in its modern sense is often attributed to Karl Marx. In Das Kapital, Marx analyzed the "capitalist mode of production" using a method of critique that later became known as Marxism. However, while Marx did discuss capitalism extensively, he used the term "capitalism" less frequently than "capitalist mode of production". His collaborator, Friedrich Engels, played a significant role in popularizing the term in more political interpretations of their work. In the 20th century, supporters of the capitalist system often replaced the term "capitalism" with phrases such as "free enterprise" or "private enterprise" to avoid its negative connotations. Similarly, the term "capitalist" was sometimes substituted with "investor" or "entrepreneur" to emphasize productive roles rather than passive wealth accumulation.

Characteristics

In general, capitalism as an economic system and mode of production can be summarized by the following:

Capital accumulation: production for profit and accumulation as the implicit purpose of all or most of production, constriction or elimination of production formerly carried out on a common social or private household basis. Commodity production: production for exchange on a market; to maximize exchange-value instead of use-value. Exchange of goods or services, can be enabled by contracts. Exchange of services can be in form of wage labor. Private ownership of the means of production. The investment of money to make a profit. The use of the price mechanism to allocate resources between competing uses. Economically efficient use of the factors of production and raw materials due to maximization of value added in the production process. Freedom of capitalists to act in their self-interest in managing their business and investments. Capital suppliance by "the single owner of a firm, or by shareholders in the case of a joint-stock company".

Market

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 they are regulated to some extent by the state in order to correct market failures, promote social welfare, conserve natural resources, fund defense and public safety or other rationale. 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. Competition arises when more than one producer is trying to sell the same or similar products to the same buyers. Adherents of the capitalist theory believe that competition leads to innovation and more affordable prices. Monopolies or cartels can develop, especially if there is no competition. A monopoly occurs when a firm has exclusivity over a market. Hence, the firm can engage in rent seeking behaviors such as limiting output and raising prices because it has no fear of competition. Governments have implemented legislation for the purpose of preventing the creation of monopolies and cartels. In 1890, the Sherman Antitrust Act became the first legislation passed by the United States Congress to limit monopolies.

Wage labor

Wage labor, usually referred to as paid work, paid employment, or paid labor, refers to the socioeconomic relationship between a worker and an employer in which the worker sells their labor power under a formal or informal employment contract. "All labor contracts were/are designed legally to bind a worker in one way or another to fulfill the labor obligations the worker has undertaken. That is one of the principal purposes of labor contracts." These transactions usually occur in a labor market where wages or salaries are market-determined. In exchange for the money paid as wages (usual for short-term work-contracts) or salaries (in permanent employment contracts), the work product generally becomes the undifferentiated property of the employer. A wage laborer is a person whose primary means of income is from the selling of their labor in this way.