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Capitalism is an economic and social system in which capital and land, the non-labor factors of production (also known as the means of production), are privately owned;[citation needed] labor, goods and resources are traded in markets; and profit, after taxes, is distributed to the owners or invested in technologies and, industries. Also see rise of financial capitalism, which controls all other forms of capitalism.

There is no consensus on the definition of capitalism, nor how it should be used as an analytical category.[1] There are a variety of historical cases over which it is applied, varying in time, geography, politics and culture.[2] Economists, political economists and historians have taken different perspectives on the analysis of capitalism. Scholars in the social sciences, including historians, economic sociologists, economists, anthropologists and philosophers have debated over how to define capitalism, however there is little controversy that private ownership of the means of production, creation of goods or services for profit in a market, and prices and wages are elements of capitalism.[3]

Economists usually put emphasis on the degree that government does not have control over markets (laissez faire), and on property rights,[4][5] while most political economists emphasize private property, power relations, wage labor and class.[6] There is a general agreement that capitalism encourages economic growth.[7] The extent to which different markets are "free", as well as the rules determining what may and may not be private property, is a matter of politics and policy and many states have what are termed "mixed economies."[6]

Capitalism as a system developed incrementally from the 16th century in Europe,[8] although capitalist-like organizations existed in the ancient world, and early aspects of merchant capitalism flourished during the Late Middle Ages.[9][10][11] Capitalism became dominant in the Western world following the demise of feudalism.[11] Capitalism gradually spread throughout Europe, and in the 19th and 20th centuries, it provided the main means of industrialization throughout much of the world.[2]

Variants on capitalism may include, depending on the theorist, such concepts as anarcho-capitalism, corporate capitalism, crony capitalism, finance capitalism, laissez-faire capitalism, technocapitalism, Neo-Capitalism, late capitalism, post-capitalism, state capitalism and state monopoly capitalism. There are also anti-capitalist movements and ideologies including Anti-capitalism and negative associations with the system such as tragedy of the commons, corporatism and wage slavery.


Etymology and early usage

Other terms sometimes used for capitalism:

Capital evolved from Capitale, a late Latin word based on proto-Indo-European kaput, 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 funds, stock of merchandise, sum of money, or money carrying interest.[9][19][20] By 1283 it was used in the sense of the capital assets of a trading firm. It was frequently interchanged with a number of other words—wealth, money, funds, goods, principal, assets, property, patrimony.[9]

The term capitalist refers to an owner of capital rather than an economic system, but shows earlier recorded use than the term capitalism, dating back to the mid-seventeenth century. The Hollandische Mercurius uses it in 1633 and 1654 to refer to owners of capital.[9] Arthur Young used the term capitalist in his work Travels in France (1792).[20][21] David Ricardo, in his Principles of Political Economy and Taxation (1817), referred to "the capitalist" many times.[22]

Samuel Taylor Coleridge, an English poet, used capitalist in his work Table Talk (1823).[23] 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.[20] Karl Marx and Friedrich Engels used the term capitalist (Kapitalist) in The Communist Manifesto (1848) to refer to a private owner of capital.

The term capitalism appeared in 1753 in the Encyclopédia, with the narrow meaning of "The state of one who is rich".[9] However, according to the Oxford English Dictionary (OED), the term capitalism was first used by novelist William Makepeace Thackeray in 1854 in The Newcomes, where he meant "having ownership of capital".[20] Also according to the OED, Carl Adolph Douai, a German-American socialist and abolitionist, used the term private capitalism in 1863.

The initial usage of the term capitalism in its modern sense has been attributed to Louis Blanc in 1850 and Pierre-Joseph Proudhon in 1861.[24] Marx and Engels referred to the capitalistic system (kapitalistisches System)[25][26] and to the capitalist mode of production (kapitalistische Produktionsform) in Das Kapital (1867).[27] The use of the word "capitalism" in reference to an economic system appears twice in Volume I of Das Kapital, 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 2600 times in the trilogy Das Kapital.

Marx's notion of the capitalist mode of production is characterised as a system of primarily private ownership of the means of production in a mainly market economy, with a legal framework on commerce and a physical infrastructure provided by the state.[28] Engels made more frequent use of the term capitalism; volumes II and III of Das Kapital, both edited by Engels after Marx's death, contain the word "capitalism" four and three times, respectively. The three combined volumes of Das Kapital (1867, 1885, 1894) contain the word capitalist more than 2,600 times.

An 1877 work entitled Better Times by Hugh Gabutt and an 1884 article in the Pall Mall Gazette also used the term capitalism.[20] A later use of the term capitalism to describe the production system was by the German economist Werner Sombart, in his 1902 book The Jews and Modern Capitalism (Die Juden und das Wirtschaftsleben). Sombart's close friend and colleague, Max Weber, also used capitalism in his 1904 book The Protestant Ethic and the Spirit of Capitalism (Die protestantische Ethik und der Geist des Kapitalismus).

Economic elements

The economics of capitalism developed out of the interactions of the following five items:


There are two types of commodities: capital goods and consumer goods. Capital goods are products not produced for immediate consumption (i.e. land, raw materials, tools, machines and factories), but as the inputs of consumer goods (i.e. televisions, cars, computers, houses) to be sold to others.


Money was primarily a standardized means of exchange which serves to reduce all goods and commodities to a standard value. It eliminates the cumbersome system of barter by separating the transactions involved in the exchange of products, thus greatly facilitating specialization and trade through encouraging the exchange of commodities.

However, besides serving as a medium of exchange for labour, goods and services, money is also a store of value, similar to precious metals.

Labour power

Labour includes all mental and physical human resources, including entrepreneurial capacity and management skills, which are needed to transform one type of commodity into another.

Means of production

Another term for capital goods – all manufactured aids to production such as tools, machinery, and buildings.

Production, costs, and pricing

The act of making goods or services through the combination of labour power and means of production.[29][30]



A painting of a French seaport from 1638 at the height of mercantilism.

The period between the sixteenth and eighteenth centuries is commonly described as mercantilism.[31] This period was associated with geographic exploration of the Age of Discovery being exploited by merchant overseas traders, especially from England and the Low Countries; the European colonization of the Americas; and the rapid growth in overseas trade. Mercantilism was a system of trade for profit, although commodities were still largely produced by non-capitalist production methods.[2]

While some scholars see mercantilism as the earliest stage of modern capitalism, others argue that modern capitalism did not emerge until later. For example, Karl Polanyi, noted that "mercantilism, with all its tendency toward commercialization, never attacked the safeguards which protected [the] two basic elements of production—labor and land—from becoming the elements of commerce"; thus mercantilist attitudes towards economic regulation were closer to feudalist attitudes, "they disagreed only on the methods of regulation."

Moreover Polanyi argued that the hallmark of capitalism is the establishment of generalized markets for what he referred to as the "fictitious commodities": land, labor, and money. Accordingly, "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."[32]

Evidence of long-distance merchant-driven trade motivated by profit has been found as early as the second millenium BC, with the Old Assyrian merchants.[33] The earliest forms of mercantilism date back to the Roman Empire. When the Roman Empire expanded, the mercantilist economy expanded throughout Europe. After the collapse of the Roman Empire, most of the European economy became controlled by local feudal powers, and mercantilism collapsed there. However, mercantilism persisted in Arabia. Due to its proximity to neighboring countries, the Arabs established trade routes to Egypt, Persia, and Byzantium. As Islam spread in the seventh century, mercantilism spread rapidly to Spain, Portugal, Northern Africa, and Asia. Mercantilism finally revived in Europe in the fourteenth century, as mercantilism spread from Spain and Portugal.[34]

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.

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-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…"[35]

Similar practices of economic regimentation had begun earlier in the medieval towns. However, under mercantilism, given the contemporaneous rise of absolutism, the state superseded the local guilds as the regulator of the economy. During that time the guilds essentially functioned like cartels that monopolized the quantity of craftsmen to earn above-market wages.[36]

At the period from the eighteenth century, the commercial stage of capitalism originated from the start of the British East India Company and the Dutch East India Company.[10][37] These companies were characterized by their colonial and expansionary powers given to them by nation-states.[10] 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 his "History of Economic Analysis," Austrian economist Joseph Schumpeter reduced mercantilist propositions to three main concerns: exchange controls, export monopolism and balance of trade.[38]


The Bank of England is one of the oldest central banks. It was founded in 1694 and nationalised in 1946.

A new group of economic theorists, led by David Hume[39] and Adam Smith, in the mid 18th century, 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.

During the 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, 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 routinization of work tasks; and finally established the global domination of the capitalist mode of production.[31]

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.[40] In the 1840s, Britain adopted a less protectionist policy, with the repeal of the Corn Laws and the Navigation Acts.[31] Britain reduced tariffs and quotas, in line with Adam Smith and David Ricardo's advocacy for free trade.

Karl Polanyi argued that capitalism did not emerge until the progressive commodification of land, money, and labor culminating in the establishment of a generalized labor market in Britain in the 1830s. For Polanyi, "the extension of the market to the elements of industry - land, labor and money - was the inevitable consequence of the introduction of the factory system in a commercial society." [41] Other sources argued that mercantilism fell after the repeal of the Navigation Acts in 1849.[40][42][43].


In the late 19th century, the control and direction of large areas of industry came into the hands of trusts, financiers and holding companies. This period was dominated by an increasing number of oligopolistic firms earning supernormal profits.[44] Major characteristics of capitalism in this period included the establishment of large 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.[2] The petroleum, telecommunication, railroad, shipping, banking and financial industries are characterized by its monopolistic domination. Inside these corporations, a division of labor separates shareholders, owners, managers, and actual laborers.[45]

By the last quarter of the 19th century, the emergence of large industrial trusts had provoked legislation in the US to reduce the monopolistic tendencies of the period. Gradually, during this Progressive Era, the US government played a larger and larger role in passing antitrust laws and regulation of industrial standards for key industries of special public concern. By the end of the 19th century, economic depressions and boom and bust business cycles had become a recurring problem.

In particular, the Long Depression of the 1870s and 1880s and the Great Depression of the 1930s affected almost the entire capitalist world, and generated discussion about capitalism’s long-term survival prospects. During 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.[46]

Keynesianism and neoliberalism

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 New York stock exchange traders' floor (1963)

After World War II, 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 the welfare state.[31] This era was greatly influenced by Keynesian economic stabilization policies. The postwar boom ended in the late 1960s and early 1970s, and the situation was worsened by the rise of stagflation.[47]

Exceptionally high inflation combined with slow output growth, rising unemployment, and eventually recession to cause a loss of credibility in the Keynesian welfare-statist mode of regulation. Under the influence of Friedrich Hayek and Milton Friedman, Western states embraced policy prescriptions inspired by laissez-faire capitalism and classical liberalism.

In particular, monetarism, a theoretical alternative to Keynesianism that is more compatible with laissez-faire, gained increasing prominence in the capitalist world, especially under the leadership of Ronald Reagan in the US and Margaret Thatcher in the UK in the 1980s. Finally, the general public's interest was shifted from the collectivist concerns of Keynes's managed capitalism to a focus on individual freedom and choice, called "remarketized capitalism." [48] In the eyes of many economic and political commentators, the collapse of the Soviet Union brought further evidence of the superiority of market capitalism over communism.


Although international trade has been associated with the development of capitalism for over five hundred years, some thinkers argue that a number of 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 a truly world system.[31] However, other thinkers argue that globalization, even in its quantitative degree, is no greater now than during earlier periods of capitalist trade.[49]

How capitalism works

Neoclassical economics explain capitalism as comprised of individuals, enterprises, markets and government. The following section is an explanation only through the point of view of neoclassical economists and does not conform to the views of heterodox economists such as John Maynard Keynes, Thorstein Veblen, Joseph Schumpeter or Karl Marx as seen below.


Individuals engage in a capitalist economy as consumers, labourers, and investors. For example, as consumers, individuals influence production patterns through their purchase decisions, as producers will change production to produce what is most profitable (most often what consumers want to buy).

As labourers, individuals may decide which jobs to prepare for and in which markets to look for work. As investors they decide how much of their income to save and how to invest their savings. These savings, which become investments, provide much of the money that businesses need to grow.


Business firms decide what to produce and where this production should occur. They also purchase inputs (materials, labour, and capital). Businesses try to influence consumer purchase decisions through marketing and advertisement as well as the creation of new and improved products. Driving the capitalist economy is the search for profits (revenues minus expenses). This is known as the profit motive, and it helps ensure that companies produce the goods and services that consumers desire and are able to buy.

To be successful, firms must sell a quantity of their product at a certain price to yield a profit. A business may consequently lose money if sales fall too low or costs are incurred that are too high. The profit motive also encourages firms to operate efficiently by using their resources in the most productive manner. By using less materials, labour or capital, a firm can cut its production costs which can lead to increased profits.

Commerce plays an important role in determining the growth rate of the capitalist economy. An economy grows when the total value of goods and services produced rises. This growth requires investment in infrastructure, capital and other resources necessary in production. In a capitalist nation, businesses decide when and how much they want to invest for these purposes.

