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For other uses, see Capitalism (disambiguation).

Capitalism refers to an economic system based on the production of commodities for sale, exchange, and profit; and private ownership of the means of production. ^{[1] [2]} In a capitalist economic system, capital, or wealth, is put to work to produce more capital. Other important characteristics of capitalism have included wage labor; the accumulation of large amounts of capital (such as raw materials and machine equipment); market exchange; and specialized techniques of finance and production such as banking, credit, and insurance.

The development of modern capitalism traces back to the 16th century, although some features of capitalist organization existed in the ancient world.^[3] 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. ^[4]

The concept of capitalism has limited analytic value by itself because of the great variety of historical cases over which it might be applied, depending on time and the geographical and political cultural scope.^[5] Thus, economists have specified a variety of different types of capitalism according to various factors, including the variation in the concentration of economic power and wealth, and methods of capital accumulation across historical cases.

Contents 1 Etymology 2 Perspectives on the characteristics of capitalism 2.1 Classical political economy and neoclassical economics 2.2 Marxian political economy 2.3 Weberian political sociology 2.4 The German Historical School and the Austrian School 3 History of capitalism 3.1 Merchant capitalism and mercantilism 3.2 Industrial capitalism and laissez-faire 3.3 Finance capitalism and monopoly capitalism 3.4 Capitalism following the Great Depression 3.5 Globalization 4 Capitalism and social and political theory 5 Criticisms of capitalism 6 Notes 7 See also 8 External links 9 Further reading

[edit] Etymology

The Oxford English Dictionary cited its first use of the word "capitalism" in 1854, and "capitalist" in 1792.^[6] Marxist writers originally popularized the term "capitalism," 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 many different ways.^[7]

[edit] Perspectives on the characteristics of capitalism

[edit] Classical political economy and neoclassical economics

The "classical" tradition in economic thought emerged in Britain in the late 18th century. The classical political economists Adam Smith, David Ricardo, John 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 mainstream economists.

Smith devised a set 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. This belief in the market as the most fair and efficient arbitrator of resources is strongly associated with the classical liberal doctrine of minimal government intervention in the economy—the political counterpart to the prevailing capitalist thought in much of the Anglo-Saxon world through much of the nineteenth and neoliberalism today.

Today, most academic research on capitalism in the English-speaking world draws on neoclassical economic thought. The ideal of capitalism of many neoclassical economists is closely tied to neoliberalism, favoring extensive market coordination and relatively neutral patterns of governmental market regulation aimed at maintaining property rights, rather than privileging particular social actors; deregulated labor markets; corporate governance dominated by financial owners of firms; and financial systems depending cheifly on capital market-based financing rather than state financing.

Liberal capitalist thought has generally assumed a clear division between the economy and other realms of of social activity, such as the state.^[8] However, the assumptions of the classical political economists have been challenged from a variety of alternative theoretical traditions. Since the mid 19th century, Marxism has emerged as the most prominent of these challenges.

[edit] Marxian political economy

Karl Marx understood capitalism as a historically specific mode of production (the way in which the productive property is owned and controlled, combined with the corresponding social relations between individuals based on their connection with the process of production) in which capital has become the dominant means of production.^[9] The capitalist stage of development or "bourgeois society," for Marx, represented the most advanced form of social organization to date. In a famous passage of his 1848 Communist Manifesto, Marx noted:

"[The bourgeoisie] has been the first to show what man’s activity can bring about. It has accomplished wonders far surpassing Egyptian pyramids, Roman aqueducts, and Gothic cathedrals; it has conducted expeditions that put in the shade all former Exoduses of nations and crusades." [1]

Following Adam Smith, Marx distinguished the use value of commodities from their exchange value in the market. ^[10] Capital, according to Marx, is created with the purchase of commodities for the purpose of creating new commodities with a higher exchange value higher than the sum of the original purchases. This distinction is possible, given the use of labor power, which itself has itself become a commodity under capitalism.^[11] According to Marx, the exchange value of labor power, as reflected in the wage, is less than the value it produces for the capitalist. Marx defined the difference as surplus value, which the capitalists extracts and accumulates. In a particularly well-known passage of Das Kapital, Marx argues that the capitalist mode of production is distinguished by how the owners of capital extract this surplus from workers:

the really distinctive feature of each society is not how the bulk of labour is done, but how the extraction of the surplus from the immediate producer is secured: 'It is in each case the direct relationship of the owners of the conditions of production to the immediate producers ... in which we find the innermost secret, the hidden basis of the entire social edifice, and hence also the political form of the relationship of sovereignty and dependence, in short the specific form of state in each case.^[12]

