Capitalism is an economic system characterized by private sector ownership and private sector control of the major economic features of a society, such as the means of production and the distribution of goods and services. Intrinsic to capitalism is the concept of a marketplace or a market society, which is what fuels capitalism and provides it with coherence. Self-interest rather than sympathy is capitalism's primary motivation and "capitalists" seek to improve their standard of living by accumulating wealth. "Selfishness" is not necessarily a pejorative word in a capitalist society. Capitalist ideology nevertheless purports that societal welfare is enhanced by capitalism. Abhorrent to pure capitalism is state interference with or manipulation of marketplace forces.
The opposite of capitalism is a society marked by central planning whereby the state controls a country's economy. While neither capitalism nor central planning exist in their pure form, capitalism is championed by the United States, Canada, and the emerging "tiger economies" of Southeast Asia. In fact capitalism has become synonymous with the American ideal of self-determination, which led to the belief that government plays only a minuscule role in the administration of a capitalist economy. Modern capitalist societies, however, are hardly free from state intervention. Federal institutions in the United States, for example, govern the volume of money in circulation, manage growth in the economy, and, through taxation and regulation, redistribute wealth.
Capitalism is nevertheless characterized by the private ownership of property and commodities as well as the means of production; a decentralized decision-making process with individuals deciding their own resource allocation—especially choosing, as mediated by the marketplace, between consumption and production; a marketplace intervention in this decision-making process, which allows prices to equalize supply and demand; and the accumulation of wealth (usually in the form of commodities) to be used for exchange rather than consumption.
In contrast, socialism is an economic system in which the major factors of production and large industries are state owned or controlled, while smaller businesses remain under private control. Communism is an economic system in which all factors of production and all enterprises are state owned, with market decisions being made by a central authority. Central planning, until the fall of the Berlin Wall in 1989, was most closely associated with the former Soviet Union, most nations of Eastern Europe, and other communist countries. After 1989 the new transitional economies of the former Soviet bloc, and indeed Russia, began moving as quickly as possible towards a capitalist model, while the few remaining stalwarts of communism, such as Cuba and the People's Republic of China, are begrudgingly moving in that direction, albeit much more slowly.
Capitalism emerged gradually from an evolution of feudal social values as individuals abandoned traditional forms of servitude in favor of self employment and acquisition of private property. This evolution occurred most rapidly in Europe during the social revolts in the 15th century that produced the Renaissance. A new secular merchant class evolved with tremendous capabilities to generate and accumulate personal wealth. Commercial transactions soon superseded other forms of social interaction, providing new forms of autonomy from established political orders. The term "capitalism" was in usage by this time. It comes from the Latin caput for "head" and originated in the 12th and 13th centuries in reference to such things as interest, money, and stocks of merchandise. It later came to denote the moneyed wealth of a firm or merchant, but by the 18th century it designated productive capital. To Karl Marx (1818-1883), German philosopher and radical economist, "capital" and "mode of production" were interchangeable terms. "Capitalist" was in use by the mid-17th century and described one who owns "capital."
In the mid-1700s a group of French economists began promoting what came to be known as laissez-faire (originally a French phrase translated as "allow to do") economics. Laissez-faire economics replaced the tariffs and trade restrictions of mercantilism, an economic system that dominated Europe from approximately 1400 to 1700. Under laissez-faire, capitalism grew and new capitalists, mostly merchants, developed better production skills and cultivated privileged trading information to maintain profits. These profits or sales margins were a significant motivating factor that provided capital with which to purchase necessities as well as luxury items. Profits served as a personal reward for transactions that were now based on economic factors, rather than feudalistic command.
The commercial merchant invested in raw materials, added value by fashioning it into a salable item, and sold it at a premium over the cost of the original raw material plus the cost of labor. This process is described as M-C-M' whereby money (M) is invested into a commodity (C), which is then finished and marketed for a larger sum of money (M'). This marked an evolution of trade not for consumption value, but for exchange value. For example, it would not be logical for a potter to make 1,000 clay pots in hopes of being able to trade them for a horse—assuming a horse and 1,000 clay pots had the same value. What if the owner of the horse didn't need or want 1,000 clay pots? But under the new economic system the potter increases the value of clay by shaping it into pots, sells the pots for gold, and in turn buys the horse with all or some of the gold. The seller of the horse then also has gold with which to purchase more horses or other goods—rather than being stuck with 1,000 clay pots. The significance of this economic trend was that products were being produced not so much for their consumption or trade value rather but rather their exchange value.