The market

The price P of a product is determined by a balance between production at each price (supply S) and the desires of those with purchasing power at each price (demand D). This results in a market equilibrium, with a given quantity (Q) sold of the product. A rise in demand from D1 to D2 would result in an increase in price from P1 to P2 and an increase in output from Q1 to Q2.

The market is a term used by economists to describe a central exchange through which people are able to buy and sell goods and services. In a capitalist economy, the prices of goods and services are controlled mainly through supply and demand and competition.

Supply is the amount of a good or service produced by a firm and 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, so that the market is able to coordinate itself through pricing until a new equilibrium price and quantity is reached.

Competition arises when many producers are trying to sell the same or similar kinds of products to the same buyers. Competition is important in capitalist economies because it leads to innovation and more reasonable prices as firms that charge lower prices or improve the quality of their production can take buyers away from its competitors.

Furthermore, without competition, a monopoly or cartel may develop. A monopoly occurs when a firm supplies the total output in the market and means that the firm can limit output and raise 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 raise prices. Many countries have competition laws that prohibit monopolies and cartels from forming.

However, even though antimonopoly laws exist, large corporations can form near monopolies in some industries. Such firms can temporarily drop prices and accept losses to prevent competition from entering the market and then raise them again once the threat of entry is reduced. In many capitalist nations, public utilities (communications, gas, electricity, etc), are able to operate as a monopoly under government regulation due to high economies of scale.


Income in a capitalist economy depends primarily on what skills are in demand and what skills are currently being supplied. People who have skills that are in scarce supply are worth a lot more in the market and can attract higher incomes. Competition among employers for workers and among workers for jobs, help determine wage rates.

Firms need to pay high enough wages to attract the appropriate workers; however, when jobs are scarce workers may accept lower wages than when jobs are plentiful. Labour unions and the government also influence wages in capitalist nations. Unions act to represent labourers in negotiations with employers over such things as wage rates and acceptable working conditions. Most countries have an established minimum wage and other government agencies work to establish safety standards.

The government

In capitalist nations, the government does not prohibit private property, or prevent individuals from working where they please. The government also does not prevent firms from determining what wages they will pay and what prices they will charge for their products.

Under some versions of 'capitalism' the government also carries out a number of economic functions. For instance, it issues money, supervises public utilities and enforces private contracts. Laws, such as policy competition, protect against competition and prohibit unfair business practices. Government agencies regulate the standards of service in many industries, such as airlines and broadcasting, as well as financing a wide range of programs. In addition, the government regulates the flow of capital and uses things such as the interest rate to control factors such as inflation and unemployment.[50]

While in other versions, the governing body/bodies have no monopoly characteristics or legal exceptions.


Classical political economy

The classical school economic thought emerged in Britain in the late 18th century. The classical political economists Adam Smith, David Ricardo, Jean-Baptiste Say, and John Stuart Mill published analyses of the production, distribution and exchange of goods in a market that have since formed the basis of study for most contemporary economists.

In France, 'Physiocrats' like François Quesnay promoted free trade based on a conception that wealth originated from land. Quesnay's Tableau Économique (1759), described the economy analytically and laid the foundation of the Physiocrats' economic theory, followed by Anne Robert Jacques Turgot who opposed tariffs and customs duties and advocated free trade. Richard Cantillon defined long-run equilibrium as the balance of flows of income, and argued that the supply and demand mechanism around land influenced short-term prices.

Smith's attack on mercantilism and his reasoning for "the system of natural liberty" in The Wealth of Nations (1776) are usually taken as the beginning of classical political economy. 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 self-interest unintentionally produces a collective good for society. It was necessary for Smith to be so forceful in his argument in favor of free markets because he had to overcome the popular mercantilist sentiment of the time period.[51]

He criticized monopolies, tariffs, duties, and other state enforced restrictions of his time and believed that the market is the most fair and efficient arbitrator of resources. This view was shared by David Ricardo, second most important of the classical political economists and one of the most influential economists of modern times.[52]

In The Principles of Political Economy and Taxation (1817), he developed the law of comparative advantage, which explains why it is profitable for two parties to trade, even if one of the trading partners is more efficient in every type of economic production. This principle supports the economic case for free trade. Ricardo was a supporter of Say's Law and held the view that full employment is the normal equilibrium for a competitive economy.[53] He also argued that inflation is closely related to changes in quantity of money and credit and was a proponent of the law of diminishing returns, which states that each additional unit of input yields less and less additional output.[54]

The values of classical political economy are strongly associated with the classical liberal doctrine of minimal government intervention in the economy, though it does not necessarily oppose the state's provision of a few basic public goods.[55] Classical liberal thought has generally assumed a clear division between the economy and other realms of social activity, such as the state.[56]

While economic liberalism favors markets unfettered by the government, it maintains that the state has a legitimate role in providing public goods.[57] For instance, Adam Smith argued that the state has a role in providing roads, canals, schools and bridges that cannot be efficiently implemented by private entities. However, he preferred that these goods should be paid proportionally to their consumption (e.g. putting a toll). In addition, he advocated retaliatory tariffs to bring about free trade, and copyrights and patents to encourage innovation.[57]

Marxist political economy

Karl Marx considered capitalism to be 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 capitalism has become the dominant mode of production.[31]

The capitalist stage of development or "bourgeois society," for Marx, represented the most advanced form of social organization to date, but he also thought that the working classes would come to power in a worldwide socialist or communist transformation of human society as the end of the series of first aristocratic, then capitalist, and finally working class rule was reached.[58][59]

Following Adam Smith, Marx distinguished the use value of commodities from their exchange value in the market. Capital, according to Marx, is created with the purchase of commodities for the purpose of creating new commodities with an exchange value higher than the sum of the original purchases. For Marx, the use of labor power had itself become a commodity under capitalism; the exchange value of labor power, as reflected in the wage, is less than the value it produces for the capitalist.

This difference in values, he argues, constitutes surplus value, which the capitalists extract and accumulate. In his book Capital, Marx argues that the capitalist mode of production is distinguished by how the owners of capital extract this surplus from workers—all prior class societies had extracted surplus labor, but capitalism was new in doing so via the sale-value of produced commodities.[60] He argues that a core requirement of a capitalist society is that a large portion of the population must not possess sources of self-sustenance that would allow them to be independent, and must instead be compelled, to survive, to sell their labor for a living wage.[61][62][63]

In conjunction with his criticism of capitalism was Marx's belief that exploited labor would be the driving force behind a revolution to a socialist-style economy.[64] For Marx, this cycle of the extraction of the surplus value by the owners of capital or the bourgeoisie becomes the basis of class struggle. This argument is intertwined with Marx's version of the labor theory of value asserting that labor is the source of all value, and thus of profit.

Vladimir Lenin, in Imperialism, the Highest Stage of Capitalism (1916), modified classic Marxist theory and argued that capitalism necessarily induced monopoly capitalism—which he also called "imperialism"—to find new markets and resources, representing the last and highest stage of capitalism.[65] Some 20th century Marxian economists consider capitalism to be a social formation where capitalist class processes dominate, but are not exclusive.[66]

Capitalist class processes, to these thinkers, are simply those in which surplus labor takes the form of surplus value, usable as capital; other tendencies for utilization of labor nonetheless exist simultaneously in existing societies where capitalist processes are predominant. However, other late Marxian thinkers argue that a social formation as a whole may be classed as capitalist if capitalism is the mode by which a surplus is extracted, even if this surplus is not produced by capitalist activity, as when an absolute majority of the population is engaged in non-capitalist economic activity.[67]

David Harvey extends Marxian thinking through which he theorizes the differential production of place, space and political activism under capitalism. He uses Marx’s theory of crisis to aid his argument that capitalism must have its “fixes” but that we cannot predetermine what fixes will be implemented, nor in what form they will be.

This idea of fix is suggestive and could mean fix as in stabilize, heal or solve, or as in a junky needing a fix – the idea of preventing feeling worse in order to feel better. In Limits to Capital (1982), Harvey outlines an overdetermined, spatially restless capitalism coupled with the spatiality of crisis formation and its resolution. Furthermore, his work has been central for understanding the contractions of capital accumulation and international movements of capitalist modes of production and money flows.[68]

In his essay, Notes towards a theory of uneven geographical development, Harvey examines the causes of the extreme volatility in contemporary political economic fortunes across and between spaces of the world economy. He bases this uneven development on four conditionalities, being: The material embedding of capital accumulation processes in the web of socio-ecological life; accumulation by dispossession; the law-like character of capital accumulation in space and time; and, political, social and “class” struggles at a variety of geographical scales.[69]

Weberian political sociology

Max Weber in 1917

In some social sciences, the understanding of the defining characteristics of capitalism has been strongly influenced by 19th century German social theorist Max Weber. Weber considered market exchange, rather than production, as the defining feature of capitalism; capitalist enterprises, in contrast to their counterparts in prior modes of economic activity, was their rationalization of production, directed toward maximizing efficiency and productivity; a tendency leading to a sociological process of enveloping 'rationalization'. According to Weber, workers in pre-capitalist economic institutions understood work in terms of a personal relationship between master and journeyman in a guild, or between lord and peasant in a manor.[70]

In his book The Protestant Ethic and the Spirit of Capitalism (1904-1905), Weber sought to trace how a particular form of religious spirit, infused into traditional modes of economic activity, was a condition of possibility of modern western capitalism. For Weber, the 'spirit of capitalism' was, in general, that of ascetic Protestantism; this ideology was able to motivate extreme rationalization of daily life, a propensity to accumulate capital by a religious ethic to advance economically, and thus also the propensity to reinvest capital: this was sufficient, then, to create "self-mediating capital" as conceived by Marx.

This is pictured in Proverbs 22:29, “Seest thou a man diligent in his calling? He shall stand before kings” and in Colossians 3:23, "Whatever you do, do your work heartily, as for the Lord rather than for men." In the Protestant Ethic, Weber further stated that “moneymaking – provided it is done legally – is, within the modern economic order, the result and the expression of diligence in one’s calling…”

And, "If God show you a way in which you may lawfully get more than in another way (without wrong to your soul or to any other), if you refuse this, and choose the less gainful way, you cross one of the ends of your calling, and you refuse to be God's steward, and to accept His gifts and use them for him when He requierth it: you may labour to be rich for God, though not for the flesh and sin" (p. 108).

Western Capitalism, was, most generally for Weber, the "rational organization of formally free labor." The idea of the "formally free" laborer, meant, in the double sense of Marx, that the laborer was both free to own property, and free of the ability to reproduce his labor power, i.e., was the victim of expropriation of his means of production. It is only on these conditions, still abundantly obvious in the modern world of Weber, that western capitalism is able to exist.

For Weber, modern western capitalism represented the order "now bound to the technical and economic conditions of machine production which to-day determine the lives of all the individuals who are born into this mechanism, not only those directly concerned with economic acquisition, with irresistible force. Perhaps it will so determine them until the last ton of fossilized coal is burnt" (p. 123).[71] This is further seen in his criticism of "specialists without spirit, hedonists without a heart" that were developing, in his opinion, with the fading of the original Puritan "spirit" associated with capitalism.

Institutional economics

Institutional economics, once the main school of economic thought in the United States, holds that capitalism cannot be separated from the political and social system within which it is embedded. It emphasizes the legal foundations of capitalism (see John R. Commons) and the evolutionary, habituated, and volitional processes by which institutions are erected and then changed (see John Dewey, Thorstein Veblen, and Daniel Bromley.)

One key figure in institutional economics was Thorstein Veblen who in his book The Theory of the Leisure Class (1899) analyzed the motivations of wealthy people in capitalism who conspicuously consumed their riches as a way of demonstrating success. The concept of conspicuous consumption was in direct contradiction to the neoclassical view that capitalism was efficient.

In The Theory of Business Enterprise (1904) Veblen distinguished the motivations of industrial production for people to use things from business motivations that used, or misused, industrial infrastructure for profit, arguing that the former is often hindered because businesses pursue the latter. Output and technological advance are restricted by business practices and the creation of monopolies. Businesses protect their existing capital investments and employ excessive credit, leading to depressions and increasing military expenditure and war through business control of political power.

German Historical School and 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.[31] For followers of the German Historical School, the key shift from traditional modes of economic activity to capitalism involved the shift from medieval restrictions on credit and money to the modern monetary 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 many contemporary 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 Friedrich 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. Thinkers within Supply-side economics built on the work of the Austrian School, and particularly emphasize Say's Law: "supply creates its own demand." Capitalism, to this school, is defined by lack of state restraint on the decisions of producers.

Austrian economists claim that Marx failed to make the distinction between capitalism and mercantilism.[72][73] They argue that Marx conflated the imperialistic, colonialistic, protectionist and interventionist doctrines of mercantilism with capitalism.

Austrian economics has been a major influence on some forms of libertarianism, in which laissez-faire capitalism is considered to be the ideal economic system.[74] It influenced economists and political philosophers and theorists including Henry Hazlitt, Hans-Hermann Hoppe, Israel Kirzner, Murray Rothbard, Walter Block and Richard M. Ebeling.[75][76]

Keynesian economics

In his 1937 The General Theory of Employment, Interest, and Money, the British economist John Maynard Keynes argued that capitalism suffered a basic problem in its ability to recover from periods of slowdowns in investment. Keynes argued that a capitalist economy could remain in an indefinite equilibrium despite high unemployment.