For Marx, this cycle the extraction of the surplus value by the owners of capital or the bourgeoisie becomes the basis of class struggle. However, this argument is intertwined with Marx's labor theory of value asserting that labor is the source of all value and thus profit. This theory is contested by most mainstream economists today, and even by many contemporary neo-Marxists. ^[13]

[edit] Weberian political sociology

In the contemporary social sciences, the understanding of the defining characteristics of capitalism are still strongly shaped not only by the influential writings of Karl Marx but also those of Max Weber, another 19th century German social theorist.^[14] Weber's pioneering works traced the correspondence between development of capitalism in the modern West and the growing rationalization of all spheres modern of social life. Weber's studies were particularly focused on the growing specialization of economic and social relations; and the rise of formally free labor; network of markets for commodities; and well-developed monetary systems.

Unlike Marx, Weber considered market exchange, rather than production, as the defining feature of capitalism.^[15] For Weber, the defining attribute of capitalist enterprises, in contrast to their counterparts associated with traditional modes of economic activity, was their rationalization of production directed toward maximizing efficiency and productivity. In contrast, according to Weber, workers in traditional 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 classic 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 'spirt' 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.

[edit] 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. Although this perspective shares similar theoretical roots with that of Weber, its emphasis on markets and money lends it different focus.^[16] For followers of the German Historical School, the key shift from tradition modes of economic activity to capitalism involved the shift from medieval restrictions on credit and money to the modern monentary 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. At any moment of time, posits Schumpeter, there are rising industries and declining industries. Schumpeter, and today many mainsteam 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 Nobel Laureate Freidrich 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.

[edit] History of capitalism

Main article: History of capitalism

In the period between the late 15th century and the late 18th century, much of Europe underwent a thoroughgoing economic transformation associated with the rise of capitalism and the shift from the town or the village to the modern state as the center of the economy.

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.^[17] Much of the history of the past five hundred years is concerned with the development of capitalism in its various forms, its condemnation and defense, and its rejection, particularly by socialists.

[edit] Merchant capitalism and mercantilism

Main article: 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.^[18][19] This period was associated with geographic discoveries by merchant overseas traders, especially from England and the Low Countries; the European colonization of the Americas; and the rapid growth in overseas trade. Referring to this period in the Communist Manifesto, Marx wrote:

The discovery of America, the rounding of the Cape, opened up fresh ground for the rising bourgeoisie. The East-Indian and Chinese markets, the colonisation of America, trade with the colonies, the increase in the means of exchange and in commodities generally, gave to commerce, to navigation, to industry, an impulse never before known, and thereby, to the revolutionary element in the tottering feudal society, a rapid development." [2]

Mercantilism was a system of trade for profit, although commodities were still largely produced by non-capitalist production methods.^[20] Noting the various pre-capitalist features of mercantilism, Karl Polanyi argued that capitalism did not emerge until the establishment of free trade in Britain in the 1830s.

Under mercantilism, European merchants, backed by state controls, subsidies, and monopolies, made most of their profits from the buying and selling of goods. In the words of Francis Bacon, the purpose of mercantilism was "the opening and well-balanacing 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..." ^[21] Similar practices of economic regimentatation had begun earlier in the medieval towns. However, under mercantilism, given the contemporaneous rise of the absolutism, the state superseded the local guilds as the regulator of the economy.

Among the major tenets of mercantilist theory was bullionism, a doctrine stressing the importance of accumulating precious metals. Mercantilists argued that a state should export more goods than it imported so that foreigners would have to pay the difference in precious metals. Mercantilists asserted that only raw materials that could not be extracted at home should be imported; and promoted government subsides, such as the granting of monopolies and protective tariffs, were necessary to encourage home production of manufactured goods.