One of the earliest and most articulate exponents of this new economic system was Adam Smith (1723-1790), a Scottish economist and moral philosopher. Smith championed the idea that laissez-faire economics would benefit its practitioners while also promoting society's general welfare. His best known work, An Inquiry into the Nature and Causes of the Wealth of Nations, was published in 1776 and remains today a cornerstone of capitalist philosophy. The Wealth of Nations sets forth the idea that the wealth of a nation is to be measured in the number and variety of consumable goods it is able to produce for sale or trade. Free trade, sans government interference, is thus vital to the prosperity of a country because the demand brought about by free trade will result in the production of more goods. These "capitalists," Smith argued (although without using that specific term), if allowed to act as "free agents"—that is free from government interference—while acting in their own self-interest would also inherently act in ways benefiting society as if they were "guided by an invisible hand." The unfettered production and sale of consumable goods is done so in response to the needs of the populace. In fulfilling these needs the capitalist profits and society prospers.
Intrinsic to capitalism is the marketplace. In fact the noted social theorist Max Weber (1864-1920) defined capitalism as an economic activity aligned toward a market and defined capitalists as those profiting from market exchanges and agreements. The marketplace is of course a concept rather than a physical reality. It is a situation in which buyers and sellers come together for the exchange of goods, labor, and capital. The marketplace is, in the words of the French economist Roger Guesnerie (1943-), an arena of opposition where conflict between buyer and seller is resolved by mutually agreed upon prices. Marketplace price determination is arrived at in accordance with supply and demand, with supply being the amount of goods and services offered for sale while demand is the amount of goods and services users are willing to purchase. Prices generally fall when supply exceeds demand and prices generally rise when demand exceeds supply. Prices will, however, ultimately balance supply and demand within an economic cycle. Another intrinsic feature of the marketplace is competition. Competition exists when a number of suppliers attempt to sell the same goods or services to buyers. Lower prices and/or improved quality will shift buyer preference from one supplier to another. Pure competition theoretically produces a marketplace equilibrium of goods and services on one hand and consumer desires and purchasing ability on the other. This in essence is pure capitalism.
The antithesis of capitalism is Marxian economics, named after Karl Marx. Marxian economics has its antecedent in the way capitalism emerged in Europe, especially in 18th- and 19th-century England—a capitalism marked by deprivation as well as enrichment. Under capitalism, economic personal property, such as commodities or the means of production, may be withheld from others by its owners. This limiting of supplies is done so as to yield higher profit margins. For example, the owner of a toll bridge may refuse passage to all but those willing to pay an exorbitantly high price. Anyone unwilling or unable to pay may not use the bridge.
Another characteristic of capitalism according to Marx is its exploitation of the surplus value of labor. At the most basic level, all able-bodied people possess personal property, or capital in the form of their labor. Workers enter the marketplace with the option of withholding their services from any employer unwilling to meet their price. But by selling their labor to other persons, workers enter into "wage-labor" contracts. The workers profit from their labor and may use the subsequent earnings to buy necessities. The employer, however, also realizes a profit from workers' labor. For instance the aforementioned potter may hire workers to shape and fire clay pots and then sell the pots for a price that exceeds the cost of wages and materials, thus providing a profit to the potter-entrepreneur. Through this wage-labor contract, however, a net portion of the workers' surplus value becomes the property of the now potter-entrepreneur-employer.
By the late 1800s Marx was arguing that this system alienated workers from the surplus value of their labor. The employer controlled the employment of labor—in effect, the capital necessary to add value to a raw material or service. Marx maintained that workers under capitalism were no better off than serfs under feudalism because of the inherently extractive nature of the employer-worker relationship that allowed social surplus to flow to a superior class. Marx was somewhat awed by the ability of capitalism to generate great personal wealth, but he felt it was nonetheless a system based on social domination rather than rational exchange.
Capitalism, Marx declared, would generate its own destruction. Marx argued that capitalist economies would falter in systematic "crises." These crises would cause social upheavals in which capital would be reorganized and economies would prepare for subsequent cycles. Wealth would become more and more concentrated into the hands of even more privileged classes. Marx felt that these crises would become more serious over time and eventually would inspire a revolution in which the laborers who were alienated from the profits of their effort would seize wealth from the higher classes and establish a society in which all property was communally owned and deprivation was eliminated—or, at least averaged.
Marx, however, could not foresee the growing intervention of governments, the rise of powerful labor unions, or the influence of new technologies—to say nothing of mutual funds and pension investment plans. He also failed to foresee the rising standard of living of the working class. These developments ultimately relieved the pressures that Marx said would produce political revolution, rendering his ideas all but obsolete. Communist revolutions, in fact, never took place in the Western industrialized countries as Marx predicted, but mostly in agrarian countries or countries with low levels of industrial development.