Essentially rejecting Say's law, he argued that some people may have a liquidity preference that would see them rather hold money than buy new goods or services, which therefore raised the prospect that the Great Depression would not end without what he termed in the General Theory "a somewhat comprehensive socialization of investment."

Keynesian economics challenged the notion that laissez-faire capitalist economics could operate well on their own, without state intervention used to promote aggregate demand, fighting high unemployment and deflation of the sort seen during the 1930s. He and his followers recommended "pump-priming" the economy to avoid recession: cutting taxes, increasing government borrowing, and spending during an economic down-turn. This was to be accompanied by trying to control wages nationally partly through the use of inflation to cut real wages and to deter people from holding money.[77]

John Maynard Keynes tried to provide solutions to many of Marx’s problems without completely abandoning the classical understanding of capitalism. His work attempted to show that regulation can be effective, and that economic stabilizers can reign in the aggressive expansions and recessions that Marx disliked. These changes sought to create more stability in the business cycle, and reduce the abuses of laborers. Keynesian economists argue that Keynesian policies were one of the primary reasons capitalism was able to recover following the Great Depression.[78] The premises of Keynes’s work have, however, since been challenged by neoclassical and supply-side economics and the Austrian School.

Another challenge to Keynesian thinking came from his colleague Piero Sraffa, and subsequently from the Neo-Ricardian school that followed Sraffa. In Sraffa's highly technical analysis, capitalism is defined by an entire system of social relations among both producers and consumers, but with a primary emphasis on the demands of production. According to Sraffa, the tendency of capital to seek its highest rate of profit causes a dynamic instability in social and economic relations.

Neoclassical economics and the Chicago School

Today, the majority academic research on capitalism in the English-speaking world draws on neoclassical economic thought. It favors extensive market coordination and relatively neutral patterns of governmental market regulation aimed at maintaining property rights; deregulated labor markets; corporate governance dominated by financial owners of firms; and financial systems depending chiefly on capital market-based financing rather than state financing.

Milton Friedman took many of the basic principles set forth by Adam Smith and the classical economists and gave them a new twist. One example of this is his article in the September 1970 issue of The New York Times Magazine, where he claims that the social responsibility of business is “to use its resources and engage in activities designed to increase its profits…(through) open and free competition without deception or fraud.” This is similar to Smith’s argument that self-interest in turn benefits the whole of society.[79] Work like this helped lay the foundations for the coming marketization (or privatization) of state enterprises and the supply-side economics of Ronald Reagan and Margaret Thatcher.

The Chicago School of economics is best known for its free market advocacy and monetarist ideas. According to Friedman and other monetarists, market economies are inherently stable if left to themselves and depressions result only from government intervention.[80]

Friedman, for example, argued that the Great Depression was result of a contraction of the money supply, controlled by the Federal Reserve, and not by the lack of investment as John Maynard Keynes had argued. Ben Bernanke, current Chairman of the Federal Reserve, is among the economists today generally accepting Friedman's analysis of the causes of the Great Depression.[81]

Neoclassical economists, today the majority of economists,[82] consider value to be subjective, varying from person to person and for the same person at different times, and thus reject the labor theory of value. Marginalism is the theory that economic value results from marginal utility and marginal cost (the marginal concepts). These economists see capitalists as earning profits by forgoing current consumption, by taking risks, and by organizing production.

Political advocacy


Economic growth

World's GDP per capita shows exponential acceleration since the beginning of the Industrial Revolution.[83]

Many theorists and policymakers in predominantly capitalist nations have emphasized capitalism's ability to promote economic growth, as measured by Gross Domestic Product (GDP), capacity utilization or standard of living. This argument was central, for example, to Adam Smith's advocacy of letting a free market control production and price, and allocate resources. Many theorists have noted that this increase in global GDP over time coincides with the emergence of the modern world capitalist system.[84][85]

Proponents argue that increasing GDP (per capita) is empirically shown to bring about improved standards of living, such as better availability of food, housing, clothing, and health care.[86] The decrease in the number of hours worked per week and the decreased participation of children and the elderly in the workforce have been attributed to capitalism.[87][88][89][90]

Proponents also believe that a capitalist economy offers far more opportunities for individuals to raise their income through new professions or business ventures than do other economic forms. To their thinking, this potential is much greater than in either traditional feudal or tribal societies or in socialist societies.

Political freedom

Milton Friedman argued that the economic freedom of competitive capitalism is a requisite of political freedom. Friedman argued that centralized control of economic activity is 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 diminish power to coerce. Friedman's view was also shared by Friedrich Hayek and John Maynard Keynes, both of whom believed that capitalism is vital for freedom to survive and thrive.[91][92]


Austrian School economists have argued that capitalism can organize itself into a complex system without an external guidance or planning mechanism. Friedrich Hayek coined the term "catallaxy" to describe what he considered the phenomenon of self-organization underpinning capitalism. From this perspective, in process of self-organization, the profit motive has an important role. From transactions between buyers and sellers price systems emerge, and prices serve as a signal as to the urgent and unfilled wants of people. The promise of profits gives entrepreneurs incentive to use their knowledge and resources to satisfy those wants. Thus the activities of millions of people, each seeking his own interest, are coordinated.[93]

This decentralized system of coordination is viewed by some supporters of capitalism as one of its greatest strengths. They argue that it permits many solutions to be tried, and that real-world competition generally finds a good solution to emerging challenges. In contrast, they argue, central planning often selects inappropriate solutions as a result of faulty forecasting. However, in all existing modern economies, the state conducts some degree of centralized economic planning (using such tools as allowing the country's central bank to set base interest rates), ostensibly as an attempt to improve efficiency, attenuate cyclical volatility, and further particular social goals. Proponents who follow the Austrian School argue that even this limited control creates inefficiencies because we cannot predict the long-term activity of the economy. Milton Friedman, for example, has argued that the Great Depression was caused by the erroneous policy of the Federal Reserve.[81]

Moral imperative

Ayn Rand was a supporter of laissez-faire capitalism, and her best-selling novel Atlas Shrugged has been an influential publication on business.[94] Rand was the first person to endow capitalism with a new code of morality (rational selfishness),[95], arguing that capitalism is the only morally valid socio-political system because it allows people to be free to act in their rational self-interest.[96][97]


Notable critics of capitalism have included: socialists, anarchists, communists, technocrats, some types of conservatives, Luddites, Narodniks, Shakers and some types of nationalists. Marxists advocated a revolutionary overthrow of capitalism that would lead to socialism, before eventually transforming into communism. Marxism influenced social democratic and labour parties, as well as some moderate democratic socialists. Many aspects of capitalism have come under attack from the anti-globalization movement, which is primarily opposed to corporate capitalism.

Many religions have criticized or opposed specific elements of capitalism. Traditional Judaism, Christianity, and Islam forbid lending money at interest, although methods of Islamic banking have been developed. Christianity has been a source of both praise and criticism for capitalism, particularly its materialist aspects.[98] Indian philosopher P.R. Sarkar, founder of the Ananda Marga movement, developed the Law of Social Cycle to identify the problems of capitalism.[99][100]

Critics argue that capitalism is associated with the unfair distribution of wealth and power; a tendency toward market monopoly or oligopoly (and government by oligarchy); imperialism, counter-revolutionary wars and various forms of economic and cultural exploitation; repression of workers and trade unionists, and phenomena such as social alienation, economic inequality, unemployment, and economic instability. Capitalism is regarded by many socialists to be irrational in that production and the direction of the economy are unplanned, creating many inconsistencies and internal contradictions.[101]

Environmentalists have argued that capitalism requires continual economic growth, and will inevitably deplete the finite natural resources of the earth, and other broadly utilized resources. Labor historians and scholars, such as Immanuel Wallerstein have argued that unfree labor—by slaves, indentured servants, prisoners, and other coerced persons—is compatible with capitalist relations.[102]

Democracy, the state, and legal frameworks

Private property

The relationship between the state, its formal mechanisms, and capitalist societies has been debated in many fields of social and political theory, with active discussion since the 19th century. Hernando de Soto is a contemporary economist who has argued that an important characteristic of capitalism is the functioning state protection of property rights in a formal property system where ownership and transactions are clearly recorded.[103]

According to de Soto, this is the process by which physical assets are transformed into capital, which in turn may be used in many more ways and much more efficiently in the market economy. A number of Marxian economists have argued that the Enclosure Acts in England, and similar legislation elsewhere, were an integral part of capitalist primitive accumulation and that specific legal frameworks of private land ownership have been integral to the development of capitalism.[104][105]


New institutional economics, a field pioneered by Douglass North, stresses the need of a legal framework in order for capitalism to function optimally, and focuses on the relationship between the historical development of capitalism and the creation and maintenance of political and economic institutions.[106] In new institutional economics and other fields focusing on public policy, economists seek to judge when and whether governmental intervention (such as taxes, welfare, and government regulation) can result in potential gains in efficiency. According to Gregory Mankiw, a New Keynesian economist, governmental intervention can improve on market outcomes under conditions of "market failure," or situations in which the market on its own does not allocate resources efficiently.[107]

Market failure occurs when an externality is present and a market will either underproduce a product with a positive externality or overproduce a product that generates a negative externality. Air pollution, for instance, is a negative externality that cannot be incorporated into markets as the world’s air is not owned and then sold for use to polluters. So, too much pollution could be emitted and people not involved in the production pay the cost of the pollution instead of the firm that initially emitted the air pollution. Critics of market failure theory, like Ronald Coase, Harold Demsetz, and James M. Buchanan argue that government programs and policies also fall short of absolute perfection. Market failures are often small, and government failures are sometimes large. It is therefore the case that imperfect markets are often better than imperfect governmental alternatives. While all nations currently have some kind of market regulations, the desirable degree of regulation is disputed.


The relationship between democracy and capitalism is a contentious area in theory and 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 many theorists to posit a causal relationship between them, or that each affects the other. 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, monarchies, and single-party states,[31] while some democratic societies such as the Bolivarian Republic of Venezuela and Anarchist Catalonia have been expressly anti-capitalist.[108]

While some thinkers argue that capitalist development more-or-less inevitably eventually leads to the emergence of democracy, others dispute this claim. Research on the democratic peace theory indicates that capitalist democracies rarely make war with one another and have little internal violence.[109][110] However critics of the democratic peace theory note that democratic capitalist states may fight infrequently and or never with other democratic capitalist states because of political similarity or stability rather than because they are democratic or capitalist.

Some commentators argue that though economic growth under capitalism has led to democratization 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.[111][112] States that have highly capitalistic economic systems have thrived under authoritarian or oppressive political systems. Singapore, which maintains a highly open market economy and attracts lots of foreign investment, does not protect civil liberties such as freedom of speech and expression. The private (capitalist) sector in the People's Republic of China has grown exponentially and thrived since its inception, despite having an authoritarian government. Private investment in Fascist states, such as Nazi Germany, greatly increased[citation needed], and Augusto Pinochet's rule in Chile led to economic growth by using authoritarian means to create a safe environment for investment and capitalism.

In response to criticism of the system, some proponents of capitalism have argued that its advantages are supported by empirical research. For example, advocates of different Indices of Economic Freedom point to a statistical correlation between nations with more economic freedom (as defined by the indices) and higher scores on variables such as income and life expectancy, including the poor, in these nations.

See also


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    Die Verlängrung des Arbeitstags über den Punkt hinaus, wo der Arbeiter nur ein Äquivalent für den Wert seiner Arbeitskraft produziert hätte, und die Aneignung dieser Mehrarbeit durch das Kapital - das ist die Produktion des absoluten Mehrwerts. Sie bildet die allgemeine Grundlage des kapitalistischen Systems und den Ausgangspunkt der Produktion des relativen Mehrwerts.

    The prolongation of the working-day beyond the point at which the labourer would have produced just an equivalent for the value of his labour-power, and the appropriation of that surplus-labour by capital, this is production of absolute surplus-value. It forms the general groundwork of the capitalist system, and the starting-point for the production of relative surplus-value.