Proponents of mercantilism emphasized state power and overseas conquest as the principal aim of economic policy. If a state could not supply its own raw materials, according to the mercantilists, it should acquire colonies from which they could be extracted. Colonies constituted not only sources of supply for raw materials but also markets for finished products. Because it was not in the interests of the state to allow competition, held the mercantilists, colonies should be prevented from engaging in manufacturing and trading with foreign powers.

[edit] 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 mercahnt 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; and finally established the global domination of the capitalist mode of production.^[22]

During the resulting Industrial Revolution, the industrialist replaced the merchant as a dominant actor in the capitalist system and effected the decline of the traditional handicraft skills of artisans, guilds, and journeymen. Also during this period, capitalism marked the transformation of relations between the British landowning gentry and peasants, giving rise to the production of cash crops for the market rather than for subsistence on a feudal manor. The surplus generated by the rise of commercial agriculture encouraged increased mechanization of agriculture.

The rise of industrial capitalism was also associated with the decline of mercantilism. Mid- to late-nineteenth-century Britain is widely regarded as the classic case of laissez-faire capitalism.^[23] Laissez-faire gained favor over mercantilism in Britain in the 1840s with the repeal of the Corn Laws and the Navigation Acts. 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.

[edit] 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. ^[24] 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 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.^[25]

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 long-term survival prospects. During the Great Depression of the 1930s, Marxist commentators often posited the possibility of capitalism's decline or demise, often in contrast to the ability of the Soviet Union to avoid suffering the effects of the global depression.^[26]

[edit] 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.^[27]

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.^[28] 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. ^[29] The phase of capitalism from the beginning of the postwar period through the 1970s has also been variously described as "state capitalism" by Maxist and non-Marxist commentators alike.

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 leadership of Ronald Reagan in the U.S. and Margaret Thatcher in the UK in the 1980s.

[edit] Globalization

Although the overseas trade has been associated with the development of capitalism for over five hundred years, a number 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. Today, these trends have bolstered the argument that capitalism should now be viewed as truly a world system. ^[30]

Following the unprecedented growth of international finance in the last quarter of the 20th century, by the beginning of the 21st century, the total value of transactions in foreign exchange was estimated to be at least twenty times greater that of all foreign movements of goods and services.^[31] This internationalization of finance, beyond the reach of state control, combined with the growing ease with which large corporations have been able to relocate their operations to low-wage states, has posed the question of the 'eclipse' of state sovereignty, arising from the growing 'globalization' of capital.^[32]

[edit] Capitalism and social and political theory

Main article: History of theory of capitalism

The basis for the study of the state in capitalism has been hotly debated across many subjects among social and political theorists since the 19th century.

The question of a relationship between democracy and capitalism has been the suject of a hotly contested debate for years. The extension universal male suffrage in 19th century Britain occurred along with the development of industrial capitalism, leading many theorists to posit a relationship. However, in the 20th century, capitalism would later accompany a variety of political forms in addition to liberal democracy, including fascist, monarchical, and single-party rule.^[33]

The relationship between capitalism and imperialism is another hotly debated question. In his famous pamphlet, Imperialism: The Highest Stage of Capitalism, Marxist theorist and revolutionary Vladimir Lenin related the rise of the 'New Imperialism' of the late 19th and early 20th centuries to monopoly capitalism. For Lenin, this stage was defined by the following characteristics: the export of financial capital supercedes the importance of the export of commodities, banking and industrial capital merge to form large finacial cartels and trusts in which production distribution are highly centralized, and monopoly capitalists influence state policy to carve up the world into spheres of interest.^[34] These trends, according to Lenin, lead states to defend their capitalist interests abroad through military power, thus increasing the likelihood of war and also imperialism. However, imperialism has been associated with a variety of political forms, and has even been attributed to foreign policy of the Soviet Union by its critics.

[edit] Criticisms of capitalism

Main article: Criticisms of capitalism

Criticisms of capitalism have sharply varied, depending on the wide range of cultural and historical contexts in which capitalist production relations have been embedded. Many 19th century conservatives were among the period's most strident critics of capitalism, seeing market exchange and commodity production as threats to longstanding cultural and religious traditions. Around the same period, Karl Marx established himself as the leading socialist critic of capitalism, predicting that what he saw as the antagonistic class relations and exploitation of capitalism would one day lead to its overthrow through revolution.