Another economist who had a profound effect on global economics and capitalist countries was John Maynard Keynes (1883-1946). In 1936, during the height of the world depression, the English economist argued in his General Theory of Employment, Interest, and Money that government intervention in market economies should take place during recessionary cycles. Keynes's theories formed much of the justification for the social welfare programs launched by President Franklin Roosevelt. The battle between nonintervention (described as neo-classicism) and limited intervention (Keynesianism) continues to rage within the political realm as conservative and liberal administrations respectively trade positions of leadership in democracies.
The politicalization of economic systems was especially pronounced after World War 11, when capitalist Western nations faced competition for resources, political influence, and wealth with the communist Soviet Union. Economic philosophy thus became an instrument of geopolitical competition.
The United States, having emerged from the war as the world's most formidable military power exercised an unrivaled capacity to project cultural and economic influence. This provided the United States and its allied economies with access to raw materials and new markets, fueling technological development and economic growth. Socialist governments, namely in the Soviet bloc, lost this competition in the early 1990s and were forced to abandon the cause of communism.
The capitalism that has emerged today, while not pure, is still based on capitalism's fundamental characteristics: private ownership, economic self-interest, and a marketplace that responds to supply and demand. Government involvement in capitalist economies focuses on maintaining competition, economic stability, public welfare, and to varying degrees a redistribution of wealth.
Nevertheless, in a lengthy interview with Nathan Gardels published in New Perspective Quarterly, author and management consultant Peter Drucker (1909-) raised questions about capitalism's future. "I have reservations about capitalism as a system because it idolizes economics as the be all and end all of life," Drucker said. He went on to say that it was socially and morally unforgivable for managers and chief executive officers to reap huge salaries, stock options, and other benefits while firing workers. "As societies, we will pay a heavy price for the contempt this generates among the middle managers and workers. In short, whole dimensions of what it means to be a human being and treated as one are not incorporated into the economic calculus of capitalism," he told Gardels. Drucker was heartened, however, by how capitalism allows for citizen participation. "The wealth that makes the difference in America today is that held by the tens of millions of small investors." This is especially true since the explosion of mutual funds, with more than 51 percent of Americans now owning shares of stock. This has resulted in workers' retirement funds owning the means of production—"capitalism sans capitalists." Drucker also believes that although capitalism is certainly important, capitalists no longer are. Drucker, for instance, compared J.P. Morgan (1837-1913) to Bill Gates (1955-). At the apogee of his accumulated wealth Morgan had enough liquid capital to finance all capital needs in America for about four months. Bill Gates, however, would be able to finance America's capital needs for only one day with his personal fortune of $40 billion plus. It must also be noted that adjusting for inflation Gates is about two-thirds wealthier than Morgan was. "As a rich man, [Gates] is totally irrelevant. How he spends or wastes his money will have no impact on the American economy. It is a drop in the bucket," Drucker said. Drucker believes that capitalism should incorporate or add another dimension in American society to the other existing two—business and government. What is needed is a "civil society" to cope with all community and social needs, from health care to tutoring students. This third sector will be complemented by the dispersed ownership of the economy through pension and mutual funds.
Capitalism is a historically developed ideology of social organization that evolved from the natural instincts of self-interest that are inherent in all humans. It is an order of social interaction, accumulation, and production that provides direct rewards to every person for the employment of his or her own capital. The engine of capitalism is private property and its primary motivational factor is profit. People are inspired to employ their personal capitals to recoup their investment—and perpetuate the cycle of production—and also generate profit. The profit thus becomes a reward for the activity, as it may be used to purchase items that raise the person's standard of living.
[ John Simley
updated by Michael Knes ]
Berger, Peter L. The Capitalist Revolution: Fifty Propositions about Prosperity, Equity, and Liberty. New York: Basic Books, 1986.
Callon, Michel, ed. The Laws of the Markets. Malden, MA: Blackwell Publishers/Sociological Review, 1998.
Gardels, Nathan. "Beyond Capitalism." New Perspectives Quarterly 15, no. 2 (spring 1998): 4-12.
Gianaris, Nicholas V. Modern Capitalism: Privatization. Employee Ownership, and Industrial Democracy. Westport, CT: Praeger, 1996.
McCraw, Thomas K., ed. Creating Modern Capitalism: How Entrepreneurs, Companies. and Countries Triumphed in Three Industrial Revolutions. Cambridge, MA: Harvard University Press, 1997.
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