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    • Die Erhöhung des Arbeitspreises bleibt also eingebannt in Grenzen, die die Grundlagen des kapitalistischen Systems nicht nur unangetastet lassen, sondern auch seine Reproduktion auf wachsender Stufenleiter sichern.
    • Die allgemeinen Grundlagen des kapitalistischen Systems einmal gegeben, tritt im Verlauf der Akkumulation jedesmal ein Punkt ein, wo die Entwicklung der Produktivität der gesellschaftlichen Arbeit der mächtigste Hebel der Akkumulation wird.
    • Wir sahen im vierten Abschnitt bei Analyse der Produktion des relativen Mehrwerts: innerhalb des kapitalistischen Systems vollziehn sich alle Methoden zur Steigerung der gesellschaftlichen Produktivkraft der Arbeit auf Kosten des individuellen Arbeiters;
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Further reading

  • Abu-Lughod, Janet L. Before European Hegemony The World System A.D. 1250-1350. New York: Oxford UP, USA, 1991.
  • Ackerman, Frank; Lisa Heinzerling (24 August 2005). Priceless: On Knowing the Price of Everything and the Value of Nothing. New Press. pp. 277. ISBN 1565849817. 
  • Buchanan, James M.. Politics Without Romance. 
  • Braudel, Fernand. Civilization and Capitalism: 15th - 18 Century. 
  • Bottomore, Tom (1985). Theories of Modern Capitalism. 
  • H. Doucouliagos and M. Ulubasoglu (2006). "Democracy and Economic Growth: A meta-analysis". School of Accounting, Economics and Finance Deakin University Australia. 
  • Coase, Ronald (1974). The Lighthouse in Economics. 
  • Demsetz, Harold (1969). Information and Efficiency. 
  • Fulcher, James (2004). Capitalism. 
  • Friedman, Milton (1952). Capitalism and Freedom. 
  • Galbraith, J.K. (1952). American Capitalism. 
  • Böhm-Bawerk, Eugen von (1890). Capital and Interest: A Critical History of Economical Theory. London: Macmillan and Co.. 
  • Harvey, David (1990). The Political-Economic Transformation of Late Twentieth Century Capitalism.. Cambridge, MA: Blackwell Publishers. ISBN 0-631-16294-1. 
  • Hayek, Friedrich A. (1975). The Pure Theory of Capital. Chicago: University of Chicago Press. ISBN 0-226-32081-2. 
  • Hayek, Friedrich A. (1963). Capitalism and the Historians. Chicago: University of Chicago Press. 
  • Heilbroner, Robert L. (1966). The Limits of American Capitalism. 
  • Heilbroner, Robert L. (1985). The Nature and Logic of Capitalism. 
  • Heilbroner, Robert L. (1987). Economics Explained. 
  • Cryan, Dan (2009). Capitalism: A Graphic Guide. 
  • Josephson, Matthew, The Money Lords; the great finance capitalists, 1925-1950, New York, Weybright and Talley, 1972.
  • Luxemburg, Rosa (1913). The Accumulation of Capital. 
  • Marx, Karl (1886). Capital: A Critical Analysis of Capitalist Production. 
  • Mises, Ludwig von (1998). Human Action: A Treatise on Economics. Scholars Edition. 
  • Rand, Ayn (1986). Capitalism: The Unknown Ideal. Signet. 
  • Reisman, George (1996). Capitalism: A Treatise on Economics. Ottawa, Illinois: Jameson Books. ISBN 0-915463-73-3. 
  • Resnick, Stephen (1987). Knowledge & Class: a Marxian critique of political economy. Chicago: University of Chicago Press. 
  • Rostow, W. W. (1960). The Stages of Economic Growth: A Non-Communist Manifesto. Cambridge: Cambridge University Press. 
  • Schumpeter, J. A. (1983). Capitalism, Socialism, and Democracy. 
  • Scott, Bruce (2009). The Concept of Capitalism. Springer. pp. 76. ISBN 3642031099. 
  • Scott, John (1997). Corporate Business and Capitalist Classes. 
  • Seldon, Arthur (2007). Capitalism: A Condensed Version. London: Institute of Economic Affairs. 
  • Sennett, Richard (2006). The Culture of the New Capitalism. 
  • Smith, Adam (1776). An Inquiry into the Nature and Causes of the Wealth of Nations. 
  • De Soto, Hernando (2000). The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. New York: Basic Books. ISBN 0-465-01614-6. 
  • Strange, Susan (1986). Casino Capitalism. 
  • Wallerstein, Immanuel. The Modern World System. 
  • Weber, Max (1926). The Protestant Ethic and the Spirit of Capitalism. 

External links



Up to date as of January 14, 2010

From Wikiquote

Capitalism generally refers to an economic system in which means of production are mostly privately owned, and in which capital is invested in the production, distribution and/or other trade of goods and services for profit in a largely unregulated market.




  • The inherent vice of capitalism is the unequal sharing of blessings. The inherent virtue of Socialism is the equal sharing of miseries.
  • No nation was ever ruined by trade, even seemingly the most disadvantageous.
  • Underlying most arguments against the free market is a lack of belief in freedom itself.
  • A major source of objection to a free economy is precisely that it [...] gives people what they want instead of what a particular group thinks they ought to want.
  • If an exchange between two parties is voluntary, it will not take place unless both believe they will benefit from it. Most economic fallacies derive from the neglect of this simple insight, from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.
  • Capitalism is based on self-interest and self-esteem; it holds integrity and trustworthiness as cardinal virtues and makes them pay off in the marketplace, thus demanding that men survive by means of virtue, not vices. It is this superlatively moral system that the welfare statists propose to improve upon by means of preventative law, snooping bureaucrats, and the chronic goad of fear.
  • Were we directed from Washington when to sow, and when to reap, we should soon want bread.
    • Thomas Jefferson, Memoirs of Thomas Jefferson (1821), collected in Memoirs, correspondence and private papers of Thomas Jefferson, vol. 1, edited by T. J. Randolph, 1829, p. 70
  • The decadent international but individualistic capitalism, in the hands of which we found ourselves after the War, is not a success. It is not intelligent, it is not beautiful, it is not just, it is not virtuous - and it doesn't deliver the goods. In short, we dislike it and we are beginning to despise it. But when we wonder what to put in its place, we are extremely perplexed.
  • For over a century, popular struggles in the democracies have used the nation-state to temper raw capitalism. The power of voters has offset the power of capital. But as national barriers have come down in the name of freer commerce, so has the capacity of governments to manage capitalism in a broad public interest. So the real issue is not 'trade' but democratic governance.
    • Robert Kuttner, "Globalization and Its Critics", The American Prospect, vol. 12 no. 12, July 2-16, 2001
  • I believe that one ought to have only as much market efficiency as one needs, because everything that we value in human life is within the realm of inefficiency — love, family, attachment, community, culture, old habits, comfortable old shoes.
  • All people, however fanatical they may be in their zeal to disparage and to fight capitalism, implicitly pay homage to it by passionately clamoring for the products it turns out.
    • Ludwig Von Mises, The Ultimate Foundation of Economic Science: An Essay on Method (1978)
  • The first condition for the establishment of perpetual peace is the general adoption of the principles of laissez-faire capitalism.
    • Ludwig von Mises, The Ultimate Foundation of Economic Science: An Essay on Method (1962), p. 137
  • The meaning of economic freedom is this: that the individual is in a position to choose the way in which he wants to integrate himself into the totality of society.
  • There are two methods, or means, and only two, whereby man's needs and desires can be satisfied. One is the production and exchange of wealth; this is the economic means. The other is the uncompensated appropriation of wealth produced by others; this is the political means.
  • What I realy belive in, first and foremost, ins't capitalism or globalization. It isn't the systems or regulatory codes that achieve all we see around us in the way of prosperity, innovation, community, and culture. Those things are created by people. What I believe in is man's capacity for achieving great things, and the combined force thar results from our interactions and exchanges. I plead for greater liberty and a more opend world, not because I believe on system happens to be more efficient than another, but because those things provide a setting that unleashes individual creativity as no other system can. They spur the dynamism that has led to human, economic, scientific, and technical advances. Believing in capitalism does not mean believing in growth, the economy, or efficiency. Desirable as they may be, those are only the results. At its core, belief in capitalism is belief in mankind.
  • It is the value of the improvement, only, and not the earth itself, that is individual property. Every proprietor, therefore, of cultivated lands, owes to the community a ground-rent ... for the land which he holds. ... Man did not make the earth, and, though he had a natural right to occupy it, he had no right to locate as his property in perpetuity any part of it; neither did the Creator of the earth open a land-office, from whence the first title-deeds should issue.
  • What they have to discover, what all the efforts of capitalism's enemies are frantically aimed at hiding, is the fact that capitalism is not merely the 'practical,' but the only moral system in history.
    • Ayn Rand, Capitalism: The Unknown Ideal (1966), p. 8
  • When I say capitalism, I mean a full, pure, uncontrolled, unregulated laissez faire capitalism, with a separation of state and economics, in the same way and for the same reasons as the separation of state and church.
    • Ayn Rand, Capitalism: The Unknown Ideal (1966), p. 17
  • Economic power is exercised by means of a positive, by offering men a reward, an incentive, a payment, a value; political power is exercised by means of a negative, by the threat of punishment, injury, imprisonment, destruction. The businessman's tool is values; the bureaucrat's tool is fear.
    • Ayn Rand, Capitalism: The Unknown Ideal (1966), p. 48
  • Businessmen are the one group that distinguishes capitalism and the American way of life from the totalitarian statism that is swallowing the rest of the world. All the other social groups — workers, farmers, professional men, scientists, soldiers — exist under dictatorships, even though they exist in chains, in terror, in misery, and in progressive self-destruction. But there is no such group as businessmen under a dictatorship. Their place is taken by armed thugs: by bureaucrats and commissars. Businessmen are the symbol of a free society — the symbol of America.
    • Ayn Rand, Capitalism: The Unknown Ideal (1966), p. 55
  • It is the cheap cloth, the cheap cotton and rayon fabric, boots, motorcars and so on that are the typical achievements of capitalist production, and not as a rule improvements that would mean much to the rich man. Queen Elisabeth owed silk stockings. The capitalist achievement does not typically consists in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort.
    • Joseph Schumpeter, Capitalism, Socialism and Democracy (1950, 3rd ed.), part II, chapter VII, p. 82.
  • [C]apitalist civilization is rationalistic 'and anti-heroic.' The two go together of course. Success in industry and commerce requires a lot of stamina, yet industrial and commercial activity is essentially unheroic in the knight's sense - no flourishing of swords about it, not much physical prowess, no chance to gallop the armored horse into the enemy, preferably a heretic or heathen - and the ideology that glorifies the idea of fighting for fighting's sake and of victory for victory's sake understandably withers in the office among all the columns of figures. Therefore, owning assets that are apt to attract the robber or the tax gatherer and not sharing or even disliking warrior ideology that conflicts with its 'rational' utilitarianism, the industrial and commercial bourgeouis is fundamentally pacifist and inclined to insist on the moral application of the moral precepts of private life to international relations. It is true that, unlike most but like other features of capitalist civilization, pacifism and international morality have also been espoused in non-capitalist environments and by pre-capitalist agencies, in the Middle Ages of the Roman Church for instance. Modern pacifism and modern international morality are nonetheless products of capitalism.
    • Joseph Schumpeter, Capitalism, Socialism and Democracy (1950, 3rd ed.), part II, chapter XI, p. 127f.
  • Civil government, so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all.
  • It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chooses to depend chiefly upon the benevolence of his fellow citizens.
  • Prices are important not because money is considered paramount but because prices are a fast and effective conveyor of information through a vast society in which fragmented knowledge must be coordinated.
  • The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.
    • Thomas Sowell, Is Reality Optional?: And Other Essays (1993), p. 131
  • Capitalism prospers in an environment with a peculiar combination of self-interested behavior - enough to induce individuals to look for profitable activities - and non-self-interested behavior, where one's word is one's honor, where social rather than economic sanctions suffice to enforce contracts.
  • It is the fundamental wisdom of the capitalist system that it functions irrespective of the wisdom or the stupidity of the capitalists.
    • Gustav Stolper, This Age of Fables (1942), Part I, chapter 8, Sec. 10, p. 167.
  • In terms of concretes, by capitalism I mean an economy with no progressive taxes, no central bank, no pure paper currency, no drug prohibition, no gun prohibition, no 'affirmative action' employment mandates for any ethnic group, no government-run health care, no federal departments of education, energy, labor, homeland security, health and human services, no DEA, BATFE, SEC, EPA, FTC, FDA, no minimum legal wage rates, no price controls, no tariffs, no welfare — domestic or foreign, rural or urban, for the rich or the poor. You know, a free economy!
    • Larry J. Sechrest, "The Anti-Capitalists: Barbarians at the Gate," Ludwig von Mises Memorial Lecture at the Austrian Scholars Conference in Auburn, Alabama (15 March 2008)[1]
  • As we know, socialism is calculational chaos. Rational appraisement and allocation are eternally elusive. It is a gigantic negative-sum game in which each player quickly grabs a piece of the pie, and all the while the pie shrinks before the players' eyes. The welfare/warfare state, the interventionist state, is no improvement. Each intervention begets yet another. Bureaucracy is the only 'industry' guaranteed to experience growth. Each new regulation taxes the private sector, relentlessly shifting resources out of the hands of the productive, and into the hands of the unproductive. Capitalism is the only positive-sum game in town.
    • Larry J. Sechrest, "The Anti-Capitalists: Barbarians at the Gate" (15 March 2008)


  • Some see private enterprise as a predatory target to be shot, others as a cow to be milked, but few are those who see it as a sturdy horse pulling the wagon.
    • Attributed to Winston Churchill in Peter's quotations: ideas for our time (1977), p. 84
  • Poverty and suffering are not due to unequal distribution of goods and resources, but to the unequal distribution of capitalism.
  • Whoever claims that economic competition represents 'survival of the fittest' in the sense of the law of the jungle, provides the clearest possible evidence of his lack of knowledge of economics.
  • A properly functioning free market system does not spring spontaneously from society's soil as crabgrass springs from suburban lawns. Rather, it is a complex creation of laws and mores ... Capitalism is a government program.