[edit] Notes

1. ^ "Capitalism" A Dictionary of Sociology. John Scott and Gordon Marshall. Oxford University Press 2005. Oxford Reference Online. Oxford University Press.
2. ^ Peter Burnham "Capitalism" The Concise Oxford Dictionary of Politics. Ed. Iain McLean and Alistair McMillan. Oxford University Press, 2003. Oxford Reference Online. Oxford University Press.
3. ^ "Capitalism." Encyclopædia Britannica. 2006. Encyclopædia Britannica Online. 24 June 2006.
4. ^ Scott (2005)
5. ^ Scott (2005)
6. ^ Burnham (2003)
7. ^ Burnham (2003)
8. ^ "Capitalism" Dictionary of the Social Sciences. Craig Calhoun, ed. Oxford University Press 2002. Oxford Reference Online. Oxford University Press.
9. ^ Burnham (2003)
10. ^ Scott (2005)
11. ^ Scott (2005)
12. ^ Karl Marx, Das Kapital, vol. iii, ch. 47 quoted in Scott (2005)
13. ^ Scott (2005)
14. ^ Scott (2005)
15. ^ Scott (2005)
16. ^ Burnham (2003)
17. ^ Scott (2005)
18. ^ Burnham (2003)
19. ^ Encyclopædia Britannica (2006)
20. ^ Scott (2005)
21. ^ Quoted in Sir George Clark, The Seventeenth Century (New York: Oxford University Pres, 1961), p. 24.
22. ^ Burnham (2003)
23. ^ Burnham (2003)
24. ^ Scott (2005)
25. ^ Scott (2005)
26. ^ Stanley L. Engerman "Capitalism" The Oxford Companion to United States History. Paul S. Boyer, ed. Oxford University Press 2001. Oxford Reference Online. Oxford University Press.
27. ^ Engerman (2001)
28. ^ Encyclopædia Britannica (2006)
29. ^ Burnham (2003)
30. ^ Burnham (2003)
31. ^ Encyclopædia Britannica (2006)
32. ^ For an assessment of this question, see Peter Evans, "The Eclipse of the State? Reflections on Stateness in an Era of Globalization," World Politics, 50, 1 (October 1997): 62-87.
33. ^ Burnham (2003)
34. ^ Burnham (2003)

[edit] See also

• Anti-capitalism
• Capitalism and related political ideologies
• Capitalist mode of production,
• Capitalist
• Classical liberalism
• Crony capitalism
• History of capitalism
  • Emergence of early capitalism,
• History of economic thought
• Late capitalism
• Libertarianism
• Mercantilism
• Merchant capitalism
• Spirit of capitalism
• State capitalism

[edit] External links

• "Capitalism" MSN Encarta
• "Capitalism" Britannica Concise
• "Capitalism" The Columbia Encyclopedia

[edit] Further reading

• Tom Bottomore Theories of Modern Capitalism (1985)
• Braudel, Fernand. Civilization and Capitalism : 15th - 18th Century 3 vols.
• James Fulcher Capitalism (2004)
• Milton Friedman, Capitalism and Freedom (1952, rev. ed. 1981)
• J. K. Galbraith, American Capitalism (1952, repr. 1982)
• Harvey, David. "The Political-Economic Transformation of Late Twentieth Century Capitalism." In Harvey, David. The Condition of Postmodernity. Cambridge, MA: Blackwell Publishers, 1990. ISBN 0631162941
• R. L. Heilbroner and L. C. Thurow, Economics Explained (1987)
• Marx, Karl. Capital: A Critical Analysis of Capitalist Production, 3 vol., 1886–1909; first published in German as Das Kapital: Kritik der politischen Oekonomie, 1867–1894.
• Rostow, W. W. The Stages of Economic Growth: A Non-Communist Manifesto. Cambridge: Cambridge University Press, 1960.
• J. A. Schumpeter, Capitalism, Socialism, and Democracy (1983)
• John Scott Corporate Business and Capitalist Classes (1997).
• Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations, 1776.
• Susan Strange, Casino Capitalism (1986)
• Wallerstein, Immanuel: The Modern World System.