  • Having created the conditions that make markets possible, democracy must do all the things that markets undo or cannot do.
  • How is property given? By restraining liberty; that is, by taking it away so far as necessary for the purpose. How is your house made yours? By debarring every one else from the liberty of entering it without your leave.
    • Jeremy Bentham, "A Critical Examination of the Declaration of Rights; Article II" in The Works of Jeremy Bentham, Vol. II (1839), p. 503
  • LAND, n. A part of the earth's surface, considered as property. The theory that land is property subject to private ownership and control is the foundation of modern society, and is eminently worthy of the superstructure. Carried to its logical conclusion, it means that some have the right to prevent others from living; for the right to own implies the right exclusively to occupy; and in fact laws of trespass are enacted wherever property in land is recognized. It follows that if the whole area of terra firma is owned by A, B and C, there will be no place for D, E, F and G to be born, or, born as trespassers, to exist.
  • We may have democracy, or we may have wealth concentrated in the hands of a few, but we can't have both.
    • Louis Brandeis, Supreme Court Justice from 1916-1939, according to Raymond Lonergan in Mr. Justice Brandeis, Great American (1941), p. 42
  • This crippling of individuals I consider the worst evil of capitalism. ... An exaggerated competitive attitude is inculcated into the student, who is trained to worship acquisitive success as a preparation for his future career.
  • Markets are interested in profits and profits only; service, quality, and general affluence are different functions altogether. The universal, democratic prosperity that Americans now look back to with such nostalgia was achieved only by a colossal reigning in of markets, by the gargantuan effort of mass, popular organizations like labor unions and of the people themselves, working through a series of democratically elected governments not daunted by the myths of the market.
  • Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.
  • I worked at a factory owned by Germans, at coal pits owned by Frenchmen, and at a chemical plant owned by Belgians. There I discovered something about capitalists. They are all alike, whatever the nationality. All they wanted from me was the most work for the least money that kept me alive. So I became a communist.
  • Corporations care very much about maintaining the myth that government is necessarily ineffective, except when it is spending money on the military-industrial complex, building prisons, or providing infrastructural support for the business sector.
  • Labor is prior to and independent of capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration. Capital has its rights, which are as worthy of protection as any other rights. Nor is it denied that there is, and probably always will be, a relation between labor and capital producing mutual benefits.
  • If by free market one means a market that is autonomous and spontaneous, free from political controls, then there is no such thing as a free market at all. It is simply a myth.
  • It cannot be said too often — at any rate, it is not being said nearly often enough — that collectivism is not inherently democratic, but, on the contrary, gives to a tyrannical minority such powers as the Spanish Inquisitors never dreamed of. Professor Hayek is also probably right in saying that in this country the intellectuals are more totalitarian-minded than the common people. But he does not see, or will not admit, that a return to 'free' competition means for the great mass of people a tyranny probably worse, because more irresponsible, than that of the State.
  • If a Martian were asked to pick the most efficient and humane economic systems on earth, it would certainly not choose the countries which rely most on markets. The United States is a stagnant economy in which real wages have been constant for more than a decade and the real income of the bottom 40 percent of the population declined. It is an inhumane society in which 11.5 percent of the population, some 32 million people, including 20 percent of all children, live in absolute poverty. It is the oldest democracy on earth but also one with the lowest voting rates among democracies and the highest per capita prison population in the world. The fastest developing countries in the world today are among those where the state pursues active industrial and trade policies; the few countries in the world in which almost no one is poor today are those in which the state has been engaged in massive social welfare and labor market policies.
  • Capitalism is organised crime, and we are all its victims.
  • The first man who, having enclosed a piece of land, thought to himself of saying This is mine, and found people simple enough to believe him, was the real founder of civil society. From how many crimes, wars, and murders, from how many horrors and misfortunes might not any one have saved mankind, by pulling up the stakes, or filling up the ditch, and crying to his fellows: Beware of listening to this imposter; you are undone if you once forget that the fruits of the earth belong to us all, and the earth itself belongs to nobody.
  • In most parts of our country men work, not for themselves, not as partners in the old way in which they used to work, but generally as employees,—in a higher or lower grade,—of great corporations. There was a time when corporations played a very minor part in our business affairs, but now they play the chief part, and most men are the servants of corporations.
    • Woodrow Wilson, The New Freedom - A Call for the Emancipation of the Generous Energies of a People
  • Capitalism has always been a failure for the lower classes. It is now beginning to fail for the middle classes.
    • Howard Zinn, A People's History of the United States, 1995 edition, chapter 23

See also

External links

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1911 encyclopedia

Up to date as of January 14, 2010

From LoveToKnow 1911

"CAPITALISM. - The meaning of " capital, " in economics, is analyzed in the earlier article under that heading (5.278). But the working of " capitalism " or the " capitalistic system," as such, had by 1921 become so highly controversial a question as to require here more detailed examination.

The term " capitalism " is generally applied to the system under which the instruments of production are the property of private owners, who usually employ managers and manual workers to carry out production by their means. By production we must include, if this definition is to be correct, the whole of the process by which raw materials are brought to the place of manufacture and worked up into manufactured goods, and the manufactured goods are then distributed to the places where they are wanted and sold to the final consumer through the hands of retailers. The instruments of production thus include not only the land, factories, tools and machinery, and other equipment used in actual manufacture, but the railways, ships and other means of transport, and the warehouses and shops through which the goods finally pass to the consumer.

Table of contents

Private Ownership

Private ownership of the instruments of production has not been universal in man's economic history, but it has been generally adopted by progressive communities. When " Adam delved and Eve span," they were " capitalists " in the sense of owning a spade and spinning-wheel and using them for purposes of production; but they used these tools themselves and for the purposes of supplying their own needs. And at a very primitive stage of society, this simply individualistic system by which the capitalist used his own tools and worked for his own needs may be presumed to have been common. When, however, by the development of a wider society the division of labour and the exchange of goods between one member and another of the community began to be practised, the new feature arose by which the producer made and grew goods not only for his own use, but to be exchanged for goods grown or produced by others; and consequently he had to produce something which somebody else wanted if he wished to provide for his own needs to his own satisfaction. Thus we find in the Middle Ages artificers and craftsmen owning their own tools, that is to say, their own capital equipment, and working to produce articles such as armour, farming implements and clothes which they exchanged in return for the food produced by the farmers who would only take the goods produced by the artificers if they were of a kind which pleased their fancy. It is important to note at the outset that the capitalist, whether he works with his capital or sets others to work with it, must invariably direct the work done so as to suit the wishes of a buyer which may or may not be expressed before the making of the article is begun. Capitalism, in the sense of a private ownership of tools and equipment, thus dates from the earliest organization of human economic activity. As soon as a savage had given time and labour to fashioning a weapon with which he could more easily kill or catch animals that he hunted for food or clothing, he had become a capitalist; he had made something which would help him to provide for his own needs and those of his dependents more easily, or by which he could more easily acquire commodities which he could exchange against those owned by other members of his tribe. But capitalism in the modern sense, and as defined above, is usually said to date from the last quarter of the 18th century, when what is called the " Industrial Revolution " began, and by the inventions of machinery and the use of steam industry was reorganized on a new basis.

Capitalist and Worker

Owing to these developments it was no longer possible for the workman using his own tools and working in his own home to compete with workmen who were assembled in a great factory and worked with machinery which it would not have been possible for their collective resources to buy. Thus arose the distinction between the worker and the capitalist, which had in effect already made considerable progress before the introduction of machinery, but was so rapidly developed after it that modern capitalism is usually so dated. By this system the worker, by which is generally meant the manual worker, is said to have been divorced from the ownership of his tools. The scale of industrial organization became so great that it was only possible for men of great means, or for a collection of people of considerable means, to provide the necessary land, factories and equipment for its working, and also to buy the large quantities of raw material required, to pay the wages of the multitude of workers and managers, and to finance the other expenses during the process of production and up till the time of payment by the final purchaser.

Originally it was usual for the owners of these factories, whether individuals or small bodies working in partnership, to act as managers of the whole concern. The capitalist was at once owner of the factory and machinery, provided the money needed for the financing of the industrial process, and managed and organized the whole enterprise. He was responsible for buying raw materials, paying wages and selling the product to the greatest possible advantage to the other capitalists, merchants and middlemen, who passed it on until it reached the final consumer; he, singly or in partnership, took all the risk of loss involved if the product failed to suit the caprices of the buying public, and took all the profit, if any, that was earned from the enterprise. This profit thus included interest on his money invested, the payment of his salary as organizer and manager, and any extra bonus which his skill might enable him to earn as compensation for the risks run.

Joint Stock System

As industry developed on a still greater scale it was not possible for this comparatively simple organization to be maintained. When it became a question of building railways, requiring hundreds of millions to finance them, no individual or partnership could supply the necessary funds, and so the joint stock system, which had already been developed on a small scale in mediaeval times, was extended so successfully to industry that the greater part of our industrial activity is now carried on by means of joint stock companies, the extension of which was enormously facilitated by the introduction of the principle of limited liability. Thus the position of the capitalist has become still further defined and differentiated. It is certainly probable that the managers of most of our great industrial concerns hold a certain number of shares in the business which they conduct, and to that extent may be described as capitalists, but the two functions are now quite distinct. The capitalist pure and simple lends money to industry or invests it in industry, using industry in the widest sense of the word to include transport and commerce. The actual management is carried on by officials appointed specially for this purpose under the supervision of a committee of the shareholders who are called directors, who are paid comparatively small fees for the usually rather nominal supervision which they exercise over the more highly paid work of the managers and staff, and for guiding the financial policy of the company with regard to dividend distributions and so on. The capitalist is either a creditor or a shareholder in the company which is formed by public subscription to carry on the industry in question; all that he does is to lend to industry the money which is essential in order that the industry may acquire all the tools, machinery, buildings, raw materials and other equipment necessary for carrying on the work, and to pay the wages of the wage-earners and managers during the initial period before the company's operations have produced something that can be sold to supply money for wages, the purchase of further raw materials, and the upkeep of the plant. The business of management is carried on by highly paid experts, and the capitalist's sole claim to a share in the earnings of the. company is based on the fact that he has provided the money which was essential for its beginning and for its further growth. He earns his reward first by placing this money at the disposal of industry instead of spending it on his own immediate enjoyment; and secondly by risking the loss of part or the whole of his money if the industry should fail.

Capital Financing

A highly ingenious machinery has been developed for the provision of money for industry and commerce by the process of investment in the securities of public companies, and for the turning of these securities back into money by their sale in markets known as stock exchanges. Joint stock companies are formed either to carry out some new enterprise, or work some new process, or to take over an existing business which has hitherto been carried on by private partners. An appeal is therefore made to the public to subscribe to the securities into which what is called the company's capital is divided. As so often happens in these matters of business, great confusion arises owing to the use of the same word in different senses: the capital of industry has hitherto been referred to in the course of this article as the tools, buildings, and other equipment by which industry works; but the capital of a company generally means the money that it receives from those who subscribe to the securities that it offers. If we take the case of a company formed to work a coal mine, and suppose that the original promoters consider that £2,000,000 will be necessary for them to make a proper start on the enterprise, then these two millions will be the original capital of the company, subscribed to it by investors who receive, in return for their money, securities which give them claims upon it for interest, dividends and repayment either at a fixed date or in the event of the company's liquidation. These claims take the form of securities issued by the company. They would probably be divided into several categories; there will be a debenture stock, perhaps carrying mortgage rights and entitling the holders to a fixed rate of interest, and most probably to repayment in full or at a premium at some future date. In case of default in payment of their interest or repayment of the sums promised at the due date, the debenture-holders would be entitled to take over the property and put it in the hands of a receiver. They are thus not shareholders in the company but its creditors, and, strictly, securities issued in this form of a mortgage or debenture are not part of a company's capital but its debt. Ordinary business parlance, however, usually includes mortgages and debentures as part of capital. The share capital is usually divided into preference and ordinary, the preference shareholder being entitled to a fixed rate of interest which has to be paid to him before the ordinary shareholders receive anything. This preference right among English companies is usually what is called cumulative, that is to say, if the preference dividend is not paid in any year all arrears have to be paid before the ordinary shareholders receive any return on their investment. In America, however, where the term " preferred " rather than " preference " is more usual, this cumulative right is not so common as it is in England; in some cases also preference shareholders are entitled to a further participation in profits after a certain rate of dividend has been paid to the ordinary share holders. The ordinary shareholders as a rule take what is left of the profits after the claims of debenture-holders and preference shareholders have been satisfied. If the company is successful they thus earn higher rates on their investments than go to the holders of other forms of securities. If the company fails they receive little or no profit, and the claims of the mortgage and preference shareholders have to be satisfied in full before the ordinary shareholders get any of their capital back in case of liquidation. Almost infinite variations, however, are performed on the theme of capital arrangements, with income debentures, cumulative ordinary shares with a fixed rate of dividend, deferred shares, founders' shares and so on. And some companies issue no securities except ordinary shares or stock.

By this ingenious system the amount of risk involved by industrial investments can be varied to suit the taste of the individual investor, but generally with the result that the less risk he takes the less return he is entitled to on his investment. The holder of a debt which is a first charge on a long-standing and well-managed industrial or transport concern comes as near as he can to eliminating risk altogether from an industrial investment. It consequently follows that this kind of security is originally issued and is dealt in on the markets of the world on terms which give their subscribers or purchasers a comparatively low rate of interest. The preference shareholder, who is not as well secured as the debenture-holder, but ranks before the ordinary holder, also stands midway between them in the matter of risk and the matter of return. Before the World War, for example, if a well-known English brewery company were appealing to the public for subscriptions it would probably have been able to issue its debenture stock in return for a promise of 4% to 4z %, its preference shares on the basis of 5% to 6%, while its ordinary shares, if they were to expect a ready response from the public, would have had to show a probable return of 7% or 8%.

When the prospectus has been issued and the public subscription has been carried out, the securities offered are then quoted on the Stock Exchange at prices which will vary with the opinion held concerning the present and prospective prosperity of the company, and also in accordance with the general rate ruling for the use of money, which varies like the price of everything else in accordance with supply and demand. At a time when there is a great demand for capital for the development of new and old enterprises all over the world the rates that have to be offered in order to tempt subscribers will be forced up by competition, and consequently the price of existing securities will tend to fall owing to sales by their holders, who are tempted by the more alluring rates offered by new ventures. If, on the other hand, enterprise is slack and new creations of capital are comparatively rare, then the pressure of accumulating savings for investment in existing securities will force their prices up and so lower the rate of return which an investor may expect.

By this means capitalism has devised a highly efficient machinery through the mechanism of the Stock Exchange by which anyone who has lent money to industry, as conducted by an ordinary joint stock company, is able in normal times to realize his holdings and turn them into cash by sale on the stock markets. If the company in which he has invested has been successful and is fulfilling, or more than fulfilling, the anticipations held out in its prospectus, he will be able to sell his holdings at a comfortable profit, especially if he is an ordinary shareholder. The prices of securities with a fixed rate of interest or dividend naturally fluctuate less than those of the ordinary shares, but even in their case the success or failure of the company has a very considerable influence upon the price for which they would be sold. Many popular securities have a world-wide market and can be dealt in in all the financially civilized countries; and this development of securities readily marketable at publicly quoted prices has been a great assistance to the growth of international banking. Freedom of Enterprise. - By the development of this machinery it is possible for the association of small contributions by a large number of people with comparatively small means to carry out enterprises on a colossal scale, and to pour the stream of investment into all the countries of the earth, fertilizing its backward places and bringing forth a vigorous crop of goods and services and making the world into one great market united by the bonds of industry and finance. In many large industrial companies nowadays, shares of LI each or less are now issued, and in this way capitalism has been democratized to an extent which a hundred years ago would have been thought quite incredible. Enormous enterprises, the most obvious example of which are the Egyptian pyramids, have been carried out in the past by means of slave labour employed by tyrants; and the Roman roads and aqueducts are another example of what could be done by the application of state management to a highly disciplined people. But the most notable achievement of modern capitalism is that it has vastly increased the productive power of mankind by making use of the resources of thousands of individuals voluntarily subscribing their money in the hope of profit which can only be earned if the consuming public will voluntarily buy the goods and services produced. Thus capitalism is essentially based on freedom - the freedom of the subscriber in risking his money, and the freedom of the consumer in giving or withholding his custom and the profit that it makes possible. It opens its pocket freely - sometimes too freely - to anyone who can persuade it that an enterprise is likely to be profitable. Under it the way is open from the bottom of the ladder to the top for those who have the diligence, determination, capacity, and luck to climb; and they can climb only by producing something that will fetch a good price in the market of their fellow-creatures' needs and desires. The freedom of capitalism is thus limited by the consumers' veto. It can only succeed by pleasing the ultimate buyer and cooperating with the consumer by satisfying his needs.

Prejudice against Capitalism

Nevertheless, capitalism is perhaps now more virulently criticized than any other human institution, largely owing to the belief that it involves robbery of the wage-earning classes by those who place the means of production at their disposal and pay them wages for working upon them. The prejudice against capitalism could not be as wide as it is unless there were some foundation for it; and in the first half century in which modern capitalism was active the exploitation of the wage-earners through low wages, long hours, disgraceful working conditions and ruthless dismissal at any time when it seemed more profitable to the employers to reduce output, was carried on to an extent which is now seen to have been criminal. This seems to be the reason for the astonishing hold which the works of Karl Marx have exercised upon those of the wage-earners who are attracted by his revolutionary doctrines. It is admitted by Marx's most fervent admirers that most of his theories were wrong, that many of his assertions were incorrect, and that most of his forecasts have been proved to be baseless. But the fact remains that he was able to describe a state of things in English industry on the authority of official documents which was entirely disgraceful; and the wage-earners, who probably seldom study his works but usually rely upon a summary of their contents, find that with regard to the exploitation of the worker he has a solid basis of facts which are known to them by the tradition they have received from their forbears who worked under the miserable conditions that he describes.

It need not be said that since the middle of the 10th century there has been a very great change in this respect, thanks to Factory Acts, the growing strength of the trade unions and a more humane and sensible spirit among the employers; and it is interesting to consider why it should be that the employers of the first half of the 10th century, most of whom were probably quite human and kindly people who thought that they were doing their best according to their lights, should have treated those who worked for them in a manner which now seems to us so inhuman. In the first place, we must remember that a very large number of them in those days were men who had risen from the ranks and had themselves had to suffer the hardships which they imposed on others, and, since they had come through them successfully, did not see any reason why anything better should be done for those who worked under them. But a further excuse has to be found for the men of noble lineage and high intellectual attainment, who also suffered barbarities to be perpe trated in the mines and factories which they owned; and this excuse is provided by the pessimistic utterances of economists such as Adam Smith, Malthus and Ricardo, who stated or implied that the pay of the wage-earners could not rise above the level required to maintain them as efficient workers; and that any attempt to improve their condition would simply lead to an increase in their number by procreation which would inevitably defeat the efforts of those who tried to improve their lot. With doctrines such as this in the air, and expounded by high authority, there is some reason to excuse wickedness or mistakes which have cost the industrial world dear by the legacy of bitterness and suspicion which they have left behind.

Capitalism and Wages

It is also true that too many modern capitalists are still apt to resent any attempt on the part of the wage-earners to improve their lot by demanding better wages and shorter hours of work, and do not seem able to perceive how entirely short-sighted such resentment is. When the wageearners are confronted, every time they ask for an improvement, by demonstrations on the part of capitalists that its granting would immediately ruin the industry in which they are concerned, and when nevertheless they insist upon the improvement and then find that the industry is by no means ruined but goes ahead to fresh prosperity, it is natural and inevitable that the wageearners should be filled with a deep distrust of any statement made by their employers concerning what is and what is not possible to be granted by industry. And it is not only owing to this distrust and bitterness that this policy on the part of employers has been short-sighted. They might have recognized that for all the great staple commodities the wage-earning classes are already, and will be to an increasing degree, the most important consumers; and therefore that those who are engaged in making any product of general use will find it to their own interest that the general level of wages should be high so that there should be a good and steady demand for the product which they have to sell. It may be true from the point of view of the next balance sheet that it will pay any individual employer to pay as low wages as possible to his workmen, but he ought to recognize that what he needs is that all the workers in all other industries should be paid as well as possible and that he, by paying his own workers low, is doing what he can to depress the general level and so defeat his own objects in securing a market. This is quite apart from the wider question how far low wages involve cheap production. Up to a point, and as long as the wage-earners can be induced to give a fair day's work in return for their wage, experience has shown - especially in America - that high wages are an important item in cheapening production. Lately, and especially since the war, experience has shown that increases of wages have been followed by absenteeism on the part of the workers, and slack work while they are at work. Up to this point it should be the ambition of enlightened employers to pay the highest wages that the industry can stand. Capitalism increases its own efficiency and those of its wage-earners up to the point at which it enables them to improve their health and efficiency by paying higher wages; but when, as sometimes happens, the wage-earner simply has no use for any increase in his money receipts, then higher wages merely mean that he works fewer days in the week. The only remedy for this deadlock seems to be the education of the worker in the habit of accumulating for himself out of any surplus that he earns. If the wage-earners could thus be induced by accumulation to become capitalists themselves, it is possible that an improvement, the extent of which it is quite impossible to measure, might be secured in the relations between labour and capital.

Charges Examined

If then we admit, as we must, that the early days of modern capitalism were marked by serious injustice inflicted on the manual workers, and that even to-day employers are much too ready to resist demands on the part of labour for improvements in its conditions, it must at the same time be remembered that these faults in the working of capitalism do not necessarily imply any essential injustice in the system or any blots upon it which cannot be improved out of existence. If the early employers, taking advantage of the unorganized state of their workers, paid them too low for too long working days under working conditions which were a disgrace, it is also true that these conditions are in most industries, especially the best organized and most prosperous industries, a thing of the past. Moreover, the charge against capitalism, brought against it by the most extreme of its critics, is not merely that it has been in the past or is now unjust to those who work for it in the matter of hours and wages, but that the whole system is essentially based upon robbery, that the whole product of industry is really due to the exertions of labour, and that any interest or profit taken by the capitalist is necessarily a form of robbery. It is not a question of degree - that the capitalist has taken more than he is entitled to - but that the capitalist is not entitled to take anything at all, and that anything he takes is essentially a theft.

Labour's Capacity

For this contention it is very difficult to find any real ground either in fact or in theory. Labour, in the sense of manual labour, by itself can effect nothing. Put down the most skilful hand-worker on a bare piece of ground and he cannot produce anything out of it until he has made himself tools and so become a capitalist; and, in the meantime, he would somehow have to feed himself on any roots that he could dig up, or any wild animals that he might be able to kill. Even if we include under labour the brain-workers and organizers, it remains true that any body of skilled workers, organized as well as possible under the most skilful management, would be equally ineffective without the assistance of the factory, tools, and other equipment which have to be supplied out of capital, that is to say out of the accumulation of past savings, before they can produce effectively. Labour by itself can effect nothing industrially or commercially; labour plus management is equally powerless. Capital by itself is, of course, in exactly the same position. Anyone who through the possession of capital owns a large supply of raw materials, and the necessary land, factory and equipment, can make nothing out of them without efficient management and efficient manual labour. These truisms are usually acknowledged by the extremist advocates of labour's claim to what is called the whole of its product. They admit that labour must have machinery and tools to work with; but Mr. Philip Snowden, for instance, the English Labour M.P., has contended that " the existence of a rich class who do no labour is the conclusive proof of the claim that labour does not receive all that labour creates, but that a surplus over and above the wages of labour is appropriated in some way and some form by those who do no work." But this argument begs the whole question by assuming that " labour creates " all that labour produces with the help of machinery. It seems to be based on a confusion of mind which imagines that because the machinery and equipment by themselves can produce nothing, therefore, those who work them and make them efficient are entitled to everything that is produced by their own efforts assisted by the machinery. In fact the existence of the machinery, which has been provided by the possibly idle capitalist, enables the manual workers to produce goods of an immeasurably greater volume and value than they could turn out without it. If labour is entitled to the whole of its product, as it surely is, it is also true that labour gets the whole of its product and a very great deal more, because, owing to the assistance given it by the machinery and equipment provided by capital, it is able to produce a very much greater volume of goods, and the bargain between it and capital results in its being better off than it could have been without capitalism's assistance.

To take an obvious example, let us suppose a man in a primitive stage of society to have hit on the idea of making a spade, and so greatly increasing his own production of food. If he then makes a second spade and lends it to a friend, enabling the latter to multiply his production and charging him a portion of the increased food for the use of the spade, then we see a rough analogy of the bargain which under capitalism is struck between capital and labour. In this case the friend who borrows the spade works for the capitalist who lent it, but he also works for himself. By the use of the spade his production is multiplied manifold; and to argue that he is entitled to take the whole amount of what he produces with the assistance of the spade, and that the man who invented and lent him the spade robs him by taking part of the increased production which it brings into being, is surely an example of astonishingly distorted logic. At the same time it has to be remembered that those who claim the whole product of industry for the manual workers can say that all the factories, means of transport, tools and machinery have actually been erected or produced by manual labour. But this manual labour, and the skill which organized it, were paid to produce these instruments by owners of wealth who were prepared to risk it on these objects. All these forms of the equipment of industry only came into being and increased the numbers and welfare of the whole community because some of those who controlled wealth when they were first invented used it to secure their manufacture and production instead of upon their own immediate enjoyment. At any time the future development of any country or community depends upon the extent to which its members are prepared to postpone immediate enjoyment to the provision of equipment for its further progress. If some of our ancestors had not made investments in industry in the past, and so equipped the world with all the machinery of industry and commerce, probably not half of us would now have been alive. Interest and profit are thus the reward paid for successful investment in the means of life in the results of which we all share.

Means of Production

Critics of the capitalistic system are, at first sight, on firmer ground when they argue that it is wrong that anybody should possess, by the ownership of private wealth, this responsibility for the future development of the country or community; that injustice arises because private ownership makes it difficult and sometimes impossible for those who want to work to secure access to the means of production, and that a more equitable basis would be arrived at if all the means of production were owned by the state, or by some other public body, or, as is now contended by the syndicalists and guild socialists, by the industries which employ them organized into an all-embracing trade union or guild.

There can be no question that the existence of private property in the means of production does involve hardships and difficulties for those members of the community who do not happen to be born into the possession of property, or of the kind of qualities which enable them to acquire it rapidly. To such people, the ordinary unskilled workers, it must naturally seem unjust that if the kind and quantity of work that they offer to any private employer is not needed, some of them find great difficulty in earning a livelihood for themselves and their dependents. And the question that we have to consider is whether the hardships involved to a comparatively small number of the less fortunate members of the community are balanced by the advantages to the community as a whole involved by the working of the capitalistic system. Under that system anybody who by ingenuity and energy can earn more than his fellows is enabled and encouraged to do so and to devote his accumulations to the furtherance of industry by putting them out at interest, or engaging them in enterprises from which he hopes for profit. There is consequently a continued stimulus for activity and exertion, and it must always be remembered that this activity and exertion can only be successful if it produces something with which the community, as a whole, or a sufficient number of its members who are in a position to buy goods and services, are satisfied.

Thus, by this stimulus, the wants of the community have been continually considered and cared for by its most enterprising members, who are urged to do so by the hope of gaining profit. If this stimulus were taken away it is at least possible that progress would be very greatly retarded and that the interests of the community, as a whole, especially those of its poorest members, would be seriously affected. It has to be admitted that the wants of the community are not always wholly sensible and are very often marked by highly questionable taste. These drawbacks are surely to be best amended by the education of the community to a more sensible and tasteful use of the power that it has by its decision, through the manner in which it spends its money, concerning the goods and services which are turned out by industry. If the decision as to what is to be produced is to be in the hands of a bureaucratic committee, as under state socialism, or of a guild or trade union committee, as it would apparently be under guild socialism or syndicalism, then it is perhaps possible, though highly doubtful, that the objects on which the productive enterprise of the community would be exercised might be more sensible and tasteful; but the general members of the community, having no power of choice, would not be exercising sense or good taste, but would merely be taking, whether they liked them or no, goods and services provided by the decision of an outside body.

Advances under Capitalism

A more serious doubt arises whether under any alternative system that has yet been suggested the actual needs and necessities of the community would be successfully met. We have to admit that under capitalism there has existed and still exists a great deal of destitution and poverty which are serious blots on the success of the system. On the other hand, anybody who takes even a superficial and cursory view of the productive progress of the last century and a half under modern capitalism must admit that an enormous advance has been secured. There is no need here to enumerate all the miraculous inventions by which man's power over nature has been increased, and his productive capacity has been enormously multiplied. The extent of these powers was only fully realized when the World War came, and, in spite of the view expressed by some economists that a modern continental war could not last more than a few months because the economic strain would be too great, it was nevertheless possible to carry the war on for more than four years, to develop the production of lethal weapons during its course on a scale which has never heretofore been dreamt of, to feed and clothe the armies in the field much better than armies in the field had been fed and clothed before, and, at the same time, at least in England, to increase the standard of comfort of the greater part of the population. These achievements were in fact only carried out by making drafts to some extent upon the capital resources of the countries engaged, as, for example, when England sold back to the United States her investments in American railway bonds in exchange for food and munitions of war, which she was importing from America. But, when full allowance has been made on this score, the fact remains that the World War demonstrated a growth of productive capacity which had not been suspected until the supreme test aroused the energies of all the chief nations of the world.

But, apart from this astonishing effort at a time of crisis, we may take the prosaic facts of the last half of the 19th century as quoted by acknowledged champions of socialism. Mr. Sidney Webb, in his Industrial Democracy, speaks of " the past fifty years' rise in the condition of the English wage-earning class." Mr. Snowden, in his Socialism and Syndicalism, says that according to official figures between 1850 and 190o the wages of the working classes in England had risen by 78%, and at the same time there had been a fall in the prices of wholesale commodities of I I %. This is surely a wonderful achievement which has to be granted as practical evidence of the efficiency of the capitalistic system, and of the extent to which its benefits were being shared with those who did its manual labour.

Mr. Snowden objected that the prices of wholesale commodities are not the best possible test of the buying power of the wageearners, and that certain articles which they use had in fact risen. This may be so, but nevertheless the very great advance in actual money wages, accompanied by a quite appreciable reduction in the prices of many articles of general consumption, is a stubborn fact. This, indeed, Mr. Snowden to some extent admits, but he goes on to argue that this progress had stopped at the beginning of the 10th century, and that the tendency had then become permanent by which the share of the wage-earners in the product of industry was actually going backwards. This was certainly true in the first few years of the century, since the rise in wages, which still continued, did not quite keep pace with the rise in general prices. But Mr. Snowden's contention that this tendency was permanent was merely an assumption which might easily have been proved false even if the war had not happened. As we all remember, the World War came at a time when the manual workers of England were preparing a great attempt to improve their position, and there is every reason to assume that this attempt would have been successful. In any case, the war came and the general position of labour was certainly improved during its course. Since the war, the struggle between wages and prices to keep up with one another has been somewhat difficult, but it may at least be contended that this has been due not to an essential fault in capitalism, but because the wage-earners thought fit to restrict output in a mistaken belief that they would thereby resist any attempt to force them back to the pre-war standard, which they were rightly determined to avoid.

We have also to remember that under the sway of capitalism this very considerable improvement in the wage-earners' lot has been carried out in spite of an enormous increase in population. If it be admitted that the general standard of life before the World War was not all that it should be, it must also be admitted that the gift of life and all that life involves had been showered upon millions of people in all the economically civilized countries of the world, who could not have come into being if it had not been for the great increase of wealth under capitalism.

Weakness of the Alternatives

One of the strongest arguments in favour of the present capitalistic system is the weakness shown by any system with which its critics would propose to replace it. State socialism has long been before the public as an alternative to the private ownership of capital. If it could be worked its economic advantages would be considerable, because it would mean that the state would own all the means of production and so would be the sole purchaser and the sole organizer and the sole distributor. The state would, therefore, decide what the needs of the community were, and how much work had to be done to provide them, and would set the members of the community to work to provide these things. All the waste involved by competition and advertisement would be saved, and all the mistakes in production would be avoided, which now arise because those who organize production have to try to foresee and forestall the needs of the public. The state would say what work each one of us was to do and what goods each one of us was to consume. If it were really possible that under this system we should work as well as we work now, there can be no doubt that the business of supplying the community's needs, as interpreted by the state, would be free from many of the joltings and jarrings which now often put the industrial machinery to some extent out of gear. But, in the first place, there is the enormously important question whether such a system could work at all - whether in fact the ordinary human being, as he is to-day, would be prepared to work at the bidding of the state, on conditions laid down by the state, with anything like the enthusiasm and readiness with which people work nowadays with the prospect of securing profit and advantage to themselves. Even if it be true that the great majority of commonplace people, who do not at present work with much enthusiasm or energy because they know that their own chance of achieving striking success is remote, would work for the state as well (or as indifferently) as they work now for private employers, there is very considerable doubt whether the more stirring spirits who think they can see their way to fortune in present circumstances if they work for it with determination, would put anything like the same vigour into work that they did for the state; it is upon the energy and readiness to take risks of this comparatively small body of stirring spirits in the community that economic progress really depends. If we stifle the incentives which now spur them to take risks and try experiments in the hope of fresh opportunities of profit, there is grave danger not only that the economic progress of the community might be checked, but that its whole economic organization might fall into decay and slothfulness, and that any attempt to improve or expand might be met with the same cold and unreceptive stare that now usually greets any new suggestion that comes up before officials of government departments. It might be possible in time to produce a set of officials who would be as ready and eager to promote the economic efficiency of the community as are the present captains of industry stirred by the incentive of profit. But past experience does not show that there is much hope of this happening, at any rate for many years, and in the meantime any community which subjected itself to state socialism might find itself very much worse off. It is true that during the World War great feats were achieved by government departments in organizing the supply of food and of war munitions, but they were achieved because the spirit of the nation was stirred to meet the most momentous crisis in its history; and because government departments were able to rely upon the assistance and experience of a large number of men who came to work in them, who had been trained in the school of practical business based on the incentive of private profit. And even so, these official achievements during the war were only carried out at a cost which the country could not possibly have stood except for a comparatively short time; they also involved continual friction between government departments and the wage-earners whom they employed, and their general results were so unsatisfactory that it is now a commonplace, even among labour leaders who are most anxious to nationalize industry, that whatever happens " bureaucratic control " must not be allowed to take charge. " Government departments are in the worst of bad odours just now, and nothing which seemed to involve an extension of bureaucracy would have a chance at the polls "- so writes Mr. Gerald Gould, one of the latest exponents of socialist ambitions, in The Coming Revolution in Great Britain, published in 1920. How it is possible to organize nationalized industry without bureaucratic control has not yet been shown.


The nearest attempt at solving this problem is made by the syndicalists and guild socialists, who do so by giving the nation remarkably little to say in the conduct of industry. Syndicalism in fact seems, as far as one can make out from the shadowy sketches that are obtainable of the desires of its champions, to ignore the state altogether. It proposes that the workers in any industry should seize the industry's capital equipment for themselves and work it for themselves. It is difficult to see how such a scheme could possibly be worked in practice. With each industry its own master there does not seem to be any means of arriving at any common denominator for the exchange of their products, that is to say, of arriving at a price, and the question of the provision of further capital seems to have been left out altogether. Guild socialism seems to be an attempt to reconcile syndicalism and state socialism and to arrive at a working compromise by a compound of the two. Unfortunately, its schemes as at present expounded seem rather more likely to suffer from a mixture of the drawbacks of both systems. The guild socialists consider that the capital equipment of industry should be owned by the state, but that the whole organization of industry, the decision as to what is to be produced, and the control of the product, are to be in the hands of those who work in it with brain or with hand. Here again we have the difficulty as to how we are to arrive at a means of exchange between one guild and another. If the shirt-making guild thinks that its members ought to get a pair of boots in exchange for two shirts, while the boot-making industry thinks that a pair of boots ought to be exchanged for three shirts, who is to decide between them and what power is to enforce decision? In the exceedingly vague sketches of the guild systems that have been produced by their champions, some attempts have been made to answer these questions. It is suggested that there would have to be a guild parliament representing all the guilds, a state parliament representing the consumers, and apparently yet another parliament which is to settle matters when these two parliaments cannot agree. Obviously there are materials here for economic chaos. It is true that if everybody worked with a perfectly angelic spirit such a system might possibly be able to carry on the work of production, but if everybody had an angelic spirit any system, even capitalism, would also be highly successful. But the guild socialists have to admit that, if any particular guild which was strong enough chose to hold a pistol at the head of the rest of the community by refusing to work except on its own terms, serious difficulty would arise. In fact, some of its more candid advocates have stated frankly that the wage-earners might conceivably be a good deal worse off under guild socialism; but they seem to think that a diminution in their actual control of goods and comforts would be more than compensated by the greater freedom they would enjoy, and by the feeling that they were no longer working to profit a private capitalist.

Economic Tyranny

How much truth is there in this claim for the greater freedom to be enjoyed by the wage-earners under guild socialism? One of the principles on which its champions most strongly insist is that production and the control of the product are to be in the hands of the guildsmen themselves, and that, consequently, they will be able to insist on producing goods which they think should be produced, rather than goods which consumers would prefer to consume. One of their champions, Mr. G. D. H. Cole, even goes so far as to mention the right to " choose whether they will make well or ill " as one of the things which must be secured for the workers under guild socialism. Certainly the right to work well or ill is a very large extension of freedom of a kind, but is it likely to react in favour of freedom in the fullest sense of the word? As industry is now organized under the principle of the division of labour, every one of us produces or helps to produce one article or fraction of one article, but we consume hundreds of articles. Economic freedom, that is to say, freedom to provide ourselves with such goods as we should like to consume, thus seems to be much more real under capitalism, which gives us the right to spend our wages and salaries as we please, than it would be under state socialism or guild socialism. State socialism would tell us what work to do and what goods to consume; and guild socialism, though apparently leaving to us, when once members of a guild, the right to decide along with our fellows concerning the goods that we will produce, and also as to whether we will work well or ill, would nevertheless leave us dependent upon the decisions of the other guilds as to what kind of goods they chose to produce, and upon the inclination to work well or to meet our demands with shoddy and ill-made commodities. Since this is the kind of freedom which is held out to the wage-earners under these rival systems, there certainly seems to be good reason why they should think many times before taking a leap in the dark by adopting them.

Capitalism and Progress

Such are the doubts and difficulties that face us when we contemplate the practical working of any alternative so far suggested to capitalism. For it, on the other hand, we can at least claim that, with all its faults, it has achieved a marvellous improvement in the command of man over natural forces; and has produced an enormously greater amount of wealth, which has been distributed, though in a manner which leaves a good deal to be desired, over a greatly increased population. Along with this purely material improvement there has proceeded a great expansion in education, sanitation and social reform. Capitalism can certainly lay no direct claim to the whole of this expansion, a great deal of which has been brought about, in spite of the opposition of the propertied classes, by a few enthusiasts, educational and scientific; but capitalism can fairly claim that these enthusiasts could not have done their work if there had not been available the surplus supply of wealth which was called into being by the efforts of private enterprise working with the incentive of profit. A noted labour leader has recently said that capitalism has made England a " C.3 " nation. But this description is more rhetorical than accurate. England's achievements by land and sea, during the World War, and likewise those of her Allies and enemies, who had also developed their resources under a capitalistic system, were such as to astonish those who had anticipated that the drift of the populations into great towns, and their occupation under sedentary conditions, would make it difficult to find armies who could fight with the spirit in which armies fought in former days. In fact, armies were produced in proportion to the population on a scale previously undreamt of, and fought an almost continuous battle for four years, showing unprecedented courage under conditions that no armies had hitherto been asked to face. The spirit and physical power of the countries which have grown into material greatness under the capitalistic system certainly show no sign of demoralization. At the same time it is true, as has already been admitted, that the blot of destitution is one which has to be erased from the record of capitalism before it can claim to have produced a system which is really worthy of what is called civilization. If capitalism is to continue it will clearly have to remedy this evil and others which have already been mentioned. The leading spirits among those who are interested in its maintenance are fully aware that these things have to be remedied. In fact the change of attitude on this point among employers in recent years almost amounts to a revolution, though there are still too many obstructive exceptions. Associations formed for the faceto-face discussion of these points by employers and employed are already common, and, on the side of the employers, it is certainly true that (perhaps under the spur of self-interest) they are earnestly trying to repair the weaknesses in the system which they have to work. Their difficulty is to know what it is that labour really wants; what concessions can be made which will induce labour to work the capitalistic system with hearty cooperation. Improved conditions, higher wages, and greater influence on problems of management, the best of them are more than ready to grant if only they can secure in return for them active work during the time when the manual labourers are engaged on their job, and the renunciation of the policy of the restriction of output. It would appear from the utterances of those who consider themselves entitled to speak for labour, such as Mr. Sidney Webb and Mr. Cole in England, that labour has made up its mind that it is not going to work in future to put profits into the pockets of private employers; in other words, it is determined to end the capitalistic system. Whether the rank and file of manual workers have really adopted this extreme view may very well be doubted, but they are extremely likely to adopt it unless they can be granted greater security. This is certainly a demand on the part of the manual worker which will have to be met by capitalism if it is to survive. The anxieties of the ordinary manual worker, who does not know how soon he may be told that he is no longer wanted at his job, should always be present in the minds of the employers, and if the schemes now being mooted by which every industry should make itself responsible for its own unemployed can be brought into practical effect, there can be no doubt that one of the worst evils of capitalism will have been abolished.

Another reform on which the manual workers seem likely to insist is a clearer statement of the costs and profits of industry. At present the accounts published by joint stock companies usually only succeed in making darkness visible. Labour has so often been misled as to the capacity of industry to stand concessions to it, that employers will be well advised to produce a more scientific system of accounting, by which they can be able to prove to demonstration what the true costs of industry really are, how much is required for depreciation and upkeep, how much goes to labour and management and how much is taken by capital.

As to the sordid ugliness with which capitalism is usually charged, everyone who has visited an English north-country industrial town must admit that the system in its craving for cheap production has ignored many things which make life tolerable for those who work for it, and has therein shown only another example of short-sightedness for which it now has to pay. Even on this point, however, one feels a certain doubt whether any alternative scheme of state socialism or guild socialism would provide the community with the necessary leisure and surplus wealth that could be devoted to the beautification of the country which adopted it, as is too usually assumed. If everybody is to have a nice house and live in pleasant surroundings, production has to be organized so as to be not only comfortable for those who are engaged in it, but efficient in the matter of output. And, on this subject, as has already been shown, there is good reason to doubt the efficiency of alternative schemes.

Inherited Wealth. - Another of the weaknesses of the capitalistic system is the power that it gives to owners of wealth to continue to accumulate it and pass it on to their heirs and assigns, with the result that a class is created which is able to live in great luxury on the past efforts of their ancestors, relatives, or friends, without making any effort to justify their own existence. There can be no doubt that the existence of these huge fortunes, accumulating and being passed on, are a source of great bitterness among the classes which do not possess them. Much might be done to alleviate this bitterness if all the owners of this wealth, and not only a certain number of them, were careful to make a more public-spirited use of it. It is true that they owe it to the work and exertions of others who have passed on this wealth to them, but this is only partially so. A large part of it they really owe to the existence of an ordered society providing a market and outlet for the efforts of those who accumulate the wealth and a machinery for investing it and reinvesting it, and so increasing it from generation to generation. From this point of view a large part of their great wealth they owe to the community in which they live, and the assumption that it is their own to do what they like with is a dangerous one which will cost them dear if put into practice too logically. It is possible, however, that this evil may be cured, at least to a great extent, by the development of death duties and inheritance taxes, which seems likely to be an increasingly important part of the fiscal arrangements of civilized nations in time to come. Here again, however, there is danger that if this remedy is exercised too freely the process of accumulation which is required to provide the community with capital for fresh enterprise may be dangerously checked. For the evil of huge fortunes is balanced by the fact that it is largely from them that accumulations of new capital on a great scale are effected; and it is highly dangerous to diminish them by the use of the fiscal weapon, before the duty of saving and accumulating has been effectually brought home to those classes of the community which are now accustomed to spend all that they earn or receive.

Need of Extended Capitalism by Savings

The efforts made in England and America and elsewhere, during the war, to try to induce everybody to save for victory have had effects which astonished those who were most closely acquainted with the thriftlessness of ordinary human nature (see Savings Movement). Long before then the cooperative movement had already developed a new and very interesting form of capitalism among the wage-earning classes. Cooperation is sometimes described by its own champions as an effort directed to the overthrow of private capitalism, but it is in fact merely a variation of it. Cooperation assembles the shillings and pounds of the wage-earners and puts them into productive and distributive industry, especially the latter, with marked success. The division of the profits is effected on different lines, those of the retail shops being divided among the purchasers in accordance with the amount of their purchases. So far its successes have been won on a somewhat narrow field, but there is no reason why they should not go ahead at a greatly accelerated pace as the higher earnings of the workers give them a larger margin available for saving. If this tendency could be continued, - if good work, rapid production, and high wages could be accompanied by individually small accumulations of capital by the great mass of the wage-earners, and if they could thus be induced to become not only wage-earners but themselves also capitalists, and if, at the same time, the large capitalists could be induced to see that the use they make of their incomes and of their leisure is a matter which concerns the community as well as themselves, - then it might be possible to arrive at a state of affairs in which every worker was a capitalist and every capitalist a worker, and capitalism, shorn of many of its worst evils, might work miracles of industrial production.


Gustav Cassel, The Nature and Necessity of Interest (1906); Prof. Shield Nicholson, The Revival of Marxism (1920); Philip Snowden, Socialism and Syndicalism (1913); J. Ramsay Macdonald, The Socialist Movement (191 I); G. D. H. Cole, SelfGovernment in Industry (1917); Reckitt and Bechhofer, The Meaning of National Guilds (1918, 2nd ed. 1920); Harold Cox, Economic Liberty (1920); H. Withers, The Case for Capitalism (1920); Gerald Gould, The Coming Revolution in Great Britain (1920); Hugh Dalton, The Inequality of Incomes (1920); J. G. Brooks, Labor's Challenge to the Social Order (1920). (H. W.)

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Simple English

Capitalism is a kind of economic system where things (property, for example) are owned by people or an individual, not by a government or communities, and where people have to work for money, so they can buy things they need or want, such as food. Capitalism mostly has a "free market" economy, which means people buy and sell things by their own judgment. In most countries in the world today the economy also has a degree of planning, done by the government or by trade unions, so they are actually called "mixed economies" instead of completely free markets. Some people disagree on whether capitalism is a good idea, or how much of capitalism is a good idea.

The word comes from "capital", meaning something of value. This can be money ("financial capital") or any other goods that can be traded. "Capital" originally comes from the Latin word caput, meaning "head", because it was used to mean how many "head" of cattle a wealthy person owned, in days long ago when cattle were used as money. (In fact, the words "capital" and "cattle" both come from caput.)


Buying, selling, working, and hiring

In capitalism, people may sell or lend their property, and other people may buy or borrow them. If one person wants to buy, and another person wants to sell to them, they do not need to get permission from higher power. People can have a market (buying and selling with each other) without anyone else telling them to. The definition of capitalism and the free market economy was introduced by the philosopher Adam Smith in his book The Wealth of Nations.

The word capital means any thing or money that a person owns that can be used to produce more things or money. For example, lands, factories, shops, tools and machines are capital. If someone has money that can be invested, that is a capital too. People who own capital are sometimes called capitalists (people who support capitalism are called capitalists, too). They can hire anyone who wants to work in their factories, shops or lands for them for the pay they offer.

In capitalist systems, many people are workers (or proletarians). They have to work for others (be given employment) in order to get money for living. People can choose to work for anyone who will hire them in a free market.

This is different from many older economic systems. In feudalism, most people were serfs and had to work for the people who owned the land they lived on. In mercantilism, the government makes it hard to buy things from other countries. In many countries with mixed economies (part capitalism and part socialism) there are laws about what you can buy or sell, or what prices you can charge, or whom you can hire or fire.


An investment is when people invest (give) their money in things. People can put their money together to buy or build things, even if they are too big for one person to make alone. The people who invest get to be the owners of what they buy or build together. The stock market lets people buy and sell investments.

Investing is important to capitalism. The word "capitalist" can mean two things: it can mean someone who likes capitalism; but it can also mean someone who invests. For example,a venture capitalist invests in new businesses.

People who start businesses, or invest in businesses, can make a lot of money. A business sells things that people want. The investors make extra money, which is called profit. Investors can take their profit and invest it in more businesses, or in making the business bigger. The investors can get more and more profit if the businesses are successful.

People who disagree

Socialists, anarchists and communists are people who do not support capitalism. They say it hurts workers, because businesses make more money by selling things than they pay to the workers who make the things and, therefore, businessmen become rich while workers remain poor and/or exploited. They also argue society would be more efficient if the individual was considerate of not only his/her interests, but the overall well being of society rather than competing against one another. Another argument is that each person has a right to minimal needs and within capitalism, sometimes people are not considerate of others or the environment in their quest for capital. The main difference between communists and spiritual communists is spiritual solidarity, as opposed to a state centered solidarity that most communists seek.[1]

Karl Marx was a famous communist philosopher from Germany. He wrote a famous book called The Capital (or Das Kapital in the German). He said that capitalism would go away after workers decided to take over the government in a revolution. There were violent communist revolutions in many countries, and many people were killed because of this. But capitalism did not go away, and most of these Communist systems have collapsed and do not exist today, or else they have become more capitalist. Some people think that communism in those countries did not work because Marx's ideas, though nice in thought, did not really work. Others think that communist countries collapsed because of the attacks (military, political and economic) from capitalist countries.

Anarchists do not support capitalism either. They do not think workers should take the government, but that there should be no government at all. They think that communism failed because the communists set up dictatorships that said that they would rule in the name of workers, instead of letting workers organize themselves freely.

People who agree

There are different words for people who support capitalism. In many parts of the world, these people are called either conservatives or liberals (especially market liberals). But in the United States, the word "liberal" means someone whose beliefs lean toward socialism; more or less what in other countries might be called social liberal. Libertarian is a word that in America and some other countries means someone who opposes the state, much like an anarchist, but is strongly in favor of capitalism.

People who support capitalism also have disagreements. Most people agree that capitalism can only work if the government keeps people from stealing other people's things. If people could steal anything, then nobody would want to buy anything.

In most countries, the government does more than that. It tries to make sure that people buy and sell fairly, and that businesses do not hurt workers. Because the government takes a lot of money in taxes, it also buys a lot of things and gives a lot of money away. It spends money on guns and ships for the military, on science research in universities, and on schools and libraries. It also gives money to people who do not have jobs, and to businesses that the political leaders think are important. Sometimes government gives money to people just because those people support the politicians who are in office. When the government is in charge of part of the economy, this is called a "mixed economy."

A few people think that people can protect themselves without any government. Instead of having laws against stealing, people could protect their own things, or agree to pay other people such as arbitrators, insurers, and private defenders to protect them. This belief is called "anarcho-capitalism." These people think that the government is a thief, because it takes taxes away from people against their will and keeps them from making agreements between themselves.


  1. July 19, 2009 (2009-07-19). "Perfect Communism | Hare Krishna Community". Retrieved 2010-08-14. 


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